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Qantas - Partners in the wind

Fat Prophets

Friday 19th June 2015

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Sharechat.co.nz Hot Stock - Qantas

 

Partners in the wind

 

What’s new?

We noted in our initial coverage of Qantas last August that the prospect of a split of the company’s domestic and international businesses would sharpen the focus, optimise use of capital, and generally be a positive. This certainly continues to be playing out with progress being shown by the airline both ‘at home’ and ‘abroad.’

In the international division it is notable that there has been a new emphasis on expanding the reach, with the unit acting with a more ‘autonomous’ air.

In our view, this was evidenced last week when Qantas announced that it was extending its relationship with American Airlines. The key takeaways from this being that the US carrier will now fly LA/Sydney for the first time, while Qantas will resume its services from Sydney to San Francisco – the latter being the most popular onward destination for corporate customers that Qantas doesn’t already serve directly on its network.

The deal with American also comes as Qantas is viewing a strong partnership agreement as a way to break into other lucrative routes. The company is looking to get a deal across the line with China Eastern which will bolster the number of flights between Shanghai and Sydney/ Melbourne.

Another key part of our original investment thesis behind Qantas was that the capacity war in Australia, and indeed overseas, would recede, and this theme continues to play out. April capacity statistics showed that, thanks to higher passenger numbers/demand relative to capacity, yields were higher across the company’s domestic and international units than a year ago.

Meanwhile the other key part of the turnaround at Qantas also continues to feature. Costs have been stripped out in the right places, with ‘total gross benefits’ set to reach $2 billion by FY17. More than $875 million of these savings will be realized by the end of this financial year. This is delivering both balance sheet improvements and improved operating efficiencies, with this aided in no small part by Qantas’ fleet age of narrow body ‘unencumbered’ aircraft being the youngest in two decades at less than 7 years.

The benefits of these improvements are clearly evident in comparisons with Virgin Australia. Based on recent data, we note that Qantas has around 63 percent of domestic capacity, but almost 80 percent of the domestic profit pool. A decade ago Virgin had a 40 percent cost base advantage against Qantas, with this set to fall below 5 percent within the next two years.

Outlook

Qantas continues to make great progress in the transformation program under Alan Joyce. This is as the end of the capacity war, a cost cutting program, restructuring and some help from the oil price have all come together for a perfect tailwind. We also see clear skies ahead, with further weakness in the Australian dollar also helping the carrier’s cause. Meanwhile the airline is continuing to expand its wings internationally, strengthening alliances and boosting exposure to lucrative routes.

Price

Qantas’ share price has pulled back somewhat since hitting multi-year highs of $3.79. However, despite current levels moving below the 50-day moving average, we expect strong support to kick in at $3.07. With the share price unwinding from overbought levels, there is some prospect for some consolidation before we see a renewed challenge of overhead resistance at $3.79

Worth buying?

Qantas continues to rub salt in the wounds of those who doubted the transformation program under Alan Joyce. Having already signalled the possibility of dividends being on the horizon, the company is displaying robust progress operationally. Capacity pressures continue to abate which are having a positive follow through impact on yields. Meanwhile the airline is continuing to expand its wings internationally, strengthening alliances and boosting exposure to lucrative routes.

Fundamentally, Qantas looks good value, trading on a price to earnings multiple of 12 times for 2015, with this falling to 8 times for 2016.

 

Disclosure: Qantas is held within the Fat Prophets Concentrated Australian Share Model.

Greg Smith is an Analyst at Fat Prophets share market research. To receive a recent Fat Prophets Report, call 0800 438 328 or Click here.

 

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