Qantas performance woes threaten financial recovery

Qantas’s recovery has been hit by poor on-time performance and high cancellation rates, Citi analysts say, predicting the airline will have to increase costs to save its brand.

Qantas’s performance woes are threatening the airline’s financial recovery, according to a new analyst report. Picture: Jeremy Piper/NCA NewsWire

Qantas’s financial recovery has been dealt a blow by poor on-time performance and high cancellation rates, analysts at Citi say – predicting the airline will have to increase costs to save its brand.

In a note to clients, the investment bank’s analyst Samuel Seow lowered his recommendation on the airline’s shares from neutral to sell, asking: “how much would it cost to improve performance?”

“While we are optimistic about the long term recovery in travel, we believe the environment is becoming more challenging economically due to fuel and staffing constraints,” Mr Seow wrote.

“We expect in the short term, higher fuel prices and overstaffing will put pressure on margins, decrease capacity and increase difficulty for management.”

In response, Citi revised its underlying profit forecast for Qantas in the 2023 financial year to $514m, down from $740m.

“In summary, Qantas charges a premium for tickets so we expect performance will be a key priority,” said Mr Seow.

“However, doing so economically appears to be difficult.”

Qantas boss Alan Joyce at Sydney Airport after a trip to Ireland. Picture: John Grainger

Mr Seow compared recent on time performance and cancellation rates for Qantas with other Australian and US carriers, finding the airline was falling well short.

In June, Qantas’s cancellation rate was 8 per cent, worse than its Australian and US peers at 6 per cent and 2 per cent respectively.

At the same time, Qantas had around 46 per cent of flights delayed, compared to an average of 38 per cent for other Australian carriers, and 22 per cent for US airlines.

“In the last few months, Qantas appears to have hired around 3 per cent more staff, and reduced capacity by 10 per cent,” Mr Seow wrote. “We expect this trend to continue and as a result we see higher costs and lower capacity. As an example US airlines are holding capacity at 80 to 90 per cent while staffing at approximately 95 to 110 per cent.”

Mr Seow also noted that reducing flights to boost load factors (the number of seats filled by paying passengers) could actually be undermining performance by impacting turnaround times.

He revised his previous share price target of $5.47 to $4.28, and moved to a sell rating from neutral.

His views were at odds with those of UBS and Bank of America analysts who maintained a “buy” rating for Qantas shares.

UBS analyst Andre Fromyhr suggested Qantas’s strategy of reducing capacity to lower fuel costs and boost yields, was right for the current economic environment.

“Combined with the greater contribution from loyalty, this strategy would be more stable for profit even if it opens up some minimal risk to market share,” Mr Fromyhr said.

Bank of America research analyst Nathan Gee said the two biggest threats to Qantas were fuel prices and recession, neither of which was as bad as Covid-19.

“Australia’s domestic duopoly allows it to cut supply to manage fuel and demand risks, while Jetstar can capture trading down in a recession,” Mr Gee said.

“And while domestic competition always lurks, we see no break in discipline with domestic capacity broadly in-line with pre-Covid levels to December 2022.”

Motley Fool chief investment officer Scott Phillips said high cancellation rates would benefit Qantas financially in the short term, but could damage the airline’s premium brand in the long run.

He said it helped that rival Virgin Australia had adopted much the same strategy and third airline Rex had limited capacity, leaving passengers with few other options.

“I think in the short term it’s probably good for their finances but if I was a long-term shareholder I’d be worried about what they’re doing to the Qantas brand,” Mr Phillips said.

Qantas, led by Alan Joyce, will deliver its 2022 financial year results on August 25, with an underlying loss in the vicinity of $1.8bn expected, about the same as the previous year.

In the first half of the financial year, the airline posted a $1.28bn underlying loss after a challenging end to the 2021 calendar year that saw widespread lockdowns followed by the Omicron outbreak.