Should you buy Qantas shares? Here are 5 reasons why the company thinks you should

Nick Sundich Nick Sundich, May 31, 2023

Should you buy Qantas shares? On one hand, there’s the common mantra that investors should never buy airlines, not to mention that the travel boom has little more room to grow and the share price is near pre-COVID highs.

But the Red Roo begs to differ. You see, the company held its first investor day since the pandemic and outlined several reasons why investors should consider it.

Yes, there’s the usual disclaimer that the presentation alone is not an offer document to buy securities. However, the intention of any company in holding an investor day is to put forward its case to investors. And there were some compelling arguments.

 

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Should you buy Qantas shares? The 5 reasons proposed by the company:

 

1. The affluence of its customer base

Obviously, Qantas believes travel demand will keep up. But particularly in respect of its own customers. It told its current and potential investors that its frequent flyers will prioritise travel spending over other categories – such as homewares, alcohol, beauty and clothing.

It also told investors that a high proportion of its tiered frequent flyers (Silver and Above) were of high affluence. 52% were high and another 42% were medium affluence. Granted, this was based on banking transaction data and instead of using income levels. It used a CommBank iQ measurement based on purchasing preferences.

It has 80% of the domestic corporate travel market and over 50% of the SME market.

 

2. Structural changes have worked to the company’s benefit

The pandemic was a huge hit to airlines globally. The ICAO estimates the impact was US$870bn to all airlines globally – measured by a loss of operating revenue that otherwise would have been achieved. And the impacts continue to hit the industry with ongoing supply chain and labour shortages, increased eCommerce and flexible working.

But Qantas says it is in a better position through the actions it took during the pandemic. It raised $4.8bn in debt and equity in 2020, generated a further $1bn in restructuring benefits and another $800m through a sale of surplus land. It was able to secure long-term fleet renewal orders at prices it otherwise wouldn’t have been able to retain, launched new routes and captured growth in the freight market.

 

Qantas (ASX:QAN) share price chart, log scale (Source: TradingView)

 

 

3. New profitable routes

Qantas Domestic has long been profitable and the group anticipates this improving as the fleet is renewed over the next decade from 737s to A220s and A321XLRs. It told shareholders it was targeting an ~~18% EBIT margin from Qantas Domestic in FY24 and a ~15% EBIT margin for Jetstar domestic.

Qantas International has lagged for years with a 6% EBIT margin pre-COVID, but is targeting 10-12% in the long-term. It is hoping to achieve this through new aircraft that make new profitable routes possible. It noted the example of the 787s that have taken Australia-London from a loss-making route to a profitable one through increased capability and a more premium cabin mix. Other routes made possible, such as Perth-Rome and Melbourne-Dallas, have been profitable too.

And the arrival of the A350 for Project Sunrise is anticipated to take it to the next level with non-stop flights from Australia to London and New York. Qantas is expecting incremental earnings in excess of ~$400m by FY30 as a result of the A350.

But even smaller aircraft, the A321XLR and A220 will play a part too, making routes possible between Australia and Asia that otherwise might not have been financially feasible.

 

4. Qantas Freight

During the pandemic, the Qantas Freight division boomed due to the growth in eCommerce. But Qantas thinks it still has some way to grow.

Qantas anticipates $1.4bn in revenue in FY23, representing $150m in structural earnings growth from FY19. This is now just because of the growth in online shopping (from 11% penetration to 20% virtually overnight), but digitisation of systems that transform the customer offering and a renewal of the fleet with A321s (and eventually A330s) that offer a greater payload, a greater range and lower emissions.

Another $100m in earnings is targeted in FY30 as eCommerce penetration grows and a curfew-free freight terminal at Western Sydney Airport opens.

 

5. Qantas Loyalty

The Qantas Loyalty Division consists of the frequent flyer program, with 15m members, and the ecosystem. Qantas earns revenue for being paid for the points it distributes to its members. It told investors that >35% of credit card spend in Australia earns Qantas points and it expects $500-$600m earnings in FY24.

The company told investors that there was more growth to come as it increased redemption opportunities, improved operating efficiency through CX improvements and growth in the membership base. This would have a ‘flywheel effect’ – a virtuous cycle when a business creates positive customer experiences, leading to increased sales and customer loyalty

 

Sounds good! But…

the company needs further capital to fund its fleet renewal ambitions – even aircraft that it has signed binding deals to purchase. And there could be further needed with the A330 replacement. There was some speculation that this would be confirmed at the Investor Day, but will now likely be deferred for at least 6 months until Vanessa Hudson takes the hot seat.

Qantas is a safer airline share than plenty of other around the world. But ask us ‘should you buy Qantas shares’ and we would only answer yes if you were comfortable with this uncertainty for the time being.

 

 

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