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Qantas positioned for take-off: Morningstar

Emma Rapaport  |  10 Dec 2020Text size  Decrease  Increase  |  
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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.

"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 an editor for Morningstar.com.au

Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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