QF profit to fall 90% - shares falling

[straitman]

[mod hat]I have removed a few posts.

A reminder to those who need it.

The topic is 'QF profit to fall 90%' and nothing to do with any individual on the forum.

As usual a small amount of banter is OK but in general let us stick to the topic please. [/mod hat]

 

[cove]

The consequence from such a result will certainly test the bonus terms and provisions for every staff member of each Qantas division. The annual report will be a most interesting read in 2012.

 

[markis10]

Good piece in todays SMH by someone who knows what they are talking about when it comes to QF:

The new CEO of Qantas International, Simon Hickey, has certainly been handed the poisoned chalice, particularly when you compare it with the money tree that is Qantas Frequent Flyers.

To turn it around, the carrier must address the economy and oil price issues head on and not just assume that the impact that these two variables have on the business is beyond their control. To do otherwise will leave them in the same position in five to 10 years as they have experienced over the previous five to 10 years.

Simon, and others in finance who are supporting tough decision making in the business, will need to jettison their accounting hats and strap their economics and strategy hats on – and don't let them fly off.

Read more: Qantas International enters dire straits
​

 

[SeatBackForward]

So much of Qantas lack of profitability is blamed on oil. I don't buy this as an excuse as they explicitly charge us a levy on this, a levy that has gone upwards and upwards. I fit was wrapped into their overall pricing, which remained steady, then fair argument, but not they way it is at present.

 

[markis10]

So much of Qantas lack of profitability is blamed on oil. I don't buy this as an excuse as they explicitly charge us a levy on this, a levy that has gone upwards and upwards. I fit was wrapped into their overall pricing, which remained steady, then fair argument, but not they way it is at present.

Short term perhaps you are correct, but QF have moved the levy downwards as well as upwards. Given oil moved on a daily basis if not hourly, such a levy wont cover all the losses (and potentially gains), and as stated by others, most of the industry has the same issues. The real issue is the over supply of capacity by the new carriers, its a win for consumers but unsustainable in the long run.

 

[medhead]

Short term perhaps you are correct, but QF have moved the levy downwards as well as upwards. Given oil moved on a daily basis if not hourly, such a levy wont cover all the losses (and potentially gains), and as stated by others, most of the industry has the same issues. The real issue is the over supply of capacity by the new carriers, its a win for consumers but unsustainable in the long run.

I think the talk of hour price movements for oil should be viewed in the context that Qantas hedge a significant amount of their fuel requirements. As such their fuel price is relatively steady and they have medium term price certainty that should allow them to set an appropriate fuel levy. That applies even when they stuff up and the fuel price moves negatively to their hedge positions.


Sent from the Throne

 

[markis10]

I think the talk of hour price movements for oil should be viewed in the context that Qantas hedge a significant amount of their fuel requirements. As such their fuel price is relatively steady and they have medium term price certainty that should allow them to set an appropriate fuel levy. That applies even when they stuff up and the fuel price moves negatively to their hedge positions.


Sent from the Throne

QF only hedged fully their needs last month, so they have always been subject to the market price" "At current prices the Group expects underlying fuel costs to increase by approximately $300 million from $1.95 billion in the second half of 2010-11 to approximately $2.25 billion in the second half of 2011-12, due to higher forward market jet fuel prices and increased flying"

I doubt further fuel levys will be seen, but the damage has already been done .

 

[medhead]

QF only hedged fully their needs last month, so they have always been subject to the market price" "At current prices the Group expects underlying fuel costs to increase by approximately $300 million from $1.95 billion in the second half of 2010-11 to approximately $2.25 billion in the second half of 2011-12, due to higher forward market jet fuel prices and increased flying"

I doubt further fuel levys will be seen, but the damage has already been done .

I did say a significant amount of their requirements not 100%. Last time I read one of the announcements on this point they had hedged 80% of their requirements at something like $110 or $120 a barrel. IIRC this information was given as a reason for maintaining the fuel levy when the fuel price was lower than the hedged price.

As for the damage being done, while hedging is extremely difficult to get right, I can't help but feel their hedging hasn't been as effective as it could be. Something I alluded to in my post.


Sent from the Throne

 

[markis10]

As for the damage being done, while hedging is extremely difficult to get right, I can't help but feel their hedging hasn't been as effective as it could be. Something I alluded to in my post.


Sent from the Throne

Qantas have not been effective because they have been hedging, it comes at a cost and there is argument to suggest that Qantas actually use it to much, to quote Tony Webber, their former chief economist:

International airlines all around the world must have plans in place to account for the trend in oil prices. For Qantas, those plans should include lower levels of fuel hedging using financial instruments. The additional volatility in the global economy means that the use of financial instruments such as swaps and options for fuel hedging will become more expensive. The natural response to this higher cost is to use these instruments less and rely more on costless measures to protect against price rises.

One of the strengths of Qantas International is that it has the greatest costless protection of any airline in the world, including key competitors. The reason is simple: as the price of oil goes up so does the Aussie dollar. This relationship has held true for almost thirty years, except for an eighteen-month period in early 2000 when the US Federal Reserve decided to jack up interest rates by 190 basis points.
Any costs that Qantas finances in US dollars – fuel costs, purchasing or leasing aircraft, spare parts and charges at foreign ports – fall as the Australian dollar strengthens.
As the oil price increases, Qantas International must risk extracting maximum possible benefits from this costless oil protection to draw its unit costs closer to its rivals.

Qantas: a ten-point plan | Inside Story

 

[medhead]

Qantas have not been effective because they have been hedging, it comes at a cost and there is argument to suggest that Qantas actually use it to much, to quote Tony Webber, their former chief economist:

I was meaning effective in a wholistic sense. What's the song? - you gotta know when to hold them, know when to fold them, know when to walk away, know when to run.

It is a matter of getting the right level of hedging be that 0%, 100% or somewhere in between. It is hard to ignore the AUD as a natural hedge.


Sent from the Throne

 

[eastwest101]

Agree - fuel prices are a poor excuse, everyone has to pay them. Hedging is a double-edged sword and it actually costs money to hedge jet fuel prices, and then costs you money again to hedge the exchange rates. A few big "price taking" resource companies found that hedging only improves the bottom line of the other parties, increases fixed costs and reduces all the upside from variable fuel prices and exchange rates. The cost of hedging often exceeds the benefits of hedging ans hedging is essentially gambling at a casino and only the house wins at casinos.

The australian dollar is a good natural hedge for fuel prices, and the other hedge is simply adjusting airfares, after all - selling tickets at the right price is their core business, not tying up profits in bets/hedges for things they can't control.

 

[eastwest101]

That SMH article did have some good points. The thing that stood out to me was the statement that the overall QF group is in the position of being a "price taker" as it has no control over some important stuff like exchange rates, the overall economy and fuel prices (to a certain extent).

I think the learning exercise will be the recognition that they are a "price taker" and adjust their approach to business accordingly. This is a very similar position to the major iron ore miners in the 1990's - they responded and adapted pretty successfully and I am sure that Leigh Clifford would have some thoughts about this.

So if you are a "price taker" what can you look at?

1. Control "Tier 1 assets" - that make $ no matter how low prices go and have a long capital life & payback period (make profits throughout the cycles) in this you need to look at assets like:
i) Fleet - need competative aircraft (QF should have taken advantage of high AUD and purchase fleet & maximized value from 787 delay)
ii) Routes - need the best routes that produce revenue (limited by trade laws and carrier rights)
iii) Economy of Scale - fleet commonality, higher utilization of assest, and enough capacity to grow to compete or grow when things improve
iv) Challenge the perpection that reducing capacity may help yields, but it only invites and encourages more competition if demand is there

2. Fuel - as others have noted, fuel hedging makes banks and other institutions profitable, not QF. There is a reason why big mining companies got out of hedging - and those reasons are well known. QF have access to an excellent hedging system already - its own fare structure and the ability to adjust fares.

3. Natural geographic disadvantage - a "euro-centric" perception that will be proven to be wrong with the growth of asia, this dosen't mean the aborted Red Herring/RedQ but something more considered.

4. The domestic story - QF still has the natural advantage in a domestic network although challenged from a resurgent DJ, plus Aust economy still doing well providing the china mining boom continues. Diversification into mining away from tourism.

5. The customer story - what do they want? Maybe challenge the perception that people only want to fly through hubs? And what about the perception that people only want to fly at the absolute lowest cost? Sure QF has to be competative but is there a customer ability to see value in QF's image, reputation and service? If not - why not? Leverage QF's natural advantage in its strong FF scheme and OW alliance.

 

[moa999]

So to look at eastwests points:
1. Assets - Agree but this is a long-term investment cycle and difficult to change quickly, and not helped by the ATOs 20-yr depreciation policy versus many other countries at 10-yrs (partially explains why QF holds onto fleet for so long, but also impacts it commercially). Agree on commonality but you cant change a fleet overnight - QF is relatively common at present and appears to have a plan.. International A380/747/330/767 moving to A380/787/330, Domestic 737-4/737-8/767 moving to 737-8/737NEO/330. QF seems to be challenging the perception of reducing capacity in Domestic which makes money, but understandably reducing investment in Intl given the massive losses (despite A380s,330s,F lounges etc)

2. Fuel - Hedging smooths, but even QF only hedges 12-18mths out, you cant get cover for much longer than that, so increased fuel prices ultimately flow through. Whilst there is an ability to adjust fares, remember that QF is a price taker so that ability is limited.

3. Euro-perception - disagree - QF has wound back Europe - Rome, Paris, Bangkok-London, HongKong-London with increased Asian focus - A380s to HK, daily Shanghai, new lounges proposed for SIN and HKG. RedQ would have enhanced this presence and enabled QF to provide more services into SIN with connections to the rest of Asia, whereas at the moment all the Asian hubbed airlines can undercut them as offering connecting flights on their own metal. Unfortunately RedQ was announced prematurely and got a very negattive reaction from SingAir and Unions.

4. Domestic story - agree - Domestic (both QF and JQ), FF (which admittedly relies on International for its aspiration factor) are holding up International. If it wasnt for brand value and impact of FF, I would have taken Int outside and shot it a few years ago. By recent purchases and expansions, QF definitely chasing the mining market.

5. Customer Story - Isnt that what QF does in their marketing. They fly the routes that people are willing to pay more for the perception, and the true leisure routes to JQ. Unfortunately a high percentage of the pax are just $ focussed, and in an industry where your net margins are very slim (or presently negative) cutting prices everywhere does hurt you

 

[markis10]

And now the shares are at 1.11!

 

[Sifor]

And now the shares are at 1.11!

Hopefully they don't have any market capitalisation covenants..

 

[chrispy3276]

Slight rebound during afternoon trade to close at $1.125, but still down 2.6% on yesterday's close. Surprisingly almost 3m more shares traded today than yesterday (52.87m v 50.03m yesterday). Last Wednesday 4.3m shares were traded.

 

[el_rooto]

I wonder if the Federal Government will inject some capital into QFi under the whole "Flagship Carrier" thing etc....

 

[browski]

Slight rebound during afternoon trade to close at $1.125, but still down 2.6% on yesterday's close. Surprisingly almost 3m more shares traded today than yesterday (52.87m v 50.03m yesterday). Last Wednesday 4.3m shares were traded.

Sometimes I wonder if the Day 1 share trading are private shareholders and the Day 2 share trading are fund managers.
Alternatively, maybe Day 1 share trading are computer generated stop-loss sells and Day 2 trading are the average punters.

 

[SeatBackForward]

Low so far of $1.03, down 6% on a day the market went up. And one very ugly looking chart:

 

[kamchatsky]

Low so far of $1.03, down 6% on a day the market went up. And one very ugly looking chart:

View attachment 7780

Never catch the falling knife. Usually it comes with handle removed! Ouch!