Qantas Earnings: As Good as It Gets but Earnings Not Expected To Fall Precipitously

We lift our Qantas QAN fair value estimate by 3% to AUD 6.10 per share on the time value of money. Fiscal 2023 was a record year for Qantas, with an underlying pretax profit of AUD 2.5 billion in line with our forecast and guidance. This is a dramatic turnaround from underlying losses of AUD 3.6 billion in the prior two years which were ravaged by COVID-19 restrictions on flying. Air travel demand has returned strongly, while capacity is still constrained by the availability of aircraft, labour, and parts. With full planes and expensive tickets, Qantas is enjoying tremendous profitability.

But we think this is about as good as it gets for Qantas, with pretax earnings softening by around 4% by fiscal 2025. We expect pricing competition to return as capacity bottlenecks ease for Qantas and its competitors. Airlines globally lack economic moats due to a long history of value destruction, a business model with high fixed costs not conducive to rational pricing, a lack of barriers to entry, and low switching costs. We expect these conditions, which plagued the airline industry before the pandemic, to return.

Rather than a dividend, Qantas announced another AUD 500 million buyback—in addition to AUD 1 billion bought back during fiscal 2023. As Qantas shares are trading only marginally above our fair value estimate, the buyback is immaterial to our valuation. Accumulating losses during the pandemic, Qantas won’t generate franking credits until it starts paying tax, and we expect dividend resumption in fiscal 2025 at about 30% of underlying EPS.