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Morningstar | Rising Fuel Bill to Weigh on Qantas Near-Term Earnings

Despite having fallen by approximately 20% in the past three months, shares in no-moat-rated Qantas are still trading slightly above our unchanged AUD 5.00 per share fair value estimate. Airlines are highly cyclical and after enjoying three years of low fuel prices, healthy consumer confidence, and lacklustre competition, we believe Qantas has passed peak cycle conditions. We have trimmed our fiscal 2019 and 2020 EPS estimates by around 7% on average to AUD 0.60 and 0.69 per share, respectively, to capture higher near-term fuel costs and flat first-half capacity compared with our prior expectation of around 1% growth.

Notwithstanding, we continue to expect the Brent Crude oil price to fall towards our long-term forecast of USD 60 per barrel by fiscal 2022, down from around USD 73 per barrel currently. Accordingly, our long-term EPS projections are broadly unchanged, and we continue to project around 3% annual growth on average during the next five years. Management expects the fiscal 2019 fuel bill to reach AUD 4.1 billion, a 27% increase on the prior year, although only 4% higher than prior guidance. This assumes a jet fuel forward market price of AUD 130 per barrel for the remainder of the year.

During the first quarter of fiscal 2019, Qantas group revenue was AUD 4.4 billion, a 6% increase on the previous corresponding period, and at the current pace, the company is tracking in line with our full-year expectations. The main driver of this strong revenue growth is higher revenue per available seat kilometre, or RASK, which rose by 5% on the pcp, while capacity was relatively flat. This stronger revenue should help offset higher nonfuel costs including commission agents to travel agents, and the weaker Australian dollar. However, due to the commoditised nature of air travel, and lack of pricing power, the company is unlikely to pass through the higher fuel bill in its entirety especially on the highly competitive international routes. Consequently, we expect the firm’s underlying net profit to fall by around 10% during fiscal 2019 to just under AUD 1 billion.

The company has already bought back over 50% of the current share buyback of up to AUD 332 million, and we expect this to complete by fiscal 2019 year-end. While the company has been buying back stock at slightly above our fair value estimate, the impact on valuation is negligible.