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Qantas profits to be hit by Hong Kong protests and US-China trade war

The Qantas Airways Limited (ASX: QAN) share price has hit a spot of turbulence after releasing its first quarter update.

The airline operator’s shares dropped as much as 5.5% to $6.17 in early trade.

How did Qantas perform in the first quarter?

During the first quarter Qantas reported a 1.8% increase in total group revenue to a record of $4.56 billion.

Over the period the airline’s group unit revenue increased 2.1% compared to the same time last year. However, total group capacity was down 0.2% due to a 0.6% decrease for the Group International business. This offset a 0.5% increase in Group Domestic capacity driven by growth in the resources market.

Qantas advised that corporate travel demand was flat and small business travel demand growth slowed. Pleasingly, its market share in both segments continued to increase. Premium leisure demand remained steady during the quarter, whereas regular leisure demand weakened.

Headwinds hitting its profits.

Unfortunately, the Hong Kong protests and the US-China trade war are expected to negatively impact Qantas’ bottom line.

The protests are forecast to impact its first half profit performance by $25 million. Management is now cutting capacity in order to minimise the second half impact.

In respect to the trade war, Qantas notes that a further deterioration in global trade conditions has impacted freight demand. It expects a full year profit impact of $25 million to $30 million in FY 2020.

Whilst this is disappointing, it will be more than offset by its transformation benefits. Qantas advised that it is on track to deliver at least $400 million in transformation benefits in FY 2020.

Qantas’ CEO, Alan Joyce, was pleased with the first quarter.

He said: “The Group continues to perform well, with strength in key parts of our portfolio helping to offset softness in other areas. Qantas International has seen significant upside from competitor capacity contracting more than anticipated, which is expected to continue for at least the remainder of the first half.”

“Given the slower revenue environment, we have a strong focus on cost reduction to make sure we keep delivering on our transformation targets. Part of this is about taking opportunities to reduce complexity and constantly improving how efficiently we manage our business,” added Mr Joyce.

Overall, I thought this was a solid quarter given the difficult trading conditions. I feel today’s share price weakness could be a buying opportunity.

Also on the move in the travel sector today have been the shares of Helloworld Travel Ltd (ASX: HLO) and Webjet Limited (ASX: WEB) following updates of their own.

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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Helloworld Limited. The Motley Fool Australia has recommended Helloworld Limited and Webjet Ltd. 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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