December 8, 2014

Qantas Chief Executive Alan Joyce proved right as airline returns to profitability

It may leave you scratching your head as to how an airline can go from making a loss of AU$2.8bn one year to making a first-half profit of AU$300m the following year. Curiously the announcement of the Qantas loss saw shares rise by 4% (7 cents) at one point, while this latest announcement has seen shares rise nearly 14%, closing at AU$2.39. However here is at least a three-fold explanation for this situation.
Firstly, a loss on paper is not the same as a trading loss. In the 2013 tax year Qantas wrote down the value of assets of its international fleet by AU$2.6bn. The actual underlying loss of the business was still bad at AU$646m, but the share rise came about as a result of this figure not being as bad as the previous profits warning had intimated. Secondly, Qantas needed to reorganize and strategize more clearly. As a consequence they withdrew from the costly commercial fight with Virgin Australia for a shrinking domestic market and began their 5000 target reduction in staffing numbers by 2017. Finally fuel costs dropped considerably while the airline chose to continue to levy its fuel surcharge on international flights. Alan Joyce said it was too early to consider any changes to present fuel surcharges on international flights, despite the fact they had not changed since March 2012, in spite of the fact oil prices had been at record levels.
Historically the airline has always proven to be more profitable in the first half of the year, but with no sign of rising fuel prices, optimism reigns for an equally profitable second half of the year. Joyce would not provide full-year profit forecasts, citing oil price fluctuations, however he is reported as saying that “We are seeing a more stable operating environment in most markets. This turnaround shows our strategy is working.” Qantas’ Chief Financial Officer, Gareth Evans, indicated savings in the second half of the year should be at least AU$300m.



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