Qantas is making a huge bet that oil prices have further to fall

Qantas A380. Image: Sergio Dionisio/Getty Images

Qantas posted a monster $975 million underlying profit this morning – a stunning turnaround from the $2.2 billion loss announced last year.

The savings from the transformation program unveiled last year came to $894 million.

But with fuel being the biggest cost in running an airline, another major external factor that has contributed to the airline’s profitability has been falling global oil prices.

Through a combination of a supply glut and softening global demand, crude prices have been getting crushed. They fell again overnight to a six-year low. Over the past year, on days when there have been big downward movements on oil markets, Qantas’s share price has been rallying.

Here’s a chart that shows oil prices (inverted, so up means the price is going down) and the Qantas share price over the past two years. The Qantas share price has tripled while oil prices only halved, but you can see the relationship:

In documents released with its financial year results Qantas sets out some of the effect of the change in its fuel bills, and also gives some indication on how the airline plans to lock in these savings through hedging, most likely in the form of fixed forward prices or options contracts that ensure it is protected against a sudden spike in global oil prices.

This chart shows Qantas saved some $600 million in the past financial year on its fuel bill and explains, to some extent, the company’s outlook for its fuel bill over the the coming year.

In the footnotes the company explains its worst case scenario – where it would see only a small increase in fuel costs this financial year – would involve Brent prices moving back up to $A100 a barrel.

But it’s going to leave a whopping 73% of its fuel bill exposed to market forces.

Brent WTI crude was hovering just above $US40, or about $A54, overnight.

The calculations for its total forward costs for fuel are based, however, on a Brent oil price of $A71, so there’s room for further savings there already.

Basically there’s a lot of upside for Qantas if fuel prices drop.

How this all flows through to the bottom line depends on a few variable like what terms company has struck on prices, when transactions take place, and what flexibility it has to respond to currency fluctuations. But the chart above gives the market a guide to how the company plans to protect itself against shocks in a volatile macro environment, and how it could benefit from positive news.

And remember, oil prices have been going only one way for the past year which has been good for airlines around the world.

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