Best and worst travel stocks of 2021, according to JP Morgan

JP Morgan tags its pick as best transport stock as ‘well positioned’, while its worst faces severe short-term challenges.

A Qantas aircraft at Sydney Airport. Picture: NCA NewsWire/Dylan Coker

Qantas and Sydney Airport have been named JP Morgan’s best and worst mid-year prospects in the transport sector, as the Covid-19 pandemic drags on.

The report by analyst Richard Jones said the airline industry was in the midst of its greatest challenge but Qantas was “well positioned” given the domestic recovery and the airline’s extensive cost-cutting.

In contrast, Sydney Airport’s reliance on international travel meant the company was unlikely to see a meaningful earnings rebound until borders fully reopened.

Despite the hiccup of the latest Victorian lockdown, Mr Jones said Qantas had a 70 per cent share of the domestic market, which was recovering strongly from the lows of 2020.

“Australia is only behind China and South Korea in terms of the domestic recovery globally,” observed Mr Jones.

“(Qantas) Loyalty continues to perform well with the company expecting second half earnings to be higher than the first half of the 2021 financial year.”

He highlighted recent financial data showing Qantas’s net debt peaked at $6.4 billion in February and was expected to be back within the range of $4.5 billion to $5.6 billion by mid-2022.

“Qantas is again free cashflow positive and revenue in advance is rebuilding. Qantas has $4 billion of liquidity with no financial covenants,” said Mr Jones.

The airline’s financial position had put it in better shape than its international rivals, which meant “behaviour was more likely to be rational and disciplined coming out the other side”, he noted.

Sydney Airport on the other hand, faced severe short-term challenges from Covid-19, with its aeronautical, retail and carparking businesses severely impacted by a 75 per cent decline in passenger numbers.

“In normal times, Sydney Airport owns the most productive retail space in Australia although it currently needs to provide substantial rent relief,” Mr Jones said.

“Its property business is proving to be more resilient.”

Passenger growth and the vaccination rollout were considered key factors in the performance of both Qantas and Sydney Airport going forward, with a delay in vaccine distribution and effectiveness considered a major threat to both stocks.

Qantas was also vulnerable to significant oil price fluctuations, and airline capacity wars while Sydney Airport was to some degree at the mercy of government regulation and material changes in consumer behaviour for air travel.

The opening of Western Sydney Airport in late 2026 also threatened to restrict passenger growth at Sydney Airport, said Mr Jones.

Over the next six months, Qantas shares were tipped to climb from $4.81 to $5.70, which would be the highest since the Covid-19 pandemic erupted in early 2020.

At the same time, Sydney Airport shares were expected to contract from $6.12 to $5.70, still above the $4.78 low of the pandemic in March 2020.