Australia's Qantas warns of lower earnings after record FY net profit

SYDNEY (AFX) - Qantas Airways Ltd has warned fiscal 2006 earnings will be lower than the record 763.6 mln aud net profit earned in the year to June because of the impact of rising fuel costs.

The latest year's profit compared to a previous record profit of 648.4 bln aud reached in 2004 and was above market estimates centered on 720 mln.

Directors recommended a final 0.10 aud a share dividend, up from the previous year's 0.09 payout, taking the total payout for the year to 0.20 aud, up from 0.17 aud a year earlier.

Qantas chief executive Geoff Dixon said fuel represented the greatest challenge for Qantas in the coming 24 months.

Dixon said fuel costs rose to 19 pct of total operating costs in fiscal 2005 from around 15 pct in 2004 and are expected to rise to 30 pct of total operating costs in the current year.

He said the extraordinary cost of fuel will have a substantial ongoing impact on the company.

"While further reforms in the business are under way, and coupled with the high fuel price, we do not expect to achieve the same levels of profitability in the current financial year," Dixon said.

Dixon said Qantas faced a further increase in fuel costs of 1.25 bln aud in fiscal 2006 after the benefit of hedging.

While the net impact of fuel surcharges will offset 600 mln aud of this amount, he said the airline still faces an increased outlay of 650 mln based on Wednesday's market prices.

Dixon said Qantas is targeting costs savings of 1.5 bln over the three years to the end of fiscal 2006 but because of continuing high oil prices, additional savings of up to at least 1.5 bln billion will be required over the following two years.

In the latest year, Dixon said the main drivers of the record results were the successful introduction of the value based domestic carrier Jetstar and improvement in yields, excluding the unfavorable impact of foreign exchange rate movements, of 2.0 pct.

Cost and efficiency savings of 545 mln aud also helped the result with a 5.8 pct unit cost reduction, before the impact of unfavourable fuel cost movements.

Dixon said Qantas will base its growth in the next 12 months on new international markets, while expanding existing profitable markets, on substantially increasing freight revenues and on expanding the Jetstar brand.

"Jetstar has been a marked success and lowered its cost base in the second half of the year to 0.762 per ASK (available seat kilometer), making it the lowest cost carrier in Australia, even with a mixed fleet," Dixon said.

But, he warned, competition in the domestic market will increase while internationally a significant growth in capacity well ahead of demand by other international airlines will continue to remain a challenge.

"Qantas International has handled this competitive pressure, increasing capacity by 8.9 pct over the year as four new A330-300 aircraft came into service, and investing in new markets in China and India," he said.
Dixon said he is confident Singapore-based Jetstar Asia will, following the merger with Valuair, secure a strong position in the Asia value-based airline market.

"We are committed, as are our partners, to establishing a growing and viable airline," he said.

Meanwhile, Qantas announce it has issued a Request for Proposal to aircraft manufacturers for the future provision of new wide-body aircraft to replace the current fleet of medium wide-body Boeing 767-300 aircraft and also to cater for international capacity growth and new route opportunities.

The RFP will cover a mix of firm orders for Boeing 767 and Airbus A350 aircraft and ultra-long variants of the Beoing 777 and Airbus A340.

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