Iconic Australian airline Qantas Airways Limited (ASX: QAN) seems to be turning the corner thanks to its $2 billion transformation program and lower fuel costs. Half-year revenue was up slightly, yet profits did almost a complete 180-degree turnaround due to heavy cost-cutting initiatives. The stock is up 4.6% to $2.94 in morning trade after the announcement.
Here are the key half-year results:
– Revenue $8.1 billion, up 2% from $7.9 billion
– Earnings before interest and tax (EBIT) underlying EBIT $500 million, up from a loss of $156 million
– Net profit after tax (NPAT) $206 million, up from a loss of $235 million
– Earnings per share attributable EPS 9.2 cents per share, up from a loss of 10.6 cps
– Dividend per share no interim dividend declared
Half-year business highlights:
— The transformation program set in place a year ago, which is expected to cut $2 billion in costs by financial year 2017, produced $374 million in benefits in the first half. It was the main reason for Qantas' net profit turning positive. More savings are expected in the second half.
— The collapse in world oil prices gave Qantas an opportunity to cut fuel costs and hedge future fuel provisions. Fuel is a major cost factor for airlines, so this benefits the company greatly.
— The Qantas International segment saw a 4.8% revenue increase. Along with $159 million in transformation cost benefits, first-half operating EBIT turned positive to $59 million, up from minus $262 million in the prior corresponding period. The Jetstar segment also turned to the black with an operating EBIT of $81 million.
Financial year 2015 outlook
Qantas didn't provide full-year earnings guidance due to volatility in the markets, forex and fuel prices. However, it raised the forecast for the transformation program's full-year benefits to $675 million. The airline expects all operating segments to be profitable in the full year.
Qantas has made substantial progress in turning around and has a stronger balance sheet to keep on going. That has been at the expense of cutting 3,800 jobs with the 2017 total reduction target of 5,000 employees.
Shareholders who bought the beaten-down stock a year ago at $1.23 a share are sitting on a fantastic 139% gain. From here on out, though, the gains may not be as big even as more cost savings are realised.
In the past, airline companies like Qantas, Regional Express Holdings Ltd (ASX: REX) and Virgin Australia Holdings Ltd (ASX: VAH) haven't given investors a good long-term return at all. Air travel is a service priced like a commodity and is highly competitive, so long-term earnings growth can be hard to come by.
