QABSY - Qantas: Bullish On The Future

2023-05-23 13:18:49 ET

Summary

• Qantas dialed down its capacity recovery trajectory.
• Net debt is expected to be significantly better than the financial framework.
• Australian airline has increased its share repurchase authorization.

I haven’t covered Qantas ( QABSY ) extensively in the past. Perhaps that is because while the country is huge, it only has a population of 25.7 million, so it does not have a huge domestic market. Instead, it relies on tourism and international travel. The company also knows this and has been focusing on improving its connectivity with the world through its Project Sunrise, for which the Airbus A350-1000 has been selected . So, with international travel recovering last somewhat naturally Qantas also appears last on the radar. On the 23 ^rd of May, Qantas issued an updated guidance which I will have a look at in this report.

Amounts in this report are in AUD.

Qantas Dials Back Capacity Outlook

What we have seen several times is that airlines have to walk away from their previous capacity deployment plans and Qantas is no exception. For 2H23, the previous guidance for domestic recovery was 101%, and it stands at 99% now with FY23 capacity recover being 100 bps lower than initially guided and the same holds for 1H24. The international network will have a 200 bps drag compared to previous estimates on 2H23 and 100 basis points for FY23 while its 1H24 capacity will be 400 bps lower than initially guided for. So, overall, we see a slower recovery profile for Qantas.

The capacity moderation is related due to the constraints that exist in the industry and are not a result of any demand softening. In fact, forward bookings for domestic are running 18% ahead for the domestic business and 23% ahead for the international business compared to pre-pandemic periods.

Net Debt Position To Improve

In the previous financial framework, Qantas had guided net debt in the range of $3.9 billion to $4.8 billion and its current guidance has been revised to $3.7 billion to $4.6 billion. Moreover, it now expects net debt of $2.7 billion to $2.9 billion by mid-2023 indicating that the airline is performing significantly better than what it had previously guided for or adopted as its financial framework. In fact, the company is so convinced of forward booking strength that it has upsized its $500 million buyback program by another $100 million. The previous program which was announced in February this year was 78% complete meaning that the remaining buyback authorization is now $210 million. Whether that has been the most prudent deployment of cash really is subject to debate. The 78% completion was achieved at a rate of $6.49 per share and the current price is $6.36 per share. Without buyback, the prices theoretically would be lower, but you could say that the buyback didn’t necessarily result in value for shareholders.

Furthermore, Qantas is heavily criticized for not returning federal support it received. Qantas is not solely to blame for that given that many countries structured support as loans that need to be repaid and the Australian government provided support that was not structured as such but Qantas is certainly subjected to criticism from taxpayers for receiving government support and now returning money to shareholders without paying the support back. However, there was no structure in which the support had to be paid back and the Australian government is to be blamed for that.

Qantas: An International Recovery Buy

Qantas really depends a lot on international travel, not just ultra-long-haul but also in the Asia Pacific. We see travel trends improving significantly there and that should benefit the Qantas Group. The recovery is somewhat held back due to shortage of ground handlers in some airports amongst other constraints and that also further supports the unit revenue strength while fuel prices are going down. So, overall while Qantas has a lot of recovery ahead and its international oriented network makes it prone to macroeconomic headwinds, I do see a very attractive cocktail of positives for Qantas stock.

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