Qantas Ltd (ASX: QAN) is the major airline operator in the domestic market and a significant airline operator in the international market. It has a market capitalisation of A$9.4 billion.
What is the HY20 result?
Underlying Profit Before Tax for the HY20 is A$771 million (down 0.5% on HY19), while underlying earnings per share is 34.3 cents (up 10% on HY19). Unit revenue increased by 2.8% while total unit cost increased by 3.2%. The interim dividend is 13.5 cents per share (fully franked), a rise of 12.5% from 1H19.
What are the key drivers of this result?
Qantas’s three business units performed soundly in the HY20. Firstly, Group Domestic’s underlying EBIT in HY20 fell 6.8% to A$645 million. This reflected weak aggregate demand for domestic travel and higher airport costs. However, Qantas was able to maintain corporate market share and grow its share of small-to-medium enterprise travel, while demand related to the resources sector continues to increase. In fact, resources-related capacity is planned to grow by around 10% in the second half and Qantas is assessing moving additional A320s into the WA market.
Secondly, Group International’s underlying EBIT rose 2% to $162 million. Qantas International continues to benefit from the 747-to-787 fleet transition and the ultra-long haul network opportunities this opens up. Perth-London continued to outperform and new routes from Brisbane to Chicago and San Francisco went on sale in the first half. The joint business with American Airlines started in October and is performing above expectations. Jetstar International’s routes into South East Asia and Japan did well but a lower Australian dollar impacted price sensitive leisure demand to markets impacted by a strong US dollar.
Thirdly, Qantas Loyalty continued its earnings growth momentum, with underlying EBIT up 12% to $196 million. An overhaul of the Frequent Flyer program helped drive an increase in member engagement. This translated into a record number of total points earned across Qantas Loyalty, including a record number from credit cards and an increase from Woolworths Ltd (ASX: WOW) customers following improvements to that partnership.
What is the outlook?
The coronavirus virus is expected to have a significant impact on earnings in the second half of FY20. Qantas management expects that the net negative impact on earnings of between $100 million and $150 million EBIT in 2H20. This is based on current analysis of an evolving situation and Qantas provide an updated at the Q3 Trading announcement in April.
Qantas indicated that the Group’s total capacity to Asia will reduce by 15% from mid-February until at least the end of May and Qantas’ only route to mainland China (Shanghai) will remain suspended for the same period. In addition, Qantas is seeing some weakness in domestic demand emerging in February 2020, so it is adjusting Qantas’ and Jetstar’s capacity by about 2% in the second half.
On the positive, Qantas announcement an off-market buy to acquire $150 million of Qantas shares. Qantas is using the off-market buy back to pass on franking credits to shareholders. As a result, the off-market buy back could be of interest to investors seeking to benefit from franking credits such as self-managed super funds in the pension phase.
What is the market’s reaction?
The market is positive, as reflected in the 5% rise in the Qantas share price to around A$6.60. This positive reaction may be due to the announcement of the off-market buy back and the earnings downgrade due the coronavirus virus being better than expected. Qantas trades on a forward P/E ratio of around 10 and an annual dividend yield of around 4 per cent (fully franked).
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
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