The chaos caused by rising Omicron cases has skittled the travel plans of so many customers that Qantas has been forced to slash its current schedule. But QAN has kept all of its Australian-based staff on active duty to create a buffer against isolation impacts. QAN has not yet calculated the financial impact on 2H22f.
On 16 December 2021, QAN confidently reinstated all its Australian-based staff to their jobs in the face of booming Christmas demand for travel. State borders were opening, international travel was back on the menu and QAN was keen to get the cash flowing through its business. QAN expected 3Q22 domestic capacity to get back to 102% of pre-COVID levels, then towards 117% by 4Q22. International capacity was anticipated to lift to around 30% in 3Q22 then 60% by 4Q22.
Unfortunately, these predictions predated the Omicron turmoil which has forced QAN into a reduced schedule as demand has evaporated. Domestic capacity in 3Q22 has been shaved to 70% of pre-COVID levels and international has been cut back to around 20% for the same period.
The important point to note is that QAN has not proportionately reduced its staffing levels. Maintaining a full roster for the reduced schedule will clearly impact on profitability, but with some staff needing to isolate due to COVID-19 issues, the decision makes some sense even if it could be detrimental to earnings.
The duration of this current travel disruption cannot be accurately determined, so QAN is taking a calculated risk that it will be a temporary issue. The reduced schedule is focused on frequency and aircraft size so if demand returns quickly then the schedule can also react.
QAN is understandably unable to quantify the financial impact of this schedule reduction yet, but it will clearly be material to 2H22f. QAN has already guided the market to expect a $1.1 billion EBIT loss for 1H22.
Investment view
Virgin Australia had previously announced a schedule reduction of about 25% so the news from QAN was not unexpected. The Omicron case surge is heavily affecting staffing levels in most industries so QAN’s decision to not reduce its active staff in line with the schedule reduction may prove wise if the COVID surge dissipates quickly. The first half result is already heavily in the red, but the second half result will now face similar pressure, especially as QAN is prepared to carry the full staff cost on a reduced schedule.
The desire of many customers to travel is unquestioned, but the practicality of doing so is a big challenge at the moment. Travel risk translates to earnings risk for QAN and remains the reason we retain our Hold recommendation.
