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Positive Outlook for the Qantas Group

Positive Outlook for the Qantas Group
Dec 15, 2015 By Simon Herrmann Tags: qan

Airline provider Qantas Airways Ltd (ASX:QAN) released an update to investors that shows improved financial performance for the first half of the 2016 financial year.

For the first 6 months of FY16, Qantas expects an underlying profit before tax between $875 million and $925 million. When compared to the first half of the 2015 financial year, there has been a rather drastic improvement, where Qantas had underlying earnings of $367 million.

Its strong first half performance is attributed to consistency from its $2 billion ‘Qantas Transformation Program’, organic revenue growth and the benefits of lower oil prices. During the 2015 financial year lower oil prices, favourable exchange movements and the transformation program saved Qantas $597 million.

Qantas’ first half results also takes into account the estimated $17 million non-cash negative impacts associated with bond rate movements, along with the approximate $25 million one-off impacts on Jetstar earnings, as a result of volcanic activity during the period.

Moreover, Qantas’ November traffic and capacity report further emphasised the improved performance of Qantas over this period. Group demand had increased by 5.5%, which resulted in a group revenue seat factor of 80.5%, 1.1% higher than the prior November.

Group Domestic (being both Qantas and Jetstar domestic) capacity rose 0.9% compared to the previous November, with the bulk of capacity growth for Qantas domestic coming from the east coast markets. Whilst Jetstar domestic’s capacity growth is predominately coming off strong demand from holiday destinations, such as the Queensland coast, Tasmania, and South Australia.

Qantas international capacity rose 9% during November, in part due to higher aircraft utilisation, and increased services to Asia, in order to accommodate higher demand. In contrast, Jetstar international capacity contracted by 1.2% in November, attributed mainly to flight cancellations caused by the Bali ash cloud.

Overall, group capacity increased by 3.2%, whilst demand increased by 4.7%. Improvements being further reflected in a ‘Group revenue seat factor’ of 81.1%, which is 1.1% higher than the previous year.

Qantas CEO Alan Joyce spoke quite optimistically about Qantas’ recent financial performance: “We’ve seen improved revenue in our domestic and international operations, reduced costs across the group through the Qantas Transformation program, and expect another record half-year result from Qantas loyalty”.

Meanwhile, Qantas Frequent Flyer and Woolworths have established a new deal that will enable Woolworth’s awards members to convert Woolworth dollars into Qantas points. This deal has extended their 6 year relationship for an additional 3 years. Under the agreement, which is set to start in the first half of 2016, will allow a conversion rate of 870 Qantas points for every 10 Woolworth points.

With QAN shares up nearly 60% year-to-date the strong results have been widely expected, however investors are relieved that Qantas delivers on its promises. In early trade QAN surged more than 2 % to reach an intraday high of $3.94 before easing slightly. With continued weakness within the oil markets, the airline sector is in particularly a good environment to prosper. 

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Simon Herrmann Author: Simon Herrmann Dec 15, 2015

Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.

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