Qantas drops most in two years as it cuts domestic expansion

[SYDNEY] Qantas Airways Ltd fell the most in more than two years after Australia's largest carrier cut its planned domestic capacity expansion as the prospect of a federal election and a drop in consumer confidence weigh on demand.

The shares fell as much as 14 per cent and were trading 11.6 per cent lower at A$3.59 at 12:31 pm in Sydney, the biggest intraday decline since December 2013. The benchmark S&P/ASX 200 Index slipped 0.3 per cent.

Expected capacity additions in the six months to June 30 will be 0.5 per cent to 1 per cent compared with a 2 per cent forecast in February, the Sydney-based airline said in a statement to the stock exchange Monday. This month, the carrier removed three US services and redeployed planes to fly to Hong Kong and Singapore, it said.

"We recognise airline share prices are highly reliant on earnings sentiment and the uncertainty presented by this announcement is likely to weigh on sentiment," UBS Group AG analysts led by Simon Mitchell said in a note to investors.

Qantas's announcement underscores the delicate balance carriers need to achieve between profits and growth amid uncertain economic conditions. Its revenue per available seat kilometer declined in March with weaker yield performance in domestic and international businesses, it said.

Every 1 per cent fall in revenue per available seat kilometer equates to A$120m lower pre-tax profit, which would in turn drive as much as a 7 per cent downgrade to its 2016 forecasts, UBS said.

"In response to changed demand conditions, the Qantas Group has revised planned capacity additions in the final three months of financial year 2016," the company said. Softness in demand "began to emerge over the peak Easter and school holiday period in late March and continued to be seen in forward bookings in April and May."

Australian consumer confidence dropped 4 per cent in April from a month earlier, data released by Westpac Banking Corp showed last week. Elections for both houses of the federal parliament could be held as early as July 2 if the Senate refuses to pass legislation aimed at curbing trade union influence, the government has said.

Qantas, which is benefiting from a A$2 billion (S$2.04 billion) turnaround, did not disclose the impact of the capacity cuts on its earnings. The airline is expected to post a pretax profit of A$1.8 billion for the year ending June 30, according to the mean estimate of eight analysts surveyed by Bloomberg, compared with A$975 million a year earlier.

BLOOMBERG