Qantas sees stronger second half on solid demand, relief from high fuel prices

SINGAPORE (REUTERS) - Australia's Qantas Airways Ltd said on Thursday (Feb 21) it expected a strong second half based on solid forward bookings and relief from high fuel prices which drove its first-half profit down 19 per cent.

The airline recovered fuel price increases through higher fares in the domestic market in the first half but was unable to make up those costs on international fares due to stiff competition.

Rivals including Air New Zealand and Singapore Airlines have also struggled to maintain margins due to higher fuel prices, but the outlook is improving given the price of oil has fallen from a peak in October.

"Looking ahead, we believe the Qantas Group is well positioned," Chief Executive Alan Joyce told reporters, pointing to strong forward bookings, slowing capacity growth by rivals in the international market and cost-cutting measures.

"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."

Underlying profit before tax fell to A$780 million (S$755.3 million) for the six months ended Dec. 31, from a record A$959 million a year ago, adjusted for accounting changes, and its lowest since 2015. Revenue rose 6 per cent to A$9.21 billion.

Despite the earnings decline, Qantas had the confidence to announce the return of A$500 million to shareholders through dividends and share buybacks.

Qantas shares fell more than 2 per cent in morning trade following the results, before recovering to be 0.4 per cent lower in a slightly stronger broader market.

The airline said its capital spending forecast for the year had risen by A$600 million to A$1.6 billion due to delayed proceeds from an airport terminal sale, bringing forward aircraft payments and the purchase of a 20 per cent stake in charter operator Alliance Aviation Services Ltd.

The Australian domestic aviation market is largely a duopoly between Qantas and smaller rival Virgin Australia Holdings, both of which have increased fares and boosted domestic earnings by keeping a lid on capacity.

Last week, Virgin posted its best half-year underlying profit before tax in a decade and forecast a 7 per cent rise in revenue in the current quarter on the strength of its domestic business and forward bookings.

Qantas said forward bookings were up 6.8 per cent as of Dec 31 and domestic and international capacity would be flat in the second half.

Australian consumer confidence has been hit by falling house prices and a sluggish economic outlook, hitting earnings for companies such as supermarket operators Woolworths Group and Coles Group.

But Joyce said travelers were ready to cut back on retail spending in order to fly.

"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," he said.