Project Sunrise, the pet project of Qantas boss Alan Joyce, will finally see the light of day after being put on hold by COVID-19.
The fleet order announced this week is a reannouncement of the fleet renewal program made in December 2021, but with a few extra details. We already know that the entirety of the narrowbody group fleet order is 299 aircraft (half are firm orders, half are purchase right options).
The new information is the 12x A350-1000 aircraft ordered to operate the non-stop international flights to London, New York, and other unspecified cities. The first of these new jets will be delivered in late 2025. Mr Joyce was on hand to spruik all the benefits, but not the ticket price which will have a ‘fare premium’ for the privilege of being cooped up with 237 other lucky passengers for 19-20 hours to London. The current business class ticket price to London is $8,379 ($5,415 for a premium economy) from Sydney with one stop. Competitors flying ultra-long distance routes are carrying more than 300 passengers, so QAN’s strategy is clearly to charge a premium to a smaller number of passengers with the benefit of greater passenger comfort (seat pitch and ‘wellbeing zone’).
Project Sunrise has been on the agenda for more than five years and the company has been flying the so-called ‘kangaroo route’ to London for so many years that it will know intimately that the demand for a non-stop flight will be substantial. The emphasis on premium classes indicates QAN is expecting most demand from the corporate and loyalty segments. Mr Joyce noted that the Perth to London route was the most profitable in the network underlining the propensity for passengers to pay up for this route.
The new fleet will certainly be more efficient and quieter than ever before, but QAN again declined to disclose the total cost for commercial reasons.
Just as well then, that the balance sheet is currently in relatively good repair with net debt at $4.5 billion in April 2022. On current market conditions, QAN expects net debt to be at the bottom of its target range by the end of FY22f.
As we expected, the re-opening of the state and international borders has been met with huge pent-up demand, particularly on domestic routes where capacity is likely to be at 105% of FY19 capacity in 4Q22. International is making progress and should reach 44% compared to FY19 by 4Q22.
The rush to fly is filling the cashflow pipes more quickly than expected so that 3Q22 saw significant levels of positive free cash flow in the quarter. This trend should accelerate into FY23f.
Higher fuel prices can be managed in the short term through the company’s hedging program, but fare price rises are likely if fuel prices persist at high levels. QAN is confident demand is sufficiently robust to cope with price rises.
The quick ramp up in group activity has QAN on track to deliver underlying EBITDA of $450-550 million in 2H22.
QAN is also looking to refill over 2,500 roles over the next 12 months, in line with demand, for which it says more than 20,000 applications have been received.
Investment view
We upgraded our recommendation to a Buy after the interim result in February, as it had become clear the recovery was finally and truly underway. Lockdowns, border closures and quarantines were no longer barriers to travel, and vaccinations were a catalyst.
Our expectation of a full international schedule by FY24f still seems reasonable as other countries cautiously re-engage in global travel.
The company’s transformation program is on track to deliver more than $900 million in annual cost savings so that QAN should be profitable again by FY23f.
QAN’s financial and operational condition is still a long way from normal, but the plane is heading in the right direction.
Risks to investment view
The return to international travel may be hindered by recurring restrictions and conditions imposed by individual countries.
Recommendation
We have retained our Buy recommendation.
