The Qantas Airways Limited (ASX: QAN) share price is up more than 5% after the airline revealed strong profit growth.
Travel demand soars
Qantas has upgraded its profit expectations for the first half of FY23, it’s now expecting underlying profit before tax to be between $1.35 billion to $1.45 billion. This represents a $150 million increase to the profit range given in early October 2022.
The airline noted that consumers continue to put a high priority on travel ahead of other spending categories and “there are signs that limits on international capacity are driving more domestic leisure demand, benefiting Australian tourism.”
However, fuel costs remain “significantly elevated” compared to FY19 and are expected to reach around $5 billion in FY23. This would be a record high for the business, despite international capacity being around 30% below pre-COVID levels.
Qantas said it was ranked as the most on-time domestic airline in October. The $200 million spending on extra staff, continued recruitment and reserve aircraft will “help maintain these levels” during the latest wave of COVID.
Balance sheet improves
Net debt is now expected to fall to an estimated range of between $2.3 billion to $2.5 billion by 31 December 2022. That’s good for the Qantas share price, in my view. This is around $900 million better than expected in the most recent update, thanks to an acceleration of revenue as customers book flights for the second half of FY23 and beyond. Around $200 million of capital expenditure was deferred to the second half.
Around 60% of the $2 billion in COVID-related travel credits have now been redeemed by customers.
Of the $400 million share buyback announced in August 2022, 76% of that is now complete at an average price of $5.66.
Thoughts on this update and the Qantas share price
This doesn’t seem like a surprising update to me, I had been thinking that it was an opportunity.
Just over a month ago I wrote in this article:
An airline is not usually a high-return, compound growth sort of business. But, I do think that Qantas could be a good performer in the shorter-term as investors see it’s back to making profits again.
While it’s not a business I’d add into my own portfolio, I think it could be an underrated opportunity. It could be particularly exciting if it starts paying a dividend again.
It’s up 10% since then.
I’m not sure how much further it can rise in the short-term, but in the longer-term I think things could improve as international capacity returns and oil prices (hopefully) lower somewhat. But, there are other ASX growth shares that could be better buys at the current level.
