3rd UPDATE: Qantas 1st Half Falls 66%; To Raise Over A$500 Million

Qantas Airways Ltd. (QAN.AU) posted a 66% dive in first half earnings Wednesday and refuted suggestions a planned A$500 million capital raising will be used to boost a war chest to acquire other struggling airlines.

Net profit for the Australian national carrier's six months to Dec. 31 fell to A$210 million from A$617.6 million a year earlier, marginally beating profit forecasts of around A$203.7 million according to an average forecast from a survey of four analysts by Dow Jones Newswires.

Australia's largest airline by revenue and passengers carried controls roughly two thirds of the domestic aviation market, and about 30% of international passenger movements in Australia, through its mainline, discount Jetstar and regional airline operations.

Despite continuing speculation that Qantas will seek a tie up with an Asian airline following the collapse in December of merger negotiations with British Airways plc (BAY.LN), Chief Executive Alan Joyce told reporters on a conference call that the capital raising, coupled with the airline's A$2.8 billion in cash, was "not us bulking up for acquisitions."

"We're not actively involved in any merger negotiations, we are focused in on our core business and we think in the current environment that's important for us to do," said Joyce.

To boost its "financial flexibility", the airline said it will raise A$500 million from an institutional placement and will also allow other shareholders to subscribe for up to A$10,000 worth of ordinary shares through a share purchase plan.

The capital will be used to support its A$35 billion dollar fleet renewal program, reduce net debt, and support its investment grade credit rating, Qantas said.

However market watchers were disappointed with the airline's willingness to dilute existing shareholders value without a clear need or plan for the equity issue.

I think it reflects a very slack attitude to capital," said one analyst at an international investment bank.

"Sure it makes you more comfortable running your business but it's not too good for shareholders and there's no real reason given for what it's for," said the analyst who declined to be named.

Ratings agency Standard & Poor's said Wednesday its BBB+ credit rating on Qantas would not be immediately affected by the capital raising, while its rating outlook remains negative, "reflecting the tough trading conditions facing the airline industry globally, the pressure on Qantas' cash flow, and the lack of visibility over when trading conditions might improve."

The indicative price range of shares to be issued in the placement, underwritten jointly by Macquarie Capital Advisors and UBS, is A$1.80 to A$1.95 per share, market participants told Dow Jones Newswires.

While the range represents a discount of between 15% and 21% to Qantas' last traded price of A$2.29, the final price, which will also be the maximum price paid under the SPP, will be determined by a bookbuild due to close at 0600 GMT.

 
    Not Immune From Challenges But Remains Flexible 
 

Joyce said while Qantas isn't immune from the challenges posed by current global economic conditions, it is differentiated from many of the recently failed global airlines by its high degree of structural flexibility.

"With two flying brands and a diversified portfolio of businesses, the Group has the scale and scope to respond rapidly to market developments and will be well-positioned to resume growth as soon as conditions improve," he said in a statement.

Joyce said Qantas, which has already significantly reduced planned capacity for the next 18 months, "will continue to monitor all our routes and make further decisions as necessary to protect our bottom line."

He told reporters that premium travel classes remain weak, but there had been no further deterioration in forward bookings from that detailed in November's profit warning.

In 2008 the airline undertook two rounds of capacity cuts and sacked 1,500 workers as the global financial crisis hurt passenger demand.

Group revenue rose 1.7% to A$7.92 billion from A$7.79 billion, however passenger revenue from its flying businesses fell 0.7% to A$6.4 billion.

The airline declared an interim dividend of 6 cents a share, down from 18 cents, and reaffirmed its November guidance for fiscal 2009 net profit before tax of around A$500 million.

Mark Williams, a transport analyst at ABN AMRO in Sydney, said "all up it was pretty much what we were expecting - a difficult first half and they've reiterated their guidance for the full year, but it's dependent on market conditions."

"Jetstar looked to have held up a little bit better, which fits the view that international premium (classes) have struggled more than the domestic leisure segment of the market," said Williams.

Analysts forecast net profit this fiscal year will fall nearly 60% to A$403.9 million from a record A$969.0 million last fiscal year, according to a survey of eight analysts by Thomson Reuters, as slowing consumer demand, particularly for premium travel and on international routes, begins to bite.

Qantas' revenue seat factor in the first half, a measure of how many seats the airline filled across its fleet, fell by 2.4 percentage points to 79.7%, while the airline carried 19.6 million passengers, around 144,000 less than a year ago.

On its Jetstar discount services passenger numbers rose 14%, in line with capacity growth, from expansion of its international routes and the reallocation of routes from capacity cuts of 2% on its mainline brand.

The group's mainline Qantas business, including its international, domestic and regional airlines, along with its engineering and services businesses, was affected by a downturn in premium and international travel, and the impact of a strike by its aircraft engineers.

Profit before tax from Jetstar fell 48% to A$72 million and was down 76% to A$199 million from the mainline brands.

Since October 2007 Qantas shares have fallen from a record high of A$6.06 to as low as A$2.10, their lowest price in more than 10 years, and last traded at A$2.29.

The shares are expected to recommence trading Thursday, pending completion of the placement.

-By Bill Lindsay, Dow Jones Newswires; 61-2-8235-2956; [e-mail]

(David Rogers in Sydney contributed to this article)

Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary. You can use this link on the day this article is published and the following day.