Qantas Airways Limited (ASX: QAN) share price has gone exactly nowhere today, despite the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) rocketing up 1.7% in lunchtime trading.
That's not what you'd expect after the airline flagged a much lower fuel bill this financial compared to last year, which could result in larger dividends or another capital return for shareholders.
Qantas says it expects fuel costs for the six months to December 2015 to be $1.76 billion, down almost 20% on the $2.16 billion it forked out in the previous half. The full year's fuel bill is expected to be between $3.61 billion and $3.85 billion. Qantas paid $3.9 billion in fuel expenses in 2015 and a whopping $4.5 billion in the 2014 financial year.
Most of the gains come from lower oil prices. The price of fuel has more than halved in the past 18 months.
Qantas hedges around 95% of its fuel requirements, suggesting the airline has locked in the low prices for the rest of the 2016 financial year. More fuel-efficient planes added to the airline's fleet are also likely to help lower the fuel bill.
Not only that, but Qantas has seen growth in revenues per seat kilometre, a better revenue seat factor, higher capacity and even higher demand. Much of that improved performance is thanks to the end of its domestic airfare war with rival Virgin Australia Holdings Ltd (ASX: VAH).
Not surprisingly, analysts are bullish on the airline's prospects for this financial year. Consensus estimates are for an underlying pre-tax profit of close to $1.7 billion, almost double that of last year. Qantas recorded an underlying profit before tax of $975 million in the 2015 financial year.
Qantas unveiled a $505 million capital return to shareholders (around 23 cents per share) in August 2015 which is expected to be paid next month. Interestingly, the capital return is structured similarly to a share buyback, which should see earnings per share rise by around 6%.
While shareholders could be in for another bonus in 2016, chairman Leigh Clifford has also stressed that the airline wants to retain a decent cash balance in case of unexpected events.
And that's the main issue with an investment in airlines such as Qantas and Virgin. Many factors outside of management's control can heavily influence the company's earnings from year to year.
A return to fuel prices of around $100 a barrel, volcano activity, a repeat of SARS, increased competition from Virgin domestically and other airlines internationally or a big fall in the Australian dollar exchange rate versus the US dollar could all individually wreak havoc on Qantas's earnings.
Foolish takeaway
As we wrote back in July, Qantas' reported earnings have been helped by the company taking a $2.6 billion writedown on the value of its international fleet of planes in the 2014 financial year. That means future depreciation charges are heavily reduced, boosting earnings.
Qantas shares may look attractive, particularly in light of the expected results and potential returns to shareholders, but it only takes an unexpected event to turn earnings on its head. I won't be buying shares in the airline anytime soon.
