Qantas Airways Limited is being buffetted by headwinds

Fuel savings, higher revenues and lower depreciation have so far delivered the results for Qantas Airways Limited (ASX:QAN)

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Qantas Airways Limited (ASX: QAN) CEO Alan Joyce said today that the airline faces intense competition on international routes – like most other global carriers.

As a result, airfares are below where they were 12 months ago.

Flight Centre Travel Group Ltd (ASX: FLT) has also noted recently that airlines chasing market share have pushed flights to London and other destinations to record lows. Many airlines are offering sub-$1,000 return airfares to the US, with China Southern offering a $894 return flight between Sydney and Los Angeles.

Vietnam Airlines is offering a $1,035 return flight to London from Sydney, and even Cathay Pacific has flights from $1,339 return.

Qantas chairman Leigh Clifford also said that the global economic recovery and the geopolitical environment remained volatile, while the domestic market was subdued following the end of the mining boom.

No wonder Qantas has seen its share price sink from a high of $4.22 in early April to as low as $2.58 on June 28, before a recovery saw the share price rise to the current level of around $3.25.

That's despite the airline's shares trading at a P/E ratio of 5.3x according to Commsec and expected to produce a similar result in the 2017 financial year as it did in FY16.

Mr Joyce says the airline will remain disciplined on cost, manage capacity to meet demand and use hedging to capture the benefits of cheaper fuel costs.

One of the big drivers of the airline's return to healthy profit has been the fall in the oil price from above US$100 a barrel to around US$51 a barrel currently.

As a result, Qantas' falling fuel bill is the biggest factor between its performance in 2014 and 2016. The airline's fuel cost in 2016 was $3,250 million, down $1.2 billion compared to the $4,461 million it was forced to fork out in FY14.

Other benefits include a ~$200 million reduction in depreciation and amortisation costs each year thanks to the $2.8 billion in write-offs in 2014.

The airline has also seen revenues rise by $848 million in the two years since 2014. But despite the much-vaunted transformation program of stripping out costs, employee-related costs have increased by $79 million or 2% since 2014. Total expenses, including fuel, have dropped 10%, despite the 27% fall in the airline's fuel bill.

The airline is also benefitting from having to pay out just $56 million in redundancies in the 2016 financial year compared to $370 million paid out in FY2014.

Foolish takeaway

Running an airline is an exercise in running fast to stand still. Read the Qantas annual report, and you'll discover the thousands of wheels in motion to keep the airline operating and costs from exploding.

Despite that, external factors, like increased international competition and a subdued local environment have seen the airline continue to struggle. No wonder the world's smartest investor Warren Buffett avoids airlines in general. Even at these cheap prices, I'm not tempted by Qantas shares.

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

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »