Qantas Airways and Virgin Australia’s dog days appear to be behind them, with both carriers set to return to the black over the six months ended 31 December.

In a trading update for the quarter ended 31 December, Virgin Australia reported an underlying profit before tax for the half-year of A$10.3 million ($8 million), a marked improvement from the A$49.7 million loss over the same period last year.

The boost has come largely from a A$55.3 million underlying pre-tax profit for the last three months of 2014. No revenue figures for the quarter were disclosed, but its yield increased, while CASK was down.

Hearteningly for Virgin, it also disclosed that Tigerair Australia reported its first quarterly operating profit since 2010, eking out a A$0.5 million underlying pre-tax profit over the three months. While ahead of its previously projected timeframe, the champagne will remain on ice until it can string together more quarters in the black.

Prior to Virgin’s update, Qantas had given guidance that it expects to record an underlying profit before tax of between A$300 million and A$350 million for the half-year to December 31. That compares to a A$252 million underlying pretax loss over the previous corresponding period.

Intriguingly, the carrier says that is expects to record positive earnings before interest and tax for all of its operating divisions, largely as a result of its A$2 billion cost-cutting programme.

Based on that statement, it appears that Qantas’s problem child – its struggling international operation – has managed to turn around. Most of that upside appears to be from the retirement of most of its Boeing 747-400s, as well as better utilisation of its Airbus A330s and A380s.

With the seeming turnaround at Qantas International, odds are firming that the carrier will announce a firm order for 787-9s during the half-year results. The carrier has delivery positions that could see the aircraft start rolling into the fleet from 2017 onwards, potentially allowing it to start scaling up its atrophied international network.

Virgin appears less upbeat about its international operations. Virgin chief financial officer Sankar Narayan says that its international yield recovery “has been constrained by continued pressure in South East Asian and Europe/United Kingdom markets” – a sign that competition in Australia’s key international markets has not yet abated.

Helping both carriers is the dramatic fall in the cost of fuel, although both carriers’ strong hedging positions will delay the expected boost to their bottom lines.

Qantas disclosed on 20 August that , on a group basis, it had hedged 94% of its fuel costs for the first half of fiscal 2015. While not saying at what level it had hedged, in an investor presentation it noted that it had “significant participation to lower fuel prices” – indicating that it may have been using more options rather than fixed prices.

Virgin has disclosed that in its second quarter it saw a A$7 million benefit from lower fuel prices, compared to the same time the year prior. Nevertheless, ineffective hedges contributed to a A$33.5 million charge on the carrier’s bottom line.

In a recent credit rating note on the carrier, Stanadard & Poor’s says: “Over time, we believe that Qantas will capture a more lasting benefit of lower oil prices through its domestic operations, where it faces less price competition compared with its international operations.”

Despite the better fuel situation, there are concerns that demand will remain subdued for the remainder of the 2015 fiscal year, with Virgin’s Narayan warning that while it has seen some improvement in domestic trading, “consumer sentiment has been relatively weak”.

Standard & Poor’s credit analyst Graeme Ferguson agrees, saying: “We expect underlying demand conditions to remain weak for the Australian airline industry.”

That appears to be borne out in recent IATA figures for December 2014, which show that domestic RPKs grew by an anaemic 0.2%, as capacity was down by 1%.

With such benign demand conditions, most analysts and investors will be looking for both carriers to show that they are making steady progress on cutting their non-fuel costs.

The expected strong profit result will validate Qantas’s cost cuts to date, with more to flow as it moves to reconfigure its Boeing 737-800s to add more economy seats from later this year.

Virgin’s positive comments on its CASK seem to show that its incremental cost cuts are working. Further synergies from its takeover of Tigerair Australia are possible, but there are still likely to be some costs involved as it digests its full takeover of the budget carrier. Nevertheless, investors will expect Virgin to maintain its unit cost advantage against the Qantas group.

While the dog days are behind Virgin and Qantas, there will be little relaxation for either carrier in the months ahead.

Source: Cirium Dashboard