The performance of Qantas Airways Limited (ASX: QAN) shares has been marked by significant volatility over the past year. However, it's essential to recognize that past performance is not a definitive indicator of future trends. Just because Qantas shares have experienced a decline doesn't imply that this trend will persist indefinitely, and conversely, a recent rebound doesn't guarantee sustained growth. In this assessment, we explore both the favorable and unfavorable aspects of investing in Qantas shares at the present moment.
Challenges Faced by Qantas
Qantas, as an ASX-listed consumer stock, confronts a multitude of challenges. These encompass escalating oil prices, legal actions brought forth by the ACCC, a High Court defeat related to the alleged illegal termination of employees, reputational damage, and a cloudy demand outlook.
While the outcome of the ACCC case remains uncertain, a potential unfavorable verdict could pose difficulties for Qantas. Furthermore, the company's well-publicized missteps may have a negative impact on its reputation and customer base.
The COVID-19 pandemic presented a particularly challenging period for ASX travel shares, especially airlines. Qantas implemented certain measures during this period, and some of these actions have since attracted scrutiny.
Broker UBS has pointed out that Qantas will incur an additional $80 million in expenses in FY24 to address sources of customer dissatisfaction. These measures may encompass offering more seats for points redemption, enhancing catering, improving call center support, and implementing more customer-friendly policies to handle service disruptions. UBS predicts that roughly half of these costs will be recurring, but Qantas can mitigate their impact by enhancing reliability.
Moreover, Qantas anticipates an increase in fuel expenses of $200 million in the first half of FY24 compared to initial guidance provided in August. Additionally, other costs may be $50 million higher due to a weaker Australian dollar. Qantas might also face substantial expenditures to renew its aging aircraft fleet in the upcoming years. These factors have contributed to Qantas shares declining by over 20% since July 2023.
Opportunities for Qantas Shares
During its annual general meeting (AGM), Qantas acknowledged its challenges but also made noteworthy comments about trading conditions. The company reported that "travel demand continues to be strong," and its balance sheet is in "excellent condition." Furthermore, Qantas highlighted that its fleet renewal is underway, and the introduction of new aircraft will aid in achieving sustainability targets and expanding network options.
Despite recent criticisms, the airline industry continues to witness robust demand. This suggests that Qantas' profitability may not be severely impacted, particularly if it can pass on rising costs to passengers through increased airfares.
In the long term, a company's performance is often assessed based on its profitability, and it is plausible that the market may have been overly pessimistic. UBS is optimistic about Qantas, projecting that the company could generate approximately $1.6 billion in net profit for FY24, with expected earnings per share (EPS) being similar, albeit slightly lower, for the 2024 financial year.
Presently, Qantas shares are trading at under six times UBS's estimated earnings for FY24. UBS regards Qantas as a "buy" with a price target of $8, suggesting a potential rise of just over 50% within the next 12 months if the broker's assessment proves accurate. While the Qantas share price appears undervalued, the extent of undervaluation may vary from UBS's perspective.
The decision to invest in Qantas shares should be weighed carefully, considering both the challenges and opportunities in the airline industry. While the company grapples with various issues and uncertainties, strong demand and ongoing fleet renewal initiatives provide a glimmer of hope. Potential investors should conduct thorough research and evaluate their risk tolerance before making investment decisions