Qantas: Challenging Costs, Revenue Average But Advantage Remains (OTCMKTS:QABSY)

In March I rated Qantas shares as a buy and the call performed quite well as the shares gained 20%. However, the reality is that airlines are facing a tough cost and revenue environment, and Qantas’ FY24 results also showed that. In this report, I will discuss the latest earnings, assess risks and update my price target and rating for Qantas shares.

Qantas earnings are under pressure as unit revenue strength fades

Revenue developments showed the challenging environment for airlines. On a 20.6% increase in capacity, revenue grew by only 10.7%. Domestic performance was good, with revenue up 4% on a 1% increase in capacity. However, underlying EBIT fell 16% to $1.063 billion. The biggest pain point was international services where competition also added capacity, leading to lower unit revenues. Capacity at Qantas grew 30% but added just 12% to revenue and underlying EBIT fell 39% to $556 million. Jetstar grew capacity by 25% and revenue by 16%. It was the only airline to add EBIT and margins, with EBIT rising 23% to $497 million. Perhaps in Jetstar Group’s results, we also see a sign that airfares have risen as travelers increasingly seek low-cost alternatives.

What we are seeing is that airlines are currently adding capacity to the market while the demand environment for air travel has softened. For Qantas, this meant unit revenue fell by almost 9%.

Group EBIT fell 15.7% to $2.078 billion. What we see is that transition costs and capacity benefits have been almost completely offset by unit revenue pressure, while inflation and industry costs have been offset by Qantas’ transformation initiative to optimize the business. Loyalty results provided a small increase in EBIT compared to a year ago, but this was more than offset by lower freight revenue, customer investments and currency pressures.

I would say the only positives in the cost balance were that unit revenues excluding fuel were down 5.8%, but you also have to consider that with a 20.6% increase in capacity, the reduction in unit costs by 5 .8% is not huge.

What are the risks and opportunities for Qantas?

The risk for Qantas is quite obvious, that capacity will continue to be added in favor of stabilizing airfares. This risk is most prominent in the international market, where RASK is set to decline by a further 7 to 10% as the company aims to fully recover capacity to 100% of pre-COVID levels by the end of 2025. Operations are expected to domestic to see increases in unit revenue, while net freight revenue is expected to increase and transformation initiatives are expected to offset inflationary cost pressures.

So it’s not all bad for Qantas, but costs and fair play remain challenging. I expect unit revenue to decline again at the group level, while I think unit revenue could improve further.

Are Qantas shares still a buy?

To determine multi-year price targets, the Aerospace Forum has developed a stock analysis tool that uses a combination of analyst consensus on EBITDA, cash flows and the latest balance sheet data. Each quarter, we revise those assumptions and stock price targets accordingly. In a separate blog we detailed our analysis methodology.

While the cost and revenue environment remains challenging, FY24 results were slightly better than expected, with FY25 and FY26 EBITDA estimates up 2.6% and 5.4%, respectively, while CapEx is expected to be lower than originally anticipated, which boosts free cash flow. expectations in positive territory for the coming years. Based on a median company EV/EBITDA, it would be 7.4% up for 2025 and another 7% the following year. This isn’t the most compelling investment case, but it should be noted that Qantas shares are significantly undervalued relative to peers, and even a slight expansion of the EV/EBITDA multiple to the peer group would unlock additional upside.

Conclusion: Qantas is focused on reducing unit costs and recovering capacity

For Qantas, it’s pretty clear that the company accepts that unit revenue will continue to decline. This is a normalization that probably had to happen at some point, and in international operations, the company aims to recover capacity to further reduce unit costs. Along with the transformation initiatives that should give the company the ability to reduce unit costs, excluding fuel and at full capacity, the company will also have increased competitive strength and, if there is any improvement in the revenue environment, which would provide a solid base for margin expansion. This revenue-driven margin expansion is not something I would expect in FY25, but in subsequent years we could see some improvement as inflation eases and airlines can’t add much more capacity than I already do.

While the risks are there, I think Qantas shares remain a buy, but investors should be aware of the volatility of airline stocks.

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Please be aware of the risks associated with these stocks.