Qantas Profit Declines Less Than Expected Amid Competition (1)

(Bloomberg) -- Qantas Airways Ltd.’s first-half earnings dropped less than the company’s forecast amid a recovery in the domestic market, while competition on international routes weighed on air fares. Shares jumped the most in almost eight months.

Chief Executive Officer Alan Joyce, who is in the final six months of a three-year turnaround plan, said confidence is returning in the Australian economy and that trend would continue in the second half of the year. After ditching some unprofitable long-haul routes to Europe, Joyce is focusing on shorter legs within Asia for growth.

“We’re very confident about our position against our major domestic competitor, both domestically and internationally,” Joyce told Betty Liu and Yvonne Man in a Bloomberg Television interview from Sydney after announcing a 7.5 percent decline in underlying profit before tax in the six months through Dec. 31.

Encouraged by cheaper oil, Australia’s largest carrier is among many that are expanding internationally even as capacity addition has pushed down air fares, hurting their earnings. Qantas’s main domestic rival, Virgin Australia Holdings Ltd., last week said demand was subdued after reporting a loss and deferring initial deliveries of a 40-plane order from Boeing Co. worth $4.4 billion.

Qantas is “getting more efficient,” said Evan Lucas, a market strategist at IG Ltd. in Melbourne. “It means they are taking market share away from Virgin and that’s the first time we’ve seen in about three years. It’s impressive.”

Qantas shares climbed 5.2 percent to A$3.735 as of 12:34 p.m. in Sydney, after gaining as much as 6.5 percent earlier, the most since June 29. That compares with a 0.3 percent loss for the benchmark S&P/ASX 200 Index.

Underlying profit before tax in the first half fell to A$852 million ($654 million) from A$921 million in the same period a year earlier, Qantas said in a statement. The carrier had estimated profit of between A$800 million and A$850 million. It will pay an interim dividend of 7 cents a share.

Qantas has identified China as a key growth area on the prospect of increased Chinese tourism after resuming services to Beijing from Sydney.

“The Chinese growth into Australia continues to be unbelievably significant,” Joyce told reporters Thursday. A new Beijing service and a partnership with China Eastern Airlines Corp. are “a good growth opportunity for us going forward.”

All the same, Qantas said it’s on target to deliver A$2.1 billion in savings by the end of June from Joyce’s turnaround program. From then on, Qantas is targeting an annual average of A$400 million in cost and revenue benefits, Joyce said.

This year, Qantas will receive the first of its eight Boeing Dreamliners and in 2018 will start the world’s first direct flights between Perth and London, a 17-hour non-stop flight.

(Updates with analyst’s comment in fifth paragraph.)

--With assistance from Karolina Miziolek and Ruth Liew

To contact the reporters on this story: Angus Whitley in Sydney at awhitley1@bloomberg.net, Kyunghee Park in Singapore at kpark3@bloomberg.net.

To contact the editors responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net, Edward Johnson, Sam Nagarajan

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