Why Qantas shares could be flying into turbulence

Qantas Airways Ltd (ASX: QAN) shares are losing altitude today.

Shares in the S&P/ASX 200 Index (ASX: XJO) airline stock closed yesterday trading for $8.70. During the Thursday lunch hour, shares are swapping hands for $8.53 apiece, down 2.0%.

For some context, the ASX 200 is up 0.1% at this same time.

Qantas shares have come under heavy pressure since the outbreak of the war in Iran on 28 February.

On 27 February, shares closed at $9.95. This puts the ASX 200 stock down 14.3% since investors woke to news of the Middle East conflict on 28 February. That’s roughly twice the 7.2% losses posted by the benchmark index over this period.

Qantas has in part been pressured by potential disruptions to its international routes. Though to date, the company has not made any major changes to its schedule.

But an even bigger potential hit to the airline’s profits, and Qantas shares, could come if the oil price remains elevated.

Brent crude oil is currently trading for US$103 per barrel. That’s up 69% year to date and up 43% since 27 February.

Qantas shares facing profit hit

Qantas former chief economist Tony Webber warned that in a worst case scenario of a “prolonged conflict” in the Middle East, Qantas earnings could fall to $544 million. That’s down more than 54% from prior earnings forecasts of $1.19 billion.

Should the war drag on, Webber said (quoted by The Australian Financial Review):

They will cut capacity most on longer sectors where fuel costs are a higher percentage of total costs and where reducing capacity provides the strongest fare response, usually routes with more business and fewer leisure travellers.

To give you an idea of just how much jet fuel prices can impact Qantas shares, on 26 February Qantas said it expected fuel costs for H2 FY 2026 to be around $2.5 billion, inclusive of hedging and carbon costs.

But in light of the surging oil price and ongoing war in Iran, Macquarie Group Ltd (ASX: MQG)  analyst Ian Myles said Qantas’ overall costs could increase by $250 million over two to three months.

Myles cautioned that Qantas’ earnings could fall by $315 million if the company doesn’t cut costs and reduce flights.

Myles noted (quoted by the AFR):

Qantas arguably has an … opportunity with off-peak flights on deeper domestic routes depending on Virgin’s response, albeit the savings are not that material and more likely to be driven by physical fuel conservation needs … the fuel savings are relatively small [compared to] customer inconvenience and limited ability to move the other costs.

Internationally, the opportunity is reduced flying hours of the Airbus A380s, whose fuel usage is twice the rate of smaller aircraft like the Boeing 787 and Airbus A350.

The post Why Qantas shares could be flying into turbulence appeared first on The Motley Fool Australia.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Macquarie Group. The Motley Fool Australia has positions in and has recommended Macquarie Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.