One of the Largest Airline in Australia: Qantas

Qantas stock provides investors with access to the airline sector. One of the largest airlines in Australia, Qantas stock has recovered from the depths of the pandemic to deliver stellar returns to investors in the last two years.

• Qantas is part of the cyclical airline sector

• The airline giant is equipped with a strong balance sheet and robust cash flows

• It remains well position to take advantage of potential elevated travel demand.

Companies part of the airline sector, such as Qantas Airlines, remain popular among investors. The travel sector is a crucial part of any economy, and airlines play a huge part in the tourism and business space. Airline companies connect people located all around the globe. But due to the capital-intensive nature of this business, airline stocks have failed to deliver consistent returns to investors.

Further, the airlines are part of a cyclical sector. In periods of economic boom, the demand for personal and business travel increases as you spend more on vacations, international conferences, and other corporate functions. Alternatively, during a downcycle, the demand for travel tapers off at an accelerated pace as individuals, families, and corporates tighten their budgets.

So, airline stocks may generate market-beating gains in times of economic expansion but may trail the broader markets significantly when sentiment turns bearish.

Qan share price chart (source: Mitrade)

As is the case with all companies, there are a few advantages and drawbacks you need to consider when investing in airline stocks. For instance, in the period prior to the COVID-19 pandemic, Qantas was among the top-performing stocks on the ASX as it enjoyed years of low-interest rates to fund its capital expenditures and expansion plans. Qantas stock bottomed out at $1 in 2014 and touched $7 in early 2020.

Qantas Stock Price Comparison (Source: Google Finance)

But as the COVID-19 pandemic gripped global economies, air travel came to a standstill. Several governments shut their borders and imposed lockdown restrictions. In order to support their cash burn rates, Qantas and its peers raised debt capital resulting in highly leveraged balance sheets.

As economies reopened and oil demand spiked, crude prices moved upwards. So, even though travel demand rose in the latter half of 2021, oil prices negatively impacted the bottom line of airline stocks.

In 2022, elevated oil prices, coupled with rising interest rates and red-hot inflation, acted as headwinds for the airline sector. At the time of writing, Qantas stock is priced at $6.40, and it has surged 24% in the last year. But let’s see what you should expect from Qantas stock in 2023 and beyond.

Qantas Airlines is a full-service airline that operates both domestically and internationally. It focuses on providing passengers with a high-quality travel experience and has a strong emphasis on safety, reliability, and customer service.

Additionally, Qantas has just been named the safest airline in the world for 2023 after it lost the top spot for 2022, according to a report from Travel and Leisure. Qantas is an airline carrier that has been operating for several decades, and is among the oldest airlines globally. 

Let’s see how at the business model of Qantas in detail:

• Revenue Generation: Qantas generates revenue primarily through ticket sales for passenger flights. It also generates revenue through the sale of travel-related products, such as travel insurance, accommodation, and car rentals.

        

• Route Network: The airline has a broad route network that covers major domestic and international destinations. Its international network is focused on destinations in Asia, Europe, North America, and South America.

      

• Fleet: The company has a modern fleet of aircraft that is designed to provide a comfortable and safe travel experience for passengers. Its fleet includes a mix of Boeing and Airbus aircraft, and it regularly updates its fleet to improve efficiency and reduce operating costs.

        

• Loyalty Program: Qantas operates a loyalty program, Qantas Frequent Flyer, which rewards customers for their loyalty and provides benefits such as flight upgrades, lounge access, and other exclusive perks.

    

• Partnerships: The airline giant has established partnerships with other airlines, which allows it to expand its route network and provide passengers with a wider range of travel options. It also has partnerships with other companies in the travel industry, such as hotels, car rental companies, and travel insurance providers.

Qantas Airlines has several economic moats that help it maintain a competitive advantage in the airline industry. Some of the key moats are:

• Brand: Qantas has a strong brand reputation that has been built over decades, with a focus on safety, reliability, and customer service. The Qantas brand is associated with quality and prestige, which helps it attract high-value customers

• Cost Efficiency: Qantas has a strong focus on cost efficiency, which helps it maintain a lower cost structure than many of its competitors. The company has implemented several cost-cutting measures, such as reducing its workforce, improving its fleet efficiency, and optimizing its network, which helps it remain profitable in a highly competitive industry.

• Government Support: As the flag carrier of Australia, Qantas receives government support in the form of regulatory protections and access to infrastructure, such as airport slots. This support gives Qantas an advantage over competitors and helps it maintain a dominant position in the Australian market.

Like any investment, there are risks associated with investing in Qantas Airlines. Some of the key risks include:

Industry Volatility: The airline industry is highly cyclical and sensitive to factors such as fuel prices, global economic conditions, and political events. This can lead to significant fluctuations in demand and pricing, which can impact Qantas's financial performance.

Regulatory Environment: Airlines are subject to a wide range of regulations, which can impact their operations and financial performance. Changes to regulations or government policies could increase operating costs or impact Qantas's ability to compete.

Fuel Costs: Fuel costs are a significant expense for airlines, and increases in fuel prices can impact profitability. Qantas has implemented fuel hedging strategies to manage this risk, but there is still the potential for volatility in fuel prices. In 2022, rising fuel prices and inflation hurt the profit margins of Qantas and its peers. 

Competition: The airline industry is highly competitive, with many well-established airlines as well as low-cost carriers. Qantas faces competition from both domestic and international airlines, which can impact pricing and profitability.

Labor Costs: Labor costs are a significant expense for airlines, and labor disputes or strikes can impact operations and financial performance. Qantas has experienced several high-profile labor disputes in recent years, which have disrupted operations and impacted financial performance.

Geopolitical Risks: Qantas operates in a global environment and is subject to geopolitical risks, such as terrorism, political instability, and natural disasters. These risks can impact operations and financial performance, as well as the safety and security of employees and customers.

Investors should carefully consider these risks before investing in Qantas Airlines and seek the advice of a financial advisor.

Last November, Qantas stated it expects net profit after tax in fiscal 2023 to range between $1.35 billion and $1.45 billion on the back of robust travel demand. The forecast was $150 million higher than the company’s previous guidance.

According to Qantas, customers continue to spend heavily on travel despite an inflationary environment. Its balance sheet is also healthy as Qantas forecasts net debt to range between $2.3 billion and $2.5 billion by the end of the December quarter, around $900 million better than its last update.

Qantas maintained that low debt levels will allow it to deliver better shareholder returns in 2023, providing it with enough room to initiate additional buybacks. As oil price move lower and international travel demand remains strong, the outlook for most airline stocks, including Qantas remains promising.

Due to its improving financials, analysts and investors remain optimistic about Qantas stock. One of Australia’s top brokers, Morgans, has a 12-month price target of $8.50 for Qantas stock, indicating an upside potential of 30%.

Morgans stated, “QAN is now our preferred pick out of our travel stocks under coverage given it has the most near-term earnings momentum. Looking across travel companies globally, airlines are now in the sweet spot given demand is massively exceeding supply.”

Morgans also emphasized that Qantas's stock price is too cheap currently, making it hard to ignore. It is trading at a material discount compared to pre-COVID-19 multiples, despite higher earnings per share, a strong balance sheet, an increase in diversification, and a better domestic market position.

The pent-up travel demand indicates Qantas is well-placed for top-line growth. Additionally, capital management initiatives and a strong environment will allow the company to expand EBITDA growth in the coming years.

As the COVID-19 pandemic is brought under control due to the rapid rollout of vaccines, several countries have relaxed border restrictions which in turn has paved the way for international travel. But in the near term, Qantas and other airline stocks remain vulnerable to the emergence of new variants making the future of this sector uncertain. These companies will also have to deal with changes in consumer behavior that have now emerged in a post-pandemic world and may have a deep impact on air travel.

Further, COVID-19 has accelerated the work-from-home trend, resulting in lower demand for business-oriented travel, which is a high-margin segment for Qantas. There is a chance that corporate travel might never return to pre-pandemic levels in the future.

However, the growth in e-commerce and online shopping in the upcoming decade will increase the demand for freight services, an important segment for Qantas. Australia’s leading airline is well poised to deliver outsized gains to investors due to the reopening of economies, pent-up travel demand, rising online shipments, and an improving balance sheet. 

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