AU earnings: Qantas - takeoff or turbulence? Upcoming earnings to decide the flight path
With the Qantas share price idling and earnings due out soon, will the airline's post-COVID 'YOLO' travel boom and fleet renewal strategies pilot it to new heights, or are there storm clouds on the horizon?
As Australia's largest airline, Qantas finds itself at a crucial juncture, navigating the skies of post-Covid recovery while confronting the turbulence of economic uncertainties and transformational strategies. This week's Investor Spotlight focuses on a share price that has remained stagnant since December 2022 to ambitious fleet renewal plans and the airline's upcoming FY23 earnings result.
Tracking a sideways journey
The Qantas share price has been tracking sideways since December 2022, which begs the question, ‘can the upcoming FY23 earnings result, due out on 24th August, prime the stock for take-off?
The sweet spot might not be so sweet
The Qantas share price has been in a holding pattern since the May results. The post-Covid recovery has been robust, with the ‘YOLO’ travel boost allowing the company to achieve near 100% load factors. I am sure my Instagram feed is not the only social media packed with travel photos from across Australia and the globe.
Qantas is, for now, in what may be termed the ‘sweet spot’ - overwhelming demand, particularly for international travel, and a slimmed-down cost base, allowing the sales revenue to drop to the bottom-line earnings.
Milking the travel demand
The question for the near term is how much has the company been able to milk the demand for travel, and how long will it last? Analysts are already starting to question whether discretionary travel spending will be able to hold up to the higher cost of living and a potential slowdown in economic growth. Equally, Australians may just travel themselves out, and look to replenish the cash coffers, particularly with a very weak Australian dollar.
A recent report from Goldman Sachs identifies that they expect Qantas' traffic to hit 95% of pre-Covid levels over the next 12 months and earnings per share to come in above the pre-Covid levels by a margin of 74%.
Qantas 1-hour chart
Cost out programme but at what cost?
Qantas' sales revenues and earnings might be a beneficiary of the post-lockdown YOLO travel boom, but removing the rose-tinted glasses and observing the numbers in the following charts reveal the company's financials have been far from a pretty picture.
A challenging picture: Qantas aummary earnings
The outgoing CEO, Alan Joyce, implemented a $1bn cost-out programme to boost earnings by 50%, according to Goldman Sachs, who forecast circa 14% growth in unit revenues between FY19 to FY24.
Even with an expected rehiring programme of 2300 people in the next 18 months, the Qantas workforce will be some 10-15% below the pre-pandemic levels, UBS noted at the 1H23 results. The massive cost-cutting has for some travellers and experts led to a deterioration in the quality of service, from lost luggage to below-par onboard food.
The analyst perspective
Stockbroker Angus Aitken was recently quoted as calling a major Sell on the stock, with analysts' over-estimating the “stronger-for-longer” outlook in what is essentially a highly cyclical business that is a discretionary spend.
The incoming CEO, Vanessa Hudson, is expected to outline Qantas’ fleet renewal plans, acquiring up to 300 new aircraft, which alongside other costs could double the capital expenditure from $7bn currently to potentially $15bn, according to Morningstar analyst, Angus Hewitt.
Project sunrise: A new dawn for Qantas
Alan Joyce has made much about the renewal process and the strategic aims of developing long-haul non-stop flights to London and New York, referred to as Project Sunrise.
Based on current trends, Qantas is lifting the percentage of premium seats to 40% from 30% for the new A350 Airbuses which will operate the non-stop routes, commencing operation in 2025 and in full service by 2030; which Joyce forecasts can add up to $400m per annum in incremental earnings, from the higher pricing.
The future fleet and growth strategy
The fleet renewal should lower the average fleet age to 9.9 years from 16.4 years. Another leg of the forward growth strategy is the Loyalty programme, alongside the targeted expansion into financial services and insurance. These ancillary services have been flagged by management to add up to $1bn in earnings by 2030.
Project Sunrise routes
Earnings preview and analyst outlook
At the May 1H23 results, Qantas gave guidance of earnings before tax of $2.425bn to $2.475bn in the 12 months to June, with $425m to $450m from the loyalty programme. There was also a lift in the share buyback to $600m from $500m; no dividend is expected to be paid according to analyst forecasts until 2025.
The volatility equation
Given the volatility of share price reactions post-earnings results this season, the Qantas share price may experience the same treatment depending on the results. Much will depend on the extent to which the 2H23 beats guidance and the outlook. The new CEO will have her work cut for her, as travel spending starts to normalise and potentially price cutting re-emerges if demand softens.
Airlines and the cyclical challenge
Airlines are highly cyclical businesses with large capital expenditures, alongside management of exposure to volatile aviation gas prices. Qantas enjoys a strong position domestically, with limited overseas competition, but the next few years could be challenging as an old fleet is upgraded.
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