A siege mentality has pervaded Qantas throughout the pandemic, but with the Australian international border now open, the company can go all out to revive itself. Unlike some of its international fleet, the company has not been idle during the travel hiatus and has used the time to hatch some cunning plans.
Prior to Christmas, QAN thought the green flag had been waved for a full scale flight recovery as state and international borders re-opened (except Western Australia) only to be cruelly hit by the Omicron variant. The refreshed schedule was instantly shredded and the 3Q22 domestic and international capacity targets of 102% and 30% respectively were toast. Western Australia subsequently added its own rude twist by reneging on its February border re-opening. With 1H22 (and FY22f) earnings scuttled, QAN has persevered with its own revenge plan that could ultimately surprise if it plays out fully.
Firstly, QAN has embarked on a sneaky plan to permanently lift its domestic market share by launching new routes, wet-leasing capacity from Alliance Aviation (QAN 19.9%) and taking full advantage of Virgin Australia’s smaller fleet. If successful, we think QAN could lift domestic market share from 60% to 70% and hold it.
The next rabbit out of the hat is the longer term move to reshape the fleet. QAN recently made a big decision to switch the entire domestic fleet, including Jetstar, to Airbus. The 40 orders (20x A321XLR and 20x A220-100) plus purchase rights to another 94 aircraft over a 10-year period combines with Jetstar’s existing shopping list of over 100 aircraft (A321neo family). QAN will therefore have access to over 299 aircraft over the next decade for its domestic fleet replacement program.
The company has long been working on a comprehensive cost saving program that is on track to deliver more than $900 million in annualised savings by the end of FY22f.
The exact outcome of FY22f costs will be sullied by the decision not to stand down staff when the Omicron outbreak forced the schedule change. Those two items in concert will probably cost QAN in the order of $800 million in 2H22f.
Rising fuel costs may be the sting in the tail of the recovery but getting the fleet, staff and passengers moving is the overriding priority.
QAN has snuffed out executive bonuses for a third year in a row but will reward executives from FY23f in line with the company’s recovery. Around 20,000 staff have been given rights to 1,000 QAN shares worth about $5,000 which will convert to shares in August 2023 subject to the recovery plan succeeding.
Investment view
There have been more false starts throughout the pandemic for QAN than an Olympic 100m final. Now that Australia’s iron curtain is finally down, CEO Alan Joyce might nervously raise a toast to his delayed retirement having rescued the flying kangaroo not once but twice now. He has done a marvellous job of fending off tunnel vision unions (including pilots) and valiantly defending the balance sheet. Then there is the small matter of more than $22 billion of lost revenue due to COVID- 19 grounding his fleet for a second time, this time not of his choosing. Who would want to be an airline CEO?
We point out that Mr Joyce has not announced his retirement (yet) but after more than 13 years in the jump seat, he must be close to doing so. QAN’s 100th birthday party last year was horribly wrecked by COVID-19, as was the launch of the premium long haul non-stop scheduled flights to New York and London (Project Sunrise). It would have been the perfect send-off for Mr Joyce, but COVID-19 put paid to that.
Lockdowns, state border closures and quarantine measures are surely a thing of the past, while international vaccine passports should be the catalyst for easier passenger movement to and from other countries. Most international airlines have survived the pandemic and will be desperate to get their very expensive idled fleets out of the desert (Alice Springs and elsewhere) and back into the jetstream along with a cabin full of paying passengers and a belly full of cargo. Cashflow will be paramount as QAN steers towards a full schedule although we do not see that occurring for international before FY24f.
The balance sheet is in reasonable condition considering the battering the business has taken. Net debt declined to $5.5 billion, within the target range.
The share price has been itching to get going, like many travellers, but this time there is cause for contained enthusiasm. We expect a drawn out recovery, possibly with more hiccups, but the time to own QAN is now.
Risks to investment view
The return to international travel may be hindered by recurring restrictions and conditions imposed by individual countries.
Recommendation
We have upgraded our recommendation from Hold to Buy.
