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Pent-up demand the (eventual) wind beneath Qantas wings

Mark LaMonica, CFA  |  24 Aug 2020Text size  Decrease  Increase  |  
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The flying kangaroo’s chief executive is adamant that people are desperate travel and Morningstar agrees.

Morningstar senior equity analyst Gareth James has maintained his fair value estimate for Qantas Airways (ASX: QAN) despite a horror year for the national carrier, in which covid-related travel curbs punched a 90 per cent hole in its profit.

James has a fair value estimate of $4.20 fair value, which is broadly in line with the company’s current share price and expects demand to return as borders closures ease.

“Despite positive early signs of relatively low cases in Australia and lockdown measures beginning to ease on a state-by-state basis, a resurgence of cases in Victoria and domestic border restrictions are delaying a return to flying,” James writes in a research note titled Wings Clipped, but Qantas Will Fly Again.

“While it will likely prove lumpy in reality, we expect pent-up demand to flow through as domestic border restrictions gradually ease.”

James forecasts domestic demand to reach 50 per cent of 2019 capacity in fiscal 2021 and to recover fully by 2020.

His expectation for international demand is 40 per cent of 2019 capacity in fiscal 2021; he does not foresee a full recovery until 2024.

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James admits that these forecasts are tenuous and says: “The roadmap for air travel demand recovery is highly volatile, and this was reflected in our decision to lift our fair value uncertainty to very high in March 2020.”

Qantas (QAN) - 1YR

Qantas 1YR

Source: Morningstar Premium

Qantas CEO Alan Joyce acknowledged the uncertainty about a return to normalcy but did signal optimism about a post-restriction world.

“Recovery will take time and it will be choppy,” Joyce said during Thursday’s results announcement.  “We’ve already had setbacks with borders opening and then closing again.

“But we know that travel is at the top of people’s wish lists and that demand will return as soon as restrictions lift.”

No-moat rated Qantas predictably reported weak results as air travel ground to a halt during the second half of fiscal 2020. 

Write downs contributed to a $2.7 billion statutory loss for the year as Qantas took $1.4 billion write down of assets as the A380 fleet was grounded for “years” and $600 million went to redundancies and other items related to a restructuring of the business.

The airline’s net profit before tax fell around 90 per cent from fiscal 2019. 

Qantas is Australia's national carrier and the leading domestic airline, with around two thirds market share. With the inclusion of Jetstar, the company is also Australia's largest international carrier, responsible for about 25 per cent of passenger traffic into and out of the country.

Visit Morningstar's Reporting Season 2020 coverage. The calendar will be updated daily to connect you with our equity analysts' take on the financial results.

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is a product manager, individual investor, Australia.

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