The Obvious Reason to Invest in Qantas (2024)

Qantas has been in the news this week for all the wrong reasons. Selling airfares on cancelled flights, whopping CEO bonuses despite no dividend payments, poor treatment of staff, customers being asked to forgo flight credits and CEO Joyce leaving two months before he was due.

So, no more perfect time to seehow the investment thesis stacks up.

Qantas is the closest airline we have to a national carrier, but it’s not fully or part-owned by the government, unlike many other international airlines. Therein lies the problem. How does it compete with, say, Singapore Airlines or Emirates without any formal government backing?

Even during the airline’s darkest days, I’ve always thought it would survive. It is the closest airline we have to a national carrier and the government would always find some way to support it.

Investing in Bonds

Survival is a key component when investing in bonds. If you think a company will survive, then you’ll be paid interest and get face value back at maturity. Some of my close associates, analysts, disagreed with me, believing the airline could fail. We saw what happened to Virgin during COVID-19.

Airlines are notoriously fickle, operating in a commodity-like market (some of you may disagree with me here), subject to fluctuating fuel prices, high maintenance and replacement costs and intense competition. An old credit rating boss felt no airline could be rated investment grade without government support.

I understand why the government has rejected Qatar’s request for additional routes but totally disagree with this type of support. It is a big negative for tourism and means flight costs are artificially inflated. In essence, we, the flying public, are helping protect an airline but the government has no formal input into its management. That’s great for Qantas and its shareholders, but not the rest of us.

An open capital system doesn’t work here. I would advocate for the government stepping up and investing in the company and getting at least one seat on the board.

Alan Joyce’s bonus and salary is a distraction, a relatively minor issue. He was clever enough to negotiate those terms. If you are looking for someone to blame, set your sights on the board, who agreed to the terms and supported Joyce’s choices.

There’s no question the brand is damaged and it will cost to rebuild.

So, after all that -- would you invest?

Qantas Shares

The Qantas share price has been volatile. The chart below shows share prices going back 20 years to 2003. Over that time, the shares peaked at $7.34 in December 2019 and settled at a low of $1.09 at the end of 2013. On Tuesday they closed at $5.64, close to past highs after encouraging annual results but influenced by other negative news.

In 2023, the company completed $1 billion of on-market share buy-backs and has committed up to an additional $500 million in the coming year, supporting the share price. To put the buyback into perspective, Qantas’ market cap as at 6 September is $9.88 billion, so roughly close to 10 per cent of the shares by value were repurchased last year.

Qantas has a sketchy dividend history. Its last one was back in 2019 and was 25 cents per share for the year. There were no dividends paid between April 2009 and August 2016. Qantas is more of a growth stock, but how much can profits grow considering:

• The federal government has protected Qantas from additional competition -- but will they maintain this stance? Would a change in government reverse the decision?
• Significant capex is expected to increase debt in the coming years and FY23’s average interest rate on fixed debt of less than 4 per cent is likely to increase, reducing profitability
• Qantas faces an ACCC investigation into selling fares on cancelled flights – that’s an unknown cost
• The cost of rebuilding the brand is also an unknown as is just how much of the damage is irreparable or sustained given limited domestic and international carriers
• Are staff happy, committed and take pride in the company? Could past labour issues resurface?
• Qantas will have to pay tax in coming years, also reducing profitability

FY23 was an exceptional year for Qantas. Demand continues at high levels as do airfares, which bode well for FY24. A new CEO should be a positive as Joyce himself saw the damage he was doing to the brand.

There is upside in the near term but plenty of downside risks with unknown timescales. The upside is pretty much solely reliant on share price growth as dividends seem unlikely. Market Index rate the shares as a ‘strong buy’ with 17 analysts rating the shares as a Buy and three rating it a Hold.

Qantas Bonds

Qantas bonds are far less risky than the shares particularly if you think the government will always find a way to support the company, ensuring its survival.

Assuming Qantas continues to operate, bond investors are assured of interest payments and the $100 face value of the bond at maturity. Below is a sample of four Qantas bonds that mature in three to seven years and their yields to maturity (YTM). This is the annual yield you would expect, which includes the current gain based on repayment of $100 face value at maturity. All four bonds are currently trading at a discount to face value. Interest is paid half yearly. The YTM calculation assumes interest is reinvested in the bonds although in reality, this option is not available.

Qantas is rated as investment grade, Baa2, stable, by Moody’s, implying very low chance of loss. Historically, the company was rated sub investment grade, which is where I would expect it to rate without any implied or implicit government support. Without reading the Moody’s credit rating report, I would assume they provide an uplift to the credit rating for implied support.

Summary

Qantas shares will go up and down and returns will be unpredictable. Yet Qantas bonds are much more reliable and assure investors of a positive return if they hold to maturity.

Direct government investment in Qantas would improve the outlook for bondholders and shareholders, adding stability, reducing volatility and provide implied additional equity or debt support if needed.

They say the sky is the limit when you invest in shares, but in Qantas’ case it feels like the upside is limited, which is why I think the bonds with their assured income and capital repayment are a better option.

Note: This article is for educational purposes only and none of the securities mentioned are recommendations.