Qantas told to clarify its plans for Asia

QANTAS is under pressure to offer more clarity about its expansion in Asia as it faces the double-whammy of high fuel prices and economic upheaval in Europe weakening demand for travel in other markets.

By InvestSMART · 16 Jan 2012

By InvestSMART ·
16 Jan 2012

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The national carrier has been leaning towards Malaysia as a base for a premium airline joint venture with Malaysia Airlines, but will not offer investors details about its plans for at least a month.

Macquarie Equities said uncertainties over Qantas' plans to set up a hub for a new premium carrier in south-east Asia "only serve to complicate the investment thesis".

The broker's preference for investing in airline stocks has reverted to Virgin Australia because it had a "better articulated strategy than Qantas" and was likely to benefit from a restructure aimed at snaring a bigger slice of the corporate travel market.

The uncertainty has led Macquarie Equities to downgrade Qantas from "outperform" to "neutral", and lower its share price target from $1.96 to $1.57. Goldman Sachs lowered Qantas from "buy" to "hold" on Friday.

Shares in Qantas have been trading in a narrow band between an all-time low of $1.375 struck in October at the height of a damaging industrial dispute and $1.705 for the past five months. The stock closed down 1.5? at $1.49 on Friday, while Virgin Australia rose 0.5? to 31.5?.

Last month, the International Air Transport Association warned that weakness in air freight markets was being replicated in passenger traffic. The association reduced its forecasts for combined airline profits this year from $US4.9 billion ($4.75 billion) to $US3.5 billion.

In a worst-case scenario in which Europe enters a full-blown banking and economic crisis, IATA has said airlines could sustain a combined loss of more than $US8 billion.

Last week, AirAsia X, an offshoot of the region's largest budget airline, AirAsia, blamed high jet fuel prices and weakening demand for air travel for its decision to abandon flights to Europe and India.

Macquarie Equities analysts said Australian airlines were "somewhat protected" from a fall in demand for premium traffic worldwide due to the strength of the resources and oil and gas industries. The domestic corporate travel market had been "holding up well", they said.

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Frequently Asked Questions about this Article…

Why is Qantas under pressure and what should investors know about Qantas' outlook?

Qantas is facing pressure because higher jet fuel prices and economic upheaval in Europe are weakening demand for travel in some markets. That combination, together with uncertainty around the airline's expansion plans in Asia, has prompted broker downgrades and made Qantas' near-term outlook less predictable for investors.

What are Qantas' plans for expansion in Asia and how clear are those plans for investors?

Qantas has been leaning toward using Malaysia as the base for a premium airline joint venture with Malaysia Airlines. However, the company has told investors it will not provide full details about those Asia plans for at least a month, leaving some strategic uncertainty.

How have brokers reacted to Qantas' strategy — what are the recent ratings and price targets?

Macquarie Equities downgraded Qantas from 'outperform' to 'neutral' and lowered its price target from $1.96 to $1.57. Goldman Sachs also lowered its rating on Qantas from 'buy' to 'hold'. These changes reflect concerns about the clarity of Qantas' strategy and broader industry headwinds.

What has Qantas' share price been doing recently and what trading range should investors be aware of?

Qantas shares have traded in a fairly narrow band recently, between an all-time low of $1.375 (recorded in October during an industrial dispute) and about $1.705 over the past five months. The stock closed down 1.5% at $1.49 on the most recent Friday reported in the article.

Why are some analysts preferring Virgin Australia over Qantas for airline exposure?

Macquarie Equities said it prefers Virgin Australia because it believes Virgin has a better-articulated strategy and is more likely to benefit from a restructure aimed at capturing a bigger share of the corporate travel market. That clearer strategy made Virgin a more attractive investment pick at the time.

What does the IATA profit forecast change mean for airline investors?

The International Air Transport Association (IATA) reduced its combined airline profit forecast for the year from US$4.9 billion to US$3.5 billion, signalling weaker demand. IATA also warned that a severe European banking and economic crisis could push airlines into a combined loss of more than US$8 billion — a reminder of macro risks that can hit airline earnings.

How have rising jet fuel prices and weakening demand affected airlines in Asia?

Rising jet fuel prices and weakening passenger demand have already led regional carriers to cut routes. For example, AirAsia X cited high jet fuel costs and weakening demand when it abandoned flights to Europe and India, illustrating how these pressures can force airlines to pull back capacity.

Are Australian airlines like Qantas protected from a global slowdown in premium travel?

According to Macquarie Equities, Australian airlines are somewhat protected from a global fall in premium traffic because of the strength of the country's resources and oil & gas industries. The domestic corporate travel market has been holding up relatively well, which can cushion airlines from weaker international premium demand.