Qantas Airways Ltd. (QAN), Australia’s largest carrier, climbed the most in nearly seven years as profit doubled on a tie-up with Emirates and the cancellation of unprofitable routes to Frankfurt and London.
The shares surged 14 percent on volumes almost four times the three-month average to close at A$1.40. That’s the biggest gain since Nov. 22, 2006. Pre-tax profit excluding one-time items jumped to A$192 million ($172 million) in the year ended June 30, from A$95 million a year earlier, the Sydney-based company said today, exceeding the A$76 million average of seven analyst estimates compiled by Bloomberg.
Qantas has retired older planes, dropped loss-making routes such as Singapore to Frankfurt and London to Hong Kong, and allied with Dubai’s Emirates to stem international losses that mounted to A$484 million in the last financial year. Chief Executive Officer Alan Joyce also added more domestic flights to defend the carrier’s 65 percent local market share.
“The ability to contain costs and take some bold steps in the international division is starting to show some positive signs,” Peter Esho, chief market analyst at Invast Securities Co., said in a note to clients after the result was announced. “The diversified group has held up relatively well.”
The stock, now at its highest closing level since July 12, is still down 6 percent this year, compared with a 9.5 percent gain for the S&P/ASX 200 index.
No dividend was declared. The company has only proposed one such payment since Joyce took over Qantas’s top job in November 2008, with a A$117 million payout announced in February 2009 on the same day as a A$514 million capital raising.
Net income was A$5 million, compared with a loss of A$245 million in the previous 12 months and the A$31 million average of six analyst estimates.
Joyce has promised to return Qantas’s international unit to profit by the year ending June 2015 by using the Emirates alliance to drop unprofitable services and extend Qantas’s network of destinations in Europe and the Middle East.
Excluding one-time items, losses before interest and tax at the international division narrowed to A$246 million from A$484 million a year earlier, the company said. Unit costs in the division fell by 5 percent from a year earlier, helped by the closure of maintenance facilities and the route cancellations.
That was a “massive achievement,” Nathan Zaia, an analyst at Morningstar Inc. (MORN:US) in Sydney, said in a note to clients. “The international turnaround strategy is paying off.”
The reduced losses helped offset a 21 percent drop in the earnings on Qantas’s domestic routes, where Ebit excluding one-time items came to A$365 million. Second-ranked Virgin Australia Holdings Ltd. (VAH) has bought bigger planes and added flights and business class seats to challenge Qantas’s dominance.
Domestic flight capacity rose 8 percent during the year, Qantas said today, as the carrier matched Virgin’s expansion to defend its profit-boosting domestic market share. Capacity growth will slow to a range of 1.5 percent to 2.5 percent in the six months ending December, the company said.
Virgin, whose chief executive officer John Borghetti was a senior Qantas executive before quitting the company five months after Joyce took the top job, will post a net loss in the range of A$95 million to A$110 million when it announces annual results tomorrow, the Brisbane-based carrier forecast Aug. 5.
“On every measure Qantas is ahead significantly in the domestic market,” Joyce said today. “Our businesses are performing relatively very strongly against the competition.”
The carrier spent A$4.2 billion buying fuel, equivalent to 27 percent of group sales, which rose 1.1 percent to A$15.9 billion. An 11 percent fall in the Australian dollar in the year raised the price of jet kerosene, prompting Qantas last month to increase surcharges by as much as A$75 a leg on international flights. The airline pays U.S. dollars for fuel.
At the Jetstar budget carrier, Ebit excluding one-time items dropped 32 percent to A$138 million. The unit is Asia’s second-largest low-cost airline after AirAsia Bhd. (AIRA) with stakes in Jetstar-branded carriers in Australia, Singapore, Vietnam, and Japan.
Jetstar is also seeking to win approval for a Hong Kong venture, which Cathay Pacific Airways Ltd. (293) says will damage the city’s economy and aviation sector. The company paid A$50 million in startup costs for its Jetstar ventures in Japan and Hong Kong, Chief Financial Officer Gareth Evans said today. He declined to give a breakdown for each carrier.
The arrival of Jetstar would be “a real positive for the Hong Kong economy,” Joyce said in an interview with Bloomberg Television today. It would “create access for low airfares that people in Hong Kong are crying out for.”
Last year, Qantas also benefited from a A$134 million accounting change which meant revenues that would otherwise have been recognized during 2014 were factored in during the second half. The carrier also said it raised A$80 million after the end of the financial year from selling its defense services business to Northrop Grumman Corp. (NOC:US)
Net debt shrank 8 percent to A$3.23 billion over the year, and fell 10 percent to A$4.82 billion including liabilities for Qantas’s leased aircraft.
Short interest in the stock rose to its highest in a year Aug. 13, according to exchange data compiled by Bloomberg. The 35 million shares sold short at that point is still just 1.6 percent of all freely-traded shares, suggesting few investors were willing to bet the stock will drop further.
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