Flight Centre and Qantas shares hit more turbulence

QANTAS and Flight Centre shares have taken a hit as analysts forecast increased turbulence for the travel stocks.

QANTAS and Flight Centre shares have taken a hit as analysts forecast increased turbulence for the travel stocks.

Flight Centre shares slipped a further 5 per cent or $1.67 to $31.88 on Tuesday, making it the worst performer on the ASX 200 for the second day in a row. The stock plunged 9 per cent on Monday on the back of a profit warning.

Qantas also ranked among the worst performers on Tuesday, sliding 3.13 per cent or 10¢ to $3.10 as broker Morgan Stanley slashed its forecasts for the airline’s profits this year and next due to falling international airfares.

Brisbane-based Flight Centre revealed on Monday that it would miss its full-year profit forecast, blaming factors including the Australian federal election and the Zika virus.

Macquarie brokers told investors to steer clear of the stock. “While Flight Centre’s balance sheet appears robust with net cash of $400 million, given a high fixed cost base, operational leverage is a key concern,” Macquarie said.

It also said Flight Centre’s ongoing transition online would impact on margins in coming years.

“While some may suggest Flight Centre offers value at current levels, we do not agree,” Macquarie said, cutting its price target on the stock by 19 per cent to $28.26 a share.

Deutsche Bank slashed its price target for Flight Centre by 25 per cent to $36 a share and downgraded the stock from “buy” to “hold”.

“Falling airfares used to be a good thing for Flight Centre given lower prices had stimulated sufficient volume uplift historically to more than offset the deflationary impact,” Deutsche said.

“The worry now is that the competition between airlines and capacity increases driving recent falls in airfares mean Flight Centre’s total transaction value is split across more carriers.

“As such, it is not delivering sufficient growth to the incumbent suppliers that is required to earn the super-overrides which have underpinned margins in the past.”

Analysts at Morgan Stanley predict falling international airfares will hurt the Qantas result.

Morgan analyst Nick Markiewicz expects the impact of weaker international airfares to slice 3 per cent from Qantas’s first-half results for 2017, shaving about $230 million from the airline’s bottom line.

Morgan expects Qantas to post a full-year profit before tax of $1.5 billion this financial year and $1.46 billion next year, down 6 per cent and 19 per cent respectively on its previous estimates.

IG analyst Evan Lucas said the international business had been tough for a while and a loss-maker for Qantas until the most recent two half-year results.

“What it does highlight is how brilliant a masterstroke it was from (Qantas chief Alan) Joyce to form the joint venture with Emirates (in 2013). Going through the Middle East rather than Asia, it speeds up the process of getting passengers into Europe and they don’t need to go through Heathrow,” Mr Lucas said.

The real battle for Qantas was in its domestic operations, he said, where the airline derived most of its revenue and was again being challenged by rival Virgin Australia in the pursuit of higher-paying travellers.

“You’ve now got a Virgin that’s trying to beef up its premium brand to match Qantas ... so far both airlines have benefited from a capacity point of view but Virgin is aiming to stand out by simplifying its loyalty points program.”