Qantas shares fall as airline warns of rising fuel costs

Qantas is facing increased fuel costs and the prospect of increased capacity growth from international rivals.

Qantas CEO Alan Joyce.

Qantas faces increased fuel costs and the prospect of a pick-up in the pace of capacity growth from international rivals in the second half of the 2018 financial year.

In a trading update, Qantas said it was expecting the first-half underlying profit before tax would be between $900mn and $950m, compared to $852m in the first half of financial 2017.

But Qantas flagged slowing revenue growth for the second half, prompting investors to send shares plunging to an intraday low of $5.94, before regaining ground to close 1.4 per cent lower at $6.31.

“The domestic market is healthy but remains very competitive,” CEO Alan Joyce said.

“The high rate of revenue growth we’ve seen so far this year is likely to slow when compared with what was a strong second half last year.

“There’s been a welcome easing of capacity growth in the international market but the indications are that it is likely to pick up again in the second half.”

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Revenue for the first quarter of the 2018 financial year was up 5.1 per cent to $4.19bn, which the group attributed to improved trading conditions across domestic and international markets.

A flurry of new capacity from international rivals is set to continue, with Qantas yesterday forecasting this would grow by about 3 per cent in the first half then rise to between 6 per cent and 7 per cent for the second half of 2018.

New services by other carriers include Air Canada’s Vancouver-Melbourne route, China Southern’s Guangzhou-Cairns, Air China’s Beijing-Brisbane, United Airlines’ Houston-Sydney and Xiamen Airlines’ Xiamen-Hangzhou-Melbourne.

Mr Joyce, who last week took delivery of the first Qantas Boeing Dreamliner, which he insisted would be a “game changer” for the carrier, said the benefit of proposed changes to the Flying Kangaroo’s international network would start “flowing fully through” from the 2019 financial year.

As well as ditching Dubai as its stopover point for flights to London in favour of Singapore, Qantas will fly London to Perth non-stop from March next year. Qantas will also increase its flights between Australia and New Zealand, while Emirates is scaling back trans-Tasman flights.

Across the Qantas group, international capacity is expected to go up 5 per cent in the first half, then 3 per cent in the second.

Over the first quarter, revenue for the domestic operations of Qantas and its budget offshoot Jetstar was up 8 per cent as the resources market stabilised and the overhang from the 2016 federal election, which had a dampening effect on demand, cleared.

Qantas has redeployed planes away from unprofitable routes in the resources sector as part of what it calls “right-sizing”. But the group will decrease capacity by a further 2 to 3 per cent over the first half of the 2018 year compared to the same period the previous year. This is deeper than the cut to capacity of about 1 per cent flagged when Qantas delivered its 2017 full-year results in August. For the second half of 2018, domestic capacity is expected to be cut by 1 per cent.

The fuel bill for the full year is forecast to come in at $3.21bn, compared with $3.04bn the previous year, which will hit earnings for the second half and comes after a period where Qantas has reaped the benefits of lower prices.