Record revenue for Qantas but high fuel costs guzzle profit

Australian airline Qantas (ASX: QAN) posted record revenue for FY19, but faced some pretty stiff headwinds that dragged its profits down.

Luckily for Qantas, planes take off into the wind.

The group's underlying profit before tax was down 17 per cent to $1.3 billion despite the company posting record revenue results.

Fuel costs and foreign exchange put a dampener on an otherwise strong full year result. Qantas was impacted by an $614 million increase in fuel costs from higher oil prices and a further $154 million of the foreign exchange impacts on non-fuel net expenditure.

The FY19 result was also hit by a $92 million non-cash expense on provisions for items including employee leave entitlements.

CEO Alan Joyce was pleased with the results despite the extra costs incurred.

"The result shows the strength of our individual businesses but also the strength of our portfolio as a whole," says Joyce.

"Even with headwinds like fuel costs and foreign exchange, we remain one of the best performing airline groups in the world."

"Our performance is the result of having the right strategy and the ability to deliver it."

Some other highlights for Qantas include the new Perth to London route, and double-digit earnings growth from Qantas' loyalty program.

Joyce's optimism did not appear to shine through in his view of FY20.

"Looking ahead, the overall market remains mixed," says Joyce.

"Domestically, we're seeing weakness in the price sensitive leisure market, but premium leisure demand is steady."

"Overall demand from our corporate customers is flat, with continued strength in the resources sector offsetting weaker demand from other industries, like financial services and telecommunications."

Domestically, Qantas delivered earnings of $1.03 billion, down by four per cent.

Jetstar's domestic unit revenue increased by three per cent and ancillary revenue per passenger rose by 12 per cent, driven largely by new baggage options and increased Club Jetstar membership.

The company's international business delivered underlying earnings of $285 million, down by 28 per cent. There was a significant improvement seen in the business' second half performance as competitor capacity and fare levels adjusted to the higher fuel prices.

The airline today announced three new 'research' flights as part of its Project Sunrise program.

Operating non-stop from New York and London to Sydney using Qantas' existing 787-9s, and made possible by carrying a smaller number of people to minimise weight, the flights will test different approaches to passenger and crew wellbeing for unique ultra-long haul services. The flights will have their emissions fully offset too.

During FY20 the company plans to completely refurbish its 12 Airbus A380 aircraft, including upgrades to each class of cabin, a new on-board lounge, and 27 per cent increase in premium seating.

The company has also announced its dedication to cutting 100 million single-use plastics by the end of 2020 and eliminating 75 per cent of waste to landfill by the end of 2021.

Looking forward, the group's fuel cost problem doesn't seem to be getting any simpler, with the total fuel bill expected to increase to $3.95 billion in FY20, up around $100 million.

In conjunction with its results, the airline has today announced an off-market share buy-back of up to 79.7 million shares, or approximately 5.1 per cent of Qantas' shares on issue.

"In the board's opinion, given the performance of Qantas Group in the financial year ended 30 June 2019 and its strong financial position, the Group is well placed to return surplus capital to shareholders and still maintain a strong balance sheet and have sufficient capital available to reinvest," says Qantas.

"The board has considered alternatives and determined that, in addition to recent dividends, undertaking the buy-back is an efficient way to distribute surplus caital to shareholders and is consistent with its financial framework."

Shares in Qantas are up 0.87 per cent to $5.83 per share at 10.07am AEST.

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