Fuel prices crucial to Qantas, Virgin results
The Australian reports that Qantas’ net profit could improve by 42 per cent in the 2008-09 financial year and Virgin Blue would come close to breaking even if current oil prices hold, according to analysts.
UBS Investment research used current spot prices and hedging profiles to calculate its forecast that net profit for Qantas would rise from $414 million to $588 million.
It said Virgin would move from the current forecast of a $34 million loss to a loss of $8 million under the same circumstances.
“Over the past month Singapore jet fuel is down 22 per cent and down 15 per cent in Australian dollar terms, with declines in the crude and refining margin both helping,” UBS analysts Simon Mitchell and Ramoun Lazar said in a note.
“For FY09, Qantas and Virgin are 75-85 per cent hedged at effective WTI crude prices of $US115 per barrel (the current spot) using mostly options, therefore offering material upside as fuel drops.”
The analysts said the airlines also had about 60 per cent of their US dollar requirements covered in the US85-90c range and this would provide protection from a weaker Aussie dollar.
The dollar continued to fall yesterday on signs of a weakening local economy and predictions that the Reserve Bank would cut interest rates.
It has now fallen almost US10c in the past two months.
The US dollar exchange rate is important to airlines because they use the currency to buy fuel, aircraft and spares.
The analysts warned that the spot fuel prices were still about 40 per cent above the financial year 2008 average and this meant that both carriers still faced major cost issues.
“But the outlook is a lot a better,” they said.
UBS is waiting for both airlines to announce their annual results next week before making any changes to its forecasts and the analysts still prefer Qantas shares on valuation grounds.
They said revenue performance was still the key unknown, despite moves by Qantas to slash capacity growth from a planned 7 per cent to zero and Virgin moves to halve growth to 10 per cent.
“This should be supportive of our forecast of a 3 to 6 per cent rise in unit revenue (yield and load) but an uncertain domestic and international economic outlook makes this still difficult to predict,” they said.
Another analyst with higher estimates for Qantas’s 2008-09 profit based on lower fuel price assumptions said he would not be moving his estimate as much as UBS.
“We won’t change our numbers that much but I suspect a lot of other people will,” he said. “The thing is the Aussie dollar is offsetting a lot of it too. The US crude price is coming down but the Aussie dollar’s coming down. That’s what happened on the way up the Aussie dollar insulated them and it’s doing the same on the way down. But overall it’s still positive.”
Despite the volatile oil prices and softer markets in the second half of 2007-2008, Qantas has not changed its last guidance that its pre-tax profit for the year would be at least 40 per cent higher than the 2006/07 result of $1.03 billion.
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