Qantas Airways Ltd (ASX: QAN) shares haven't exactly impressed investors over the past year.
At the time of writing, the airline's shares are down around 8% over the past 12 months, lagging the S&P/ASX 200 Index (ASX: XJO), which has gained about 2%.
But one leading broker believes the next chapter could be much brighter.
Image source: Getty Images
Market underestimates Project Sunrise
Morgan Stanley (NYSE: MS) has retained its overweight rating on Qantas shares and lifted its price target to $12.50, up from $10.60. That implies more than 20% upside from current levels.
The broker believes investors are underestimating the long-term value of Project Sunrise. This is Qantas' ambitious plan to launch non-stop flights from Australia's east coast to London and New York from October 2027 using specially designed Airbus A350-1000ULR aircraft.
Management has previously guided to around $400 million in additional annual earnings once the new routes mature. However, Morgan Stanley believes that's only part of the story.
More than just higher earnings
The broker argues Project Sunrise could fundamentally improve the quality of Qantas' business. The new aircraft will have around 41% premium seats, compared with roughly 10% to 20% across much of Qantas' existing international fleet.
That greater exposure to premium travellers could lift margins and make international earnings more resilient through economic cycles.
Combined with Qantas' ongoing fleet renewal and broader network strategy, Morgan Stanley believes Qantas shares deserve a higher valuation multiple than the market currently assigns.
Earnings forecasts are climbing
While the broker made only minor changes to its FY26 forecasts, it increased FY27 earnings per Qantas share estimates by 5%, helped largely by lower expected fuel costs.
Further out, Morgan Stanley lifted its international EBIT forecasts by between 3% and 31% across FY28 to FY30 and now expects international EBIT to reach $1.23 billion by FY31.
That's more than double the $596 million generated in FY25 and around 26% above broader market expectations.
Why the broker is confident
Morgan Stanley points to Qantas' existing Perth-to-London service as evidence that passengers are willing to pay a premium for non-stop long-haul travel.
Since launching in 2018, the route has consistently achieved a revenue premium of more than 20% over one-stop alternatives while maintaining load factors close to 90%.
With Sydney's premium travel market roughly three times larger than Perth's, the broker believes Project Sunrise doesn't need a dramatic shift in customer behaviour to succeed.
What could go wrong?
Qantas shares still carry risks, obviously.
Premium demand may fall short of expectations, rival airlines could introduce competing ultra-long-haul services sooner than anticipated, or aircraft delivery delays could push back the earnings benefits.
Fleet investment is also expected to weigh on free cash flow over the next few years before tapering off.
Foolish takeaway
Morgan Stanley believes Project Sunrise could transform Qantas into a stronger, more profitable airline rather than simply adding another route.
Investors in Qantas shares won't have long to wait for another update, with the airline set to release its FY26 results on 27 August, when management is expected to provide further details on its fleet renewal and flagship expansion plans.
