ADVERTISEMENT

Qantas Turnaround Plan Likely to See Faster Return to Profit

Qantas Turnaround Plan Likely to See Quicker Return to Profit

Qantas Airways Ltd.’s plan to raise capital, cut staff and reset its cost base is likely to enable the airline to return to profitability more quickly, helped by its dominance of Australia’s domestic market, according to analysts.

The airline on Thursday said it will raise as much as A$1.9 billion ($1.3 billion) and slash 20% of its workforce, and warned that some of its largest aircraft will remain idle for at least three years as it seeks to deal with the fallout from the coronavirus pandemic. Shares fell as much as 6.9% in Sydney trading, after completing its institutional placement at a 13% discount to the Wednesday close.

Here’s what analysts are saying:

Morgan Stanley

  • It’s an appropriate time for Qantas to reassess its cost base and there is scope for further upside if savings are retained.
  • Even with the share dilution from capital raising, expect a faster return to “normal profitability”.
  • Capital raising provides liquidity to structurally reduce cost base sooner rather than later.
  • Qantas targets A$1 billion sustainable cost reduction; if successful, it would be a strong return on expected A$1 billion cost to fund program.
  • Still expects loss in FY21 as incremental cost savings are more than offset by reduced capacity; FY22 profit forecast raised about A$500 million on cost out plans, EPS boosted 30% even with share issue dilution with upside to “normal” demand and capacity.
  • Maintains overweight; PT lifted to A$5.30 from A$5.20

Jefferies

  • Raising allows Qantas to accelerate cost cut plans while schedules remain light and positions it well for the other side of Covid-19.
  • Signs of recovery in loyalty unit and expectations for an improved domestic market by FY22 offer scope for strong profit without international operations.
  • Targeted A$1 billion/year cost savings largely from head office, supplier renegotiation and other benefits; Jefferies analysis suggests FY23 CASK ex-fuel may be 4.6% lower vs FY19.
  • “With Qantas’s strong position in the domestic market, and the return to growth for Loyalty we believe the earnings recovery for ~85% of Ebit is encouraging.”
  • Maintains buy; PT cut to A$5.31 from A$6.20 on post-raising valuation

Goldman Sachs

  • Qantas restructure plan confirms it’ll become smaller in the near-term, in line with other regional airlines.
  • While Qantas is targeting A$15 billion in cost savings over three years, about A$12.6 billion of this is a result of forced cut in activity.
  • Qantas cost cuts may not yield immediate margin gains given a lot of the staff to be cut have already been stood down; given plan to cut 20% of workforce, expect airline is preparing to be about 20% smaller during the restructuring period.
  • Maintains neutral; PT kept at A$3.03

Citi

  • Expect ramp-up in earnings and capacity from FY21 as the domestic market reopens and cost benefits are realized, although there is uncertainty in the longer term outlook: EPS forecasts slashed in FY21 and FY22 amid dilution from capital raising.
  • “We expect the path to recovery will be volatile and could lead to unexpected financial outcomes.”
  • Longer term structural changes in demand likely to see capacity levels holding around 30% below the FY19 level.
  • Cost restructure to help limit cash burn, underpin earnings; Australian domestic market recovery puts Qantas in strong position.
  • Cut to neutral from buy and considered “high risk” on uncertain earnings outlook; PT increased to A$4.60 from AS$3.70

UBS

  • Capital raising likely to remove an overhang for investors that were concerned about gearing outlook; Cost out targets “not onerous”
  • Plan to cut costs, lower gearing likely to help Qantas retain advantage over second carrier in the domestic market
  • Decision to cut 20% of full time employees gives guidance on long-term demand expectations
  • Demand outlook is difficult to forecast but the likelihood of a second airline and a “rational duopoly structure” is a positive for Qantas
  • NOTE: Earlier: Cyrus Pulls Virgin Australia Bid Leaving Bain Sole Suitor
  • Maintain buy; PT cut to A$4.60 from street-high A$5.50

©2020 Bloomberg L.P.