Qantas upgrading its profit guidance signals not only is the airline’s turnaround story gathering momentum, but so is the recovery in the broader Australian economy.
The airline now expects underlying profit before tax to be in the range of $875 million to $925 million for the first six months of this financial year.
This is a significant improvement and compares to an underlying profit before tax of $367 million in the first half of financial year 2015.
The airline says the stronger performance is attributable to the $2 billion Qantas transformation program, revenue growth and the benefit from lower fuel prices. CEO Alan Joyce says revenue has improved in both domestic and international operations.
“This strong performance is underpinned by our continued focus on delivering the best service for our customers in all of the markets we serve,” Joyce said.
While the company puts the profit upgrade down to its transformation program, improved revenue growth and lower operational expense stemming from lower fuel prices, that may only partially explain the turnaround in its fortunes.
The turnaround in profitability has also coincided with improved economic conditions, not only within Australia but abroad.
The lower Australian dollar, something that is making Australia’s vast services sector far more competitive – particularly tourism and education – is clearly helping non-mining sectors of the economy.
According to the NAB business survey for November, released last week, business operating conditions across Australia remain at levels above the survey’s long run average.
As the chart below from NAB shows, operating conditions for non-mining sectors are trending higher. Record low interest rates, the lower Australian dollar and recent strength in house prices are clearly helping to boost conditions, especially in the household services and retail sectors.
The strengthening in business operating conditions is filtering through to improved household confidence, helped in part by an acceleration in employment growth. This, in turn, is helping to boost household consumption, as witnessed in Australia’s Q3 GDP report.
Things are picking up. Confidence is building. The non-mining sectors of the economy, particularly those with the greatest sensitivity to fluctuations in the currency, are starting to hum.
Along with record international tourism arrivals in the year to October, strength in Qantas’ domestic operations speaks volumes about the current mindset of Australian business and households.
If things weren’t great in the domestic economy, you wouldn’t expect to see results such as the one released by Qantas today.
Put simply, while clearly a good news story for Qantas, it’s perhaps an even greater story for the broader Australian economy.
In August, Qantas announced one of the biggest turnarounds in Australian corporate history, posting a full year underlying profit of $975 million, reversing last year’s record $2.8 billion loss. The expected first half result includes a $25 million one-off impact on Jetstar earnings from volcanic activity in Bali.
The statutory profit after tax of $560 million included $186 million of costs driven by redundancies, restructuring and other costs associated with the Qantas transformation program. Revenue was up 3% to $15.816 billion.
Qantas announces its first half 2016 results February 23.
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