The share price of Qantas Airways Limited (ASX: QAN) is up a massive 77% this year. That makes it the best performer by far on the ASX 100. The shares are also up 500% from their cyclical low point in mid 2013 when rising oil prices, high costs, and union issues were all conspiring against the company.
Since then, it's been upside only for Qantas as all these problems have reversed themselves. In addition, a huge share buy-back programme has reduced shares in issue by 18%.
Analysts' forecasts have been consistently upgraded over the period. Qantas is now forecasting half year profits of $900-$950m, compared to $850m the previous year.
But industries don't get much more cyclical than airlines. What goes up must eventually go down. In fact, there are signs that this is already happening, with the shares off 11% in the last month.
There are a number of factors that are now starting to come into play:
Firstly, there's oil prices. They're up 20% in the last three months. At its AGM in late October, Qantas CEO Alan Joyce warned that conditions were likely to toughen in the second half, in large part due to that rise in fuel prices.
At the then price of A$74 per barrel, he said that fuel would likely cost Qantas $3.2 billion v $3 billion in 2017. Readers should note that since then, the A$ price of oil has risen a further 3.4%.
Secondly, Joyce also warned that more international capacity growth would affect unit prices in the second half. That's coming on the back of a 3% increase in competitor capacity in Q1.
Thirdly, there's the question of the scope for further cost reductions. In 2014, as part of its major and successfully implemented strategy update, Qantas announced $2 billion of cost reductions by June 2017. Having achieved these, the scope for cost and revenue improvements is now reckoned to be $400m p.a. That's no mean feat, but the heavy lifting has arguably already been done.
Foolish takeaway
The strong earnings momentum that has propelled the group's share price may now be coming to an end. Arguably, half year earnings will represent the high point. On that basis, I reckon it's time for Qantas shareholders to take their profits.
