Should you Buy Qantas Shares?

Richard Hemming

 

Should you buy Qantas (QAN) shares? The world's airlines have been struck hard by the global pandemic of COVID-19. Australia's flagship carrier, Qantas, has scaled back its operations to a fraction of standard capacity. 

Qantas operates its main business of transportation of passengers using two complementary airline brands - Qantas and Jetstar. The Company also operates Australia’s largest loyalty program, earning money from selling miles to partners who offer them as incentives to their own customers.

Is Qantas a good buy?

To determine whether Qantas is a good buy we need to look at the what has happened to Qantas shares. Under the Radar Report's recent stock report noted that Qantas share related news has come like a torrent over the last few weeks.

Qantas is still feeling the sharp end of the decline of business and leisure travel, which has drastically impacted the Qantas share price. International flights have been suspended since March and the company does not expect to fly internationally again until July 2021, apart from possibly across the Tasman. The Qantas share numbers for FY20 weren’t pretty and included a $4bn revenue impact from COVID-19. 4Q20 revenue for Qantas was down 82%, cash costs were reduced by 75%; underlying 2H20 loss before tax was $1.2bn.

Qantas is forecasting a significant underlying loss in FY21, after savings of $8.2bn, of which $5.9bn are activity-based savings.

In times of crisis, the balance sheet is key, which has been bolstered providing $4.5bn of available funds as at 30 June. Measures included a $1.4bn placement and a share purchase plan, 20% taken up. $1.75bn long-term debt was secured in 2H20, plus a $500m bond issue this month. Debt maturities do not arise until June 2021, by which time some uncertainty about the scale and nature of 1H22 operations will be clear. 

Will Qanatas shares bounce back?

While Qanatas shares will get a bump from any sustained re-opening expectations, it will be a long time before investors are comfortable that the share is out of the turbulent air. Pre-COVID, the majority of Qantas profits were earned domestically. Today, the competitive environment has dramatically changed after the exit of old Virgin, the likely entry into the market of New Virgin, as well as some newly emboldened and enriched regional competitors like Alliance (AQZ) and Rex Holdings (REX). 

Cost cutting also plays a role in determining whether Qantas shares will bounce back, with 6k redundancies and 20k employees furloughed; over 100 aircraft in storage. The market thinks that Qantas has sufficient liquidity for the medium term, but in our opinion the current situation is not tenable. Qantas is operating around 20% of pre-COVID domestic capacity, but thinks that there is significant pent up demand for domestic travel when permitted. But if forced by government policy to operate for another 9 months at these reduced levels, it is hard to be sure what kind of business will be left. Competition in international traffic is unlikely to get easier. Whatever happens, it will be hard to rebuild the Qantas network to its previous status.

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Qantas is at the pointy end of the corporate challenge in balancing obligations to the community with duties to shareholders. Qantas will lose $250m-plus a month as long as the COVID-19 pandemic carries on. As measures to limit the effects of the pandemic recede, demand for the airline’s services will not simply bounce back to where they were prior to the crisis. With all this said it's not difficult to see why investors are asking whetherQantas shares will bounce back. 

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We’re covering the Qantas share price closely as its part of our Blue Chip Value Portfolio. Expect to read more about Qantas and our thoughts in our Blue Chip Value Report.

About the Author

Richard Hemming

Richard Hemming (r.hemming@undertheradarreport.com.au) is an independent analyst who edits www.undertheradarreport.com.au, which provides investment opportunities in Small Caps that you won’t get anywhere else.

Under the Radar Report is licensed to give general financial advice only (AFSL: 409518). The author does not own shares in any of the stocks mentioned.

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