Qantas Airways Limited : Qantas Warns Profit May Sink 91%
06/04/2012| 08:36pm US/Eastern
--Qantas warns pre-tax profit may fall by up to 91%
--Shares slump to touch a record low
--Airline blames Europe's debt crisis, jet-fuel costs
SYDNEY--Qantas Airways Ltd. (QAN.AU) surprised the market Tuesday by warning full-year earnings may sink up to 91% as deteriorating global economic conditions widen losses at its struggling international unit.
Qantas shares slid as much as 18% in Sydney to a record low after Australia's biggest carrier said it expected pre-tax underlying profit in the year to June 30 of between 50 million Australian dollars ($49 million) and A$100 million, compared with A$552 million a year earlier.
The magnitude of the share decline reflected how far investors were taken off guard by the severity of the profit warning.
"People were aware of the economic environment, but it's really starting to bite into earnings," said Angus Gluskie, managing director of White Funds Management. "It's also biting into cash flows. It's highly likely you're going to see them needing capital very shortly."
The weak forecast reflects downward pressure on demand created by Europe's debt crisis, soaring jet-fuel costs, declining bond yields, and competition in Australia's domestic travel market, Qantas said in a statement. The International Air Transport Association in March cut its forecast for airlines' net profit for 2012 to a combined US$3 billion, down from $3.5 billion in a previous estimate.
Qantas said it expected an earnings-before-interest-and-tax, or EBIT, loss at its international unit of more than A$450 million. The figure is more than double the A$216 million loss reported for last year.
"The deterioration in international and domestic has only started to come through in recent weeks," Chief Executive Officer Alan Joyce said later on a conference call.
The far healthier Qantas domestic unit and low-cost offshoot, Jetstar, are expected to book a combined profit at the EBIT level exceeding A$600 million. The company didn't provide a comparison figure for the previous year.
Qantas remains one of the world's few investment-grade-rated airlines, as Australia's resources boom spurs demand for business travel. Its international unit, however, is posting steep losses as fuel costs and state-backed rivals in the Middle East compete aggressively for market share.
The company posted a group pre-tax profit of A$202 million in the first half, which means its new guidance indicates that the company expects to swing to a loss-making position in the second half. The first-half figure included A$194 million in costs associated with the two-day grounding of its entire global fleet late last year to ward off industrial action by trade unions.
Joyce said the company was still aiming to return the international flights unit to break-even point by 2014 through a turnaround strategy that has included terminating poorly-performing routes, cutting thousands of jobs, and setting up new joint-venture carriers in Asia.
"The group has funding in place for the majority of its 2012/13 aircraft deliveries and intends to fund the remainder of its future capital commitments from operating cashflow, cash reserves and available debt," Mr. Joyce said in a statement.
In a bid to hold its investment-grade rating, Qantas has already deferred delivery of two Airbus A380 superjumbos, and has said it will close engineering and catering bases. One-off costs associated with the turnaround program of A$370 million-A$380 million will be booked in the current financial year.
The progress of the turnaround strategy will be key to assessing the airline's credit rating, May Zhong, a credit analyst at Standard & Poor's, said in an interview.
"We'll continue to monitor their response to conditions in the international market," she added. "Also, very importantly from a credit perspective is the trend in cash-flow over the next two years."
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