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Qantas shares rally on results, but CEO says earnings volatility part of airline business

Australian flag carrier Qantas Airways on Thursday announced better-than-expected results, sending share prices rallying to a 10-month high even as net profits tanked 25 percent from a year ago.

The airline posted underlying pre-tax profit of A$852 million ($653 million) for its first half ending December 31, down from A$921 million a year earlier, but ahead of the A$800-A$850 million guidance it gave in October. Net profit fell to A$515 million.

In an interview on CNBC's "Squawk Box", Qantas CEO Alan Joyce highlighted challenges of the business but said the company recorded its third best first half in its history and was "making more money than nearly all of the major carriers put together". Qantas he said, gave a 22 percent return on investor capital.

"Everybody in the region is having bigger drops, 50 per cent to 80 per cent drops in the profitability," Joyce told reporters earlier.

Even though Qantas saw a 7.5 percent drop in underlying profit and a 25 percent drop in net profits for the first half of the year, the company was coming off a year of record profits the year before that saw the carrier hand out its first dividend since 2009 amid an ongoing restructuring program that has borne fruit for the carrier amid challenging operating conditions in the industry.

"A lot of capacity has been added around the globe. What that is doing is lowering average airfares and passing back the fuel benefits that the airlines are getting back to consumers," he said.

Australian airline Qantas, seen here with CEO Alan Joyce, launched daily flights between Sydney and Beijing in January 2017 for the first time since 2009 to capitalise on the increasing growth of the Australia-China travel market.
Peter Parks | AFP | Getty Images
Australian airline Qantas, seen here with CEO Alan Joyce, launched daily flights between Sydney and Beijing in January 2017 for the first time since 2009 to capitalise on the increasing growth of the Australia-China travel market.

"The strong domestic and loyalty base insulates us from some of the capacity that has been added globally," he added. Qantas subsidiaries include the budget Jetstar Airways.

Among new developments is a repositioning of additional capacity in its Asian routes, particularly to and from China where it resumed flights to Beijing last month—seven years after it axed the service.

According to the Australian Bureau of Statistics, a record 1.2 million Chinese tourists visited Australia in 2016, up from 1 million in 2015.

While its traditional capacity allocation was distributed evenly among the American, European and Asian regions, Joyce said Qantas has repositioned its strategy. In the last two years, some 90 percent of capacity growth was to Asia which now accounts for 50 percent of the airline's capacity.

"We think that growth will continue…There's a great story in Asia, the weakness is more in the European markets," he said.

While Qantas said it would push back the delivery dates for the first of 99 Airbus A320neo aircraft for Jetstar until the 2019 financial year from this calendar year, Joyce said it was to rebalance capital expenditure as the company invests in services such as new lounges and wifi. Jetstar will not be at a disadvantage as no other airlines in Australia will be operating a new generation of aircraft until 2019, he added.

Contango Asset Management CIO George Boubouras was upbeat on the outlook for the airlines, describing the results as a vast turnaround for the carrier delivering "quality earnings" in an industry facing "not-quite-quality growth".

"The opportunities on the international scale are still promising...the China market is critical for them going forward ," he told CNBC's "The Rundown."

Bobouras added Qantas' new long haul routes from Australia to London starting next year that will be serviced by a new fleet of Dreamliners could be a "game changer" for the airlines.

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