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Investors dump Qantas even after record profit as fuel bill, wages rise
QANTAS Airways Ltd dropped the most in almost five months on concern rising fuel prices and costs will erode earnings, even after the Australian airline reported record annual profit.
The fuel bill - among the biggest expenses for any airline - will probably jump 21 per cent this financial year, the carrier said on Thursday. Wages and aircraft leases will also become more onerous, it said, stoking concern a run of record earnings may falter.
The shares fell 2.8 per cent in Sydney on Thursday, after tumbling as much as 7.7 per cent earlier. The biggest loss since March 2 trimmed the stock's gains this year to 30 per cent.
"The market has looked at that cost inflation and sold the stock down," said Daniel Mueller, a fund manager at Vertium Asset Management in Sydney.
"The stock has had a really strong run without any pullback since the beginning of the year. It's a bit of a reality check."
Brent crude that has doubled to about US$75 a barrel from a January 2016 low is casting a shadow over Qantas's outlook, after chief executive officer Alan Joyce restored the carrier to profit with his cost-cutting turnaround plan.
He has rewarded investors with share buybacks and dividends over the last three years. The stock is still the best performer in 2018 among global airlines.
With profit at a record, the airline pledged to return as much as A$500 million (S$498.3 million) to shareholders, including a higher-than-expected dividend and another stock buyback, it said in a statement on Thursday. About 27,000 employees were showered with bonuses worth A$67 million.
Underlying pretax profit in the 12 months ended June rose 14 per cent to a record A$1.6 billion, the top of Qantas's own forecast.
But, investors were spooked by the fuel bill. The airline said its total cost on kerosene is expected to increase by about A$690 million to A$3.92 billion in the year through June 2019. Qantas said it's confident it can "substantially recover" that larger fuel bill, based partly on forward bookings.
Speaking to reporters on Thursday, Mr Joyce said Qantas should be able to "more than cover" higher fuel costs in the domestic market, where the airline dominates smaller rival Virgin Australia Holdings Ltd. He didn't match that pledge for the more competitive international market, saying only that Qantas will "substantially recover" the higher cost of jet fuel on those routes.
He is also upgrading his fleet with more fuel-efficient aircraft and redirecting international capacity towards Asia to tap a travel and tourist boom. The carrier has ordered six additional Boeing Co 787-9 aircraft, the first of which will be delivered before the end of next year, taking its Dreamliner fleet to 14 by 2020.
It is also looking into a larger version of the Airbus SE A350 as the European jetmaker and Boeing Co vie to connect Sydney and London in a non-stop 20-hour flight by 2022, said Mr Joyce.
The airline's selection process for what would be the world's longest commercial flight has advanced to the request for proposal stage with a purchase decision due next year, said Mr Joyce, after Qantas reported a record annual profit on Thursday.
Qantas had been eyeing the A350-900ULR that rival Singapore Airlines Ltd will use to relaunch flights from Singapore to New York this year. It is still considering the Boeing 777-8, which has a higher seating capacity.
Airbus said in June it could look to develop an ultra-long range version of the larger A350-1000 that might suit Qantas, which has set a goal of 300 passenger seats on London flights, including an economy class offering. Mr Joyce told Reuters on Thursday the A350-1000 was the only Airbus jet that remained in contention for the Sydney-London mission, although the airline could combine that with orders for A350-900s for other routes if it selected the Airbus option.
Airbus modified the A350-900's fuel system, without adding extra tanks, to allow it to carry extra fuel for long-range missions on the A350-900ULR.
Qantas in March launched the Perth-London route, the first series of non-stop flights between Australia and Europe.
The performance to date on that route, combined with shifting the Sydney-London flight's current stopover to Singapore from Dubai, has been strong, Mr Joyce told analysts on Thursday.
"That has turned around the economics of London. London is back in profit," he said. REUTERS