Qantas (ASX: QAN): In the right direction, but not off the ground yet

Marc Kennis Marc Kennis, February 24, 2022

Qantas shares more than doubled from their COVID-bottom, still below pre-COVID highs

Qantas released its half-yearly results on Thursday, revealing just how its recovery is proceeding. As with its peers in the travel industry, the pandemic all but wiped-out passenger numbers and it has been a long and slow road back, impeded by border closures and new strains of COVID-19. The recent half-yearly period finally saw Australia’s international border and numerous state borders re-open, but the Omicron strain still dented passenger demand. Will the next phase of the recovery for Australia’s flag carrier be smoother?


COVID-19 decimated Qantas

The airline industry is notorious for being highly capital intensive and vulnerable to external shocks. Virgin Atlantic founder Richard Branson once illustrated this point by declaring the way to become a millionaire was to start as a billionaire and then start an airline.

In FY19, the last full financial year unaffected by COVID-19, Qantas was an exemption to that argument, generating $17.96bn in revenue, $3.36bn in EBITDA and a pre-tax profit of ~$1.3bn. But COVID-19 swung things in the wrong direction. Even in FY20, when COVID-19 only affected the company for four months, it took a $4bn revenue hit. And while it recorded a $124m pre-tax profit, aircraft write downs resulted in a statutory loss of $2.7bn. In FY21, it suffered a $12bn revenue hit and a statutory loss of $2.35bn.

However, Qantas managed to survive the pandemic thanks to its Recovery Plan. The most prominent aspects were its Mascot property sale and worker redundancies (there have been 9,800 since July 2020), but it also included debt reductions and aircraft hibernation. Despite recording a substantial loss in FY21, the company committed to refreshing its domestic fleet with Airbus A320s, A220s and A321s. And today Qantas told investors it had officially resumed work on its Project Sunrise program, implying an order for aircraft to fly non-stop to London and New York from Sydney and Melbourne is imminent. The company was also helped by its strong Loyalty division, which holds its frequent flyer program and was its only profitable division in its recent half yearly result with $127m in EBIT.


Qantas’ recovery a Work in Progress 

Qantas’ share price fell from over $7 in late 2019 down to $2.36 in late March 2020. The company’s share price slowly recovered over the following months, but since November 2020 has been volatile and never surpassed its pre-COVID high. This share price performance was due to the hope that travel demand would eventually recover to pre-COVID levels, but the reality is that this is not anticipated until 2024. The closure of Australia’s border meant that domestic flight levels briefly recovered to pre-COVID levels during 2021, but the Delta wave eroded demand again.

In late 2021, the border was opened, but international travel demand levels remain low and the Omicron wave has impacted demand domestically. In the March quarter, Qantas is forecasting capacity to be at 68% of pre-COVID levels, rising to over 90% in the June quarter. International capacity is expected to be just 22% of pre-COVID levels, doubling to 44% in the June quarter.

The Omicron wave hit Qantas’ share price, but shares have recovered and found support above $5. Today’s results caused a 2% drop in the share price, but the buyers have a slight edge in trading momentum.



Qantas share prices last 12 months (Source: Tradingview)


Hoping business travel will take off again

Qantas’ half yearly results depicted that there’s still some way to go. The company made an underlying EBITDA loss of $245m and a statutory loss of $622m, although it recorded positive statutory net free cash flow supported by Qantas Loyalty and Qantas Freight.

Consensus estimates for FY22 forecast revenues of $8.4bn, followed by $15.8bn in 2023 and $18.3bn in 2024 – surpassing pre-COVID levels in that year. EBITDA is expected to nearly reach pre-COVID levels in FY23 with $3.2bn forecast, although EBIT will be lower considering the extent to which depreciation is relied upon by airlines such as Qantas.

The bulk of travel for the foreseeable future will be leisure bookings with business travel lagging – corporate bookings are at just 33% of pre-COVID levels. Corporate bookings are higher margin customers for airlines because they tend to book closer to the time of departure and willingly pay a premium for the privilege. Undoubtedly, the company is hoping that the end of work from home mandates will quickly lead to business travellers taking to the skies once more.


Ready for take off

Assuming no further capital raises are undertaken, this gives Qantas stock a P/E ratio of 14x for FY23 and 8x for FY24. One could be concerned about the competitive landscape domestically – with low-cost airline Bonza set to launch later this year – and internationally as more airlines return to Australia.

We also believe that the recovery in air travel will continue in 2022 as countries remove their travel restrictions. Although the IATA estimates air travel remained 59% below pre-COVID levels in 2021, the industry body also reported a substantial increase in demand in the first two weeks of February when numerous governments lifted restrictions. Specifically, ticket sales rose from 38% of pre-COVID levels in the first week of February to 49% two weeks later – this was the biggest 2-week increase in ticket sales since the crisis began.

While Qantas investors will inevitably feel more turbulence, we believe there remains light at the end of the tunnel and QAN could be good buying around these levels.


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