Results overview (vs consensus):
Profit before tax $2,465m, guidance range $2,425-2,475m
EPS 96cps in-line with market
Domestic EBIT at $1,270m was 63% higher than FY19 (pre-COVID) while International EBIT of $906m was 180% above FY19. Jetstar EBIT at $404m was almost the same as FY19 while Qantas Loyalty at $451m is well on its way to achieving its $500-600m target by FY24.
A further $500m share buyback was announced for 1H24 after $1bn of shares (~8.6% of issued capital)was repurchased in FY23. Net debt at 30 June 2023 was $2.89bn and at that point was still below the company’s target range of $3.7-4.6bn. Net debt/EBITDA is only 0.6x.
QAN has been generous towards its staff throughout the recovery, and this has continued. A total of $340m worth of shares (approx. $6k for 21k staff) plus $20m in staff travel credits will be distributed. This is in addition to the $5k ‘thank you’ payment for completing the new enterprise agreements. Active customers have likewise been showered with over 1bn of frequent flyer points and status credits.
The fleet replacement program is continuing apace. A further order for 12x B787s and 12x A350s was announced with deliveries starting in FY27. These aircraft will replace most of the A330 fleet (28). QAN has purchase right options stretching out to FY37 and beyond providing flexibility for growth and the ultimate replacement of the 10x A380s. This order is in addition to the existing 12x A350-1000 order that is being specifically built for the Project Sunrise routes – non-stop flying from Australia to the US and Europe commencing in FY25.
In total, QAN has firm orders for 118 aircraft for delivery by FY29. Pre and final delivery payments amount to $US$4.3bn over FY24-26. Group capex in FY24 is $3.0-3.2bn (non-aircraft capex $0.4bn). QAN spent $2.67bn on capex in FY23. Of some interest is the 30x E190 and 2x A330 aircraft that are on wet leases that provide additional fleet flexibility.
QAN has total liquidity of >$10bn comprised of $3.2bn cash, $1.2bn of uncommitted facilities and $4.1bn of unencumbered aircraft assets.
CEO Alan Joyce (retiring Nov 2023) said of the fleet replacement program: “this is the panacea we’re after” in terms of the flexibility it brings. The A380 fleet, for example, was primarily about putting large numbers of passengers into a hub destination (such as Los Angeles) then letting passengers continue on to their destination with other partner airlines.
The A350 and B787 replacements (twin-engines) are more about point-to-point flying. QAN intends to open up more destinations, particularly in North America, so the replacements are not just a one-for-one approach.
A deliberate strategy of moving towards greater ownership of the fleet, as opposed to leasing it, has also brought benefits. QAN now owns 90% of its fleet and with more narrowbody aircraft (which tend to hold their value better), it can borrow against those assets more easily if needed.
Figure 1: Group EBIT
Figure 2: QAN Fuel spend
Domestically, QAN has purposely used its dual brand against Virgin. With more than 9.2m fares priced under $100, Jetstar has captured the heavy demand for leisure travel. As government, resource and construction flyers have picked up domestic travel habits (not the finance industry), Qantas domestic has scooped up much of that business. Jetstar’s domestic market share is about 27%, Qantas domestic 35% leaving Virgin with around 33%. QAN effectively has double the domestic market share to Virgin but captures about 4x the profit.
Fuel costs in FY23 were originally guided to $5bn but the business flew 5% fewer km than expected. Fortunately, the price of jet fuel was -39% compared to last year which helped reduce the total fuel bill to $4.6bn in FY23. QAN expects a 1H24 fuel bill around $2.6bn.
Outlook. QAN is expecting its international capacity to reach 100% of pre-COVID levels by March 2024, but this is a fluffy number. The group flexes its fleet so that it can switch domestic aircraft onto international routes as it sees fit. The same flexibility occurs between the budget Jetstar network and Qantas domestic. The comparisons with pre-COVID capacity have become meaningless, in our view.
Qantas Loyalty is on track to reach its EBIT goal of $500-600m about 6 months early. CY23 EBIT is expected to be $500m.
A further $300m of transformation cost will be spent in FY24.
No FY24 group PBT guidance was given.
Investment View
Alan’s last ‘hurrah’ as CEO has been marked with a showering of goodwill on the company’s customers, staff and shareholders. But there will be a sense of relief if QAN can return to normal under Vanessa Hudson. Passengers simply want their plane to leave and arrive on time with their baggage for a reasonable fare. At the moment, this is palpably not happening, especially on international flights where QAN claims air fares have increased by just 10%, adjusted for inflation (domestic -4%). The balance sheet is holding $8.6bn of ‘revenue in advance’, more than double its normal level, so the outcry for refunds and the government scrutiny is unsurprising. QAN has been the most complained about company in Australia in the last year. QAN doesn’t see it this way – it is expecting working capital (which includes revenue in advance) to grow as the company grows. In a sense, QAN is using its loyalty program as a means of filling forward bookings which are mostly back to normal patterns (4-5 months for international and 4-6 weeks domestic).
As Alan heads off into the sunset, Project Sunrise and Project Winton will oversee the fleet replacement that has been overhanging the business, interrupted by the pandemic. The balance sheet is sub-optimally geared with net debt at $2.89bn, substantially below the target range of $3.7-4.6bn. Spending on planes will consume some of that gap while the new share buyback will take a bite too.
The $1bn transformation program is complete and is reflected in a 23% fall in unit operating costs. QAN is a skinnier outfit than pre-COVID and in our view, certainly made the most of the COVID opportunity to re-size its workforce.
QAN is clearly in a strong position to compete internationally while it retains its domestic hegemony. Operating margins are certainly edging higher – Group EBIT target 8-10% (domestic 18%) as revenue increases (fares and volume) and costs fall ($1bn transformation program benefits).
At 6x FY24 PER, QAN is fairly valued on the old model of airline earnings. It may need some rubber on the tarmac to convince investors to pay more as the new management team and fleet takes over.
Risks to Investment View
Global air traffic may be affected by the potential for recession in various regions and the slow return of China to world aviation markets. The Russia/Ukraine conflict is restricting global air traffic routes and may continue to do so. High fuel prices may persist, and this could affect profitability of airlines.
Recommendation
We have retained our Hold recommendation.
