Fleet Renewal And Dual Brand Strategy Will Strengthen Future Market Position

Key Takeaways

• Fleet renewal and dual brand strategy aim to enhance operational efficiencies and capture demand, supporting future growth in margins and earnings.
  
• Investments in customer experience and loyalty programs focus on boosting brand loyalty and sustaining high-margin revenue growth.
  
• Fleet renewal, legislative costs, currency fluctuations, delivery delays, and competitive pressures challenge Qantas's margins and growth unless proactive strategies mitigate impacts.

Catalysts

Provides air transportation services in Australia and internationally.

• Fleet renewal is expected to accelerate, with 18 new aircraft this year and 21 next year, unlocking EBIT benefits and driving future growth through operational efficiencies and increased capacity. This will likely have a positive impact on net margins and earnings as new aircraft improve cost structures.
  
• Increased investment in customer experience and satisfaction, such as improvements in Net Promoter Scores and investments in travel experience, are expected to drive future revenue growth by enhancing brand loyalty and customer retention.
  
• The dual brand strategy with Qantas and Jetstar is well positioned to capture strong travel demand across both premium and low-fare markets, expected to boost revenue and maintain high load factors, which is critical for sustaining high operating margins.
  
• The Qantas Loyalty program's expansion and investment in new products like Classic Plus are likely to increase member engagement and points earning rates, supporting revenue growth from high-margin loyalty partnerships and offerings.
  
• Strong operating cash flow and the reinstatement of a base dividend indicate robust financial health, with plans for disciplined capital allocation towards fleet renewal and shareholder returns, positioning the company for sustainable earnings growth and value creation.

Qantas Airways Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Qantas Airways's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.7% today to 7.6% in 3 years time.
• Analysts expect earnings to reach A$2.1 billion (and earnings per share of A$1.4) by about September 2028, up from A$1.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.6x on those 2028 earnings, down from 10.7x today. This future PE is greater than the current PE for the AU Airlines industry at 8.7x.
• Analysts expect the number of shares outstanding to decline by 2.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.62%, as per the Simply Wall St company report.

Qantas Airways Future Earnings Per Share Growth

Risks

• Ongoing fleet renewal introduces significant entry into service costs, potentially impacting net margins until the efficiencies and benefits are fully realized.
  
• The Same Job Same Pay legislation is expected to increase costs for the group, which could affect net margins if not offset by transformation initiatives.
  
• Currency fluctuations, particularly the decline in the Australian dollar against the U.S. dollar, could increase fuel costs, impacting net margins if hedging strategies are insufficient.
  
• Minor delays in aircraft delivery from suppliers like Airbus may affect capacity planning and the realization of anticipated transformation benefits, potentially impacting revenue growth and earnings.
  
• Increasing international competition, particularly in the European markets, could affect pricing power and pressure international earnings if the Qantas group's differentiated strategy does not successfully mitigate these challenges.

Valuation

• The analysts have a consensus price target of A$12.7 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$14.45, and the most bearish reporting a price target of just A$9.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$28.1 billion, earnings will come to A$2.1 billion, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 8.6%.
• Given the current share price of A$11.61, the analyst price target of A$12.7 is 8.6% higher. 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.