Qantas share price: What's the outlook following market update?

The Qantas share price (ASX: QAN) has risen over 20% in the last 6-months, but one investment bank sees further upside from current price levels.

An improving situation

Airline and travel businesses have been some of the most impacted by the coronavirus pandemic.

Australia’s premier airline – Qantas (ticker: QAN) – has in no way been immune. Despite a dominant market position leading into the pandemic, border closures and travel restrictions have placed immense pressure on the airline’s financial health and brand reputation.

Things look to be turning around, with Qantas on Thursday raising its domestic travel guidance. The stock however, remains off its 2019, pre-pandemic high.

Domestic capacity outlook

As a result of significant pent up demand for domestic travel, Qantas yesterday raised its Q4 domestic capacity guidance, as part of what was a relatively positive market update. This demand, said the airline has been driven by the Australian government’s half-price fare offering as well as corporate and SME related travel.

Key Implication: Qantas said it now expected Q4 FY21 domestic capacity to hit 90% of pre-covid levels. This represents a 10% improvement against previous estimates.

Management noted that this was based on the assumption that there would be no 'significant border closures'.

Looking forward, the airline said it expected domestic capacity to normalise further in FY22, with Jetstar capacity expected to hit 120% of pre-covid levels, while Qantas capacity is forecast to reach 107% of pre-covid levels.

Despite the improving outlook, the stock finished out Thursday’s session lower, closing at $5.20 per share.

Other key points from the market update included:

  • Demand for travel within the trans-Tasman bubble has been robust, with 'thousands of bookings made in the first few days'
  • Approximately 90% of the Group's aircraft would be active in Q4, well ahead of the 25% that were active during the COVID-19 trough
  • The airline's premium lounges across Sydney, Melbourne and Brisbane will reopen from April 19 onwards

Strategy Check: The airline noted that its short-term focus would be on cashflow opposed to margins. As a result, it was noted that 'the positive impact on FY21 earnings from […] increased activity will be relatively small.'

'This means even more low fares that will continue to stimulate demand,’ the airline added.

Analysts from Macquarie zeroed in on this strategic focus, saying:

‘Whilst the earnings improvement will lag the domestic capacity recovery, cashflow is being well managed meaning that the surging capacity gives greater certainty on Qantas entering balance sheet repair mode in’ the fourth quarter of fiscal 2021.’

‘For Qantas, we continue to push a re-rating thesis, considering the improving outlook and structural business improvements made through COVID – this will eventually support higher profitability.’

Qantas share price (ASX: QAN)

The stock opened at $5.21 per share on Friday, slightly ahead of Thursday’s close.

Against Macquarie's projections QAN trades on a 9x FY23 earnings multiple, which, it should be noted, is comparable to pre-covid valuations.

The investment bank has an Outperform rating and $6.45 price target on QAN.

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