Qantas Airways (QAN) News Update

Submitted by Jim Thesiger on 29 May, 2008 - 14:12

Qantas Airways (QAN) has a $4.30 share price target from Australian stock analyst Macquarie Research Equities.

Qantas Airways (QAN) Starts taking the necessary steps

Shows management’s flexibility:

Qantas’ announcement of a 5% cut in capacity and other cost saving measures shows management’s ability to take the steps necessary to mitigate the impact of higher fuel prices. Since raising our Singapore jet fuel assumption to US$150bbl last week, the spot price touched US$174bbl yesterday, largely driven by the ballooning refining margin. Each US$1bbl adds c.A$30m in costs to the airline.

We estimate A$400m in incremental benefit from these measures:

Qantas’ capacity cuts will be materially earnings enhancing because they shed marginal routes and involve older aircraft. Shedding the higher variable costs associated with these routes, and assuming Qantas loses 50% of the associated revenue (there will be some Jetstar substitution) sees c.A$400m in pre-tax earnings accretion. As written last week, with an average fleet age of 10 years, there is plenty of scope for further value enhancing capacity cuts.

Neutralises US$10bbl rise in jet fuel price:

We are not changing our forecasts at this stage, but estimate these measures are sufficient to offset us raising our jet fuel price assumption from US$150bbl to US$160bbl. This will also see Qantas’ capacity flat in FY09, versus the market’s expectation for above trend growth, which will be a welcome enhancement to the supply-demand balance. We expect some of Qantas’ competitors to follow suit.

Valuation A$4.30 (unchanged) using SOTP

Our valuation was last published on 22 May and includes an analysis of fleet value.

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