QABSY - Qantas Airways: Scandals But Stock Remains A Buy

2023-11-13 00:06:57 ET

Summary

• Qantas refused to pay back COVID-19 support received from taxpayers, instead announcing share repurchases.
• The controversies surrounding Qantas have damaged its brand reputation, leading to a loss of corporate travelers to competitors.
• Despite the scandals, Qantas stock still provides value with a potential upside of around 30% due to the decline in share price.

Qantas (QABSY)(QUBSF) stock is one that I previously had a buy rating on. However, amidst controversies surrounding the airline and the general industry concerns on higher oil prices, the buy has become questionable. In this report, I will be discussing some pressures faced by Qantas and establish a price target for the stock.

Qantas Refused To Pay Back COVID-19 Support

Qantas was several months away from bankruptcy as the world went into lockdown in early 2020. Qantas received a total support of AUD $2.7 billion. Funded by the tax payer, Qantas received significant criticism when it refused to pay back the support but did announce share repurchases in 2022 and 2023.

In the eye of the tax payer, Qantas was kept alive by the tax payer and subsequently instead of returning the aid to the tax payer Qantas took the aid distributed it among shareholders in the form of buy back yield while the money to keep Qantas operational and eventually make Qantas profitable with elevated ticket prices came from the tax payer. So, the tax payer without doubt may feel duped. The reality, however, is that Qantas used various schemes for which no payback was part of the agreement. Qantas was eligible to JobKeeper program support and received $1 billion during the pandemic to operate medical flights. So, as unfair as it may sound Qantas simply was never obliged to pay back the support it received.

Qantas Brand Takes A Big Hit

The view on tax payer’s money funding Qantas hasn’t been good for the Qantas brand and there were more elements that did not make the Qantas brand any stronger. The kangaroo branded carrier allegedly kept selling tickets for flights it knew were already cancelled. Furthermore, a judge ruled that the company illegally fired 1,700 ground staff members and there were significant problems with Qantas refunding customers.

The various scandals that Qantas has been involved in significantly harmed its reputation and brand. The damage to the brand reputation is even so severe that corporate travelers and corporate travel agencies who tend to be a brand loyal customer group are now more open to considering Virgin Australia for its corporate travel purposes. Allegations from Qatar Airways that Qantas kept capacity limited to drive prices up did not help the company recover its shattered reputation.

Qantas CEO Departs, Attempts To Repair Trust

Amidst all scandals, Qantas then-CEO Alan Joyce departed early and the company saw other board members leaving or announcing their departure. In an attempt to recover trust the company will be investing an additional AUD $80 million in customer improvements including more seats that can be redeemed with Frequent Flyer points. One point that the company also wants to improve on is its customer care with better training for support staff. One thing that I have repeatedly observed is that customer care of Qantas is lacking adding to the frustration.

Furthermore, the company scrapped the deadline for customers to redeem their unused flight credits worth AUD $570 million. So, the attempt to repair the brand is focused on improving customer support services and being flexible on the flight credits.

Is Qantas Stock A Buy?

While Qantas has been dealing with some big negative publicity items, that does not necessarily mean that the stock does not provide any value. However, in September investor update, the company did increase it fuel cost estimate to AUD $2.8 billion from AUD $2.6 billion and forex impact of AUD $50 million.

Ater filling the numbers in for Qantas using the balance sheet data and forward projections, much to my surprise it showed that the company has around 30% upside to $4.33. To me that was somewhat surprising, not so much because of the negative sentiment regarding the stock since the stock screener is to some degree insensitive to this but due to the relatively low free cash flows in the coming years as Qantas renews its fleet and will likely perform debt financed share repurchases. Important to keep in mind is that Qantas has no significant appeal for multi-year investment in the sense that there is no clear upside once the value gap is closed, and I see little reason for the stock to trade in line with peers.

Conclusion: Stock Remains A Buy Despite Scandals

While airlines are facing pressure and the future results are covered by a thick layer of uncertainty to which Qantas can add its own scandals that eroded brand reputation, I continue to see value in the stock. However, it should be pointed out that the upside I am currently seeing is actually caused by the share price decline following the scandals that Qantas have been involved in. In that sense, previously the stock did not have significant upside, but due to shareholders punishing the stock that upside has increased.

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