Qantas is on course to turn its loss into a big profit amid strong travel demand

Shares in the airline have taken off on the profit guidance, as it vowed to keep a tight hold on flying capacity until next year.

Qantas says it is on track for a pre-tax profit of up to $1.3bn for the six months to December 31, pulling off a significant turnaround as strong travel demand supports a recovery from the Covid-19 pandemic.

The strength of the upgrade following two and a half years of large losses – in total $7bn – caught the market by surprise, pushing shares up 8.7 per cent, or 45c, to $5.62.

Qantas chief executive Alan Joyce said the airline would spend an additional $200m to roster additional crews and train new staff as it attempts to end ongoing disruptions affecting its flights.

Qantas’ reputation has taken a significant hit this year as the airline attempts to resolve high levels of flight cancellations and delays.

In an investor update, the company said domestic demand was strong and business travel revenue was over 100 per cent of pre-pandemic levels. Revenue from leisure travel was also 130 per cent above pre-pandemic levels, it said.

But the operating environment remained “complex”, Qantas said, with “high fuel prices and higher inflation, as well as higher interest rates impacting on consumer confidence”. The airline flagged it was still working on the return of A380 aircraft from storage.

“We’re pretty proud of the fact Qantas is getting its act together,” said Mr Joyce. “We’ve apologised to our customers for what happened over the last few months and we have focused a massive effort on getting the operation back to where it needs to be.”

Qantas is on course for a before-tax profit. Picture: Dan Peled

Analysts at Morgan Stanley, in a note to clients, said the result was”surprisingly strong”. Morgan Stanley had estimated underlying first half pre-tax profits of $200m, and full-year profits of $1.31bn.

UBS, which had expected a first half result of $463m, said: “Trading update suggests a strong performance for both earnings and cash flow, continuing the momentum of the (2022 financial year) results and sets a compelling path towards our expectations for an even better (2024 financial year).”

“We think this is a result largely driven by yields due to the fact passenger numbers actually fell in August compared to July,” said Citi’s Samuel Seow. “Our back of the envelope suggests yields at a group level were 35 per cent higher than a couple of months ago.”

International capacity across the Qantas group is expected to increase from 61 per cent of pre-pandemic levels in the first six months of the financial year to 77 per cent in the second half, the airline said.

Domestic capacity will increase from 94 per cent to 100 per cent – six percentage points below what the airline had forecast earlier.

Mr Joyce said airfares had increased particularly for international routes, largely because of elevated jet fuel prices, which were up 76 per cent on 2019 levels.

But he said capacity constraints would remain in place until performance issues were erased.

“It’s clear that maintaining our pre-Covid service levels requires a lot more operational buffer than it used to especially when you consider the sick leave spikes and supply chain delays that the whole industry is dealing with,” said Mr Joyce. “That means having more crew and more aircraft on standby and adjusting our flying schedules to help make that possible until we’re confident that extra support is no longer needed.”

After almost half of all flights were delayed in July, Mr Joyce said earlier, three-quarters of services were on time, and cancellations fell to under 2 per cent.

The mishandled bag rate was 6 in 1000 with further improvement expected in the lead up to the busy summer holiday season.

“Qantas is performing better than a lot of our peers (but) is it good enough? No,” said Mr Joyce. “Now that we’re making money, we’re investing over $200m for the rest of the year to continue to improve the reliability.”

The profit upgrade, Forager Funds Management chief investment officer Steve Johnson said, “confirms Forager’s thesis that pent up travel demand is offsetting any consumer weakness”. “We think there is clearly some short-term tailwinds here but that the longer-term company and industry structure is going to be far more sustainable too,” said Mr Johnson, a shareholder.

“The restructuring and efficiency gains made during (the pandemic) have been underestimated by the market.”

Employees would also share in the return to profitability after enduring wage freezes and stand downs during the pandemic.

Qantas said annual pay rises for 20,000 workers would be adjusted upwards from 2 per cent to 3 per cent, at a cost of $40m.

Mr Joyce said those workers signing new enterprise agreements would also be eligible for $10,000 in bonuses next year providing the company’s good fortune continued.

The comments came as domestic cabin crew applied to the Fair Work Commission for a protected industrial action ballot, threatening to throw flights into chaos over summer. At the heart of the dispute is a demand to extend duty times from 9.45 hours to 12-hours and up to 14-hours.

“The 12 hours we’re asking for is already in place with other airlines,” said Mr Joyce. “It’s very unreasonable to ask Qantas to be the only airline in Australia that won’t have that capability.”

Originally published as Qantas is on course to turn its loss into a big profit amid strong travel demand