Qantas has emerged from the pandemic in perhaps the best shape of its corporate life. The balance sheet is ready for the big fleet renewal and yields are up there with the Chinese spy balloons. Passengers may have to get used to higher fares if airlines can continue to manipulate capacity.
Result. Underlying profit before tax $1,425m within guidance range of $1.35-1.45bn. Domestic EBIT of $785m and Jetstar $177m both returned to profitability as did International at $464m. Qantas Loyalty increased 73% to $220m so that Group EBIT of $1,544m was comfortably the largest interim EBIT in more than 10 years.
Fuel costs have increased 65% compared to FY19, according to QAN. The average Singapore jet fuel price in 1H23 was US$120/bbl leading to QAN’s 1H23 fuel bill of $2.3bn. QAN has revised its FY23 fuel cost guidance to $4.8bn down from $5bn.
Net debt is down to $2.4bn, below the company’s optimal range of $3.9-4.8bn. Net debt to EBITDA target range is 2.0-2.5x.
No interim dividend was declared but QAN has announced a new $500m share buyback after it completed the previous $400m buyback in the period.
Investment View
Winston Churchill famously said: “Never let a good crisis go to waste”. The airline industry has used the pandemic to reverse a decades long downward trend in airfares due to heavy competition despite huge growth in global travel. The industry standard measure for yield is RASK (revenue per available seat kilometre). Although QAN no longer reveals its RASK by segment, we do know that domestic RASK is about 25% higher than international RASK. That reflects the competitive intensity of the international business. If QAN (and other airlines) want to improve their ‘yield’, increasing airfares is the way to go and partly explains why airlines are in no hurry to bring back every international route and flight schedule that existed pre-COVID. This is a positive factor in the earnings outlook for QAN.
From a different angle, the ‘crisis’ provided the opportunity to yank $1bn of ‘restructuring benefits’ from the cost base. After three years, QAN has now achieved this.
The next cunning move has been to control the return of capacity in the face of the heavy demand. This has two benefits. First, keeping planes as full as possible (load factor 88% Jetstar and International, 80% domestic) is operationally efficient.
Second, by keeping spare capacity aside, ostensibly for back-up during delays etc, this keeps operating costs down. QAN will continue to drip feed its full capability back into the fleet with domestic capacity to reach 103% and International 81% by the end of FY23.
Virgin Australia’s return to the share market appears imminent with bankers appointed for the process. Clearly, Virgin will be piggy backing off QAN’s deserved multiple, but it is too soon to know if it will be a worthwhile investment. We do know that Virgin’s fleet is now dedicated to the domestic market where QAN has likely upped its share to around 70%. In November 2022, Virgin Australia resumed the sale of codeshare flights with Singapore Airlines to 42 destinations in 23 countries. That should provide a steady supply of domestic travellers into Virgin’s network.
SIA itself is rapidly recovering financially and operationally. With 199 aircraft in total (including budget carrier, Scoot), SIA is a smaller airline than QAN (311 aircraft) but competes directly with QAN on international routes. SIA also now has a 25.1% stake in the merged Air India/Vistara airline giving it a stronger presence in India. SIA’s 9-month result reported this week showed it too is on track for a bumper financial year ending in March.
Rex has added several B737s on various key routes and new kid Bonza has put Sheila, Shazza and Bazza (the first 3x B737-800 aircraft) into service already. QAN’s dual brand offering will keep it in a commanding position, as long as it does not attract attention from the ACCC.
Earnings revisions may not be large following this result, but consensus forecasts still have EPS growth on a solid trajectory through to FY25f. Provided there are no further global calamities on the horizon, QAN can achieve these forecasts in our view.
Fuel
QAN has guided FY23 fuel cost to $4.8bn (previously $5bn), a figure never before paid by QAN to operate its fleet. The primary driver for the forecast was assumed higher fuel prices, but a key assumption is the consumption of ~26m bbls of jet fuel equating to around 81% of FY19 usage when the entire fleet was operating. QAN 1H23 group capacity was at 73% compared to FY19 and is expected to reach 79% by the end of FY23f. QAN began the FY23 year at 66% of FY19 comparable capacity. QAN’s average annual fuel bill for the 10 years prior to the pandemic was $3.7bn.
On these current full year assumptions compared to FY19, QAN is anticipating spending 30% more on jet fuel while flying 20% fewer kilometres.
Domestic passenger traffic has almost fully recovered to pre-COVD levels, but international traffic was at 30% of comparable BITRE data for annual traffic as at 30 September 2019. This is mainly due to the absence of Chinese visitors who, from 8 January 2023 no longer need to quarantine on returning home, could be expected to rapidly increase now that Chinese New Year has passed.
Fleet
Projects Sunrise and Winton are on the way. Sunrise will see the first of 12x A350-1000 aircraft delivered at the end of 2025 and these will form the basis of the ultra-long-haul fleet flying non-stop to New York and elsewhere. Sydney to JFK (New York) is just shy of 16k km. The A350-1000 has a range just over 16k km carrying a maximum seating of 480, so we expect QAN will reduce the number of seats to lighten the load, increase the range and bump up the ticket prices to optimise the revenue. Air New Zealand has been flying direct to JFK from Auckland since September last year using its B787-800 fleet to make the 16-hour flight. The A350-1000 looks to be an excellent aircraft with 25% better fuel efficiency than the equivalent B777 because it is 20t lighter. Interestingly, the A350-1000 is slightly longer than an A380 but its wing span at 65m is smaller than the huge 80m span of the A380. However, the A350-1000 wing has some very smart technology that creates outstanding aerodynamics and hence efficiency.
Project Winton is the replacement fleet program for the domestic fleet, including Jetstar. The 40 orders (20x A321XLR and 20x A220-100) plus purchase rights to another 94 aircraft over a 10-year period shifts the entire domestic fleet to Airbus aircraft. The A321XLR has an extra 12,900L fuel tank in its belly to boost the ~33kt main fuel load, but somehow the range of the aircraft increases 80% to 8,700km. Even for Australia, that is a huge range considering the longest main domestic route, Brisbane to Perth, is 3,605km. In fact, the A321XLR can fly Brisbane to Tokyo, Perth to Bangalore or Sydney to Hong Kong.
The A220s will replace the ageing B717s and will not only cover the vast regional network but will probably be on duty for mainstream routes thanks to its excellent range. Perth to Brisbane is within its capacity. Fleet flexibility anyone?
Risks to Investment View
Global air traffic recovery may be affected by the potential for recession in various regions and the slow return of China to world 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 Buy recommendation.
Figure 1: 1H23 RESULT
Figure 2: JET FUEL PRICES
