A current holding in Rivkin’s ASX Growth Portfolio, Qantas announced a promising FY 2023 outlook on Tuesday as part of a quarterly update. Australia’s flagship carrier is forecasting a record pre-tax profit of A$2.43 billion to A$2.48 billion, an almost $1 billion jump from its 2018 record, credited to strong travel demand and a successful cost-cutting program.
Despite strong headline numbers which topped analyst estimates, the stock is underperforming today, down -1.92% while the broader ASX200 is up 0.19% with investors seemingly focusing on expectations that fares will begin to moderate post 2024 as capacity increases post-pandemic. However, given the stocks strong outperformance since July 2022, the reaction in today’s trading may equally be a combination of profit-taking and portfolio rebalancing.
Domestic capacity is expected to exceed pre-COVID levels by 104% by 2H23 driven by key domestic routes, and despite operational hiccups, international capacity should reach more than 80% of pre-pandemic levels by 2H23, aiming for full recovery by March 2024. Outgoing CEO Alan Joyce noted, “The industry remains capacity constrained, and the travel category remains strong, so there’s still a mismatch between supply and demand that’s likely to persist for some time, especially for international flying” and should mean international airfares remain above pre-pandemic levels for some time. Qantas also plans to increase its share repurchase program to A$500 million from A$100 million previously, reflecting its financial strength and positive outlook, while net debt is predicted to lie between A$2.7 billion and A$2.9 billion by June 30th.
While acknowledging high jet fuel prices, Qantas anticipates cost improvements from recent price drops, potentially benefiting A$150 million in the latter half of 2023, albeit potential setbacks from foreign exchange rate fluctuations.
Outgoing CEO Alan Joyce expressed concerns about supply-demand mismatch in international flying, predicting airfares to remain above pre-pandemic levels through 2024. Under Joyce, Qantas has improved service standards and resolved customer issues, reinstating spare aircraft and crew initially reserved due to supply disruptions, with five aircraft returning to operation by 2H23. In an imminent leadership transition, CFO Vanessa Hudson will succeed Joyce in November, coinciding with the retirement of director Michael L’Estrange and the appointment of ex-American Airlines CEO Doug Parker.
Qantas’s bullish forecast and strategic measures suggest strong growth potential, leaving it well positioned in the aviation sector. As Qantas sits within the momentum component of the growth portfolio, as long as the share prices continues to outperform on a relative basis, the stock remains an active buy with the next rebalance date set for June 15th while the stock is new due to report earnings for the year ending June 30th 2023 in August.
