Qantas flies into more turbulance as analysts cut valuations

Qantas shares have dived to their lowest level in a year as analysts cut their valuations and question the airline’s ability to fully recover from fuel costs and reputational damage.

Qantas shares have dived to their lowest level in 12 months as analysts question the airline’s ability to fully recover a jump in fuel expenses amid growing headwinds including reputational damage.

CLSA broke ranks among big brokers, becoming the first to slap a “reduce” rating on Qantas. Others kept their “neutral” or “buy” ratings but several slashed their share price targets for the next 12 months.

Citi cut its target price 14 per cent to $6, while Goldman Sachs trimmed its target 6 per cent to $8.25.

Qantas sharesclosed down 1.3 per cent at $5.16 on Tuesdayafter falling as much as 3.3 per cent to $5.06 per cent in early trading. Shares are down 14 per cent so far this year after falling as much as 27 per cent from a post-pandemic high of $6.94 in April.

Citi analyst Samuel Seow said Qantas’s earnings guidance for the current financial year “may already be under question” as it battles legal, regulatory, and political “overhangs”.

“In another environment, regulation fuel headwinds would be easy to look through,” Mr Seow said.

Newly appointed Qantas CEO Vanessa Hudson. Picture: Britta Campion / The Australian

“However, the willing absorption of costs perhaps might be a potential sign that recent public issues are/can leak into earnings. Looking forward, the company (at least on paper) appears to be balancing the recovery of higher costs with the importance of affordable travel in this environment and appearing to show what may be the first sign that recent negativity/politics can impact earnings,” Citi said.

On Monday Qantas said it would spend at least an extra $80m on consumer initiatives and that it expects an additional $250m in fuel-related costs for the first half of fiscal 2024.

Mr Seow said the airline’s fiscal 2023 target for domestic revenue growth of 18 per cent before interest and tax will be “difficult”, given limited evidence globally that corporate domestic capacity can grow; and a starting point that implied the first half of 2024 needs to “do the heavy lifting.”

“Given the timing of the fuel impacts/under recovery, we estimate the circa 18 per cent target becomes incrementally more challenging,” he added.

Citi’s valuation fell more than its revisions to “try and incorporate higher risk premia”.

Legal, regulatory, and political overhangs “appear to be growing and harder to fundamentally price,” Mr Seow warned.

The caution came as investors count the cost of a public relations nightmare since former CEO Alan Joyce announced his resignation in June. His departure was subsequently brought forward by two months amid allegations the airline continued to sell tickets for flights after they had been cancelled.

Chairman Richard Goyder has come under fire from the pilots union, which has called for his resignation as the pilots have lost all confidence in him and his board of directors.

Qantas senior executives face a grilling on Wednesday at a Senate inquiry investigating why the government blocked Qatar Airways from more flights to Australia and any role that Qantas may have played in that decision through its intensive lobbying in Canberra.