Qantas Airways Limited is being buffetted by headwinds

Credit: Joits

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.

These Low Interest Rates Could Totally Devastate Your Retirement!

With global interest rates set to remain at these "emergency low" levels for years -- perhaps even decades -- unless you take decisive action NOW, your retirement could be seriously at risk. Click here to learn how to NOT run out of money in retirement.

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.