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Australia's iconic airline has finally got a hold of the controls after five straight years of virtual free fall. Shares in Qantas have rallied 40 per cent over the past six months – over four times more than its regional peers Cathay Pacific and Singapore Airlines. First-half results released on Thursday suggest there were good reasons for the gains as underlying profit picked up 10 per cent from a year earlier. Over the same period last year, the airline was dealing with a 50-per-cent fall in those earnings.
Granted, axing loss-making routes and retiring old aircraft is helping to reduce losses in its international segment. And Qantas's frequent flier program continues to provide a steady income stream - 44 per cent of earnings before interest and tax over the past six months. There is also the potential uplift from Qantas's tie-up with Emirates, which is set to start in April this year, assuming the deal gains regulatory approval.
But then the first half is always a seasonally better one for Qantas. And the company has not yet quantified the boost it will gain from its relationship with the Middle Eastern airline – it is unlikely to hit revenue streams until the 2014 financial year starting in July. In the near term the tie-up will add $40- to 50-million Australian ($52-million) in costs as Qantas switches its hub on European services from Singapore to Dubai. What is more, Qantas's domestic business, the airline's backbone accounting for 70 per cent of earnings, has started to falter. Overcapacity and competitive price cutting by Virgin Australia continues to weigh on yields – earnings in Qantas's domestic segment fell 34 per cent year-on-year in the past six months. That Qantas will add another 5 to 7 per cent capacity domestically in its second half does not bode well.
All that suggests there is little in the near term to get more air under Qantas's shares.