The global airline industry is taking off and Qantas Airways Limited (ASX: QAN) is capitalising on this by significantly expanding its partnership agreement with American Airlines.
The deal will see Qantas restart flights to San Francisco and the US carrier fly from Los Angeles to Sydney for the first time.
Both airlines will also move to a revenue sharing arrangement and the significance of the expanded joint venture is highlighted by the International Air Transport Association’s (IATA) industry profit upgrade announcement yesterday.
The IATA said global airlines will reap $US29.3 billion in profits for 2015, which is nearly twice what they made the year before and 17% higher than originally forecasted.
Most of the profits will be centered in North America, thanks in large part to the strengthening US economy.
The expanded deal announced by Qantas will give the airline a bigger slice of the booming North American market as capacity on the Australian and mainland US routes will increase by 9%.
No doubt the weakening Australian dollar will give Qantas an added boost over its US counterparts and the news is likely to prompt analysts to upgrade their earnings estimates for the airline.
That couldn’t come quick enough as the stock is starting to look fully valued after its 136% surge over the past year as fuel costs plummeted and management forecasted a dramatic turnaround in profits for the current financial year.
Consensus estimates are forecasting a net profit of $685 million for 2014-15, which is tipped to increase by around 60% in 2015-16. Qantas posted a $512 million loss in the previous financial year.
All eyes are now on Virgin Australia Holdings Ltd (ASX: VAH) to see if it will leverage its partnership with US carrier Delta Air Lines.
There is probably more upside to Qantas’ share price given its trading on a forecast price-earnings multiple of 6.9x for 2015-16, but I think there are better investment opportunities elsewhere given the inherently volatile nature of the airline industry.
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