Morgan Stanley slashes Qantas profit forecast

Morgan Stanley expects profit to be 19pc lower in 2017 than previously forecast, as fare prices fall.

Morgan Stanley analyst Nick Markiewicz said deteriorating international yields would raise earnings risks at the Flying Kangaroo. Photographer: Liam Kidston.

Morgan Stanley has slashed its forecasts for Qantas’s 2016 profit result by 6 per cent and its 2017 result by 19 per cent on the back of falling prices for international airfares.

Pointing to a spate of recent carrier downgrades on the back of reduced capacity, Morgan Stanley analyst Nick Markiewicz said deteriorating international yields would raise earnings risks at the Flying Kangaroo over the next 12 months.

“We did not expect this previously,” Mr Markiewicz said in a note to clients this morning.

As Qantas does not report international yield on a quarterly basis, the Morgan Stanley analysts looked to international peers as a proxy and found Air New Zealand and Singapore Airline over the first quarter of this year took a hit to their international yields which fell five per cent and 7 per cent respectively.

“Negative yield growth does not appear to have found a floor, pointing to tough international conditions ahead,” Mr Markiewicz said.

“For a Qantas specific read-through, we have done channel checks with Australian travel agents who have also pointed to strong discounting, particularly to the US. As a result, we now expect to see third-quarter 2016 negative yield momentum spill into the fourth quarter of 2016 and first half of 2017.”

The downgrades come after Qantas and Virgin Australia were recently forced to revise plans to increase seat capacity in April, May and June because of weak customer demand.

Both Virgin and Qantas have blamed the capacity cuts on the election uncertainty, weak consumer sentiment and the continued collapse of the resources sector.

Those falls in capacity have also weighed on travel agents like Flight Centre, which yesterday issued a shock profit warning as a result of airfare declines.

Morgan Stanley said it “conservatively” expects international yields at Qantas to fall 3 per cent over the next 12 months, which would equate to a $230 million hit to its bottom line.

Those falls in international yield will hurt Qantas’s earnings, which could fall by as much as 15 per cent according to Morgan Stanley, and smash its profit outlook.

According to Morgan Stanley, Qantas is now expected to report a full-year profit before tax of $1.5bn (down 6 per cent on previous forecasts) and a full-year profit for the 2017 financial year of $1.46bn (down 19 per cent on previous forecasts).

The investment bank has also downgraded its target price for Qantas from $5.15 to $4.30.

But despite the downgrades, Morgan Stanley cited five reasons why this would not be the start of a 2011-style downgrade cycle for Qantas.

These include: aggressive domestic capacity management; Virgin Australia’s limited ability to compete; solid international demand conditions; ongoing fuel benefits; and a lower Aussie dollar.

“To put our earnings downgrade into context, we still expect Qantas to generate more than $1.4bn of profit before tax over the next three years, which would be in line with prior record year,” Mr Markiewicz said.