 Qantas Airways’ (QAN) 8.5% slide in its annual underlying profit to $1.4bn was the flagship airline’s second biggest in its near 100-year history, was largely in-line with analyst expectations and slightly above guidance provided in early May. The result was boosted most by the strengthening of its domestic business and a better result in its Frequent Flyer operations. This helped offset weakness in its international and Jetstar divisions. 

 QAN’s $500m capital management (dividend plus buyback) was also in-line with estimates. QAN will pay eligible investors a 7c per share final dividend on 13 October 2017. It will trade ex-dividend on 8 September 2017 and has a dividend yield of 2.4%. It also announced a further $373m to be used on an on-market buyback of its shares. Since October 2015, the airline has reduced the number of QAN shares on issue by more than 20% (including the newly announced buyback). QAN has a 26% payout ratio. 

 Qantas and Jetstar combined generated $865m in underlying EBIT over FY17 in the domestic market (a record). QAN continue to be the most profitable operation in the local market, accounting for 90% of the Australian profit pool. Jetstar Group’s $417m EBIT was a $35m or 8% slide on last year as margins declined. Qantas International made $327m in underlying EBIT, thanks partly to an improvement in conditions over the second half. The result however was a $185m fall on last year partly due to ‘8.5% capacity growth in the broader market’, which has held back revenue. Its cost controls have helped limit the deterioration of its margins. 

 Qantas Loyalty (Qantas Frequent Flyer program) made a record $369m underlying EBIT, up $23m and together with Qantas Domestic was the only unit to improve its earnings. The result was underpinned by its core Frequent Flyer program, which the airline said added 400,000 new members over the year to reach 11.8m. The division has enjoyed double digit earnings growth over the second half. Qantas Freight announced underlying EBIT of $47m (26% fall) which it has attributed to weakness in the international market caused by increased wide-body aircraft capacity. Its domestic freight unit remains largely stable. 

 QAN is investigating direct flights from Australia’s east coast to London & New York by 2022. It has urged Airbus or Boeing to build an aircraft able to travel the distance non-stop. Direct flights would cut the travel time for Sydney-London by up to four hours and almost three on Melbourne-New York. Its transformation program delivered $470m in benefits over the year, which completes the airline’s three year $2bn saving program ahead of target. 

 Moving forward, QAN provided only limited guidance for the year ahead. It expects 1H18 group capacity to increase by 3% and domestic capacity to decrease 1%. It expects fuel costs at no more than $3.16bn for the year ahead (increase of no more than 4%). QAN shares improved on the result and have surged by more than 70% this calendar year. 


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