Qantas investors get little joy from Joyce
Sydney Morning Herald
Friday February 19, 2010
In mid December Qantas issued a market update correcting previous guidance that in the half year to December 30 it would be in loss. It told investors its statutory profit would come in between $50 million and $150 million.But at the end of December it experienced a rapid reversal in its fortunes, and $50 million of its profit had evaporated in less than a week.Qantas did not need to tell the market of this, presumably because even after taking this into account the profit would still fall within the recently stated range.But in the minds of investors, Qantas would hit the $150 million mark or at least something close to it.When the numbers were made public yesterday and the statutory profit came in at a more meagre $90 million there was an understandable knee-jerk reaction. The shares were trashed. It is a well understood dance in the professional investment market. If you provide profit guidance you are expected to come in at the upper end of the range or exceed it.Companies that under-deliver are usually punished, and yesterday Qantas was no exception. The airline made plenty of positive noise about improvements in its financial metrics in that mid-December update. And while these stand as the world continues to slowly climb out of the doldrums the fact is that Qantas still battles with its two biggest costs - fuel and wages.In that week in late December fuel prices and currency went against it. Big time. And this goes to the heart of why in the second half of the 2010 financial year (the six months to June 30) it will deliver a profit that is well below the half it just reported.A change in the accounting regime for Qantas can explain some of the change in statutory profit referred to above but it does not alter the fact that costs associated with wages (that rise in line with CPI) and fuel are both outside the company's control and rising faster than additional sales revenue can offset.Qantas is taking costs out of its business in this financial year of $500 million - of which $300 million will come out in the second half.But over the year it will have to pay another $300 million in pay rises to its staff and in the second half it will be hit with an additional $200 million in fuel costs and another $50 million in depreciation.Once this is all netted out, the guidance for underlying profit (not statutory profit) will fall from $267 million in the first half to between $33 million and $133 million in the second half. Not surprisingly the market was underwhelmed.Even if one factors in that the second half is traditionally weaker, and if not for the additional fuel and depreciation charge it would have beaten the first half, the fact remains that investors were under the impression that if business conditions and revenue were improving the profit would be going along for the ride.To make matters worse, investors will receive no dividend in the first half. They did not get a full-year dividend last year, and plenty of them are not thrilled about it.The only consolation is that if revenue continues to pick up, the 2011 year may provide more impressive earnings. But that is a way off.In the meantime Qantas needs to battle with its biggest enemy - fuel.There are two reasons the cost of fuel is such an issue. Firstly, it plays havoc with its statutory profits. Qantas hedges a large part of its fuel costs and when the cost moves around it can cause enormous swings in reported profit. Exchange rate swings have the same effect. This is what caused the $50 million change in profitability in late December.Then there is the real cost of fuel that is slugging the earnings. Qantas could have mitigated the effects of fuel gyrations had it picked movements better and adopted a better hedging policy. But that's all with the value of hindsight.Instead the Qantas boss Alan Joyce has now to operate in a still depressed (albeit improving) market where domestic holiday passengers are happy to fly Jetstar but his high-yielding corporate customers have yet to return to international routes in any serious way, and costs continue to rise.On top of this, the story has not been adequately communicated to investors. This is now his immediate job. Maybe investors can be persuaded that the cyclical decline has declined.