The Qantas Airways Limited (ASX: QAN) share price hit a 10-year high today as it responds to multiple broker valuation upgrades and a credit rating upgrade from Moody's investor services.
According to the Financial Times analysts have a median share price target of $5.20 on the business with a high estimate of $7.09. Analysts are also reportedly expecting total dividends of 15 cents per share over FY 2017, which would be more than double the 7 cents per share posted in FY 2016.
Moody's investor services also noted in its credit upgrade that Qantas is benefiting from falling oil prices as jet fuel is one of its main overheads. Moody's stating: "Qantas' fuel-hedging strategy reduces cash-flow volatility and provides the business time to adjust to fuel price spikes. The use of options to hedge enables Qantas to participate in lower fuel prices while protecting the business from unexpected fuel price spikes".
Notably, even though fuel prices have been low for two years and are generally expected to stay low, airlines do not bring forward much of their future fuel requirements as there's no futures market for airline tickets as such.
Unfortunately for the airlines most business and leisure travellers book tickets less than six months before travel dates, which makes it hard for the airlines to buy long-dated oil futures, as getting it wrong (by paying too much) could allow rivals to offer far cheaper airfares to passengers at a time when short-term demand is surging.
The kicker is that ticket prices also rise and fall with demand that has picked up as the airlines offer more competitive pricing, while fuel costs have plummeted. This has hurt the travel agents like Flight Centre Travel Group Ltd (ASX: FLT), but put the likes of Qantas and Air New Zealand (ASX: AIZ) in a profit sweet spot.
Qantas shares could go higher over the medium term as I expect oil prices are in a prolonged bear market that spells bad news for Flight Centre shareholders on the other side of the coin. However, over the long term the airline business remains competitive and despite some of its attractive features I'm not a buyer of Qantas shares.
