Deutsche sees pressure on Qantas profit from rising oil price

Rising oil prices and other pressures could crunch Qantas’s profits, according to analysts at Deutsche Bank.

Qantas faces higher oil prices and increased competition. Picture: Stuart McEvoy

Rising oil prices and competitive pressures on international fares could crunch Qantas’s full-year profit over the next three years, according to analysts at Deutsche Bank.

While fares for international economy seats remain steady for Qantas, Deutsche analyst Cameron McDonald believes continued pressure on the airline’s yields for Jetstar and reductions in the price of its main line business-class tickets will hurt the airline’s profits.

“While Qantas has been able to reduce the capacity in the domestic market to provide some offset, this has not been the case in international, and hence group RASK (revenue per available seat kilometre) is lower than in fiscal 2015,” Mr McDonald said.

“We have reduced our earnings to reflect these revenue assumptions as well as updating for the current oil forward curve.”

The rise in the cost of oil and the yield pressures have led Mr McDonald to downgrade Qantas’s full-year profit forecast from $1.63 billion to $1.57bn. Its 2018 profit forecast will also take a half-billion-dollar hit from $1.9bn to $1.4bn, according to Deutsche.

The reduction in Qantas’s profit forecasts led the investment bank to also reduce its target share price for the airline by 85c to $4.30 but it has kept its buy recommendation.

Even with the downgrade, Qantas remains a cheap buy, according to analysts. The airline’s shares have dropped 25 per cent in value this year on the back of concerns about oil prices and a reduction in capacity. But Qantas shares have rallied in the past week with an increase of 10 per cent. Yesterday, shares in the airline were up 5c to $3.07 as the market rose 0.33 per cent.

The rebasing of Qantas’s earnings assumptions comes as the cost of oil — the chief component in jet fuel — has increased over the past three months from $US38.61 a barrel to $US49.76. The average price for the fourth quarter of the 2016 financial year has come in at $US47.15 compared with $US35.33 in the third quarter.

Qantas has locked in a “worst-case scenario” fuel bill of $3.4bn for its fiscal 2016 results and has started hedging into 2017. But Mr McDonald believes the climb of oil prices means the airline is looking at a fuel cost increase of $473 million for 2018.

The rerating of Qantas’s earnings by Deutsche comes as the International Air Transport Association, which represents more than 250 airlines responsible for more than 80 per cent of global air traffic, released the results of a wideranging survey that found airline chief financial officers were not expecting profits to improve over the next 12 months.

The IATA survey found that industry profitability has fallen year-on-year as the impact of terrorist attacks and wider pressure on yields took their toll.

Despite the pressures IATA expects passenger growth to remain positive over the next 12 months. “While the latest financial results from Q1 2016 continue to indicate a robust start to the year for industry profitability, July’s survey of airline CFOs … suggests that profitability fell slightly in year-on-year terms,” IATA said.