Qantas Airways Limited (ASX: QAN) has revealed a $100 million border hit to its earnings in Q1 FY21, but Qantas shares are up 2.5%.
Qantas AGM update
The airline said that the unexpected closure of several domestic borders in July meant the Qantas recovery was delayed.
Qantas had been expecting its domestic segment to be operating at around 60% of pre-COVID levels by now. Instead, the continued border closures mean capacity is now below 30%.
This delay has resulted in a $100 million negative impact on earnings in the first quarter of FY21 and it’s going to hurt the second quarter as well.
Qantas CEO Alan Joyce said this is timing issue, he “knows” the upswing will happen, just later than planned.
The airline said that it has the liquidity to manage this. Its cashflow from continuing operations is positive – before one-off expenses like redundancies – so Qantas could keep flying at this level for a very long time if the airline had to. But Qantas doesn’t expect this to be the case.
He pointed to plenty of positive signs on borders. He’s expecting the Queensland border to open to NSW in the coming weeks. Domestic capacity is expected to reach up to 50% by Christmas.
Qantas sold 20,000 seats across Qantas and Jetstar in 36 hours after South Australian opened to NSW.
The company is looking to capitalise on the domestic boom in tourism as more borders open up. It’s expecting to increase its domestic market share organically from 60% to around 70% as its main competitor (Virgin) changes its strategy.
Qantas Loyalty and Qantas Freight continue to do well. Loyalty’s profit slipped less than 10% in FY20. Since the start of the financial year, Loyalty added new partners like BP fuel and Afterpay Ltd (ASX: APT).
Qantas Freight has benefited from a shift to e-commerce, with levels closer to the Christmas rush in recent months. Australia Post thinks the higher freight volumes will be significantly higher going forward, which is good considering it has an exclusive, 7-year deal with Austrlaian post.
Summary
Things are certainly difficult for Qantas. But the situation is improving. Qantas may also benefit from borders slowly opening. New Zealanders can now come here, with Japan and South Korea potentially next on the list.
Qantas has identified $15 billion in cost savings over the next three years, mostly through reduced flying activity. It’s also targeting $1 billion in ongoing cost improvements from FY23.
I’m not surprised to see the Qantas share price go up 2.5% in reaction to this. The fact it’s underlying cashflow is positive is good news. Qantas may rise over the next few months, but I think it’s a shorter term opportunity until an effective vaccine is available.
It’s not the share I’d buy for my portfolio, instead I’d go for other ASX growth shares that are seeing accelerating growth due to these conditions, such as Pushpay Holdings Ltd (ASX: PPH).
