Company Overview: Qantas Airways Limited is an Australia-based company, which operates domestic and international airline. The Company is engaged in the operation of international and domestic air transportation services, the provision of freight services and the operation of a frequent flyer loyalty program. Its segments include Qantas Domestic, Qantas International, Jetstar Group, Qantas Freight, Qantas Loyalty and Corporate. The Qantas Domestic, Qantas International and Jetstar Group segments include passenger flying businesses. The Qantas Freight segment is engaged in the air cargo and express freight business. The Qantas Loyalty segment is engaged in the customer loyalty recognition programs. Its main business is the transportation of customers using two airline brands, which include Qantas and Jetstar. It also operates subsidiary businesses, including other airlines and businesses in specialist markets, such as Q Catering. Its airline brands operate regional, domestic and international services.


QAN Details

Qantas Airways Limited (ASX: QAN), an Australian airline with a market capitalization of about $9.15 billion, is considered to be positioned relatively well, given healthy management processes on fuel cost recovery and capacity management. While the demand landscape in the travel sector is changing, Qantas is expected to make capacity adjustments. Overall, first half of the year might see impacts from fuel scenario and lower ticket yields, the cost management is expected to play a role in the second half. The latest quarter one update for FY19 showcased a revenue rise of over 6% while forward bookings have been up 8% in terms of value and this sets the performance for the year ahead. On a long-term profile, the fundamentals depict a decent investment scenario with stock upside of single digit expected in the next 24 months.
 
Decent footing with regards to fundamentals and margins: Qantas Airways happens to possess decent footing when it comes to margins. The company’s net margins have witnessed a year on year (YoY) improvement to 5.7% in FY 2018 which implies the company’s efficiency in converting its top-line into bottom line.  Moreover, the company’s net margins have witnessed a significant improvement in the past five years to FY 2018. In FY 2014, the net margin was -18.5%. This further builds confidence on the company’s efficiency. There are expectations that its focus on the margins would act as catalyst for the growth moving forward. The company’s operating margin has witnessed a YoY improvement of 0.7% and stood at 9.2% in FY 2018. Also, the company is having decent position with regards to the liquidity levels. In FY 2018, the company’s current ratio stood at 0.49x which reflects an improvement of 11.2% on the YoY basis implying strong standing in the company’s liquidity position. Therefore, the company happens to be in the stable position to effectively meet its short-term commitments. The company’s return on equity (or ROE) has also encountered an improvement of 1.1% on the YoY basis to 26.2% in FY 2018. Moreover, the company’s ROE is comfortably higher than the industry median of 12.1%.


Cash Flow Scenario (Source: Company Reports)

First direct flight from Sydney to London: Qantas Airways has always set the vision to have the first direct flights from Sydney to London, and this is now nearing reality as Boeing Co. and Airbus SE are working on the proposals for longer-range jets required for the 10,600-mile trip. This plan is expected to get finalized by the year end and it is expected they will reach the decision for starting the flights in 2022. Meanwhile, QAN is working on the strategy to start a projected 20-hour journey to the U. K. capital and significant important cities like New York and Paris in a comfortable manner. The strategy comprises of choosing the desired number of seats and a cabin layout, which may include beds in transit. If a route from Sydney or Melbourne to London starts off, it would beat the record of longest-flight which is achieved by Singapore Airlines Ltd. Singapore Airlines provides the service from Singapore to New York through 1,000 miles. Further, QAN is strategizing a new deal with its pilots to make the required changes needed in working practices for undertaking such long distance flights, and is also engaging with authorities for getting the required regulatory approvals and changes. Moreover, QAN has undertaken the project with the code-Project Sunrise, under which the flights will cover the destinations from Australia’s two biggest cities directly to cities like London, Paris and Frankfurt, and New York and Chicago in the U. S. After the Project Sunrise takes place, all major cities will get covered and will be within the range of non-stop flights. To get this project successful, QAN has already commenced opening up of new routes with the existing jets, has also added the first direct flights from London to Perth through Boeing 787 Dreamliner. Boeing 787 Dreamliner is looking to serve from Brisbane to Chicago, Dallas and Seattle. On the other hand, QAN has scrapped an order for eight Airbus A380 superjumbos that have the list price of more than $445 million. A380 is facing pressure regarding its efficiency of the largest twin-engine jets, which may hamper QAN’s plans to fly to far-flung destinations. However, QAN will continue to proceed with other fleet plans, that include the introduction of more Boeing 787 Dreamliners this year.

Transforming the Distribution Model: QAN is working on the strategy to transform and evolve its distribution model through modernising the way by which the agents book fares. The Qantas Channel is part of this digital strategy for evolving QAN’s booking systems, and forms the new agreement between the airline and its agency partners. It is projected to get effective on 1^st August 2019, which will ensure of getting the access to the wide range of QAN’s fares, products and the information for its agents. The company in 2018 had already launched the Qantas Distribution Platform (opens in new window) (QDP), through which the company is unlocking the value from IATA's New Distribution Capability (NDC) that can deliver airlines, trade with partners and customers. QAN has made an announcement regarding signing up the partnership with the popular Global Distribution Systems (GDS), that include Sabre, Amadeus and Travelport, so that the Qantas Channel will be available to agents all over the world and is also working with other regional GDS partners for the delivery of the channel. Meanwhile, the majority of Qantas' key agency partners that have accepted or agreed to be part of the Qantas Channel globally are Flight Centre, Corporate Travel Management, Carlson Wagonlit Travel, Expedia Group, Egencia, Webjet, Consolidated Travel Group, ATPI Voyager, CT Connections, Helloworld, Virtuoso and Express Travel Group. QAN is  also working closely with other agents to get them registered in the coming months and the company will continue to make new innovations, evolve with them and plans to share the benefits of the new distribution setup. Additionally, the agencies who do not want to register for the Qantas Channel will have to incur a channel fee, and will not be able to access the widest range of traditional fares that are available through indirect channels or new content on the Qantas Distribution Platform from 1 August 2019.

QAN will benefit from weakening crude outlook: QAN’s major cost is related to fuel and it is expected to be on a lower side due to slowing of global growth and also due to surprise US inventory buildup of approximately 1 million barrels, as per the data released by the EIA. WTI Crude had already fallen during the last week (from above $55.00/bbl by about 4.5 percent to a level of $52.50/bbl). Meanwhile, QAN had already projected to recover the earlier rise in fuel price in the domestic market through capacity discipline and also through the effective execution of the dual brand strategy. The company has been confident to significantly recover the higher fuel costs in the International market due to the company’s strong Group operating margin compared to the regional peers.

Capital Management and returns to shareholders: As of 23 October 2018, the share buyback was 53 per cent complete, which is up to $332 million announced in August, and the company had acquired 30,454,244 shares. In August, QAN had announced another $500 million as it had already returned $1 billion to shareholders during FY18. Thus, the total number of shares on issue (after cancellation) has been around 1,653,113,636. Once the latest buyback gets completed, QAN through buy back would have bought back an approximately 26 per cent of its shares since October 2015, which means the company has given significant value to its shareholders. Moreover, QAN had increased the fully franked dividend to 10 cent base from 7 cents, which the company had paid to its shareholders on 10th October and it represents a further return of $168 million.

Future Outlook: Lately, QAN reconfirmed the outlook for the company in regard to capital expenditure, deprecation and transformation benefits for FY19; and has projected the net capital expenditure to be $1.0 billion for the year. The FY19 net depreciation and non-cancellable aircraft operating leases have been estimated to be about $155 million over the FY18 level. Moreover, the company has now hedged 76 per cent of its fuel for FY19 while the figure is 39 per cent for FY20 with the ability to benefit from the scenario. QAN’s full year fuel cost has been estimated to be about $4.09 billion compared with $3.23 billion of FY18; and the projection is based on a Jet Fuel forward market price of A$130 per barrel for the remainder of FY19. At 30 September, the value of forward bookings expanded BY 8 per cent, showcasing a rise over the 6.2 per cent enhancement noted as at June 30. QAN thus aims to recover a significant amount of fuel cost rise in FY19. For the first half of FY19, the company is expecting a flat Group capacity while Group Domestic capacity is anticipated to drop by about 0-1 per cent with International capacity also staying at a flat level. Nonetheless, QAN is on track to deliver at least $400 million in transformation benefits in FY19, and cost improvements have been showcased to materialize in the 2H of the current year.


Qantas Targets (Source: Company Reports)

QAN meets the requirement to be included in MSCI Index: QAN is again qualified to be included in the MSCI Global Investable Market Indexes (“MSCI Index”), which will continue to increase the horizon to reach to more investors. As at 23rd October 2018, the foreign persons were potentially holding the required interests of 40.8% in the issued share capital of QAN. On that basis, under section 2.2.8 of the Methodology, September 2018 for the MSCI Index, QAN meets the requirement of MSCI of foreign holdings of at least 15%.

Response to Media Announcement: QAN was supposed to have announced that it is having 19.9% holding in Alliance Aviation Services Limited. On this Alliance Aviation’s Board said that they have not received any specific notification. This is something to be watched out.

Stock Recommendation: Meanwhile, QAN stock has fallen 1.40% in three months as on February 08, 2019. The company’s stock is trading at A$5.65 and has an immediate support at $5.2 and resistance at $6.8 level. The  company’s transformation program has posted significantly better earnings resilience at Qantas International and the company had continued to report about $400m gross benefits for FY19. Further, the growth of Loyalty business has diversified the earnings base of the company that has no direct dependence to higher fuel costs. The group has decent fundamentals. Additionally, QAN continues to post strong cash flows. In FY 18, QAN had increased its net free cash flow by $133 million, which had reduced the net debt below the low end of the preferred range. Moreover, the company will benefit if the fuel price declines more. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $5.65.



QAN Daily Chart (Source: Thomson Reuters)

Disclaimer
 
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.