The Qantas Airways Limited (ASX: QAN) share price has dropped by a quarter so far this year, losing 26% to trade at around $3.00 in lunchtime trading.
The moves over the past 4 weeks or so have also been dramatic, sinking from $4.22 or 28%. That comes after a dramatic turnaround saw the share price rise from a 3-year low of 95 cents in December 2013 to $4.22.
Here are 3 reasons why the share price is now sinking…
1. The oil price has recovered
The Benchmark Brent crude oil was at US$49.72 a barrel overnight, after hitting a low of under US$30 a barrel in mid-January. Fuel is the airline's largest expense – after the planes themselves – and the halving in the oil price over the past two years has played a huge part in Qantas' turnaround. There are signs now that the oil price may have stabilised and potentially could go higher. Qantas hedges much of its fuel purchasing, so the oil price movement can take some time to have an impact on the company's financial results.
2. Weaker consumer confidence
Qantas announced in April that it was cutting back on domestic and international flights due to weaker than expected demand. The airline said that there was a fall in demand over Easter and recent school holidays and facing turbulence ahead of the Federal election and also weak consumer confidence. Qantas domestic flights booked for April were down 8%, and flights for May 15% down over last year, according to Deutsche Bank.
Domestic capacity growth over the second half of the year is now expected to be virtually flat, down from the previous estimate of 2%, and negative over the April, May and June months.
Virgin Australia Holdings Ltd (ASX: VAH) announced last month that it was reducing capacity by 5.1% in the fourth quarter of FY 2016, also citing weak consumer demand and the resources sector downturn. Travel agent Flight Centre Travel Group Ltd (ASX: FLT) has also marked down its growth for similar reasons.
3. Cheap flights aren't working
Both Qantas and Virgin had also been cutting airfares, partly as a response to cheap international airfares to and from Australia by competitors, but also to entice customers to fly more. Australians can fly from Sydney to Los Angeles, USA return for less than $1,000 or London return for as little as $1,079 according to current deals on Flight Centre's website.
That doesn't appear to have worked. Despite cheap flights, the airlines have both still been forced to cut capacity. With high fixed costs and substantial leverage, if cheap airfares don't work, the airlines will still be flying aircraft around, so expenses don't fall much, while revenues do.
Foolish takeaway
Despite the share price fall, Qantas could still post a profit after tax of more than $1 billion for the 2016 financial year, which would represent a fairly low P/E ratio. It's currently at just 6x, suggesting the share price is currently very cheap. But uncertainty over issues the airline has no control over clearly has the market worried.
