Qantas Enjoying Sky-High Fares, but Competition to Weigh on Future Profitability

We maintain our AUD 5.90 fair value estimate for shares in Qantas QAN following the release of interim fiscal 2023 results. Underlying pretax profit of AUD 1.4 billion—a record result—is a dramatic turnaround from the AUD 1.3 billion underlying pretax loss in the prior corresponding period, or pcp, which was marred by lockdowns and border restrictions. While air travel capacity remains constrained, demand is strong, leading to expensive tickets, fuller planes, and unprecedented profitability for Qantas.

We continue to expect healthy domestic capacity recovery leading to a strong fiscal 2023 at roughly fiscal 2019 levels of flying (about 94% of pre-COVID-19 levels during the first half). But we think the recovery in international travel will be more gradual. International (both Jetstar and Qantas) was about 60% of pre-COVID-19 capacity during the period. We forecast international capacity to recover to pre-COVID-19 levels by fiscal 2024, marginally ahead of company projections.

Despite favorable near-term conditions, we expect pricing competition to return as capacity bottlenecks, particularly labor shortages, ease for Qantas and its competitors. Competition in the key domestic business is set to heat up. Virgin Australia has risen from the ashes after falling into administration in 2020 and is eyeing a float in 2023, regional competitor Rex has expanded its domestic footprint into more lucrative routes since the onset of the pandemic, and new budget upstart Bonza has just received regulatory approval from the Civil Aviation Safety Authority in January 2023. 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.