From the depths of the pandemic, Qantas has navigated its way to a healthy balance sheet and quickly improving earnings. With operating costs $1bn lower, future plans such as Project Sunrise are back on the agenda. CEO Alan Joyce may yet leave the airline on a high note.
Two earnings upgrade announcements in quick succession late in 2022 confirm that QAN is heading for record earnings in FY23f and beyond, according to consensus views (Figure 1). As concisely as we can summarise the situation, COVID-19 lopped around $20bn from revenue resulting in pre-tax losses of ~$3.6bn across FY21-22. QAN used the opportunity to accelerate its cost transformation program leading to the exit of about 9k employees and 1k contractors. Together with other initiatives, the company has saved close to $1bn in annual operating costs. With state and international borders re-opened in early 2022, the rush to the departure gates overwhelmed the company’s ability to cope given its own staff were significantly affected. The mid-year response to reduce domestic capacity, ostensibly to improve operating performance and mitigate high fuel costs, fortuitously led to much higher revenue as travellers absorbed the soaring airfare prices.
Heading into 2023, demand for travel remains vigorous despite rising cost of living pressures. Domestic capacity will pass FY19 levels with international capacity still 30% behind. As at 30 September 2022, 50 international airlines were operating to and from Australia but passenger traffic of 12.4m was 70% below the equivalent 12-month total of 42.2m as at September 2019 (BITRE data). The number of flights in and out of Australia in September 2022 was down 39% compared to the same month in 2019. Clearly, there is a long way to go before international travel fully recovers. Chinese international flights are just 8% of pre-COVID levels, so the lifting of quarantine on returning home (from 8 Jan 2023) should help to boost travel numbers regionally. IATA’s latest forecast is for global air traffic levels to return to 2019 levels by 2024 led by the USA with Asia-Pacific ‘notably lagging’.
The current guidance from QAN is for 1H23 profit before tax to be between $1.35-1.45bn with net debt at 31 December 2022 likely between $2.3-2.5bn. The recent $400m share buyback was completed on 9 December 2022.
Investment View
Domestic capacity is almost back to FY19 levels and yet airfares remain higher due to pent up demand and a lack of international capacity. QAN’s domestic share is around 61% but it has publicly stated it will get to around 70% for its dual brand offer once the market normalises.
We expect to see domestic airfares gradually normalise over 2023 but international airfares may remain elevated given the slower rate of normalisation. In either case, QAN will still point to high fuel costs as an excuse for retaining higher airfares.
The shared view amongst Australia’s airport and airline managers is for airfares to normalise in 2023 as more capacity is added. But this will depend on a rebalancing of international airlines flying into Australia so that the number of passengers coming and going is more equal. Currently, for every international passenger coming to Australia, two Australians are heading overseas.
Operationally, all airlines will see better performance as labour issues ease and ground handling activities stabilise. Bad weather remains a constant threat to performance, but even this may swing in QAN’s favour as La Nina fades.
QAN will be keen to accelerate Project Sunrise, the ultra-long distance routes that will see non-stop flying to several key cities around the world. Delivery of the 12x A350-1000 planes that will anchor the specialised segments is within sight (first delivery expected late 2025) and QAN has been working assiduously to get the operational aspects tied down (crew, pilots, safety, passenger welfare etc). Project Sunrise has been on the agenda for more than five years and is the pet project of CEO Alan Joyce.
Mr Joyce is expected to retire in 2023 and his likely replacement may be an internal appointment. Vanessa Hudson has been CFO since 2019, Stephanie Tully has quickly risen to be CEO of Jetstar and Olivia Wirth is the CEO of Qantas Loyalty. All three are considered possibilities to become CEO of QAN.
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: Consensus EPS forecast upgrades
Figure 2: capacity compared to pre-covid (FY19)
Figure 3: international passengers carried (m) to/from australia
Figure 4: Domestic airfares – best discount
Figure 5: domestic airfares – restricted economy
