Deutsche slashes Qantas profit outlook

International competition and rising oil prices have hit the bank’s forecast for Qantas’ profit.

Deutsche Bank has slashed its profit forecast for Qantas, as the price of oil slowly rises and the airline continues to face pressure from competitive fares on international routes.

While fares for international seats remain steady for Qantas, Deutsche analyst Cameron McDonald believes that pressure on the airline’s yields for Jetstar and declines in the costs of business class tickets will hurt its profit going forward.

“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 kilometer) 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 changing oil price and yield pressures have led Mr McDonald to downgrade Qantas’s full-year profit forecast from $1.63 billion to $1.57bn. The bank’s 2018 profit forecast has dropped from $1.9bn to $1.4bn.

The bank has also reduced its target share price for Qantas by 85 cents to $4.30 but has kept its buy recommendation.

The re-basing of Qantas’s earnings assumptions comes as the cost of oil - the chief component in jet fuel - has increased over the last 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 to $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 continued climb of oil prices mean the airline is looking at a fuel cost increase of $473m for 2018.

“This has resulted in the forward curve increasing and our fuel cost forecasts increasing by $114m in fiscal 2017 and $473m in 2018 (with the Australian dollar foreign exchange rate also falling to low of US67c in 2018),” he said.