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Why the Qantas share price is experiencing severe turbulence

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. 

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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.

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