Results: Qantas profits slide but $500 million shareholder return announced

The Qantas Airways Limited (ASX:QAN) share price will be on watch on Thursday after the airline reported a decline in profits…

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The Qantas Airways Limited (ASX: QAN) share price will be on watch this morning following the release of the airline’s half year result.

What happened in the first half?

For the six months to December 31, Qantas posted a 5.8% increase in revenue to $9,206 million and a 18.7% decline in underlying profit before tax of $780 million.

Net passenger revenue was up 6% to $8,027 million, net freight revenue increased 15% to $525 million, and other revenue rose 3% to $654 million.

The main drag on the company’s profits during the half was rising oil prices which led to a $416 million increase in fuel costs to $2 billion.

This offset the solid revenue growth which was driven partly by a 1.3% lift in passengers carried to 28.5 million and a 5.7% increase in unit revenue (RASK) to $8.94.

How did its businesses perform?

The Qantas Domestic business performed well during the first half. It generated revenue of $3,230 million and a record underlying earnings before interest and tax (EBIT) of $453 million. This was a 5.7% and 0.9% increase, respectively, on the prior corresponding period.

Things weren’t quite as positive for the Qantas International business which posted a 6.7% lift in revenue to $3,693 million and a 60% decline in EBIT to $90 million. Higher fuel costs, increasing selling costs, and foreign exchange impacts weighed on its performance.

The Jetstar business posted revenue of $2,048 million and underlying EBIT of $253 million. This was a 5.1% increase and a 19.7% decline, respectively, on the prior corresponding period. A record result from its domestic operations was offset by weakness in Jetstar’s international operations.

The Qantas Loyalty business put in another solid performance. Revenue rose 8.2% to $809 million and underlying EBIT increased 4.2% to $175 million.

How will the market react?

Whilst I felt this result was very strong given the difficult trading conditions and higher fuel costs, it does appear to have fallen short of the market’s expectations.

According to a note out of Goldman Sachs, it was expecting sales of $8,990 million and an underlying profit before tax of $865 million. Although Qantas beat on the top line, it has missed by a decent margin on the bottom line.

One positive, though, is that Qantas has announced a $500 million shareholder return. This comprises an interim dividend of 12 cents per share fully franked and an on-market buyback of up to $305 million.

Further, management is confident that higher fuel costs for FY 2019 will be fully recovered by the end of the year.

In its outlook management said: “With strong forward revenue projections, reduced fuel headwinds and continued transformation, the Group expects to generate strong net free cash flow during 2H19.”

Should you invest?

I’m a big fan of Qantas and feel it could be well worth taking a closer look at the company when the dust settles on this result. I would certainly choose it ahead of rivals Air New Zealand Limited (ASX: AIZ) and Virgin Australia Holdings Ltd (ASX: VAH).

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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 Scott Phillips.

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