Qantas Flying High After Turbulence As Fuel Price Eases

The Age

Thursday August 31, 2006

By ROD MYER, AVIATION REPORTER

THE long unloved Qantas has flown high in August. Its share price has climbed 18 per cent to $3.55 since just before the airline reported the tough news that skyrocketing oil prices had sent its profit down 30 per cent last year.

To the casual observer, the outlook for this year looked even bleaker. Qantas faced another $1.1 billion jump in fuel costs, and on reporting day two weeks ago had identified only $750 million of $1 billion in planned cost cuts.

Despite the bleak outlook, Qantas predicted a flat result for the current year.

But strangely, all that seems to have given the market hope. At least two brokers, JPMorgan and Macquarie Equities, have upgraded their projections. JPMorgan did so despite analyst Matt Crowe saying the latest result was 9 per cent below his estimate, having being beefed up by a one-off $104 million payment from Airbus for late delivery of the A380 super jumbo.

Mr Crowe said Qantas' guidance on outlook was better than expected because just standing still in the current year meant Qantas would have to increase underlying profit by 20 per cent to make up for the lack of the Airbus payment.

JPMorgan doubts Qantas will quite get there, but Mr Crowe is tipping a profit rise of 16 per cent without one-off gains and has raised his rating from "underweight" to "neutral".

Qantas chief Geoff Dixon briefed analysts on Friday, saying "so far so good" for the current year, with forward sales and yields strong. Qantas has a three to four-year jump on its competitors on the Boeing 787, which will give far better fuel efficiency than the A380.

As a result, Mr Crowe said he expected yields in the international business to grow by 8 per cent this year while domestic yields should be up 4 per cent.

The market is also using Qantas to punt the oil price. Qantas did its sums for this year on an oil price of $US71 a barrel, and has 60 per cent of its needs hedged at that price. So when the oil price falls, as it has recently to below $US70, the market gets a little breathless thinking the airline's profit will rise as a result.

There is extra leverage for investors in a falling oil price. Macquarie Equities analyst Paul Huxford observes that 66 per cent of Qantas' fuel hedging is through options. That means if the oil price really tanks and looks like staying weak, Qantas can trade out of most of its $US71 hedges, giving it still cheaper fuel.

"They run a pretty good treasury operation so there's upside," Mr Huxford said. On the strength of the oil situation and its ability to cut costs Mr Huxford also has upgraded the stock.

Argo Investments director Rob Patterson said Qantas was a heavily traded stock that traditionally swung between $3 and $4, and a falling oil price had encouraged investors.

Saxon Nicholls, of Herschell Asset Management, sees another angle. "The stock was arguably oversold when Singapore Airlines sold out," he said. Qantas shares ended 2? higher at $3.55.