Qantas may halve its core earnings

QANTAS may at least halve its core earnings in the first half of this financial year as it bears the brunt of intense competition in the domestic market.

It has tried to bolster investor confidence by using proceeds from an asset sale and compensation from the US plane-maker Boeing to buy back shares and repay debt early.

Qantas expects to post an underlying pre-tax profit of between $180 million and $230 million in the first half.

But stripping out one-off payments from Boeing, the pre-tax earnings will be just $45 million to $95 million, due largely to excess capacity in the domestic market.

It compares with an underlying pre-tax profit of $202 million in the same period last financial year, which did not include a $194 million hit from an industrial dispute.

The battle between the country’s four largest airlines has led to heavy discounting of fares over the past six months. With Qantas revealing the impact to its bottom line on Thursday, Virgin Australia and the budget airline Tiger will also face a hit to their earnings over the coming months.

The airlines typically make most of their earnings in the first half.

Shares in Qantas rose as much as 6 per cent on Thursday, as investors responded positively to the buyback and debt reduction, before closing up 5¢ at $1.28.

A Macquarie Equities analyst, Russell Shaw,said the market was likely to take a favourable view of the airline’s latest measures, but the rate of earnings growth recovery ”continues to frustrate”.

Qantas chief executive Alan Joyce said the airline had signalled for some time that its earnings would take a hit from the intense competition in the domestic market.

”While the domestic market is going through a tough period, it has gone through that three times before in the last decade, and it has always rationalised,” he said.

”We are confident about coming out of that battle in a strong position.”

Mr Joyce said both Qantas and its budget offshoot, Jetstar, were still profitable in the domestic market, even though increased capacity had put pressure on yields – or returns from fares. Qantas will spend $100 million buying back about 4 per cent of its issued shares.

It will also will repay $650 million in debt in January – five months ahead of schedule – as part of a $1 billion debt reduction program this financial year. The airline will fund the measures from what it receives from the sale of its half stake in the road freight business Star Track Express, and the compensation from Boeing.

The two deals have delivered Qantas a total of $750 million this financial year.

The airline will also spend $100 million less on capital requirements this financial year than previously forecast.

Qantas did not give guidance for the second half because of volatile conditions, uncertainty in global economic conditions, fuel prices and foreign exchange rates.

The original release of this article first appeared on the website of Hangzhou Night Net.

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