Qantas still flying high despite forecast profit dip

Qantas expects profit before tax this year to be less than last year’s record, but still above analysts’ expectations.

Qantas chief executive Alan Joyce says competition on international routes is still tough.

Qantas has moved to douse expectations of another record year amid a tough international aviation market.

In a preliminary trading update for the third quarter, the airline said it expected underlying profit before tax of $1.35 billion-$1.4bn, down on last year’s record $1.53bn. The figure is slightly above average analyst forecasts.

Qantas chief executive Alan Joyce said the international market was still tough, but this was moderating slightly.

“Internationally it’s still tough, with high levels of capacity growth pushing fares down, but we’ve seen those conditions ease slightly,” Mr Joyce said.

“Because of the work we’ve done to transform Qantas and expand into growth markets, our international businesses are navigating the headwinds better than our key competitors.”

Last year was the best ever for Qantas in what was considered a major turnaround story and came just two years after calls for a federal bailout.

Mr Joyce has cut costs, focused on high-growth markets in Asia and moved away from the unprofitable routes. “Last year we posted the highest earnings in Qantas’s history and our guidance today would make this year’s underlying profit the second best in almost 100 years,” he said.

The headwinds in the international market have eased slightly because capacity growth from competing foreign carriers has slowed.

Qantas expects the capacity growth of rivals will reduce to about 5 per cent for the second half of the year, from high levels for the first half of financial 2017.

On the domestic routes, the carrier has continued to deploy planes away from resource sector-related markets. The national carrier said its domestic operations and loyalty program had improved, which was offset by the “relatively weaker, but resilient” international performance.

For the third quarter, domestic unit revenue was up 4.6 per cent compared to the same period last year, while international unit revenue was down 5.6 per cent.

The group’s revenue is down 1.4 per cent year-on-year at $3.96bn.

Last week analysts at Macquarie said Qantas could have enough spare cash for $500m a year in buybacks and that it was “fundamentally undervalued on any metric.”

Qantas shares have been rising ahead of today’s investor day. Macquarie reiterated its outperform rating and $4.90 target price last week. The shares closed up 1.38 per cent at a nine-year high of $4.42.

Investors have been feeling optimistic since Tuesday’s comments by Mr Joyce about “reducing” international capacity and about an “improving” domestic market. But JPMorgan cut Qantas to neutral on Tuesday and lowered its target price to $4.05, saying it did not expect “significant” improvement in key domestic and international markets.