Qantas shares take a dive

Eleanor Steed
By Eleanor Steed October 31, 2016 09:02

Qantas shares take a dive

Qantas shares have fallen nearly 10% following the airline’s warning that its interim underlying profit could fall by 13%. The Australian flag carrier has forecast an underlying profit before tax of $800 million to $850 million for the six months to December 31, down from $921 million over the same period a year earlier. This is blamed on international competition and a flat domestic market.

This news follows a 3% fall in revenue to $3.98 billion for the three months to September 30 from $4.11 billion a year earlier. The driver was falling international fares.

Chief executive Alan Joyce stated: “Like most carriers globally, we are seeing international air fares below where they were 12 months ago, but the impact of that is tempered by the competitive advantages we’ve been working hard to fortify, including our strong domestic position and diversified Loyalty business.”

The good news is passenger numbers are up 2.5% for the quarter to 13.2 million, on the back of 2.2% growth in capacity in the three months to September 30.

Qantas shares have been riding very high of late and this is more of a correction than a loss of confidence by investors. The truth is that the Qantas figures, will, in the cold light of day in the not too distant future, read as one of the better fairing airlines in this crowded market.

Meanwhile the aircraft financing community continues to fret about Basel IV, which will increase the amount of money banks would have to set aside against the risk of an airline defaulting. This will increase the cost of aircraft finance in the future and it may narrow the field of active financial institutions in the market. Some would argue that this would not be an all bad situation.

Standard Chartered is reported by the Financial Times to be in advanced talks over a Chinese joint venture with “either a state or a provincial entity” that would see it manage the portfolio of leased aircraft for Chinese airline(s). Standard Chartered has been looking to offer the same type of agreement in other areas of the world too. In a market where lease rates are falling and the outlook for aircraft life spans is uncertain, this is a prudent move to rapidly grow in the asset management side, which will, in the end, provide the edge to lead front end lease and finance agreements.

In the USA, there is some interesting activity in American Airlines Group share trading: Short interest has grown to 7.3% of the total shares in circulation. So do some investors know something? The shares are riding high following the October 20 earnings report. The airline earned $10.60 billion during the quarter, compared to analysts’ expectations of $5.43 billion. During the same quarter last year, the business posted $2.77 earnings per share, revenue was down 1.0% on a year-on-year basis. Analysts expect that American Airlines Group will post $5.46 EPS for the current fiscal year. Many are now betting that will be revised down.

Eleanor Steed
By Eleanor Steed October 31, 2016 09:02