Fleet Renewal And Project Sunrise Expected To Improve Operational Efficiency

Key Takeaways

• Fleet renewal and Project Sunrise are key strategies to drive profitability and future revenue growth in long-haul markets.
  
• Enhancements in operational efficiency and loyalty programs aim to boost earnings and net margins over time.
  
• Vulnerabilities from declining profits, revenue challenges, and regulatory risks could pressure Qantas's earnings and margins amid potential cost increases without productivity offsets.

Catalysts

Provides air transportation services in Australia and internationally.

• Continued fleet renewal is expected to drive profitability through improved fuel efficiency, reduced maintenance costs, and increased revenue from better utilization and yield premiums. This will likely have a positive impact on net margins and earnings growth.
  
• Project Sunrise is anticipated to deliver incremental EBIT of over $400 million once all aircraft are integrated into the network, signaling potential future revenue growth in the ultra long-haul market segments.
  
• An improving RASK (revenue per available seat kilometer) environment is expected as international market capacity stabilizes, supporting future revenue growth for Qantas International.
  
• The expansion and engagement of the Qantas Loyalty program, including growth in members and the launch of Classic Plus, are set to enhance earnings potential, contributing to an EBIT target of $800 million to $1 billion by 2030.
  
• Anticipated benefits from reducing on-time performance inefficiencies and enhanced operational reliability are planned to support significant cost savings through transformation initiatives, positively impacting net margins.

Qantas Airways Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Qantas Airways's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.7% today to 7.5% in 3 years time.
• Analysts expect earnings to reach A$1.9 billion (and earnings per share of A$1.26) by about February 2028, up from A$1.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$2.1 billion in earnings, and the most bearish expecting A$1.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.2x on those 2028 earnings, down from 11.1x today. This future PE is about the same as the current PE for the AU Airlines industry at 7.2x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.53%, as per the Simply Wall St company report.

Qantas Airways Future Earnings Per Share Growth

Risks

• The decline in statutory profit after tax by $493 million, driven in part by one-off impacts and legal provisions, highlights vulnerabilities that could affect future earnings.
  
• The moderation in unit revenue, including an 8.9% fall for the year amidst restored capacity, suggests potential revenue challenges in maintaining pricing power as market conditions normalize.
  
• The fall in freight yields in the first half, along with moderating fare environments, points to possible revenue pressure in the freight segment, particularly if such trends persist.
  
• Legal and regulatory challenges, like the ACCC settlement, introduce risk factors that could generate unexpected costs, impacting net margins.
  
• The additional financial impact from commitments like Same Job Same Pay, which lacks immediate productivity offsets, suggests potential near-term cost pressures that could affect net margins and overall earnings.

Valuation

• The analysts have a consensus price target of A$9.098 for Qantas Airways based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$10.9, and the most bearish reporting a price target of just A$6.1.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$25.1 billion, earnings will come to A$1.9 billion, and it would be trading on a PE ratio of 7.2x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of A$9.41, the analyst price target of A$9.1 is 3.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.