Fuel costs to weigh down Qantas profit

QANTAS Airways shares slipped after the airline warned rising fuel costs would soon begin to weigh on earnings.

In a trading update yesterday, the carrier said it expected underlying profit — a measure that strips out one-off items — to rise as much as 11.5 per cent in its first half, the six months to December.

But it flagged “some toughening in trading conditions” in the following six months, with fuel costs among potential headwinds.

Shares in the company tumbled 7 per cent early yesterday after it released the trading update, but recovered much ground to end the session 1.4 per cent lower at $6.31.

It comes after a spectacular rally over the past year in the Qantas share price, which on Monday chalked up a record high close of $6.45.

Qantas said in the three months to September, revenue clocked in at $4.19 billion, up 5.1 per cent on the same period a year earlier.

It came amid improving trading conditions in both domestic and international, the group said.

The Flying Kangaroo said it expected its first-half underlying profit to rise from the previous year’s $852 million tally to between $900 million and $950 million.

However, chief executive Alan Joyce cautioned that the domestic market remained highly competitive.

“The high rate of revenue growth we’ve seen so far this year is likely to slow when compared with what was a strong second half last year,” he said.

“There’s been a welcome easing of capacity growth in the international market but the indications are that it is likely to pick up pace again in the second half.”

Qantas forecast full-year fuel costs of $3.21 billion, up from $3.04 billion in the previous past financial year.

In an investors’ report, Goldman Sachs analysts Owen Birrell and Joseph Horbec said Qantas delivered a solid first quarter and the airline’s outlook was “overly cautious”.

“While Qantas appears to talk down the second half outlook due to ongoing sector competition, rising fuel costs and lower rates of year-onyear growth, that appears based on a view that there is limited recovery in passenger demand,” they said.

Qantas’s capacity in the first half is expected to be up 2 to 3 per cent from a year ago, despite a drop of the same magnitude domestically.

Mr Joyce said the benefit of international route changes were significant and the full benefits would become apparent next financial year.