Key Points
- Qantas shares down 6% last week due to market fears and WA border closure
- Retains lowest domestic capacity needed to break-even against rivals
- Scheduled to report H1 FY22 results on 24 February
A few turbulent weeks has led the Qantas Airways Limited (ASX: QAN) share price lower in 2022.
Stock markets around the world plummeted following concerns of military tension between Russia and Ukraine. In addition, interest rate rises and the spread of Omicron has fuelled investors' worries.
Nonetheless, after a strong sell-off during the week, the airline operator's shares rebounded by 3.96% to $4.73 apiece. It is worth noting though that Qantas shares are still down by 6% over the last five trading days.
In contrast, the S&P/ASX 200 Index (ASX: XJO) rose 2.19% to 6,988.1 points on Friday. While ending the day on a positive note, the benchmark index shed 4.83% for the week, hitting a 9-month low.
How's Qantas coping with COVID-19?
Known as the 'flying kangaroo', Qantas has been diligent in its fight against the COVID-19 pandemic.
Management's focus on trimming down costs has helped the company stay afloat during the last two years.
The airline can sell fewer seats and still make a profit as compared to industry rivals, Virgin Australia, Regional Express Holdings Ltd (ASX: REX) and upcoming low-cost carrier, Bonza.
In the past 12 months, domestic planes flying across Australia were at 55% capacity. This is compared to around 80% before the pandemic struck, with Qantas and Virgin taking the lion's share.
According to Jarden analyst, Jakob Cakarnis, Qantas only needs 55% of its seat to fill in order to break even. For low-cost subsidiary, Jetstar, this number stands at just 43% due to its 'no frills' approach.
On the other hand, out of voluntary administration, Virgin, needs 76% of its seats to be bought to reach break-even.
Regional Express, which launched several new domestic routes to compete with Qantas and Virgin, requires at least 80% capacity.
Bonza is expected to arrive to Australia sometime this year and be ultra-cost competitive with Jetstar.
Without a doubt, Qantas remains in a strong position given its premium offering and wide network of flights. As the most established airline in Australia, it is only a matter of time before Qantas returns to pre-COVID profitability.
This is despite providing an update on its domestic capacity settings following the border closure of West Australia.
Consequently, management advised that it will cut its planned domestic capacity by roughly 10% from 5 February to 31 March. Qantas stated that whilst it operates at a reduced capacity, core connections between Perth and other capital cities will remain.
Factoring in the latest changes, total group domestic capacity stands around 60% of pre-COVID levels for the third-quarter of FY22.
Qantas is scheduled to report its FY22 half-year results on 24 February.
What do the brokers think?
A couple of brokers believe that the Qantas share price is attractively valued at its current price.
Last month, UBS slashed its outlook by 3.1% to $6.20 per share, representing a potential upside of 26%.
Similar to UBS's view, the team at JPMorgan also reduced its valuation by 1.6% to $6.15 on Thursday. It appears the broker thinks that there is still significant value in the airline and that a recovery is inevitable.
Qantas share price summary
Since the start of 2022, the Qantas share price has fallen by 5% amid negative investor sentiment across global markets. However, when looking at a larger time frame such as the last 12 months, its shares are up 4%.
Based on valuation grounds, Qantas has a market capitalisation of around $8.92 billion, with approximately 1.89 billion shares on issue.
