Qantas just reported a $2.8 billion loss – so why are its shares up 21%?

Qantas just reported a $2.8 billion loss – so why are its shares up 21%?

Undoubtedly one of the worst results during reporting season came from terminal basket case Qantas (ASX: QAN) which has faced an appalling environment in recent years – such as a capacity war with domestic competitor Virgin, and increased competition with its international business.

Also read: Telstra - should you buy, hold or sell?

But rather than punish the company, Qantas shares have rallied since the announcement. And these are the reasons why:

  1. The headline loss of $2.8 billion included a $2.6 billion non-cash writedown on its fleet and has been done in line with its competitors – this was expected and importantly is non-cash.
  2. This result represents the past. A company’s share price will always reflect the market’s expectation of the future and management at Qantas was clear to say the worst had passed.
  3. The capacity war has come to an end, both for the international and domestic business, and this will stabilise the revenue environment.
  4. Qantas expects a return to profit for the first half of this year. That is a huge turnaround and demonstrates the progress in cost cutting that the company has achieved.
  5. Qantas announced that it would not be spinning out its valuable Frequent Flyer business. This to me is statement about the board’s confidence in the company’s recovery, and considering the balance sheet stress, a sale would have been an easy fix.

So despite a hideous headline result, the market has seen the trees for the forest and added almost $600 million in market capitalisation. One of our oldest rules (shared by Warren Buffett, I might add) is to never buy airline businesses – they are capital intensive and dominated by cycles – so we have no plans to recommend Qantas ourselves, but if the improvements continue then weary shareholders may still see higher prices.

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