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In recent days, there has been significant attention drawn towards Qantas’ capex needs going forward. As it appears, CEO Alan Joyce will depart before this year is out. Observations are being made that he has underinvested in the group’s fleet and that his successor will pick up the bill.
But while the issue of Qantas’ capex has been bubbling under the surface for some time, developments in recent days have bought it to the surface.
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Why investors are looking at Qantas’ capex bill now
Qantas’ average fleet age is 15 years, well above global peers, such as Cathay Pacific, Emirates and Qatar Airways. This age is exactly the same as Alan Joyce’s tenure. He hasn’t been much of a plane buyer, inheriting an order of 65 787s, of which only 25 will be delivered.
To be fair, he has undertaken fleet refurbishment and made orders for the new domestic fleet (A220s and A321s) and for Project Sunrise aircraft (A350s), but much of Qantas’ capex bill will be paid after his departure (specifically FY25-FY27).
Although he made a big Airbus order for Jetstar in 2011, this was deferred a number of times. There are only 20 firm orders for the A220s and A321s and these alone carry a combined list price of at least $6.5bn, before the typical 30-50% discount enjoyed by airlines.
A total order enough to replace the existing 737 and 717 fleet could be up to $20bn. But even with a 50% discount, $10bn is still a lot of money. The order for 12 A350s could be $3.2bn, as estimated by Barrenjoey. And this doesn’t take account a potential A330 replacement.
Although Qantas’ net debt is down from its $5.5bn peak during the pandemic, it is still above $2bn. Accusations have been made that it has deliberately underinvested in capital to keep the share price higher than it otherwise would be.
Institutional brokers have given the issue of Qantas’ capex little scrutiny until UBS downgraded Qantas stock last month because of this. The report estimated its bill over FY24-FY28 would be $12bn to replace the planes. That is 3 years of operating cash flow, at record levels. Furthermore the report noted that estimated figure for Qantas’ capex would only meet committed deliveries and it would cost even more than that to keep the fleet at its present stage.
Why Qantas is shirking the issue (right now)
To be fair, it is not exactly shirking the issue. After all, its latest advertising campaign boasts that it would receive ‘1 new aircraft every 3 weeks over the next 3 years’. And with certain planes being hibernated during COVID, some could be used a few more years than they otherwise would be.
The company is experiencing rapid demand for its routes and profiting accordingly. Even though complaints have been high, people have ultimately been voting with their wallets – or at least enough have to prevent an impact. But most important of all, the company clearly wants to minimise any damage to Alan Joyce’s legacy while he is still at the company.
One saving grace that makes the issue of Qantas’ capex bill not as bad as it otherwise would be, is that it the government support it received will not have to be repaid. This cannot be said in respect of Air New Zealand (ASX:AIZ).
Qantas’ capex will could cost it further
In the medium to longer term, a lack of investment in capex could cost it market opportunities. United Airlines’ rapid Oceania expansion, announced earlier this week, is a case in point. During the northern winter season (October 29 2023 to March 30 2024), it will have more routes than any other carrier.
Qantas has big US aspirations, but lacks the aircraft to service any more routes. It is so constrained, it has to use aged A330s between Brisbane and Los Angeles that don’t even have a crew rest. United, however, will be using modern 787s and refurbished 777s, both containing Polaris business class seats.
Admittadly, United will likely scale down service during the Northern Summer season (March 2024-October 2024) to service European markets instead. But that’s the flexibility that comes with having a larger fleet. It has 71 787s, and just ordered another 100 more, along with nearly 100 777s.
We believe Qantas’ capex bill, if unpaid, will lead to it ceding market share to its competitors on key international routes. If the service (particularly in premium cabins) isn’t worth the premium price, people take their business (class) elsewhere.
Never invest in airlines!
Airline stocks have done very well post-pandemic. But the issue of Qantas’ capex bill illustrates that they operate in a very cyclical environment and that these businesses have high capex requirements. Therefore, it is more difficult to make money from them compared to other businesses. As one famous investor once said … “Never invest in airlines” ~ Warren Buffett.
However, Stocks Down Under Concierge has done just that in 2022
And we did that very successfully. We advised our subscribers to buy Qantas (on 14 July 2022) and Air New Zealand (on 28 September 2022) and our subscribers came away with a profit of 20.3% on Qantas and 19.5% on Air New Zealand by the time we told them to sell. Check out all of our Concierge trades here!
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