Qantas Share Price: Is ASX: QAN Undervalued or Overvalued?
Qantas’ (ASX: QAN) profitability is normalizing following an exceptional fiscal 2023.
Mentioned: Qantas Airways Ltd (QAN)
Key Morningstar Metrics for Qantas (ASX:QAN)
Data from Morningstar Direct as of 26 February 2024
What we think of Qantas’ Shares
Qantas Airways is Australia's largest domestic airline, which typically has around two thirds market share via its dual brand strategy with low-cost carrier Jetstar complementing the full-service Qantas brand. It effectively operates in a competitive duopoly with Virgin in Australia. We expect Qantas remains well-positioned to participate in the recovery as skies reopen.Â
Qantas Share Price (ASX: QAN)
Source: Morningstar Direct. Data as of 26 February 2024
Qantas Economic Moat Rating
We do not believe Qantas has carved an economic moat. On average, we forecast returns on invested capital failing to keep up with the firm's 11% weighted average cost of capital. While Qantas' returns on invested capital, or ROICs, may exceed its weighted average cost of capital, or WACC, as it has done in the past on occasion, we do not think this will be consistent over the next decade.
Airlines globally lack economic moats for the following reasons: a long history of value destruction, a business model not conducive to rational pricing, a lack of barriers to entry, the commoditization of air travel, and the presence of low switching costs coupled with growing price transparency. We believe these conditions which have plagued the airline industry will persist through the cycle. Airlines are extremely capital-intensive, and management has limited control over key external earnings drivers, such as fuel costs and exchange-rate movements.
Access our full research report to continue reading about Qantas’ (ASX: QAN) moat rating.
Qantas Risk and Uncertainty
We assign Qantas a Morningstar Uncertainty Rating of High based on the company's fundamental exposure to the economy and economic cycles, and the range of return outcomes used by our star rating system. Airlines are exposed to several major risks, including volatile jet fuel prices and foreign currency, increased competition, and cyclical exposure to global economic conditions affecting demand. Terrorism, armed conflict, natural disasters, and global epidemics are all risks associated with operating an airline.
Airlines have a long history of irrational competition. Customers are price-sensitive and barriers to entry are low, leading to our view that airlines globally lack economic moats. As skies reopen, there is a risk of capacity growth outpacing the recovery in demand as international competitors look to minimize underutilization of assets. The domestic market is also set to be no less competitive with the re-emergence of Virgin under Bain Capital ownership, regional competitor Rex is now looking to expand to more lucrative domestic routes, and budget upstart Bonza targeting the Jetstar leisure customer base.