QAN CEO Alan Joyce proclaimed ”the existential crisis posed by the pandemic is now over”. That may be true, but Qantas is battling to bring its service back up to standard and is still grappling with the complex recovery pathway.
QAN reported another big underlying pre-tax loss of -$1.85 billion in FY22, exceeding the (restated) FY21 loss. CEO Alan Joyce makes the point that the airline has foregone around $25 billion of revenue due to COVID-19 disruptions from which around $7 billion in pre-tax losses have accumulated.
It would be an understatement to say the recovery of domestic and international air travel in Australia has been tortuous. When the international border was re-opened in November 2021, travellers gleefully booked long overdue holidays and QAN wrangled all its staff back to work. Omicron intervened and left QAN with a dilemma of sending its staff home again as bookings vanished or keeping them ‘stood up’ and on active duty. QAN chose the latter.
The complexity of organising a sophisticated regular airline schedule is not beyond QAN but rearranging the entire schedule at short notice is monumentally difficult. The criticism QAN received was unfair, in our view, particularly as the airline struggled with staff absenteeism due to COVID-19 and services such as the call centre were overwhelmed. The tribulations of Australian travellers paled against the chaos faced by Europeans and Americans.
The current trajectory to recovery has domestic capacity reaching 106% of pre-COVID (FY19) levels in 2H23f and 84% for international on the same time frame.
QAN has added 20 new domestic routes this year which will ensure it retains its domestic hegemony. This may go further if the ACCC agrees to allow QAN to buy the rest of Alliance Aviation, although the regulator has flagged issues of competition concern.
The international recovery was severely limited early on due to big markets such as New Zealand and Indonesia not re-opening their borders to coincide with Australia’s timing.
Achieving pre-COVID levels of capacity is commendable, but FY19 EBITDA was $3,544 million compared to $281 million in FY22.
A key issue for QAN to navigate is the fuel price. QAN is anticipating a fuel bill of $5 billion in FY23f which will be a mix of increasing capacity and the fuel price itself.
QAN is assuming it will consume approximately 26.1mmbbls of jet fuel compared to 32.2mmbbls used in FY19 on ASKs of 151.4 billion back then. But the Singapore jet fuel price was US$83/bbl in FY19 compared to US$149/bbl at 30 June 2022.
The Recovery Plan has stripped almost $1 billion from the cost base in FY23f. Some 9,800 employees were shown the door as the business effectively shut down (except for freight) and is now building back towards 24,500 in FY23f. Whether QAN can sustain and grow it business on this much smaller number is an open question.
Investment view
The pandemic certainly put QAN through the wringer and if not for an array of fairly drastic measures, it may not have survived. Yes, Federal and State Government support helped, but there was a large dollop of self-help, much of it very unpleasant. What has emerged is a leaner, more forward-looking airline that consensus earnings forecasts say can generate EBIT in excess of $2 billion by FY25f – a level it has never before achieved. The closest it has been to that mark was in FY18 at $1.78 billion.
There is a large fleet renewal program underway, part of which will awaken Project Sunrise, Alan Joyce’s pet project for direct non-stop flights from Australia to New York, London and elsewhere. The first delivery of the new A321LR aircraft has arrived for Jetstar and is among the first of 300 new narrowbody jets the group will buy over the next 10 years.
Risks To Investment View
A recurrence of COVID-19 restrictions, including international border closures, would affect earnings. Jet fuel prices, labour availability and passenger demand are all crucial factors in determining earnings. Changes in demand for travel would affect earnings. Regulatory oversight, particularly for safety, is a key risk factor.
Recommendation
We have retained our Buy recommendation.
FIGURE 1: FY22 RESULT
FIGURE 2: DIVISIONAL UNDERLYING EBIT
FIGURE 3: SINGAPORE JET FUEL PRICE
FIGURE 4: FUEL COST
FIGURE 5: A321XLR RANGE 8,700KM
FIGURE 6: A220-300 RANGE 6,300KM
