Qantas Soars to Record Profit as Pain Pays Dividend

SYDNEY—A first dividend payment in seven years marks a big turnaround for Qantas Airways Ltd., which as recently as 2014 had been selling terminals, deferring plane orders and laying off staff to stem losses from a bruising battle for dominance in Australia's skies.

It also comes as some of its biggest regional rivals, including Cathay Pacific Airways Ltd., remain in a funk.

Qantas, known as the "Flying Kangaroo," on Wednesday reported an 85% rise in net profit for the year through June to A$1.03 billion (US$780 million). The result, which Qantas said was the best in the company's 95-year history, comes just two years after it posted a A$2.8 billion annual loss amid a costly price war with domestic rival Virgin Australia Holdings Ltd.

Qantas' recovery owes much to painful decisions made by management who bet that defending the airline's 65% share of the domestic market was more important than catering to yield-hungry investors. In late 2013, Qantas set a target of saving A$2 billion by flying its planes more, overhauling its fleet and reducing head count.

Since then, Qantas has cut A$1.66 billion in annual costs and said Wednesday that it is on track to save a total of A$2.1 billion by next year, more than the A$2 billion initially expected.

"Essentially, without that we would have produced a loss," Chief Executive Alan Joyce said.

Mr. Joyce added that Qantas' fuel hedges had saved it A$664 million compared with the prior year, as the airline avoided the missteps in strategy that led Cathay Pacific's first-half net profit to slump 82%. Earlier this month, Cathay reported a fuel-hedging loss of HK$4.49 billion (US$579 million) after being caught on the wrong side of swings in global oil prices.

Qantas investors were rewarded for their patience with a final dividend of 7 Australian cents per share, representing the first such payout since 2009. The airline also said it would buy back shares worth A$366 million, bringing the total targeted capital return to A$500 million. Qantas shares jumped on the result, rising 2.4% to A$3.48 at 0418 GMT to outpace the broader Australian stock market, which was up 0.2%.

Qantas' bruising battle with Virgin Australia, which saw both airlines add seats and slash airfares to woo customers, wiped nearly A$1 billion from industry earnings from 2012 to 2014, according to analyst estimates. Virgin Australia hasn't recovered as quickly as Qantas, posting a A$224.7 million annual loss earlier this month as it sought to remove unwanted aircraft from service.

To be sure, both airlines continue to face turbulence even as a truce in the capacity war holds. Qantas said Wednesday it didn't expect to increase capacity on domestic routes in the six months through December, and it may even fall by 1%.

The company said annual revenue from flying Qantas-branded planes to regions of Australia that rely on the resources industry fell A$121 million compared with the 2015 financial year, although overall earnings before interest and tax at its domestic business rose 20% to a record A$578 million.

On international routes, Qantas planned to increase capacity by around 4% during the six months through December, with a lower Australian dollar making the country a more enticing vacation option for overseas travelers, especially from Asia and the U.S. Qantas added that it expects to take delivery of 787-9 Dreamliners from Boeing Co. starting in around 15 months, which could fly to Europe and the U.S.

Meanwhile, the company's Jetstar budget carrier in Japan posted its first full-year profit since it started flying in 2012.

"The Chinese market is booming, the Japanese market has been exceptionally good," Mr. Joyce said. "We're seeing very strong growth from the U.S."

Mr. Joyce, originally from Ireland, has led Qantas since 2008. Before presiding over the loss two years ago, he made the controversial decision in 2011 to ground Qantas' fleet amid a dispute with its unions.

His actions came under intense scrutiny in Australia because Qantas is one of the country's most well-recognized brands. Its frequent flier program has some 11.2 million members, which is about 47% of the Australian population, according to J.P. Morgan. In comparison, programs from American Airlines Group Inc. and Delta Air Lines Inc., the two biggest U.S. carriers by traffic, have 31% and 29% penetration in the U.S., respectively.

On Wednesday, Mr. Joyce joined Australian Prime Minister Malcolm Turnbull to greet returning athletes from the Olympic Games in Rio de Janeiro. When asked whether he might leave Qantas following the strong earnings, Mr. Joyce was unequivocal.

"As far as I'm concerned, I've still got a lot to do," he said.

Write to Mike Cherney at [e-mail]

(END) Dow Jones Newswires

August 24, 2016 04:15 ET (08:15 GMT)

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