Where next for Qantas shares?

An industry in chaos

On a global scale – the coronavirus pandemic has potentially impacted the aviation industry the most significantly – with many governments locking down their borders and restricting travel on a domestic-level. Adding to this, oil price volatility and a generally weak economic outlook have not helped matters.

Qantas Airways (QAN) – Australia’s flagship carrier – has been particularly impacted, drastically slashing their domestic and international capacity in response to the still-unfolding coronavirus pandemic.

The secondary consequence has been a broad-based collapse in the share prices of global airlines, with many US and European airlines seeing their stock precipitously decline since late-February. Australia’s second domestic airline Virgin Australia, even fell into voluntary administration, though was subsequently bought by US-based private equity giant Bain Capital.

The Coronavirus & Qantas relationship in focus

In response to the emerging coronavirus pandemic, on 10 March Qantas informed the market that it would be further reducing its international and domestic capacity by 23% and 5%, respectively; cancelling its previously planned off market share buy-back program; though it told investors at the time it was still committed to paying an interim dividend of 13.5 cents per share.

The Group's CEO, Alan Joyce, even said he would take no salary during FY20.

Things deteriorated at a rapid click however, as coronavirus cases across the globe continued to spread at an accelerated rate during March. Just a week later, on 17 March, Qantas released an additional coronavirus update to the market, revealing it would be slashing international capacity by 90% and domestic capacity by 60% – with the cuts set to last from the end of May to the middle of September.

Just two days later Qantas made yet another coronavirus-related update. The headline revelation here was that the majority of the airline’s workforce would be stood down until at least the end of May. The dividend, previously announced was also pushed back to September – though would eventually be cancelled completely.

'No airline in the world is immune to this' Alan Joyce said in a statement to the ASX at the time, while reassuring investors that 'Our balance sheet means we've entered this crisis in better shape than most and we're taking action to make sure we can ride this out.'

On that day, 19 March, the Qantas share price hit what currently stands as the airline’s 52-week low of $2.030 per share.

Debt and equity funding secured

Besides standing down large swathes of its workforce and culling flight capacity – from March to April Qantas would go on to secure $1,600 million in fresh debt funding in a move aimed at making sure the airline’s liquidity position was beyond reproach.

All up, these funding moves took Qantas to the middle of the Group's target debt range. At this point in the unfolding situation, the Group said Trans-Tasman flight cancellations would remain in place until the end of June, while international flights would remain cancelled until the end of July.

The stand down of Qantas employees was also extended until at least the end of June, with the Group's CEO saying 'We're expecting demand recovery to be gradual and it will be some time before total demand reaches pre crisis levels.’

Unsurprisingly, as we move further away from the vicious March sell-down that saw many of even the most stable firms witness substantial share price declines, the market’s outlook for Qantas looks to have improved substantially.

Indeed, by late June, some three months after the coronavirus threatened to ingulf equity markets – the Qantas share price traded around $4 per share, up over 100% off its March lows, though still well off the price levels it recorded in January.

What came next then proved both surprising and highly predictable: on 25 June Qantas announced that it was launching a ~$1.9 billion capital raise – comprised of a $1,390 million placement and a $500 million share purchase plan.

This raise was part of a broad three year strategic plan that will hopefully see Qantas become a leaner, more competitive airline. In quantifiable terms, this plan aims to see the airline’s costs reduced by $15 billion over three years, as well as deliver $1.0 billion in annualised cost savings from FY23 onwards.

More immediately, Qantas also said it would be reducing its workforce by 6,000 employees – as well as continuing to stand down around 15,000 employees in the short term – with a focus on those holding internationally-oriented positions.

The raise will also see the Group’s share count expand by ~25%, with restructuring costs expected to come in at $1.0 billion.

At the time of writing, QAN traded at $3.84 per share.

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Qantas share price: Where next?

One is left wondering – after considering the above – what exactly Qantas will look like in a post-Covid world.

CEO Alan Joyce, revered for salvaging the airline once already, is ‘fundamentally optimistic’ about the outlook, with Mr Joyce reminding investors that around two-thirds of the airlines’ earnings are derived from Australia’s domestic market – a segment, which he stressed – would likely rebound the quickest.

'We have the leading full service and low fares airlines in Australia, where distance makes air travel essential, and diversified earnings through Qantas Loyalty.'

As it stands, Qantas expects to report break-even or a small underlying pre-tax profit for fiscal 2020. For those looking for stability, the CEO – having now been tasked with saving Qantas a second time – is expected to oversee the airline’s three year strategic plan – noting that he planned to reamin as the airline's Chief Executive until at least the end of FY23.

The analyst take in focus

Besides the airline's Chief Executive, a number of top investment banks – Morgan Stanley, UBS and Citibank – are all relatively constructive on the outlook for Qantas – though each acknowledge the uncertainty that global airlines, and Qantas in particular, face right now.

Starting with Morgan Stanley (MS), the investment bank currently has an Overweight rating and a $5.30 price target on the airline, implying substantial upside from current price levels.

Moreover, in spite of the dilutive nature of the capital raise, MS was ultimately optimistic about the Group’s re-tuned business strategy, saying:

‘Notwithstanding dilution, we expect a faster return to 'normal' profitability (~FY22) and see further upside from there if cost savings are retained.’

‘In the short/medium term, the improved liquidity position (net of restructuring costs) and increased variabilisation of the cost base provide an added buffer against any demand volatility through the recovery phase,’ Morgan Stanley analysts added.

Elsewhere, in the wake of the capital raise announcement, Citi analysts bumped up their price target on the airline from $3.70 per share to $4.60 per share, though lowered their price target from Buy to Neutral, while retaining their high risk rating on the stock. Earnings per share (EPS) targets for fiscal 2021 and 2020 were reduced by 22% and 30%, respectively, as a result of the 25% increase in shares outstanding.

Even so, in the vein of Alan Joyce’s own comments, the investment bank’s analysts said:

‘Qantas is well-positioned with a strong domestic airline franchise and likelihood of a quicker resumption of flying in the Australian domestic market.’

UBS by comparison downgraded their price target on QAN in the wake of the cap raise – from $5.50 per share to $4.60 per share – a decision spurred on by the dilutive impact of the raise.

Interestingly, though the UBS analysts framed the raise as a surprise, they said it should ‘remove an overhang for some investors that were concerned with the outlook for gearing.'

‘While the demand outlook is difficult to forecast accurately; we are encouraged by the narrative being expressed by the final bidders in the Virgin administration process through recent press articles,’ UBS analysts finished.

Compared to the other three investment banks, Goldman Sachs analysts appear significantly more bearish – hitting the airline with a 12-month price target of just $3.03 per share – implying downside potential from current price levels.

How to trade Qantas shares

With IG, you can trade on the best trading platform and back whether you think Qantas' shares will rise or fall in value. Go long (buy) if you think they will increase in value, or go short (sell) if you think they will decrease in value.

To take a position, follow these simple steps:

1. Create an IG trading account or log in to your existing account
2. Type the 'QAN' or 'Qantas' in the search bar and select it
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4. Click on ‘buy’ or ‘sell’ in the deal ticket
5. Confirm the trade

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