Price pressure hits Qantas profit, down 25pc

Qantas’s first half profit has dived 25pc to $515m, but it still managed to top its forecasts for underlying earnings.

Qantas CEO Alan Joyce announces flights to Beijing last year. Pic: Renee Nowytarger

National carrier Qantas’s first half profits have fallen by a quarter on swelling international pricing pressure, but it still managed to top its guidance for underlying earnings.

For the six months to December 31, the airline (QAN) logged a 25 per cent drop in net profit to $515 million.

Its underlying earnings before tax weakened 7.5 per cent to $852m.

The figure just edged its own guidance for a reading between $800m and $850m.

Revenue for the period dipped 3 per cent to $8.1 billion, with the group echoing commentary from rival Virgin Australia that the global aviation market is “mixed”.

The company said all parts of the group were profitable in the period, including its long-challenged international arm.

Its other divisions include Qantas domestic, freight, Qantas loyalty and Jetstar, with the latter two delivering record half-yearly earnings.

The domestic division noted underlying earnings before interest and tax (EBIT) of $371 million, off 4 per cent from last year as it was impacted by capacity cuts.

The unit was hurt by continued softness in the resources sector, although Qantas reported an improvement in the division was noted through the second quarter as challenged resources conditions began to stabilise. It is, however, not anticipated to be stable until fiscal 2019.

Qantas’s international operations booked EBIT of $208m, down 22.9 per cent on competitive pricing pressure, while Jetstar’s EBIT ticked up 4.9 per cent to $275m.

The growth in Jetstar earnings was pinned on its international expansion.

Elsewhere, its loyalty arm saw EBIT lift 2.8 per cent to $181m, while its freight unit reported a 29 per cent drop in EBIT to $27m.

“Qantas and Jetstar’s domestic operations produced an outstanding result and Qantas Loyalty continued to thrive,” chief executive Alan Joyce said.

“The international market is tough because of capacity growth and lower fares, and Qantas International is not immune from those pressures.

“But the work we’ve done on removing costs and making the business more efficient means Qantas International is outperforming its peers in the region.”

Qantas pinpointed its transformation program as the core reason between the discrepancy in underlying earnings and net profit, with the airline recording $137m of redundancy, restructuring and other costs tied to the transformation program it announced in 2014.

The program purportedly delivered $212m in benefits through the last six months, bringing the total benefits to $1.9bn over the cycle and brining it close to its $2.1bn target by the end of fiscal 2017.

“Our transformation program has built a strong, sustainable business that generates returns throughout the economic cycle,” Mr Joyce said.

Qantas declined to offer profit guidance for the second-half given the turbulent conditions in the sector, but noted group capacity would likely rise 1-2 per cent in the second-half despite a further 2 per cent reduction in domestic capacity.

Domestic revenue is tipped to further improve in the second-half despite “continued softness” in resources markets, while the international arm is likely to see the rate of revenue decline moderate from the 7 per cent figure in the first-half.

Qantas also anticipates a return to double-digit growth for its loyalty division as the benefits of its renewed partnership with supermarket chain Woolworths begin to flow.

Qantas declared a fully franked interim dividend of 7c a share.