Qantas Airways Limited’s [ASX:QAN] share price slipped after their interim financial report for 1H19 revealed a net profit decrease due to a 27% jump in fuel costs — resulting in a $416 million increase in the fuel bill.
At time of writing, Qantas shares remain at $5.76 after sliding down 0.88% earlier this morning.
Qantas remains one of Australia’s most popular airlines and continues to dominate Australia’s aviation market alongside Virgin Australia.
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Are fuel bills driving profits lower?
Qantas’ overall domestic operations (including Jetstar) grew by 1%, returning a profit of $659 million. In comparison, the international arm struggled to make a profit against rising fuel costs. International earnings came in at $90 million — down 60%.
Higher global fuel prices in 2018 meant that rival airlines Air New Zealand and Singapore Airlines also faced difficulty reaching expected profit margins, leading to increased insecurity and fiercer competition.
Overall net profit for the period ending 31 December 2018 was down 16.3% from $595 million to $498 million.
Even with the loss, CEO Alan Joyce was quick to look on the bright side. The company experienced a record half-year revenue rise of 5.7%, which was helped along by domestic earnings and ‘disciplined capacity management’ — otherwise understood as increasing the capacity on international flights.
Management say this has helped to offset rising fuel costs against the fall in earnings.
‘Higher oil prices were a significant headwind and we moved quickly to recover as much of the fuel cost as we could,’ Mr Joyce said.
Declining oil prices are now expected to make it easier for Qantas to recapture their targeted profit in the second half.
Qantas share price outlook for second half of FY19
Despite this setback, Mr Joyce was confident that Qantas is not set to experience the same headwinds as major retailers and other industries which have suffered as a result of slow wage growth and decreased consumer spending.
‘We are not seeing some of what the retail sector is seeing out there, maybe because a new generation of flyers are spending more on experiences and less on retail and alcohol.’
Instead, the company predicts uphill guidance and solid revenue growth based on further cost-cutting measures and decreasing fuel prices in the next six months.
But in an ever-contrary market, Qantas will also be looking to keep shareholders onside with an interim dividend gesture of $500 million to shareholders at 12 cents a share — up from seven cents.
‘These factors point to a strong second half, and we expect to completely recover our increased fuel costs by the end of this financial year.’
For Money Morning
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