Qantas Airways is poised to report an underlying pre-tax profit of $1 billion this year – approaching its 2008 record for the first time in years – as it reaps the benefits of the lower fuel price, UBS analyst Simon Mitchell says.
He expects the pre-tax profit will reach a record $1.7 billion in the next financial year, which will allow the airline to conduct capital management through share buybacks. Qantas's previous pre-tax earnings record was $1.41 billion, reported in 2008.
Mr Mitchell also forecast Qantas would exercise its options over new Boeing 787-9 aircraft for delivery from 2017, which would allow the airline to replace ageing 747s and Airbus A330s and to launch new routes.
"We see FY16 as peak profit, aided by transformation gains and a lag in passing on fuel savings," he said.
He has raised his 12-month price target on the stock to $4 from $2.80 and has the most bullish profit forecasts in the market.
The consensus among other analysts who have issued relatively recent forecasts is for a pre-tax profit of more than $600 million.
That represents a big turnaround from last year's pre-tax underlying loss of $646 million.
Mr Mitchell expects Qantas to focus on returning cash to shareholders through share buybacks rather than dividends, in part because it is short on franking credits. Qantas has not paid a dividend since 2009, but it last bought back shares in 2013.
Mr Mitchell forecast the ratings agencies, which do not rate Qantas as investment grade, would lift their negative outlook after the airline's first-half results in February. But he believes it will take until the next financial year before Qantas regains its investment grade credit rating.
Qantas confirmed on Tuesday it would be keeping the majority of the savings from the falls in the oil price rather than lowering fares for customers. The airline will gradually eliminate fuel surcharges on commercial fares and will instead wrap that component into the base fare.
It also plans to lower fuel surcharges on some routes for frequent flyer redemptions. However, the Australian Competition and Consumer Commission is querying why any fuel surcharge should remain for frequent flyer redemptions if it is being removed for commercial fares.
Separately, Qantas has argued the government's strategy of allowing relatively liberal access for international airlines has damaged the domestic tourism industry because it led to a surge in outbound travel, rather than the expected influx of tourists.
In a submission to a Productivity Commission research paper on the international tourism industry, Qantas said the government's strategy of allowing air capacity to grow ahead of demand had come at a cost to the national economy.
"Capacity gifted for the express purpose of promoting inbound travel was instead shifted into Australia's outbound market, as inbound growth failed to materialise," Qantas said. "The rapid growth in the outbound market has resulted in jobs and investment being exported to competitor off-shore destinations … ultimately to the detriment of both the tourism sector and Australian airlines."
Qantas said in late 2007 the number of Australians heading overseas surpassed the number of arriving foreign tourists for the first time. Since then, outbound growth has increased at four times the rate of inbound visitor arrivals and domestic tourism spending will be overtaken soon by Australians spending on overseas holidays.
Deloitte Access Economics research shows the tourism balance of trade has declined from being positive in 2005-06 to an accumulated loss to the Australian economy of about $100 billion over less than a decade.
Qantas benefits disproportionately from domestic tourism, given it holds nearly 65 per cent market share, versus its 24.1 per cent share of the international market, including Jetstar.
