It hasn't been a great year to be a shareholder of Qantas Airways Limited (ASX: QAN). Despite delivering a 57% rise in underlying profit before tax to a record $1.5 billion this year, its shares have had a turbulent time.
Year to date the shares of Australia's flag carrier airline are down a disappointing 22%. Personally, I think that this decline could be a great opportunity for investors to buy its shares on the cheap.
I was very impressed with its full year results and the strong performances of both its Jetstar and Qantas International businesses. The Jetstar brand posted a whopping 97% increase in earnings before interest and tax to $452 million and Qantas International wasn't far behind with a 92% increase to $512 million.
With Australia in the early stages of a tourism boom, I expect that this strong performance could continue for some time still.
Especially with the growing number of Chinese visitors flying into Australia. According to the Australian Bureau of Statistics the number of Chinese visitors has now exceeded 1 million per year and is rising rapidly.
Qantas has certainly been taking note of this. Yesterday it was reported in the Australian Financial Review that Qantas is targeting the China market and has resumed flights to Beijing through its alliance with China Eastern.
Beijing's airport is incredibly busy and airport slots are hard to come by. Previously the only slot Qantas was able to get meant that passengers landing in Beijing would arrive at 4am local time. Not very attractive for travellers.
But thanks to its alliance with China Eastern the two airlines have swapped slots and from January 2017 Qantas will have a more favourable evening arrival time for its flights.
Overall I feel things are looking very good for Qantas right now. The only thing that could get in its way of bumper profits next year would be a rising oil price.
A big factor in the airline's increased profitability was a result of fuel savings. Fuel costs dropped from $3.9 billion in FY 2015 to just over $3.2 billion in FY 2016. As a percentage of total revenue, fuel costs dropped from 24.7% to just 20% this year.
If an OPEC production cut does occur and drives up the price of oil then Qantas, AIR N.Z. FPO NZ (ASX: AIZ) and Virgin Australia Holdings Ltd (ASX: VAH) are likely to see their margins impacted.
But as I'm not expecting oil prices to rise a great deal over the next 12 months (despite OPEC's plans) as far as I'm concerned Qantas is a buy at the current price.
