Goldman Sachs said yesterday about the Qantas announcement:
Today’s announcement provides some clarity on the potential earnings impact of earthquakes in Japan New Zealand While there was no specific mention of ongoing weakness in the domestic leisure market, comments by VBA last week suggest that this remains an issue.
Domestic capacity growth reductions announced by QAN are likely to be partially due to the demand impact of recent natural disasters but also the capacity cuts announced by VBA last week (given QAN seeks to maintain 65% domestic market share).
In our view, while capacity growth reductions across both its domestic and international network throughout 2H11 may weigh against volumes in the period, it may be partially offset by stronger yields and load factors, particularly on the back of recent reductions in domestic capacity growth by Virgin Blue.
Operating statistics for February highlighted continued weakness in domestic market conditions, which were adversely impacted by extreme weather conditions in Queensland. Load factors for Qantas Domestic and Jetstar Domestic services declined vs. previous corresponding period (pcp) (-2.5pts and -4.9pts respectively).
However, we note that domestic yields were +0.9% on pcp in the month.
While it is difficult to isolate the impact of wet weather, we will need to keep an eye on domestic yields and load factors over the coming months to determine how much of the load factor/yield impact is being driven by weather related issues vs. continued solid capacity additions and weakness in leisure travel demand.
Growth rates in international yields continued to moderate in February on the back of stronger comps in the pcp (+3.9% in February vs. +5.7% in January and +8.0% in December).
While comps will become increasingly difficult as we move through the remainder of FY11, the introduction of fuel surcharges from mid February should help.
We remain comfortable with our FY11 international yield growth assumption of +8.0% (vs. FYTD of 10.2%).
Given the company has largely hedged the remainder of its fuel price exposure for FY11; it retained its 2H11 fuel cost guidance of $2.0b (in line with GS&PA estimates).
However, should recent increases in jet fuel prices continue, it may present a source of downside risk to our FY12 earnings estimates (GS&PA FY12 jet fuel price assumption A$118/bbl vs. spot A$128/bbl).
Our earnings estimates and recommendation are under review.
Qantas remains our preferred airline exposure given its leverage to improving premium travel demand is likely to provide some offset the impact of intense competition in the domestic leisure market.
However, we note that the geopolitical issues driving the spike in the oil price remains a key headwind for the sector.
