Qantas Airways Profit to Soar -- Earnings Preview

Australia's largest airline, Qantas Airways Ltd. (QAN.AU), is scheduled to announce first-half earnings before the market opens on Tuesday (Feb. 23). Here's what you need to know:

EARNINGS FORECAST: Net profit of 645.8 million Australian dollars (US$462.8 million) is the consensus estimate of analysts surveyed by The Wall Street Journal, compared with A$203 million a year earlier. The carrier hasn't provided net profit guidance but said in December it expects an underlying profit before tax of between A$875 million and A$925 million, more than double the A$367 million it reported a year earlier.

REVENUE FORECAST: Revenue of A$8.48 billion is forecast, compared with A$8.07 billion reported a year earlier.

WHAT TO WATCH:

--CAPITAL RETURNS--After a six-year restructuring that helped return the company to profit in the last financial year, Qantas said in August it would hand out A$505 million in cash to its dividend-starved shareholders via a special distribution; Investors are hoping more capital will come their way. Morgan Stanley estimates the carrier could return about A$500 million to shareholders via a share buyback, while Macquarie thinks the airline is on course for a special dividend of 22.3 Australian cents a share.

--FUEL WINDFALL--Falling global oil prices are providing a major tailwind to the world's airlines by shrinking their jet fuel bills and Qantas is no different. Last year, falling fuel costs saved the carrier a whopping A$597 million, and Morgan Stanley estimates the majority of Qantas's profit gains this year will come from a further fuel price windfall.

--SLASHING COSTS--The airline's bottom line is also being helped by reduced costs from the company's turnaround plan. The company cut nearly A$900 million in costs in the last fiscal year, a level well above the A$600 million it had projected, representing about half of the A$2 billion in cost and productivity-led savings it is targeting by fiscal 2017. Expect management to give an update on its cost-cutting program Tuesday. Credit Suisse estimates the airline will deliver A$113 million in cuts during the half.

--RATIONAL GROWTH--Until a year ago, Qantas was engaged in a bruising battle with Virgin Australia to defend its 65% share of Australia's aviation market. The result was a glut in supply of air tickets, which had to be sold at a discount. Faced with mounting losses, both airlines eventually backed off on capacity growth and Qantas cut back unprofitable routes. Recently, the airline has started adding capacity in a more targeted way in response to rising demand on popular routes.

DEBT REDUCTION--In November, Qantas regained its prized investment grade rating from Standard & Poor's after being downgraded to "junk status" in 2013 when it was struggling financially. Morgan Stanley estimates that Qantas will generate A$1 billion of free cash in the first half and an additional A$500 million in the second half, thanks to rising revenue and lower oil prices. As a result, the broker thinks the airline could pay down another A$1 billion of debt as well as returning capital to shareholders.

Write to Rebecca Thurlow at [e-mail]

(END) Dow Jones Newswires

February 21, 2016 22:36 ET (03:36 GMT)

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