Company Reports

The long-awaited revamp to the Qantas Frequent Flyer loyalty program has been unveiled. In short, in the hope of retaining more customers over the longer term, loyalty now offers more value to consumers. A major bugbear for Qantas frequent flyers is the lack of seats available to book with points, and the poor value points offered on alternative fares. The revamp effectively allows customers to redeem points at a largely higher value on a broader range of flights.

The covid-19 pandemic has wreaked havoc on the global airline industry. Lockdowns, border restrictions, and social distancing measures have clipped Qantas' wings. Stringent Australian entry requirements for international arrivals and an effective ban on noncitizen, nonpermanent resident arrivals decimated passenger revenue, and despite aggressive cost-cutting, operating deleverage led to significant aftertax losses in 2021 and 2022.

Qantas’ profitability is normalizing following an exceptional fiscal 2023. Interim fiscal 2024 profit before tax fell 13% on the previous corresponding period to AUD 1.2 billion. Pent-up demand is largely exhausted, capacity constraints have eased, and competition is intensifying. Both internationally and domestically, the Qantas brand experienced a sharp drop in margins, while budget brand Jetstar is pulling ahead. Profits are normalizing faster than expected. We lower our fiscal 2024 underlying pretax profit forecast by 5% to AUD 2 billion, which is 19% lower than fiscal 2023. However, our longer-term forecasts remain largely intact, and we make no changes to our fair value estimate of AUD 6.10.

We maintain our AUD 6.10 fair value estimate for shares in Qantas. Profitability is normalizing after an exceptional fiscal 2023. Pent-up demand has largely exhausted, and previously constrained capacity is beginning to ease. Pricing competition is intensifying as capacity bottlenecks ease for the airline industry. Burdened by high fixed costs, low barriers to entry, and low switching costs, airlines globally lack economic moats and Qantas is no exception. We think these conditions, which plagued the airline industry before the pandemic, are set to return. We lower our fiscal 2024 EBITDA forecast by 7% to AUD 4.2 billion as a higher focus on customer service weighs on near-term profitability more than previously anticipated. But the impact on our valuation is immaterial, as our longer-term forecasts stand.

The COVID-19 pandemic has wreaked havoc on the global airline industry. Lockdowns, border restrictions, and social distancing measures have clipped Qantas' wings. Stringent Australian entry requirements for international arrivals and an effective ban on noncitizen, nonpermanent resident arrivals decimated passenger revenue, and despite aggressive cost-cutting, operating deleverage led to significant aftertax losses in 2021 and 2022.

We lift our Qantas fair value estimate by 3% to AUD 6.10 per share on the time value of money. Fiscal 2023 was a record year for Qantas, with an underlying pretax profit of AUD 2.5 billion in line with our forecast and guidance. This is a dramatic turnaround from underlying losses of AUD 3.6 billion in the prior two years which were ravaged by COVID-19 restrictions on flying. Air travel demand has returned strongly, while capacity is still constrained by the availability of aircraft, labour, and parts. With full planes and expensive tickets, Qantas is enjoying tremendous profitability.

We maintain our AUD 5.90 fair value estimate for Qantas shares with another positive trading update. Demand still outstrips supply, and jet fuel prices have moderated recently, partly offset by unfavourable currency movements. Full planes, high ticket prices, and an easing fuel bill see Qantas set for record profitability. We lift our fiscal 2023 pretax profit forecast by 6% to AUD 2.5 billion, the midpoint of company guidance.

We maintain our AUD 5.90 fair value estimate for shares in Qantas following the release of interim fiscal 2023 results. Underlying pretax profit of AUD 1.4 billion—a record result—is a dramatic turnaround from the AUD 1.3 billion underlying pretax loss in the prior corresponding period, or pcp, which was marred by lockdowns and border restrictions. While air travel capacity remains constrained, demand is strong, leading to expensive tickets, fuller planes, and unprecedented profitability for Qantas.

We maintain our AUD 5.40 fair value estimate for shares in no-moat Qantas following the release of its interim fiscal 2022 earnings. The underlying pretax loss of AUD 1.3 billion was 30% worse than the AUD 1.0 billion loss in the prior corresponding period, or pcp. Persistent lockdowns weighed heavily on air travel during the period, exacerbated by continued international and domestic border restrictions. While we lower our near-term forecasts for the airline, our longer-term forecasts remain broadly intact. We think Australia's overwhelmingly vaccinated population means a likely end to wide-ranging lockdowns, and with borders progressively reopening and restrictions loosening, the worst is now behind Qantas.

We raise our fair value estimate for shares in no-moat Qantas by 4% to AUD 5.40. The increase is principally due to the impact of time value of money and the AUD 802 million sale of an unused parcel of land at Mascot, partially offset by lower near-term earnings from lower international travel assumptions and higher jet fuel expenses following a market update on first-half performance. Qantas has guided to an interim fiscal 2022 EBITDA loss of between AUD 250 million and AUD 300 million in a period marred by extended lockdowns and domestic and international border restrictions. While we continue to expect a significant improvement in the second half, we lower our full-year fiscal 2022 EBITDA forecast to AUD 1.3 billion, from AUD 1.9 billion previously.

We maintain our AUD 5.20 fair value estimate for Qantas following the release of fiscal 2021 results. It was a challenging year for the no-moat rated airline as domestic and international border restrictions weighed heavily on air travel. Underlying EBITDA declined 83% to AUD 410 million, slightly behind our AUD 420 million forecast, reflecting the first full-year impact of COVID-19. Qantas' domestic business gradually recovered to pre-COVID-19 levels toward the end of fiscal 2021 as domestic borders eased, driven by local leisure demand amid international border restrictions. By contrast, the international business remained subdued, with limited repatriation flights partially offset by the Trans-Tasman travel bubble and countercyclical freight earnings amid surging e-commerce demand. Qantas' net statutory loss came in at AUD 1.7 billion--less than last year's AUD 2.0 billion. As expected, Qantas declared no full-year dividend--we expect dividends to stay suspended until the firm returns to profitability, which we expect in fiscal 2023.

The COVID-19 pandemic continues to wreak havoc on the global airline industry. Lockdowns, border restrictions, and social distancing measures have clipped Qantas' wings. Stringent Australian entry requirements for international arrivals and a ban on noncitizen, nonpermanent resident arrivals have decimated passenger revenue, and despite aggressive cost-cutting, we expect operating deleverage to lead to significant aftertax losses in 2021.

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.

The COVID-19 pandemic continues to wreak havoc on the global airline industry. Lockdowns, border restrictions, and social distancing measures have clipped Qantas' wings. Stringent Australian entry requirements for international arrivals and a ban on noncitizen, nonpermanent resident arrivals have decimated passenger revenue, and despite aggressive cost-cutting, we expect operating deleverage to lead to significant aftertax losses in 2021.

The COVID-19 pandemic continues to wreak havoc on the global airline industry. Lockdowns, border restrictions, and social distancing measures have clipped Qantas' wings. Stringent Australian entry requirements for international arrivals and a ban on noncitizen, nonpermanent resident arrivals have decimated passenger revenue, and despite aggressive cost-cutting, we expect operating deleverage to lead to aftertax losses in 2021.

Buying high and selling low does not lead to positive shareholder returns. But over the past two years, Qantas' management has done just this. The firm has bought back AUD 1.83 billion in shares since the beginning of fiscal 2018 at an average price of AUD 5.77 per share--a premium to our fair value estimates at the time. Qantas is now raising AUD 1.85 billion through a AUD 1.35 billion institutional placement and AUD 500 million share purchase plan, or SPP, at a maximum of AUD 3.65 per share--below our current fair value estimate, and well below the prior share repurchase prices. In our opinion, these capital allocation decisions have destroyed shareholder value, and we downgrade Qantas' stewardship rating to Poor. Although we don't fault management for not foreseeing the onset and impact of COVID-19, demand disruptions are commonplace within the air travel industry, highlighted by our no-moat rating for Qantas (and all airlines globally) and very high uncertainty rating. A cyclical downturn was inevitable at some point.

Shares in no-moat Qantas look undervalued, trading at a 22% discount to our unchanged AUD 4.70 fair value estimate. The near-term outlook remains bleak as domestic and international air travel grinds to a halt amid the ongoing coronavirus pandemic. The majority of Qantas' fleet is grounded and we forecast a full-year fiscal 2020 capacity reduction of 26% and an aftertax loss of AUD 86 million. However, Australia's proactive approach to containing the virus appears to be reaping benefits with relatively low case numbers and lockdown measures beginning to ease on a state-by-state basis. We continue to forecast a recovery in air travel demand, albeit with capacity not again returning to fiscal 2019 levels until fiscal 2022.

We reduce our fair value estimate for Qantas by 6% to AUD 4.70 following significant capacity restrictions across the firm's network as COVID-19 continues to wreak havoc on the global airline industry. This comes on the back of more stringent Australian entry requirements of mandatory 14-day self-isolation for international arrivals; a ban of noncitizen, nonpermanent resident arrivals; and federal government advice to avoid all overseas travel. We also raise our fair value uncertainty to very high, as financial leverage across the business is having a significant impact on underlying earnings. Nevertheless, we don't expect the impact of the virus to be protracted and forecast demand to recover from fiscal 2021. Despite our lower fair value estimate and increased uncertainty rating, shares in Qantas continue to screen as attractive, trading at a significant discount to our fair value estimate.

We maintain our AUD 5.00 fair value estimate for shares in no moat-rated Qantas following further capacity reductions flagged across its network. The impact of novel coronavirus, or COVID-19, is weighing on air travel demand across the globe, and Qantas is not immune. Despite announcing reductions to capacity and an off-market buyback on Feb. 20, 2020, the COVID-19 impact is proving highly disruptive, and Qantas has now earmarked deeper cuts and cancelled its buyback. We lower our fiscal 2020 net profit after tax, or NPAT, forecast to AUD 647 million, from our previous estimate of AUD 787 million, representing a 30% drop compared with fiscal 2019. However, we don't expect this to persist in the longer term and anticipate air travel demand recovery from fiscal 2021.

Shares in no-moat Qantas remain expensive following the release of its first-half fiscal 2020 earnings. The firm also announced another off-market share buyback--this time for AUD 150 million--which may prove an attractive option for some investors looking to take some off the table. We expect Qantas is buying back less than 2% of shares on issue, and given the buyback discount of 14%, the impact on our fair value estimate is immaterial. Underlying profit before tax, or PBT, for the first half of fiscal 2020 remained virtually flat compared with the prior corresponding period, or PCP, at AUD 771 million. However, the coronavirus outbreak is weighing on earnings and the near-term outlook appears soft. We maintain our fair value estimate of AUD 5.00 per share, as our softer near-term forecasts are broadly offset by the time value of money. Our forecasts now include the impact of the new accounting standard for leases, AASB 16.