Don't be surprised if there are some well-timed upgrades for Qantas about to emerge.
The high value of the Australian dollar (over 84 USc yesterday) and continuing strong traffic and passenger numbers, are behind the rising belief that the airline's 2007 result will be better than previously indicated.
This week saw not only the Aussie dollar roll back over 84 USc and stay there but very solid traffic figures for April, and the 10 months to the same month.
QAN shares eased a fraction in yesterday's weak market, losing 2c to close at $5.73. It jumped 5c Tuesday to $5.75 after reporting another month where it filled more than 80 per cent of the available seats.
It was the eighth time in 10 months Qantas has been able to fill more than 80 per cent of its seats; the overall load factor rose 0.8 per cent to 82.2 per cent in 10 months to the end of April.
In its 12 years as a listed company, Qantas has been only able to report load factors above 80 per cent 22 times. Eight of those have come so far in 2006-07.
Leading analyst, JP Morgan's Matt Crowe, said he was not surprised by the robust figures. He was one of the early sceptics among analysts about the $5.45 a share offer from Airline Partners Australia that failed.
And ABN AMRO said in its daily transport note to clients yesterday that "April was another solid month for QAN, driven by continued favourable operating conditions. Whilst we remain cautious on FY08 and FY09, we believe capital management initiatives and realisation of non-core asset value will continue to assist the share price.
"Domestic operations continue to benefit from strong demand and a stable operating environment. Mainline domestic load factor was up 0.8ppt on the pcp to 82.2% (vs. 80.3% YTD) on a 5.4% increase in capacity.
"Jetstar also continues its rapid expansion, with capacity up 74.4%, although this is inflated by the inclusion of international operations. Total domestic yields also remain solid, up an estimated 5.2% for the month and 5.4% YTD.
"International operations continue to benefit from limited capacity, a strong business class offering and the positive effects of rolling Australian Airlines into the main group. Load factor increased by 5.4ppt on the pcp to 82.5% (vs. 82.0% YTD).
"International yields also increased, up an estimated 9.6% for the month and 8.7% YTD. This strong result came despite overall passenger traffic on QAN's top five routes falling by 2.5% on the pcp in April, driven by decreased traffic on the Hong Kong and UK routes, which were down 5.0% and 10% respectively.
"QAN now has 63% of its FY08 fuel requirements locked in at US$70/bbl for WTI.
"Whilst this goes some way to mitigating risks associated with recent jet fuel price increases (up 16% since February 07 to US$81/bbl), we note the premium for Singapore Jet Fuel over WTI has increased, slightly eroding the benefits of QAN's hedging.
"We also believe current high load factors and yields are likely to be negatively impacted in FY08 and FY09 as a result of increased capacity and the entry of Tiger Airways.
"We remain cautious on current favourable conditions continuing into FY08 and FY09. Despite this, we believe QAN's share price is likely to be assisted by the announcement of capital management initiatives (likely to be in the form of a share buyback) and further management plans aimed at unlocking the unrealised value of non-core assets, particularly Frequent Flyer and Freight."
Qantas is now getting much of its higher earnings from price rises and not fare surcharges which haven't been increased for a year or more.
The 8.7 per cent increase in international yields, as well as the 4.4 per cent rise in domestic yields (in the 10 months to April), came from higher fares as the fuel price surcharge was cut in January.
According to Qantas' March upgrade; it is expecting a full-year pre-tax profit of around $940 million. According to analysts it could be as high as $1.1 billion.
The rising dollar continues to help Qantas, offsetting the cost of fuel, capital equipment repayments and overseas operating costs.
Qantas said in its April traffic statement that it had also locked in 63 per cent of its fuel needs for 2007-08 "at a worst case rate of $US70 a barrel" of West Texas Intermediate, which is presently trading around $US66 a barrel. That's lower than the key prices in London and Singapore for similar type crude oils.
