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Qantas still experiencing turbulence, but turns small profit

In 2012 Qantas Airways (ASX: QAN) had a tough year, producing a big yearly loss after eight years of profits, so returning to profit this year is a healthier sign, yet the net profit after tax was a mere $6 million on revenues of $15.4 billion.

Despite continued harsh market conditions, the company attributed the profit increase to improving underlying unit costs, stronger domestic group earnings, a steady improvement in its Qantas International division, and a record result for its Qantas Loyalty business.

It produced a positive net free cash flow of $372 million, and paid down debt by $469 million. That still leaves the gross gearing at 102%, which shows how much more work it has to do. Net interest expenses are at $187 million, increasing by more than eight times over the past four years. It’s still not out of the woods yet.

Of its business segments, its Qantas Loyalty division, the new name for its frequent flyer business, saw the best overall net profit increase, rising 13% to $260 million from $231 million. The large loss of $484 million from the Qantas International segment of 2012 has been whittled down to a net loss of $246 million. This business was the source of last year’s overall company net loss, and this year was the same with all segments generating a net profit except for Qantas International.

Carbon tax was one extra cost for both Qantas Domestic and Jetstar, hitting their segment results by $77 million and $29 million respectively. Future proposed changes to the carbon tax, either by moving to a carbon trading scheme under a Labor government or a potential scrapping or scaling back of the tax altogether by a possible Liberal government, will definitely affect Qantas’ profitability going forward.

Also in the near future, the company reported that substantial benefits will be coming from its Qantas and Emirates Airlines partnership, which was launched in March this year. One cost this did produce in 2013 was a $56 million charge related to transitioning Qantas’ European hub to Dubai.

No final dividend was announced, and no interim dividend was paid previously for 2013.

Since July 2012, the share price has risen 27.2% from $1.10 to around $1.40, slightly outperforming the S&P ASX All Ordinaries Index’s (ASX: XAO) increase of 23.8%.

Foolish takeaway

Although people won’t stop travelling more in the future, the associated costs of running an airline and the intense competition even along its most profitable lines make this industry tough even in good times. Sir Richard Branson once said, “It’s easy to become a millionaire — start out as a billionaire, and then buy an airline.” For investors, it is probably better to buy discount tickets than to buy stock.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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