Updates: Qantas’ Profit Update Fails To Impress

Investors were left a bit surprised, and not that impressed, with Qantas's announcements yesterday.

The airline had its shares suspended ahead of a trading update, and a speech at the National Press Club by CEO Alan Joyce that was supposed to draw a line in the sand in the fight with its unions.

As it was the profit upgrade was based on a bit of creative bookkeeping.

The shares jumped to a day's high of $1.89, then eased as investors realised the profit upgrade was a bit lightweight. The shares ended the day at $1.82, up half a cent.

In the statement to the ASX Qantas forecast a pre-tax profit of up to $550 million for the 2010-11 financial year, which ends on June 30.

That will be boosted by a one-off $95 million payment from engine manufacturer Rolls-Royce for damage to one of its A380s and the subsequent grounding of its entire fleet of superjumbos.

That relates to the engine explosion on the A380, the Nancy Bird Walton, shortly after take off from Singapore on November 4 last year.

The airline said it now expects to post an underlying profit of between $500 million and $550 million this year.

Before yesterday's update, analysts had expected Qantas to make about $450 million in pre-tax earnings, against the $377 million for the 2009-10 financial year.

Qantas has previously forecast that its underlying pre-tax profits this financial year would be ''materially stronger'' than in 2009-10.

A bit imponderable has been the cost of various natural disasters in the past six months.

That cost was put at $206 million in yesterday's statement, up from the $140 million estimate given in a March statement which also revealed cuts to domestic and international capacity over the next 18 months.

Without that, guidance would have been up 40% to more than $700 million, pre-tax.

But that's a bit misleading.

Looking at the figures over the full year, it's clear the airline has done it tough in the second half, thanks to the impact of those disasters.

After reporting a profit before tax of $417 million for the first half of the current financial year, Qantas now looks like reporting a pre-tax profit of less than $100 million, to just over $130 million in the current half year.

In the 2010 financial year, the airline reported a profit of $377 million, with $110 million coming in the second half of the financial year.

Including the $95 million from Rolls Royce, the second half result look much better: without it pre-tax profit in this half could have been a few million dollars, or a loss if the ash cloud hangs around into next week.

The company warned that the final profit figure (to be revealed on August 24) for the financial year was subject to the continuing impact of the ash cloud from the Chilean volcano.

As at Monday 20 June 2011, the disruptions caused by volcanic ash were estimated to have cost the Group $21 million. Given the disruptions are continuing this week, Qantas is not in a position to provide a more specific guidance range at this stage.

That $21 million estimate is included in the new $206 million figure.

Qantas said the updated cost of the impact of the Queensland floods, Cyclones Yasi and Carlos, the Japan tsunami and the Christchurch quake was now $185 million.

In addition to these events, the Group's second half financial performance reflects a more challenging operating environment, with significantly higher fuel prices than in the first half.

While fuel hedging has provided some protection against these increases, prices remain at historically high levels.

Qantas CEO Alan Joyce said in yesterday's ASX statement the forecast FY11 result reflected the underlying strength of the Qantas Group portfolio.

"Considering the challenges facing the aviation industry, this is a very good result - the Qantas Group's best since the global financial crisis," Mr Joyce said.

"The combination of our two domestic flying brands, Qantas and Jetstar, together with Jetstar International, Qantas Frequent Flyer and Qantas Freight, has enabled us to withstand a number of major events affecting our performance. On a combined basis, these businesses are profitable and are returning in excess of their cost of capital.

"In FY11, Qantas International is forecast to generate a loss before interest and tax of approximately $200 million, on invested capital of over $5 billion, with a weaker result expected next year.

"Qantas International is the Group's weakest business - it has achieved required returns only three times in the past 15 years.

"Clearly the situation is not sustainable. However, we are developing a long-term strategy aimed at restoring competitiveness and profitability.

"We have a proud history and unmatched experience in international flying and will take the hard steps necessary to turn this airline around.

"Our review of Qantas International is progressing in line with expectations and we will announce plans for its strategic renewal later this year," Mr Joyce said.