The Sky's Limited: Border Restrictions to Weigh on Qantas Near Term; Shares Fairly Valued

We maintain our AUD 5.00 fair value estimate for shares in no-moat Qantas following the release of interim fiscal 2021 results. Border restrictions and lockdowns continue to wreak havoc on Qantas (and the global airline industry in general), leading to an underlying first-half net loss before tax of about AUD 1 billion. Stringent Australian entry requirements for international arrivals have virtually grounded the international business (with the exception of limited repatriation flights), only partially offset by increased freight amid surging domestic e-commerce. The domestic business is also heavily stifled as lockdowns and state border restrictions continue to weigh on demand. However, as borders reopen and the national vaccine rollout begins, we expect domestic flying in the second half to recover. Despite this gradual recovery and aggressive cost-cutting, we expect Qantas to remain loss-making in the second half. We now forecast operating deleverage to lead to an aftertax loss of AUD 1.3 billion in fiscal 2021, a downgrade from our prior forecast of AUD 1 billion.