Qantas Says Profit May Fall 64% on Slowing Demand
By Iain Wilson, Shani Raja, Bloomberg News | Nov. 25, 2008
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Qantas Airways Ltd., Australia's largest carrier, said full-year profit may fall 64 percent to the lowest in six years as demand for international travel slows.
Profit before tax will be about AU$500 million (US$327 million) for the year ending Jun. 30, the Sydney-based company said in a statement to the Australian stock exchange.
Qantas reported earnings of AU$1.4 billion in fiscal 2008 and on Aug. 22 forecast profit before tax of AU$751 million this year.
The task of adjusting to the slowdown in demand and international business travel falls to Alan Joyce, the 42-year-old Irish man who takes over as chief executive officer this week.
Qantas will cut capacity and growth targets as rivals Cathay Pacific Airways Ltd. and Singapore Airlines Ltd. also forecast declining demand as the global recession erodes business travel.
"Some people might have unrealistic expectations of what Qantas can achieve in this adverse environment," said Donald Williams, chief investment officer at Sydney-based Platypus Asset Management Ltd., which oversees the equivalent of about US$768 million. "If you cut too hard, you can't respond to a change in circumstances."
Qantas will cut capacity by the equivalent of 10 aircraft, lowering its total number of flights over the next six months by about 4 percent and reducing its planned growth in fiscal 2010 to 2 percent from 10 percent.
Qantas shares fell 7 cents, or 3 percent, to AU$2.24 at the close in Sydney, valuing the airline at AU$4.4 billion.
They've declined 59 percent since Jan. 1, compared with the 43 percent drop in the S&P/ASX 200 Index and a 41 percent slide for Singapore Airlines Ltd., the world's largest carrier by market value.
Passenger Traffic
The drop in business travel is hurting the airline as it tries to correct safety lapses that have plagued the carrier this year.
A flight last month suddenly lost altitude, injuring passengers and crew. On Jul. 25, a Qantas aircraft made an emergency landing in Manila after an oxygen tank exploded, puncturing the plane's fuselage at 29,000 feet (8,800 meters).
Global airline-passenger traffic dropped in September, the first decline in five years, according to the International Air Transport Association (IATA).
At Qantas, revenue per passenger fell 2.1 percentage points in September compared with the same month a year ago, according to traffic and capacity statistics.
Qantas' international business passenger traffic fell 9.3 percent in September.
The carrier said on Nov. 25 that its fuel bill will be AU$750 million more than last year's AU$3.6 billion.
"By taking this action now we will have the flexibility to switch growth back on as soon as market conditions improve," outgoing Chief Executive Officer Geoff Dixon said in the statement. "We are in unpredictable times and the international business market, in particular, has slowed."
Currencies, Tourism
Joyce takes charge of the carrier almost five years after establishing the airline's discount unit, Jetstar.
While at Jetstar, Joyce turned the carrier into Qantas' fastest-growing unit, partly by targeting Qantas' less profitable routes with more fuel efficient aircraft and lower labor costs.
The Australian dollar has fallen 26 percent against the U.S. currency this year, limiting some of the benefits of cheaper fuel for Qantas as jet kerosene is priced in U.S. dollars.
The price of jet fuel has fallen 38 percent this year to US$67.95 a barrel in Singapore as of Nov. 24.
Singapore Airlines posted the biggest drop in profit in more than three years last quarter. The carrier said there were "signs of weakness" in advance bookings stemming from financial turmoil and weak consumer confidence.
Tourism demand is declining as Asia's economies slow.
Japan, the world's second-biggest economy, has entered a recession, leading to job cuts at companies including Toyota Motor Corp.
China's economy grew at the slowest pace in five years in the third quarter, prompting the government to announce a US$586 billion stimulus package.
Singapore lowered its growth forecast for a fourth time this year last week and said the economy may contract in 2009.
Photograph: Qantas planes at Australia's Sydney Kingsford Smith International Airport on Sep. 19, 2006. Photo by CARNOC.com message board member.