Should you consider buying Qantas (ASX:QAN) shares?

With all the trouble the Australian aviation industry is facing this year as a result of COVID-19, namely the debt crisis, should investors consider buying Qantas shares?

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The Qantas Airways Limited (ASX: QAN) share price has plummeted by around 40% year to date. On top of this, the national airline has recently announced it is terminating its 30-year sponsorship of Rugby Australia due to the deteriorating market conditions.

With all the trouble the Australian aviation industry is facing this year, namely the debt crisis, outbound travel restrictions and labor disputes, should investors consider buying Qantas shares?

Will COVID-19 permanently impact Qantas?

In Qantas' recent FY20 Chairman's report, Chairman Richard Goyder AO commented that "Aviation is all about connecting people and place, which is exactly what the public health response to COVID-19 is designed to avoid."

There is no doubt that the COVID-19 pandemic is hitting the aviation industry hard, and the current crisis is worse than the problems Qantas faced in 2019 (namely, cost of fuel and a low Australian dollar). With the restrictions on international and domestic travel, the airlines are grounded, and the significant 22% drop in passenger revenue since June 2019 has hit Qantas' balance sheet hard.

Can the business revive itself?

One of the most critical business indicators in the aviation industry is the cost of available seat kilometres (CASK). This is used to measure the unit cost expressed in cash value to operate each seat for every kilometre.

CASK has increased 11% to 8.87 since FY19 as a result of rising operational costs and less available seats due to pandemic restrictions. Qantas has a difficult time in controlling its CASK given the high revenue volatility from a range of external factors, including fluctuating exchange rate movements and higher fuel cost.

However, the Morrison Government announced a $165 million bailout plan earlier in April to keep the airline afloat. Furthermore, Qantas conducted a successful $1.9 billion capital raising via institutional investors in July, which demonstrates that investors still see equity value in Qantas. This bodes well for the airline's future.

Three-year recovery plan to keep the iron bird alive

While the economic outlook still looks skinny, Qantas has decided to focus on cost cutting given its limited opportunity to generate income in the current environment.

It is clear to me that the coronavirus pandemic is pushing Qantas into a corner, so this cost cutting is probably the best defensive strategy the national airline can do to manage further downside risks at the moment.

While Qantas turned to the private placement market to shore up its balance sheet, the airline also launched a 'flight to nowhere' program in September to maintain its cash flow and keep its pilots working. The plane takes off and lands at the same airport and has proved popular – the first of these 7-hour routes around the country saw 134 seats sold out in 10 minutes.

Foolish takeaway

It may seem attractive for short-term traders to buy Qantas as it looks like a good bargain based on its share price. However, I think it will take a substantial effort for Qantas to return to its former glory.

With the continual refusal of the Queensland and Tasmania premiers to open up state borders in the near future, I would say the negative sentiment has not been fully priced in yet, and perhaps Qantas will also need to resume its dividend payment to further restore investors' confidence in the long run. 

Motley Fool contributor MWUaus 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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