Sandstone Insights: Qantas faces competition as Virgin Australia plans ASX return

ASX code: QAN

Suggestion: Hold

Need to know

• Airfares are normalising, and domestic travel is soft
• The potential tie-up between Virgin Australia and Qatar Airways, if approved, is expected to introduce more international competition
• The $400 million share buyback is 80% complete, and fully franked dividends are set to be reinstated from the second half of 2025.

Suggestion on Qantas Airways (QAN) is 'Hold' after the stock's prolonged upward trend, supported by the buyback.

Leadership changes and financial outlook

At the company’s annual meeting in October, shareholders were informed that a 'new era' had begun with changes in management and a renewed board. New chief executive officer (CEO), Vanessa Hudson and chairman, John Mullen are now leading, and Qantas is focusing on rebuilding its reputation to align with its strong market position in domestic and international travel.

The upcoming first-half 2025 (1H25) results announcement in February 2025 will reflect normalising airfares, following a post-COVID rebound in travel demand. Some routes are exceptions due to the collapse of Rex Airlines.

Impact of fuel price changes

The interim results will also reflect lower fuel prices, with the company expecting a fuel bill of $2.55 billion based on an average cost of A$140 per barrel, excluding into-plane costs and hedging. This guidance is lower than the August projection of $2.7 billion at A$150 per barrel.

Expansion plans and competitive changes

Qantas plans to increase group capacity by 10% in the financial year 2025 (FY25), with just 1% being domestic and a 15% increase in international capacity, including Jetstar Asia.

Virgin Australia is expected to re-list on the Australian Securities Exchange (ASX) at some point in 2025. While this won't directly impact Qantas, it will reveal more about its main domestic competitor’s health and might explain the slowdown in Qantas' domestic business this year.

Additionally, the Virgin Australia/Qatar Airways tie-up, pending approval by the Australian Competition & Consumer Commission (ACCC), could enhance international competition for Qantas. Qantas is nearly the only objector to the deal but has strong lobbying power with the government.

Share price performance

The Qantas share price has risen by 65% since the start of 2024, compared to 11.3% for the ASX 200, -15% for Air New Zealand, and -4.6% for Singapore Airlines. At the current price, consensus earnings for financial year 2025 value Qantas at 8.3 times financial year 2025 earnings per share (EPS) and 7.0 times financial year 2025 earnings before interest and tax (EBIT).

Investment view

Fundamentally, Qantas is well-positioned, with opportunities for earnings growth through EBIT margin improvements in its international and Loyalty divisions. Although expensive and lengthy, the fleet renewal is funded by operational cash flow and promises enhanced operational efficiency.

Most controversies are behind the company, but the brand still needs extensive rehabilitation, which will take time.

The fall of Virgin Australia gave Qantas room to grow, but Virgin’s revival under private equity will reintroduce a disciplined domestic competitor once it re-lists. Qantas retains its advantage, leveraging both Qantas and Jetstar across the value spectrum, yet regulatory scrutiny remains.

Our long-term view of Qantas is positive. Project Sunrise, which includes non-stop ultra-long-haul flights, is approaching as the first A350-1000 arrives in mid-2026. Our recommendation to "Hold" simply allows shareholders to capitalise on the substantial share price gains this year.

Risks to investment view

Earnings momentum could continue supporting the share price. The Virgin Australia IPO and Qatar Airways tie-up may not significantly impact Qantas' earnings. Persistently high demand for domestic and international travel could sustain higher average airfares.

Conversely, geopolitical instability could disrupt international travel more than expected. Rising oil prices could strain profitability, and increased international competition might compress Qantas' margins.

Domestic and international fuel usage trends 2016-2024