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Qantas reveals the impact of the coronavirus with its half year results

The Qantas Airways Limited (ASX: QAN) share price will be one to watch on Thursday.

This morning the airline operator released its half year results and became the latest travel company to warn of the impacts of the coronavirus on its business.

How did Qantas perform in the first half?

During the first half of FY 2020 Qantas delivered record revenue of $9,464 million, which was a 2.8% increase on the prior corresponding period. This was the result of a 3.5% lift in net passenger revenue to $8,305 million, a 1.4% lift in other revenue to $663 million, and partially offset by a 5.5% decline in net freight revenue to $496 million.

But due to weaker margins, underlying profit before tax came in 0.5% lower than the prior corresponding period at $771 million. First half statutory profit before tax was down 6.2% to $648 million. The statutory result from the prior corresponding period included an $88 million gain on the sale of assets and an impairment reversal.

Despite the softer profit result, the Qantas board has continued to grow its dividend. It has declared a 13.5 cents per share fully franked interim dividend. This is up 12.5% on the prior corresponding period. The company has also announced an off-market share buy-back of up to $150 million.

Qantas’ CEO, Alan Joyce, was pleased with the first half. Especially considering the tough market conditions it dealt with.  He said: “Overall, our performance in the first half was very positive and it shows we remain in a strong position going forward.”

What were the drivers of the result?

Speaking about the domestic business, the CEO advised: “In the domestic market we dealt with some travel demand weakness and a structural change in our overheads from the sale of domestic terminals. Fundamentally, Qantas and Jetstar both did well.”

As Joyce said, the fundamentals of the Group Domestic business remained strong in the first half. However, headwinds led to a 7.2% reduction in underlying EBIT to $645 million.

The Group International business had a better half. Mr Joyce explained: “Internationally, the growth in passenger revenue outweighed the impact of disruption in Hong Kong and a freight market affected by trade wars. Our ultra-long haul routes like Perth-London continue to perform extremely well.”

This led to Group International underlying EBIT rising by 2.5% to $162 million.

But the star of the show was its Loyalty business. “Loyalty achieved another record result. The overhaul of the Frequent Flyer program has increased member engagement, which is key to the program’s long-term success,’ advised Mr Joyce. Underlying Loyalty EBIT jumped 12% to $196 million in the first half.

Coronavirus impact.

Qantas has taken immediate action in response to demand weakness as a result of the coronavirus outbreak.

Mr Joyce advised: “Coronavirus resulted in the suspension of our flights to mainland China and we’re now seeing some secondary impacts with weaker demand on Hong Kong, Singapore and to a lesser extent, Japan. Other key routes, like the US and UK, haven’t been impacted.”

In light of this, the company’s total capacity to Asia will reduce by 15% from now until at least the end of May. Qantas’ only route to mainland China (Shanghai) will remain suspended for the same period.

The capacity cuts extend to the domestic business as well. Joyce added: “We’ve also seen some domestic demand weakness emerging in February, so we’re adjusting Qantas and Jetstar’s capacity by about 2 per cent in the second half.”

Importantly, the company retains the flexibility to respond to the situation if market conditions improve or worsen. The company advised that it can extend how long the capacity cuts are in place, deepen them, or add seats back when demand rebounds.

The impact of coronavirus on its underlying EBIT, after capacity adjustments and lower fuel costs, will be an estimated at $100 million to $150 million in FY 2020.

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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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