Qantas’ (ASX:QAN) fiscal 2025 underlying pretax profit was AUD 2.4 billion, up 15% on last year. Budget brand, Jetstar, is performing particularly well, with segment earnings up 55%. Qantas international earnings lifted 7% while domestic earnings were down about 1%.

Why it matters: The result was 3% better than our expectations. We raise our fiscal 2026 pretax profit forecast by 4% to AUD 2.6 billion, mostly on stronger capacity and pricing guidance.

  • Jetstar is capitalizing on the lack of domestic competition. Domestic fares have been supported by Bonza’s collapse, and Rex’s retreat to regional flying is now under administration. The exits have left a hole at the cheaper end of the leisure market, to which Jetstar is directing additional capacity.

The bottom line: We lift our fair value estimate for no-moat Qantas by 6% to AUD 9.50 per share. Shares are expensive. Qantas is overearning currently, with double-digit returns on invested capital again in fiscal 2025. But we think conditions are cyclically, not structurally, favorable.

  • Competition in the Australian market is probably near a trough. Including Jetstar, Qantas holds about two-thirds of Australia’s domestic market, with Virgin Australia the remaining third. However, we don’t think Australia will have only two airlines forever.
  • Continued strong returns should attract competition. Or, conversely, we think it would take substantially weaker returns to deter competition. Indeed, upstart Koala Airlines could be the next to try its hand in Australia, reportedly targeting a 2026 entry.

Big picture: Qantas is eyeing a massive capital expenditure program to replace its ageing fleet. We expect more than AUD 20 billion in gross capital expenditure over the next five years, compared with about AUD 11 billion in the last five.

  • While new aircraft can offer higher customer appeal and cost benefits like lower fuel costs, these benefits are accompanied by additional capital cost and are typically competed away over time.

Since the covid-19 pandemic wreaked havoc on the global airline industry, Qantas has rebounded stronger than ever. The domestic business, of which Qantas typically captures around a two thirds market share, returned to pre-covid-19 levels by the end of fiscal 2023.

The international recovery was more gradual, returning to pre-covid-19 levels by the end of fiscal 2025.

We expect that the Qantas’ loyalty program, Qantas Frequent Flyer, to some extent cushion earnings volatility in the flying business. Amid a lack of flying activity, the loyalty business remained profitable and delivered stable cash flows. Qantas Frequent Flyer is essentially a capital-light business attached to a capital-intensive flying business. Consumers want to earn loyalty points when they fly, and status benefits are important to corporate passengers. The program generates earnings from the sale of points to hundreds of partners, including banks, supermarkets, telephone companies, and department stores. This offers more ways to redeem and earn points, attracting more customers, which in turn attracts new partners—a network effect but not enough to warrant a moat for the group.

Bulls say

  • Qantas’ earnings are highly leveraged to improving macroeconomic conditions and unrestricted air travel.
  • The two-brand Qantas and Jetstar strategy provides flexibility to align capacity and costs with prevailing demand and economic conditions, without affecting the Qantas brand and service perception.
  • The Qantas Frequent Flyer program continues to deliver strong earnings and cash flow, underpinning dominant domestic market share.

Bears say

  • Qantas is exposed to cyclical factors outside management’s control, including passenger demand, fuel prices, and exchange rates.
  • Qantas operates in a highly competitive industry and spare industry capacity can lead to downward pressure on fares and profitability.
  • Competition is set to increase. Virgin is back flying domestically, and set to become a more formidable international competitor through a partnership with Qatar Airways.

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