Are the skies brighter now for travel stocks?
Travel stocks could be poised for a significant uplift in earnings and even a return to dividends as the health pandemic abates.
Despite a hit to their bottom line from the health pandemic, Qantas and Flight Centre are poised for a relatively solid outlook as consumer demand grows for travel and international borders continue to ease.
The recent reporting season did reveal a significant fall in fiscal 2022 profit for both businesses. Qantas delivered a $1.9 billion pre-tax loss – significantly worse than Morningstar’s forecast of $1.5 billion while underlying losses before interest, tax, depreciation and amortisation (EBITDA) for Flight Centre was $183 million, less than half of its $338 million from the previous year.
The fiscal 2022 period for these businesses was of course heavily impacted by lockdowns and international and domestic border restrictions which significantly dampened travel demand.
However, institutional investors and our own Morningstar’s analysts Angus Hewitt and Brian Han are positive on the outlook for both Qantas and Flight Centre.
“We think Qantas will capitalise on recovering travel demand, and we continue to forecast the airline returning to profitability in fiscal 2023,” Hewitt says.
For Han, Flight Centre is “firmly on the recovery path”
Equally Tribeca Investment Partners portfolio Jun Bei Liu sees a brighter outlook underpinned by strong demand for travel adding that domestic travel has now been elevated to pre covid numbers growing around 10 – 20%. She also believes that international travel will also continue to track upwards to match the equally strong domestic demand, particularly as more countries such as Singapore ease their border restrictions.
“Both Qantas and Flight Centre have a strong pipeline of growth following pent up demand from a consumer who has been in prolonged lockdown. There is a real ‘Get out of the house’ mentality and this will feed into strong demand for travel,” Liu says.
A return to dividends?
It seemed it was a tale of two halves for Flight Centre. On Han’s assessment, the corporate unit’s return to profitability is kickstarting the turnaround for the business. It posted a $43 million second half EBITDA, from a loss of $30 million in the first half and an $80 million loss in fiscal 2021.
“A return in business travel is coinciding with continuing account wins,” Han says, noting that the leisure unit continues to lag. However, its second-half underlying EBITDA loss of $25 million is “a big improvement” on the $155 million loss in the first half.
“Airline capacity constraints and border restrictions continue to hamper leisure volumes, but pent-up demand is palpable (especially during school holidays),” Han says.
A lack of dividends typified the fiscal results for both businesses. However, the surprise for Qantas was the announcement of a $400m on-market buyback. For Hewitt, the buyback is accretive to Morningstar’s valuation - shares currently trading at a discount to fair value.
He also believes that Qantas' balance sheet strength is sufficient to support a return to dividends in fiscal 2023.
For Flight Centre, Han would like to see its dividends reinstated and expects this will happen in the second half of fiscal 2023.
Qantas has been marred by travel delays, lost luggage, and staff shortages – its CEO Alan Joyce even calling on his executives to work temporarily as baggage handlers.
Liu says staff shortages have been a big challenge for all sectors and not just unique to the travel sector. She expects this will continue.
According to Liu, consumers will also continue to tap into their “elevated savings” thanks to government stimulus provided through the pandemic and this should continue to support this demand for travel at least for the medium term.
However, consumers confront inflationary pressures with steep rises in grocery prices as well as rising mortgage repayments. For Liu consumers will become increasingly cost conscious as they watch their budgets, and this will be a ‘headwind’ for travel stocks in 12 months’ time.
For Han, Flight Centre is well equipped to navigate the likely bumpy road to full recovery and is now generating positive operating cash flow - $40 million in the June 2022 quarter. With $697 million in available liquidity, Han also highlights that management is tentatively discussed investing in future growth (for example, acquisitions) and capital management.
Qantas is also on the path to recovery. The airline is now in cash-positive territory with a balance sheet in good condition.
“We expect the firm to quickly deleverage over coming years on improving earnings,” Hewitt says.