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Why Qantas Airways Limited shares hit turbulence today

It certainly wasn’t a great start to the day for the Qantas Airways Limited (ASX: QAN) share price on Thursday.

The airline’s shares sank over 7% to $5.94 in early trade before recovering to be down a little under 2.5% at $6.25.

What happened?

This morning Qantas provided the market with an update on its performance during the first-quarter of FY 2018.

According to the update, the airline posted a 5.1% increase in quarterly revenue over the prior corresponding period to $4,190 million.

This was driven largely by improvements in domestic demand, proactive capacity management, and ultimately a 3.1% lift in unit revenue per available seat kilometre (RASK). RASK is a financial measure which combines the percentage of seats filled and average airfare prices.

Furthermore, conditions in the international market eased slightly despite a 3% increase in competitor capacity.

What’s next?

As a result of this solid first-quarter, management expects first-half underlying profit before tax of between $900 million and $950 million.

This will be an increase of between 5.6% and 11.5% on its profit before tax of $852 million during the first-half of FY 2017.

However, a forecast 6% to 7% increase in international competitor capacity and a rise in the oil price is expected to weigh on the company’s second-half result.

Based on a Brent forward market price of A$74 per barrel for the remainder of financial year 2018, management expects its full-year fuel cost to be approximately $3,210 million, compared to $3,040 million in FY 2017.

All in all, I believe this could result in flat to low single-digit earnings growth in FY 2018 depending on its performance in the second-quarter.

Should you invest?

While I still think that Qantas is a far better investment option to Virgin Australia Holdings Ltd (ASX: VAH) and AIR N.Z. FPO NZX (ASX: AIZ), I would class it as a hold now due to the rising oil price and its strong share price gain this year.

If oil prices start to slide lower once again then it could easily become a buy, but until that happens I would suggest investors hold off buying shares.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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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