What does Qantas’ surprise profit forecast mean for other ASX airline stocks?
Thursday was a good day for Qantas (ASX:QAN), with its share price surging 12% on a bullish quarterly update that forecast H1 FY23 underlying profit before tax of between $1.2 and $1.3 billion with Australia’s national airline back at around pre-Covid-19 service levels in the first half of October.
The positive outlook follows five consecutive halves of heavy losses due to the pandemic and cumulative statutory losses of $7 billion. Net debt is expected to fall between $3.2 billion and $3.4 billion by the end of December, which is below the bottom target range of $3.9 billion.
As Stockhead’s Eddy Sunarto reported, it’s been a massive turnaround for the Flying Kangaroo, after sustaining heavy losses and damage to its global reputation in recent times.
But Qantas CEO Alan Joyce did say that maintaining pre-Covid service levels is challenging and there may still be some turbulence among the blue skies.
“It’s clear that mainintaining our pre-Covid service levels requires a lot more operational buffer than it used to, especially when you consider sick leaves, spikes and supply chain delays that the whole industry is dealing with,” he said.
But what does the Qantas bounce mean for other ASX-listed airlines stocks and could it have a positive flow-on effect? While the world may be slowly returning to a new pandemic normal with less Covid-19 restrictions, could rising inflation, interest rates and cost of living now have an impact?
There are several airline and travel plays on the ASX.
The New Zealand national carrier saw its share price rise 7.5% on September 21 after providing a half-year earnings guidance for FY23.
The airlines said it currently expects earnings before tax for the first half of the 2023 financial year to be in the range of $200 million to $275 million, assuming an average jet fuel price of approximately US$130/bbl.
AIZ’s domestic network offers services to 20 main centres and regions across New Zealand, while from Australia, the airline operates direct flights to New Zealand from Sydney, Melbourne, Brisbane, Perth, Adelaide, Cairns, Gold Coast, Sunshine Coast and Hobart.
According to its website until the impact of Covid-19, AIZ delivered positive earnings from 2003 to 2019. The company also paid dividends to shareholders every year since 2005.
“As the world slowly returns to normal, we expect our business to do the same,” the AIZ site said.
The AIZ share price has risen more than 6% in the past five days after falling ~28% year to date.
As the industry continues to recover from Covid-19 restrictions CTD’s FY22 result beat its guidance with a particularly strong Q4 H22 recovery.
CTD reported an underlying EBITDA for FY22 of $59.8 million, increasing from a loss of $7.2 million in FY21. Broker Morgans have a 12-month target price of $25.65 and an Add rating on the corporate travel specialist’s share price.
In 4Q22, CTD earned revenue and other income of $140.8 million, underlying EBITDA of $35.7 million, underlying PBT of $25.5 million and underlying NPAT of $20.5m. CTD paid a final dividend of 5 cents/share (unfranked) on October 5.
The CTD share price has fallen ~28% year to date.
VP Capital portfolio manager Thomas Lambeth told Stockhead it seems like the underlying catalyst for the 1H23 upgrade was an improvement in demand for air travel, or so called “revenge” travel.
“Whilst some of this was expected, the magnitude and speed of the return to pre-Covid levels would have surprised the market, particularly with many tourist destinations still not completely accessible,” he said.
“In the short term, we expect revenge travel to continue to feature as a theme across most companies exposed to international travel, but caution against building expectations of large share price movements.”
Lambeth said it’s a question of valuation and what’s been priced into the market.
“One of the reasons, in our view, behind the Qantas rally today was because of the cheap earnings multiple – low to mid single digit FY23 EBITDA, and lower in FY24 EBITDA,” he said.
“Of course Qantas itself has risks from here, the main ones being the price of fuel, which has come off in recent times, but could easily appreciate again. But also how discretionary international travel is perceived by the consumer, particularly in an environment of rising interest rates to combat inflation.”
He said the natural listed comparable for Qantas is Air New Zealand.
“We could see an uptick fundamentally in this name too, although from a share price perspective we would caution given the higher valuation metrics it trades on versus Qantas,” he said.
“Looking further afield there are companies like WEB, FLT, HLO all of which may benefit on a read through.
“That said these companies trade on higher multiples with different risks, so we would be cautious about assuming a direct read through.”
Martin Currie Australia research analyst Chris Schade told Stockhead capacity constraints are currently the standout feature of the travel sector, particularly for international flights, and the key question is when capacity will normalise.
“For example, Qantas is returning its international capacity ahead of the market, and it expects capacity to sit at just 66% of pre-Covid levels in the December 22 quarter, vs 95% of pre-Covid levels for domestic,” Schade said.
“Combined with pent up demand for travel as a result of consumers being unable to travel through the pandemic, this is resulting in a very favourable environment for Qantas, who in this supply constrained environment is able to achieve significantly higher ticket prices versus those pre-Covid and is set to deliver record levels of profitability over the coming 18 months.”
He said for listed travel agents like FLT and CTD this dynamic is much less positive in the short-term as they are driven more by travel volume than travel value and as such their business models thrive in an environment where travel capacity is high as opposed to constrained.
“That said over the medium term these companies look well-placed to capture the upside as travel volumes fully recover.”
Datt Capital chief investment officer Emanuel Datt told Stockhead investors should take a considered and pragmatic approach towards exposures within this sector.
“At present, we believe that the travel and aviation sectors are priced for perfection, yet are heavily exposed to three external forces consisting of rising interest rates, higher than usual inflation and energy prices,” he said.
Seneca CEO Luke Laretive told Stockhead Qantas appears to be more profitable than ever and while the stock looks reasonable value he expects the Aussie dollar be a headwind to a return to near-full international capacity.
“On the costs side, I’d be wary of the sustained period of elevated capex out to 2027. This is a result of underinvestment during the 2021-2022 which will negatively impact free cash flow on a go-forward basis,” he said.
“As for other stocks in the sector, Flight Centre is a permanently impaired business model in our opinion, Webjet looks cheap but might be hampered by weaker economic conditions in Europe and Corporate Travel is fairly priced given risks.”