Will Qantas shares be ‘Joyced’ along with the customers?

On 25 August 2022, Qantas Airways Ltd announced a pre-tax loss of A$1.19 billion for the financial year 2022 (the year ending 30 June 2022). This follows losses of A$2.30 billion and A$2.71 billion in 2021 and 2020, respectively.

Following three losses totalling $6.2 billion, Qantas announced that domestic revenue was back at pre-Covid levels by 30 June 2022. The market responded: Qantas shares traded 7% higher the day after the announcement on 25 August.

Compared to five years ago, Qantas shares are trading just 7% lower, valuing the company at $10 billion, despite the $6.2 billion in accrued losses wiping out the company’s entire equity. Qantas is one of just a handful of viable businesses with negative shareholders equity.

So will Qantas bounce back as Alan Joyce claims? It appears to be on the right track, but there may be some headwinds to come:

• Qantas appears to have suffered reputational damage that could affect its revenue
• The government may force Qantas and other airlines to reduce their traffic to meet emission targets
• The economy may weaken faster than expected

The Qantas brand appears to have been damaged

Qantas customers suffering inconvenience from Qantas have started calling it ‘getting Joyced’ after CEO Alan Joyce . As a part of a cost-saving initiative, Joyce replaced long-serving staff with inexperienced, untrained casual workers, and then complained that passengers weren’t ‘match fit’ for flying.

In June, Qantas cancelled 8.1% of all scheduled flights, making it Australia’s least reliable airline and leaving thousands of passengers stranded. The performance improved slightly in July to 5.6% – 1 in 18 flights cancelled.

In addition to the cancelled flights, hundreds of Qantas customers shared their negative experiences on the popular blog Crikey .

On domestic flights where Qantas has a monopoly, this reputational damage may have no impact. However, on competitive international flights where Qantas competes with other national carriers, a reputation of losing baggage cancelling flights, leaving late, and poor customer service may make selling tickets at a premium more difficult.

Qantas may be forced to reduce flights

The Albanese government aims to achieve a 40% reduction in carbon dioxide emissions from 2015 levels (541 million tonnes ) over the next eight years. Specifically, from the current 494 million tonnes in the year to March 2021 to 325 million tonnes in 2030 – 21 million tonnes a year. This aggressive agenda may include reducing air traffic.

Australia’s aviation industry produced 22 million tonnes of CO2 in 2016 – around 4% of the total – so it’s an obvious target.

Indeed, European governments have been targeting Aviation to achieve climate goals:

• France has banned flights between destinations less than 2.5 hours apart by rail
• The Dutch government will cap flights into Schiphol airport in 2023 – the third busiest in Europe

A major concern for Qantas is that domestic flights – which contribute to national emissions targets – contributed the lion's share of Qantas profit in 2019 (pre-pandemic). Emissions from International flights are excluded from national emissions counts, so are less likely to be targeted for cuts.

The economy may weaken faster than expected

1. China’s economy may crash: Australia is highly dependent on China – which accounted for 35.3% of Australia’s exports in 2019-2020. China’s economy appears to be slowing down, which may affect iron ore and coal prices – Australia’s top exports.
2. The yield curve has inverted: the US government treasury yield curve has inverted – one-year treasury yields are higher than ten-year yields. This indicates market uncertainty and usually precedes a recession.

How far could Qantas shares fall?

As of 30 September, Qantas is trading at $5.02, which is about 22% below its 2007 high of $6.44. Over the next 16 months, as the recession kicked in, Qantas shares fell to $1.49 – a 77% fall. A similar fall during the next recession is not impossible.

The average forecast of 14 analysts is for a price target of $6.50, which would be a new record for the Qantas share price. This could be pushing the share price higher than perhaps it deserves to be.

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