The airline industry has always been a difficult business for strong long-term returns. Fuel costs, aggressive competition and the need to discount flight prices to drive sales sap potential growth even when people are flying now more than ever. Qantas Airways Limited (ASX: QAN) has started a restructure program to cut $2 billion out of operations. Recently, it announced that about 5,000 jobs would go and it has cut flight capacity to control costs.
What: However, since 21 May, the stock is up about 12%. Could this be just a relief rally, or is there something real behind it?
So what: Here are three reasons the shares are climbing and what we may see in the near future for Australia’s biggest airline company.
1) Air wars for airways
The company was in a heated battle for market share with Virgin Australia Holdings Ltd (ASX: VAH). It wanted to maintain its 65% control of the domestic market, so it expanded seating capacity. Virgin Australia answered with its own increase in capacity. Now, it seems both companies have called at least a temporary ceasefire and are cutting back on capacity. This can work to support ticket prices and give Qantas a little margin relief.
2) Restructure program
The company announced in early May that its restructure program target is to create $800 million in cost savings by fiscal 2015. The company projects that it will be positive free cash flow from fiscal 2015 onward. The job and service cuts may reduce revenue, but if margins and operating costs in general can improve then that’s positive. The stock could rise before the actual savings and earnings targets are met.
3) Airliner fleet changes
Qantas will be retiring older aircraft in line with its reduction in pilot numbers. This will also help the company hit its target of reducing fuel costs by more than 10% since older aircraft are less fuel efficient. It has eight new Airbus A380s on order, but has postponed delivery.
Now what: It is still early days for its transformation program to take root and show concrete improvements. Further rivalry with Virgin Airlines could exacerbate progress, so although a 12% rise in share price is always welcome, there still could be more twists and turns. I believe it may be better to closely watch from the sidelines and view any initial missed upside as insurance that things are getting better.
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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.