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Will the Qantas share price soar after trading update?

Credit: Joits

The Qantas Airways Limited (ASX: QAN) share price could be set to soar after the company released a trading update today.

The airline says it expects to report an underlying profit before tax (PBT) in the range of $875 million to $925 million for the six months to end of December 2015. That compares to $375 million reported in the first half of the 2015 financial year (FY15).

“We’ve seen improved revenue in our domestic and international operations, reduced costs across the group through the Qantas Transformation program, and expect another record half-year result from Qantas Loyalty,” said Qantas CEO, Alan Joyce.

The airline says the $2 billion Qantas Transformation program, revenue growth and the benefit from lower fuel prices contribute to the strong first half performance. Back in November, I listed 6 of the main factors that have resulted in Qantas reporting such an improved performance.

Qantas has also benefitted from sensible competition domestically, with rival Virgin Australia Holdings Ltd (ASX: VAH) not flooding the market with ultra-low cheap airfares and massive additional capacity. That benefits both players locally.

The Qantas share price has soared more than 160% since July 2014, as the effects of the company’s various strategies have resulted in much lower group expenses. Oil prices have more than halved since July 2014, falling from above US$100 a barrel to below US$40 a barrel. Fuel makes up one of Qantas’ largest expenses, with the airline forking out $3.9 billion in FY15, down from $4.5 billion the previous year.

As the airline hedges against moves in the oil price, it may be some time before the full effect of the oil price plunge is reflected in the airline’s financial results.

Foolish takeaway

Has the tide turned for airlines?

The International Air Transport Association (IATA) recently said the global airline industry is set to report collective profits of US$33 billion this year, it’s second consecutive year and results are expected to increase again next year.

But the turnaround is heavily dependent on the falling oil prices – which is out of the airlines’ control. Qantas shares look cheap, trading on a trailing P/E ratio of 8x, but if oil prices start to rise, look out below.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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