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Qantas Airways Limited – It is time for the investors to fly high?

October 17, 2015 | Team Kalkine
Qantas Airways Limited – It is time for the investors to fly high?

Improving services to address demand:



Qantas Airways Limited (ASX: QAN) reported that its capacity (Available Seat Kilometers) improved by 3.3% in August 2015 while demand (Revenue Passenger Kilometers) rose by 3.5% leading to the revenue seat factor of 79.9%, which is 0.2% higher over prior corresponding period (pcp). Qantas Domestic and Jetstar Domestic capacity improved by 0.8% in August 2015 as compared to pcp. Meanwhile Qantas International, Jetstar International and Jetstar Asia International capacity improved by 4.9% on a year over year basis in August 2015. Qantas Group capacity rose by 2.7 % yoy during the fiscal year of 2016 year to date (as of August 2015) while demand improved by 3.8% leading to a revenue seat factor rise by 0.9% to 81.2% against pcp, during the period. Qantas is also introducing new services to leverage the growing demand to destinations. The group launched new seasonal services to Bali from Sydney, and would operate four services per week leading to a total of 33 return services during December 2015 and January 2016. Qantas is also launching more services between Hobart and east coast cities in 2016, with extra 11 return services per week add an additional 2,420 seats to-and-from Hobart. The airlines is also adding more flights between Australia and Hong Kong and Manila to address demand from travelers. QAN is adding four Sydney-Hong Kong services from this month. The group is also enhancing Sydney to Manila series from four to five per week from December 2015.
 
 
Monthly traffic and capacity statistics (Source: Company Reports)
 

Demand and airfares:

Market expects steady price rise in Australian airfares in domestic market in early FY16. Government data for July 2015 has reflected a 2% passenger growth with solid load factor. There seems to be recovery in demand but the sector may be hit by the fare rise in the near term. It needs to be noted that the domestic growth outlook seems to be modest in FY16 and in fact the end of the year may witness some negative growth while Jetstar and Tiger may witness growth.


Financial Framework and Shareholder Objectives (Source: Company Reports)

The FY16 fuel guidance by Qantas also looks conservative at the back of the current fuel price environment. The average Singapore jet fuel price for FY16 remains about 29% below FY15 levels. Competition from players like Virgin may lead to take away share in corporate travel segment. It is also to be noted that returns and earnings in Airline industry are historically poor in terms of giving long-term value. Primarily, airlines being exposed to cyclical factors wherein economic conditions and fuel prices play a role. As per the company, QAN’s credit rating is Ba1 positive outlook by Moody’s and BB+ stable by Standard and Poor’s, and this when compared to an investment grade credit rating indicates that there may be an increase in the price of new debt funding. Also, there may possibly a reduction in the Group’s access to some sources of unsecured credit in a gradual manner.


Result Overview (Source: Company Reports)

Stock Performance:

Qantas airways delivered an outstanding performance during this year to date, generating returns of 61.57% (as of October 16, 2015) as compared to the broader S&P/ASX 200 index decline. The stock is trading at a valuation of P/E of 15x and has reached the highest at its 52-week price. The stock has particularly risen about 20% in the last six months. Given the current trading scenario with risks hovering around QAN and airlines industry in general, we believe that the stock is almost crowning and we don’t expect any further great surge in the stock price. Accordingly, we give a “SELL” recommendation on the stock at the current price of $3.91.


QAN Daily Chart (Source: Thomson Reuters)


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