Qantas Limited (ASX: QAN) shares surged 4% on Friday after the company returned to underlying profitability in the first quarter of this 2015 financial year. In addition, traffic and passenger statistics showed that the company may have turned the corner after a terrible 2014 financial year.
Numbers Improving
In September, Qantas group recorded a 2.7% increase in passenger numbers on a 0.7% increase in supply, and a 1.1% increase in revenue per passenger-kilometre compared to last September. Qantas also reported that passenger numbers had increased by 3% on a 1.1% increase in capacity since the start of the financial year in July.
Frequent Fliers
Qantas' management highlighted changes in the business that were driving increased takeup of the lucrative frequent flier program. The business is incredibly important to Qantas and is estimated to be worth as much as $1 billion. An additional 200,000 people signed up to the program in the last 4 months, driving a 6% increase in flier miles spent over the period. Total members increased to 10.3 million, from 9.6 million a year ago.
PROFITS!
Qantas' management stated that preliminary figures indicate underlying profitability before tax in the three months between July and September. The company attributed the success to a lower oil price and Australian dollar, driving inbound tourism and lower costs.
Analysis
There are still concerns surrounding the group's international arm and the stagnant local market. While management expect international fleet aircraft utilisation to increase by 12% this year, the market is only expected to grow by 2.4% and competitors are still heavily discounting. The local market has been stagnant and has driven a reduction in planned supply.
A concern for me is that all growth in the domestic market has come from QantasLink regional services and Jetstar. The company's full-service Qantas brand experienced a 5.2% decline in passengers, mind you supply was reduced by 4.6%. Pleasingly, passenger numbers increased more than supply for QantasLink and Jetstar Domestic.
International flights saw the same trend; passenger numbers fell more than supply for the Qantas brand but rose more than supply for Jetstar. This may indicate that margins are being squeezed.
The company's plan for cost reduction appears to be on track, with $1 billion in debt due to be repaid by the end of the financial year.
To Buy or Sell
Well, some investors have already made plenty of money out of Qantas this year but I feel that future gains will be more difficult to achieve. Airlines are notoriously poor businesses to invest in due to the high capital expenditure and fixed-cost base requirements. I prefer companies with lower capital costs, such as online businesses.
