Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn


Qantas positioned for take-off: Morningstar

Emma Rapaport  |  10 Dec 2020Text size  Decrease  Increase  |  
Email to Friend

Lockdowns, border restrictions, and social distancing measures. Coronavirus continues to wreak havoc on the global airline industry, but Morningstar equity analyst Angus Hewitt expects demand and profitability for Australia's national airline to recover from fiscal 2022.

Hewitt, who picked up coverage of Qantas (ASX: QAN) this month, says the road map for air travel demand recovery is highly volatile but he anticipates pent-up demand to flow through as domestic restrictions gradually ease.

"Stringent Australian entry requirements for international arrivals and a ban on noncitizens, non-permanent resident arrivals have decimated passenger revenue, and despite aggressive cost-cutting, we expect operating deleverage to lead to an aftertax loss of $1 billion in fiscal 2021," he says.

"We're more optimistic on group domestic capacity recovery, which has lifted to 68 per cent of pre-covid-19 levels in December 2020, from about 20 per cent in the months of July and August 2020."

Hewitt has raised Morningstar's fair value for Qantas to $5 from $4.20. At close on Wednesday at $5.185, QAN is trading within a range analysts consider fairly valued. He is forecasting fiscal 2021 domestic demand to represent about 60 per cent of pre-covid-19 capacity on a full-year basis, before fully recovering in fiscal 2022.

International recovery will be more gradual, he says, forecasting capacity decreasing 70 per cent in fiscal 2021, returning to fiscal 2019 levels by fiscal 2024.

"Despite near-term headwinds, Qantas is well-positioned to participate in the recovery as the skies open up," he says.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

"Qantas still has plenty of liquidity to weather the storm - particularly after raising equity in June 2020.

"While the dilutive impact of the raising had negative consequences for shareholder value, the additional capital will put the company in a comfortable position to navigate near-term challenges."

Qantas is pushing ahead with its plan to cut and outsource about 2000 jobs, after rejecting an in-house bid from a union representing ground staff late last month. Maurice Blackburn Lawyers will seek to overturn the decision in the Federal Court on behalf of the Transport Workers Union (TWU). Lawyers will argue that the decision is unlawful under the Fair Work Act.

The jobs affected are at 10 airports around the country and impact ground operations workers including ground crew, aircraft cleaners and baggage handlers.

5 reasons for no-moat

Qantas trades without a moat. Hewitt believes airlines globally lack moats due to:

  1. A long history of value destruction
  2. Business model not conducive to rational pricing
  3. A lack of barriers to entry
  4. The commoditisation of air travel
  5. 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 next economic cycle," he says.

"Airlines are extremely capital-intensive, and management has limited control over key external earnings drivers such as fuel costs and exchange-rate movements."

Qantas did not declare a final dividend in fiscal 2020, which Hewitt anticipates will continue in 2021.

is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

© 2022 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend