In December 2013, Qantas Airways Limited (ASX: QAN) couldn't buy any friends with the share price falling to an all-time low of 95 cents.
The litany of woes afflicting the airline would be enough to scare even the most hardened investor away.
Oil prices were above US$100 a barrel, and the Australian dollar had just slumped from above parity with the US dollar, falling under 90 US cents. That had forced Qantas to raise fuel surcharges across its international network.
The airline was is the midst of an ongoing domestic airfare war with rival Virgin Australia Holdings Ltd (ASX: VAH), which was putting pressure on prices, while at the same time the airline had been forced to add even more capacity, resulting in a lower revenue pool and hitting both airlines.
Qantas had drawn a line under its 65% market share of the domestic market, forcing it to match Virgin on price and capacity.
As a result, Qantas was staring down the barrel of a $300 million loss for the six months to December 2013. To add insult to injury, the airline's debt was downgraded by Moody's to junk status shortly after.
Since then, the share price has appreciated more than 300% and is currently trading at around $3.90. That's still a fair way off the all-time high price of just over $6.00, set in October 2007 – just before the Global Financial Crisis struck, but an impressive turnaround nonetheless.
Here are several factors that have turned around the airline's fortunes:
- In 2013, Qantas CEO Alan Joyce announced a $2 billion cost-reduction program, with around 1,000 jobs to be shed within 12 months. In February 2015, Qantas announced another 5,000 redundancies, with 2,500 jobs gone by the end of August 2015.
- The historic partnership with Emirates in early 2013 has started to pay benefits, cutting costs in Qantas' perennially underperforming international network.
- Rationalisation of Qantas's fleet, from 11 different types of aircraft down to seven, resulting in lower maintenance costs, cheaper fuel expense through the use of more efficient models and retirement of ageing aircraft.
- Oil prices have crumbled, tumbling to US$50 a barrel currently, resulting in significant savings for the airline. In the 2015 financial year, Qantas enjoyed a 13% fall in its fuel bill.
- A $2.6 billion writedown of the value of its international fleet in 2014 has resulted in lower depreciation charges each year. In 2015, Qantas' depreciation fell by $326 million, a 26% improvement over 2014.
- Qantas has relaxed its stance on its 65% domestic market share 'line in the sand', and Virgin has reacted by acting more rationally, not slashing prices to cut-throat rates.
The net result is that last financial year, Qantas was able to turn a 3% increase in revenue to a $1.6 billion turnaround in underlying profit before tax – from a $646 million loss to a $975 million profit.
The airline even resumed dividend payments and implemented a capital return to shareholders – worth around 23 cents per share.
Foolish takeaway
With the $2 billion transformation program still underway, Qantas' financial results are likely to improve further, and it is still benefitting from lower depreciation charges. International competitor capacity growth has slowed, and an influx of inbound tourists – thanks to the lower Australian dollar – is a positive sign for the group's domestic operations.
In fact, analysts have pencilled in an almost doubling of net profit in the 2016 financial year, suggesting the share price might have a bit further to run.
