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), a well-known provider of freight air transportation services for the passengers at Australian and international platforms, and air cargo and express freight services, has many offerings spread across customer loyalty programs. While talks about unfair refund policies are doing some rounds in the market, the group seems to have a resilient business as despite the exposure to oil prices, the group has been able to maintain a higher return on equity in 2018 and the level is well above the industry median of 12%. Gross margin at 57% is also well above the 41% median. The group has maintained net margins above 5% in the past two years. The group now aims to benefit from higher demand and future hedging plans.

 

Financial Framework (Source: Company Reports)

Again qualified for inclusion in the MSCI Global Investable Market Indexes: As of June 30, 2018, the company was operating a fleet of 313 aircraft. With given circumstances, QAN was included in MSCI Global Investable Market Index as foreign persons still held interests of about 40.8% in the issued share capital of QAN, as at October 23, 2018; and QAN met the requirement of MSCI of foreign holdings of a minimum of 15%.

Decent Performance for the First Quarter of FY 19: For the first quarter of FY19, Qantas Group has reported 6.3 per cent increase in the revenue to record levels, compared to the corresponding period last year. QAN’s forward bookings is up by 8 per cent on flat capacity in the first quarter of 2019 compared with same time last year. For the first quarter of FY19, the Group’s Unit Revenue (RASK) rose by 5.4 per cent compared to the prior corresponding period, which means the company has substantially offset the rise in fuel costs. Further, the revenue performance could mitigate the challenges seen owing to higher non-fuel costs (including higher commissions paid to travel agents) and softness in Australian dollar to some extent. Meanwhile, QAN for FY 19, expects to substantially recover higher fuel costs, which was around $860 million higher than last year. QAN has fuel-saving strategies like ‘single engine taxi’ and a new flight planning system, which makes optimum use of jet-streams and tailwinds. On the other hand, the company’s total group capacity has declined by 0.3 per cent in Q1 2019 as the international market as well as domestic market witnessed some drop. On the other hand, 6.8 per cent rise in Unit Revenue across Group Domestic operations (Qantas and Jetstar) was noted for the first quarter of FY19. The company has experienced strong Travel demand across both business and leisure markets, and there was improvement in the resources sector. Unit Revenue across Group International has grown by 4.0 per cent in the first quarter. The revenue growth came at the back of many structural changes. These were undertaken with regards to international network and entailed focus on Perth-London route, traffic flows across Singapore hub and renewed codeshare agreements. Additionally, in September, Qantas International had retired another 747-400, and the remaining nine are anticipated to be steadily phased out by the end of calendar 2020. The group also flagged for the delivery of two additional 787-9s in November 2018. All in all, QAN indicated to have about eight of company’s Dreamliner fleet.

Continued investment: The Premium Frequent Flyers data shows that the lounges are a key factor in their decision to take a flight of QAN. Therefore, the company continues to invest in lounges. QAN has already announced lounges upgrades for Sydney, Brisbane, Tokyo, Auckland, Hobart and Tamworth. The company tapped a significant investment in a new First Lounge while it is expanding its existing Business Lounge at Singapore Changi Airport. These two together can enhance the lounge capacity at Changi by about 60% post completion towards the end of year 2019. The whole scenario reflects for a higher demand for premium travel and the expanding importance of Singapore hub to broader network wherein QAN operates. The company also has planned to recently cut the ribbon on a new domestic lounge precinct in Melbourne. Moreover, the company is finalizing the detailed design work on a major cabin upgrade for the A380s. QAN has also upgraded the cabins of turboprops, which fly on regional routes. QAN continues to do feasibility work on Project Sunrise, which is the company’s ‘moonshot’ to fly non-stop from the east coast of Australia to London and New York by 2022.

Well positioned to substantially recover fuel costs: QAN aims to recuperate the higher fuel price in the domestic market through capacity discipline and execution of dual brand strategy. The company has confidence to substantially recover the higher fuel costs in the International market due to the company’s strong Group operating margin compared to the regional peers. The Transformation program has posted significantly better earnings resilience at Qantas International and it continues to deliver about $400m gross benefits for FY19 and FY20. The company has introduced 787-9 Dreamliner fleet, London network and hub restructure and has commenced Perth –London direct service. Further, earnings base has been diversified through the Loyalty business with no immediate exposure to fuel costs. Additionally, QAN continues to generate 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.


EPS over the years (Source: Company Reports)

Capital Management: 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 indicated to be about 1.65 bn. 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 cents’ base from 7 cents, which the company had paid to its shareholders on 10th October and it represents a further return of $168 million.


Long-term Positioning (Source: Company Reports)

Future Outlook: QAN has affirmed company’s outlook for transformation benefits, capital expenditure,  and depreciation for FY19. For the full year, net capital expenditure is expected to be $1.0 bn. The company had also projected the net depreciation and non-cancellable aircraft operating leases for FY 19 to be approximately $155 million higher than FY18. Qantas has hedged 76 per cent of its fuel in FY19; and 39 per cent for FY20. The full year’s fuel cost has been flagged to be $4.09 bn compared to $3.23 bn for FY18. The Jet Fuel forward market price of A$ 130 per barrel for the remainder of FY19 has been indicated; and the value of forward bookings expanded by 8 per cent (as at September 2018), which reflects a further improvement on the 6.2 per cent rise at 30 June. Therefore, QAN is still expecting to significantly recover the increase in fuel costs in FY19. With not much growth expected in capacity, QAN in FY19 is on track to deliver at least $400 million in transformation benefits, and the majority of the cost improvements is anticipated to be materializing in the second half.

Target Milestones (Source: Company Reports)

Stock Recommendation: Meanwhile, QAN stock has fallen 12.44% in three months as on December 14, 2018 and is trading at P/E of 9.8x. The company’s stock is trading at A$5.5 and has an immediate support at $5.2 and resistance at $6.8 level. The fall in oil prices may help the company to expand its bottom line while it still possess long term value. Further, the company has already hedged 76% of its fuel costs for FY 2019 and 39% for FY 2020. Moreover, in FY 18, all operating segments had delivered ROIC above WACC (weighted average cost of capital). The resilient business with exposure to oil prices, is still expected to lead to single digit share price growth in next 12- 24 months. We believe that short term headwinds with respect to penalties levied in relation to alleged consumer practices may impact QAN. However, the long-term potential and other transformation moves are key for future, and thus, we give a "Buy" recommendation on the stock at the current price of $ 5.5.

 

QAN Daily Chart (Source: Thomson Reuters)

 
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