Qantas warns of profit fall as global capacity war looms

Qantas has warned of softening profits for its first-half results amid signs of an international capacity war.

Qantas CEO Alan Joyce. Picture: Renee Nowytarger

Qantas has warned of softening profits for its first-half results as the beginnings of an international capacity war continue to drive down passenger airfares.

The nation’s No 1 airline released a quarterly update to the market yesterday revealing that its profit before tax for the first six months to December 31 would come in between $800 million and $850m, about 10 per cent lower than the record $921m first-half profit it banked in the last financial year.

The warning places Qantas among a growing list of international carriers to be buffeted by the headwinds of transcontinental competition.

Air New Zealand and Cathay Pacific have also delivered downbeat forecasts in recent months as low oil prices (the chief component in jet fuel) continue to encourage airlines to inject extra capacity into routes, which is driving down ticket prices.

“Like most carriers globally, we are seeing international airfares below where they were 12 months ago,” Qantas chief Alan Joyce said. “But the impact of that is tempered by the competitive advantages we’ve been working hard to fortify, including our strong domestic position and diversified loyalty business.”

Qantas’s first ever quarterly earnings update also revealed the group’s revenue had fallen 3.2 per cent to $3.98 billion in the three months to September 30, including a 6.9 per cent decline in international revenue.

However, while revenue in its international business slid, ­capacity on links that include routes into Asia and the US increased by 5.8 per cent.

Citi analyst Anthony Moulder said Qantas was right in piling on more capacity as it represented the group’s greatest growth opportunity over the next few years.

“It makes sense to put in extra capacity for international routes like Sydney to Beijing, as they recently announced, because it’s an improving market for business passengers,” Mr Moulder said. “It’s also important to keep in mind that Qantas is not buying new aircraft to service these new routes or added capacity.

“It’s coming from some of their repositioning of domestic flights and increased utilisation of the fleet. So if you’re able to take a $250m aircraft and get another few services out of it on a weekly basis then you’re effectively getting a free A380 as a consequence of that higher utilisation.”

Qantas said capacity across the group, measured by available seat kilometres, was expected to increase 1.5 to 2 per cent in the first half, compared with previously ­issued guidance of 2 to 3 per cent.

Mr Moulder agreed with Mr Joyce that the airline’s reduced cost base, disciplined financial framework and fuel hedging strategy would continue to insulate it from any serious headwinds.

“It will get a bit harder for them particularly if (Donald) Trump is successful in the US, which could hurt people’s willingness to travel and spend, but I think they have insulated themselves better than any other carrier we see,” Mr Moulder said.

The Qantas update sent its shares diving 9 per cent at the open before recovering to close 4.08 per cent higher at $3.06.