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Why Goldman Sachs thinks Qantas Airways Limited shares could climb to $6.97

Qantas Airways Limited (ASX: QAN) shares trade for $5.62 this afternoon, but according to the analysts at leading investment bank Goldman Sachs they have a lot of room to fly higher in the year ahead.

For the finanical year ending June 30, 2018 Qantas reported a record profit of $1.6 billion, yet its share price is still around 19% lower than its 52-week high of $6.92, which coincidentally is just below the 12-month price target of $6.97 per share from Goldmans.

The lower share price may be even more of a surprise to some investors when you consider that Qantas recently reported a strong start to FY 2019. In fact it reported that revenue for the quarter ending September 30 2018 was up 6.3% on the prior corresponding quarter to $4.41 billion, with the value of ‘forward bookings’ also up 8% on the prior year.

What’s holding the Qantas share price back then is probably the spike in oil prices over Autumn 2018 when oil futures rose around 20% on the back of rising global political tensions and sanctions on Iranian oil.

Fuel is a key cost for Qantas and as such when its cost rises, Qantas’s bottom line will be adversely affected. However, the group reported that 76% of its fuel costs are now hedged for FY 2019 and 39% for FY 2020.

Importantly, Qantas also flagged that RASK (revenue per available seat kilometre) increased 5.4% over the prior corresponding quarter 2018 in a result that “substantially offsetting higher fuel costs”.

RASK is a key measure of profitability for airlines as it represents operational capacity levels and financial performance in dividing operating income by available seat kilometres. Therefore the higher an airline’s RASK the stronger its competitive position, underlying demand, and profitability.

For comparison Air New Zealand Limited (ASX: AIZ) grew RASK 3.2% for the quarter, while Virgin Australia Holdings Ltd (ASX: VAH) grew revenues 9.7%.

Due to the positive operating environment Goldmans has a $6.97 price target on Qantas, which suggests more than 20% in upside from today’s valuation.

However, Goldmans also warns significant risks exist such as “rising competition, higher fuel prices, poor passenger volumes, and loss of cost benefits”.

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Motley Fool contributor Yulia Mosaleva has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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