October 25, 2017 / 10:35 PM / in 2 months

Australia's Qantas flags domestic earnings squeeze

SYDNEY (Reuters) - Australia’s Qantas Airways Ltd (QAN.AX) warned on Thursday that earnings growth for its higher-margin Australian domestic fights could hit turbulence in 2018, rattling investors even as it forecast strong domestic revenue would boost first-half profit.

The flagship carrier, which has emerged resurgent from a three-year turnaround under Chief Executive Alan Joyce, beat expectations with a forecast rise in underlying profit before tax for the six months to Dec. 31.

However Joyce also sounded a warning note in the company’s quarterly trading update, predicting earnings growth for Qantas’s Australian domestic flights to weaken in the new year following big gains in the year-ago period.

“The high rate of revenue growth we’ve seen so far this year is likely to slow when compared with what was a strong second half last year,” he said in a statement.

The comment prompted a selldown in Qantas’ shares at the open in Sydney. The stock, which has almost doubled since February, shed as much as 7.2 percent to hit A$5.94 in morning trade.

“The stock’s not priced for that sort of thing, it’s in turnaround mode and the market’s not expecting that sort of conversation,” said Tom Piotrowski, an analyst at stockbroker Commonwealth Securities.

The shares had pared their losses by lunchtime to trade 1 percent under Wednesday’s closing price at A$6.34, while the broader market was flat.

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Qantas expects total underlying first-half profit before tax to rise to between A$900 million ($693 million) and A$950 million, mainly thanks to domestic revenue gains. That is ahead of a Goldman Sachs estimate of A$886 million and higher than the A$852 million first-half figure it posted last year.

Revenue in the three months to Sept. 30 rose 5.1 percent to A$4.19 billion.

    Its strategy of cutting capacity and hiking fares returned an 8 percent jump in domestic revenue per available seat kilometer, a measure that combines ticket prices and seats filled, for the first quarter.

    The airline, which controls nearly two-thirds of the domestic market according to IBISWorld, said Australia’s recovering resources sector had also spurred domestic sales.

    International revenue rose just 0.2 percent in the same period, as rivals added flights to Japan and North America and capacity in the sector increased about 3 percent.

    Joyce said international competition, was expected to intensify in the second half.

    “Things do look very positive at home for Qantas. That’s where the profit is,” said Peter Harbison, executive chairman for the CAPA Centre for Aviation in an email.

    Qantas raised its full-year fuel cost estimate to A$3.21 billion from between A$3.11 billion and A$3.16 billion in August, assuming a forward Brent crude price LCOc1 of A$74 per barrel.

    Additional reporting by Chris Thomas in Bengaluru and Jamie Freed in Singapore; Editing by Stephen Coates

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