Why the Qantas share price is experiencing severe turbulence

The Qantas share price has suffered extreme turbulence resulting from the pandemic. And the difficult operating conditions are far from over.

| More on:
outline of a Qantas plane against backdrop of share price chart

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Qantas Airways Limited (ASX: QAN) share price has fallen nearly 35% since 10 June. With no end in sight to the coronavirus pandemic, it appears turbulence has well and truly set in. Here we look at what is continuing to drive the Qantas share price lower.

Flights severely impacted

Yesterday, as reported by News.com.au, the International Air Transport Association (IATA) predicted that international travel will not return to pre-COVID-19 levels until 2024. This is one year later than originally forecast by IATA and is obviously bad news for Qantas.

Additionally, in Qantas' 2019 Annual Report, the company reported that its international segment contributed $285 million to its underlying earnings before interest and tax (EBIT). Underlying EBIT from all segments was $1.487 billion. As a result, the significant reduction in international travel is material to the financial results of Qantas. 

Similarly, its domestic segment contributed $740 million to EBIT. Due to continuing restrictions on travel within Australia, the company's domestic segment has also been significantly impacted by the pandemic.

Qantas loyalty

The Qantas loyalty program is one segment that delivered positive EBIT growth in its 2019 Annual Report. As a result, $374 million EBIT was reported in FY 2019 compared to $345 million in FY 2018. This is represented by an 8.4% increase.

In addition, Afterpay Ltd (ASX: APT) recently announced a partnership with Qantas. This involves giving boosted Qantas Frequent Flyer points to customers when they use the buy now, pay later platform.

ACCC announcement

On 30 July 2020, in recognition of the difficult period being experienced by airlines, the ACCC proposed to continue to allow airlines to cooperate on regional routes

Deputy Chair of the ACCC, Mick Keogh, said "The ACCC recognises that airlines are still facing significant challenges, including exceptionally low demand, due to the ongoing impacts of the COVID-19 pandemic".

The authorisation will extend until 30 June 2021. 

Share purchase plan

A share purchase plan (SPP) was announced to the market on 2 July 2020. The announcement followed the completion of a $1.36 billion institutional placement. Qantas is hoping to raise an additional $500 million before 5 August 2020 which is an extension to the original estimated closing date of 22 July 2020. 

Currently, at time of writing, the Qantas share price is trading at $3.23 which is 11.5% less than the $3.65 share purchase plan offer price. As a result, investors could be better off buying in the open market rather than participating in the plan, assuming the price is still trading at a discount to the SPP price next month. 

The purpose of the SPP is to support Qantas' recovery plan, strengthen its balance sheet, improve financial flexibility, and position it to capitalise on opportunities in line with its strategy. 

Foolish takeaway

The continuing effects of the pandemic point to ongoing turbulence for the Qantas share price over the next year or two. Personally, I would avoid buying shares in Qantas in the short term as investing now appears to be a purely speculative play given all the uncertainties. I also feel the company's capital raise only serves to reinforce the fact that Qantas is a company bleeding cash. 

Motley Fool contributor Matthew Donald has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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.

More on Share Market News

A man has a surprised and relieved expression on his face. as he raises his hands up to his face in response to the high fluctuations in the Galileo share price today
Broker Notes

These ASX shares could rise 20% to 50%

Analysts are tipping these shares to rise strongly over the next 12 months.

Read more »

A female ASX investor looks through a magnifying glass that enlarges her eye and holds her hand to her face with her mouth open as if looking at something of great interest or surprise.
Broker Notes

Top brokers name 3 ASX shares to buy next week

Brokers gave buy ratings to these ASX shares last week. Why are they bullish?

Read more »

A view of competitors in a running event, some wearing number bibs, line up together on a starting line looking ahead as if to start a race.
Technology Shares

Here's how the ASX 200 market sectors stacked up last week

ASX technology shares led the market with a 2.48% increase last week.

Read more »

A father helps his son look through binoculars during a family holiday or day out in the city.
Opinions

Up 190% in a year, why I think Life360 shares can keep soaring higher

This tech stock has plenty of potential.

Read more »

Doctor doing a telemedicine using laptop at a medical clinic
Healthcare Shares

3 small-cap ASX healthcare shares 'with strong prospects'

Fund manager IML discusses why these 3 ASX healthcare shares are likely to rise in value.

Read more »

Magnifying glass on a rising interest rate graph.
Share Market News

Will the RBA finally cut interest rates next week?

Let's see what economists are saying about the central bank's meeting.

Read more »

A couple sits on a sofa, each clutching their heads in horror and disbelief, while looking at a laptop screen.
Share Gainers

Here are the top 10 ASX 200 shares today

Investors endured a rough Friday to close the trading week today.

Read more »

a man wearing old fashioned aviator cap and goggles emerges from the top of a cannon pointed towards the sky. He is holding a phone and taking a selfie.
Broker Notes

7 ASX All Ords shares elevated to 'strong buy' status in October

The brokers turned bullish on these ASX companies last month.

Read more »