Qantas upgrades profit outlook by $150m; shares rally

Qantas (ASX: QAN) lifted its pre-tax profit guidance to $1.35bn to $1.45bn for the first half of FY23 to reflect continued strength in travel demand. The company's shares rallied 5.1% as the market opened.

"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," the company said in a statement.

The new profit guidance is $150m higher than the $1.2bn to $1.3bn guidance provided in October, which was already more than double what brokers including Credit Suisse, UBS and Citi were expecting.

High fuel costs

Qantas said fuel costs remain 'significantly elevated compared with FY19' and expects the fuel bill to reach a record high of approximately $5bn in FY23 despite international capacity sitting around 30% below pre-covid levels.

To add some perspective, Qantas' fuel expense in FY19 was $3.85bn.

Improved operational performance

Qantas noted that its operational performance has continued to improve, with the airline ranked as one of the most on-time domestic carriers in October.

"The $200 million investment in rostering additional staff, continued recruitment and reserve aircraft will help maintain these levels ... and into the busy Christmas period," said Qantas.

"The Group is adding capacity as quickly as possible in the second half of the year while maintaining operational reliability."

Net debt to fall, buybacks complete

Group debt is expected to fall to an estimated $2.3bn to $2.5bn by year end, which is approximately $900m better than what was expected in the October update.

The improved debt position was largely due to an "acceleration of revenue inflows as customers book flights on Qantas ... into the second half and beyond, as well as the deferral of approximately $200 million of capital expenditure to the second half."

Qantas declared an on-market share buyback of up to $400m in August, which is currently 76% complete at an average price of $5.66.

"Low levels of net debt put the Board in a position to consider future shareholder returns in February 2023 consistent with the Group’s financial framework and phasing of capital expenditure for fleet renewal," said Qantas.

Bullish brokers

Most broker see further upside in Qantas shares.

Note that most of these recommendations are from last month, following the company's market update on 13 October.