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TRADING UPDATE

Need To Know

• 1H23 underlying profit before tax guidance upgraded to $1.35-1.45bn
• Net debt at 31 Dec 22 likely $2.3-2.5bn, well below management target
• Current $400m buyback 76% complete

The earnings recovery continues at Qantas, spurred on by controlling capacity to extract maximum revenue while limiting exposure to rising fuel costs. This theme has further to run as international capacity remains below pre-COVID levels.

Underlying profit before tax in 1H23 now expected to be $1.35-1.45 billion. This upgraded guidance comes just 6 weeks after QAN told the market it would deliver PBT of $1.2-1.3 billion. QAN did not update the capacity situation other than to say that international capacity is still 30% below pre-COVID levels of FY19 (Figure 1).

QAN is carrying a significant buffer of operational capacity (staff and fleet) to counter any delays and cancellations. This will be very important for the fast approaching Christmas season.

Fuel costs heading to $5bn in FY23f. This is not new news. The underlying assumptions here are that QAN will consume 26.09MMbbls of jet fuel at US$97/bbl Brent oil price and AUD:USD at 0.6887. The Singapore jet fuel price has averaged US$125/bbl since 1 July 2022, in-line with the average cost in FY22 (Figure 2).

Net debt is shrinking. The balance sheet is rapidly de-gearing with net debt at 31 December 2022 expected to be $2.3-2.5 billion. This is well below its target of $3.9 billion. QAN noted its current $400m buyback is now 76% complete at an average price of $5.66 per share. The Board will likely be contemplating further capital management at the 1H23 result.

Investment implications

We read the short term tactics of QAN as optimising its revenue based on recovering demand for travel. It is achieving this through the managed reinstatement of fleet capacity so that load factors are maximised (crowded planes) while air fares are elevated. Recent promotional activity including over a million sale fares and availability of 5m loyalty seats is clever marketing for the Christmas season. QAN will be heavily focused on operational execution to avoid customer dissatisfaction that was prevalent earlier this year.

The recovery of international capacity is much slower, but perhaps deliberately so given the domestic muddle throughout 2022.

We retain our Buy recommendation on QAN as earnings continue to vigorously recover.

Figure 1: QAN GROUP CAPACITY

Figure 2: QAN FUEL CONSUMPTION AND SPEND