‘Reckless’: Analyst slams Qantas buyback

Qantas has repeatedly blamed staff shortages for a range of problems over the past year including an uptick in cancellations, delayed flights, lost luggage, cutbacks to in-flight service, and reports up to 4000 passengers were stranded in Bali in September after the airline cancelled eight return Jetstar flights.

“Qantas has really focused on shareholders. It’s clear customers are angry at them, staff are angry and them, the brand is suffering,” said Mr Sodhi. “Labour is so hard to find and keep right now, I would’ve thought you’d maybe want to distribute a little bit of your surplus to labour. It seems to me it’s excess working capital being returned to shareholders, not excess profitability.”

Qantas posted a negative 36.1 per cent return on invested capital (ROIC) in financial 2022, with a long-term ROIC target of 10 per cent. Its net debt (including lease liabilities) target range is $4.2 billion to $5.2 billion on an average of $4.9 billion invested capital for the 12 months to June 30. Its targeted net debt to ROIC/EBITDA range is 2 to 2.5 times.

In May, the airline confirmed it had ordered 12 Airbus A350-1000s for its Project Sunrise to facilitate non-stop flights from Sydney to New York and London, with more than 40 per cent of the cabin configured as premium seating.

The significant capex is justified by an ability to deliver a premium to revenue per available seat kilometres (RASK) via higher ticket prices and a higher mix of premium seats on planes, flying the same distance. This could help these flights post a ROIC or EBIT margin comfortably over 10 per cent.

Mr Sodhi said it is wrong to tip Qantas into a poor investment bucket on the basis investors such as Warren Buffett often dismiss airlines as poor investments because the space is competitive and features challenging unit economics.

“Qantas is a fantastic business, it’s not some basket case, you’ve got a duopoly in domestic airfares which makes fantastic returns on capital, year in year out,” he said. “The frequent flyer business I’d say is one of the top five businesses in Australia, it’s a literal license to print money. It’s capable of generating good returns, they don’t need to do a buyback.”

Other investors such as Forager Funds Management founder Steve Johnson also criticised the buyback as inappropriate “while customers are suffering”.

Meanwhile, Morgan Stanley deemed the buyback as a clear sign of management’s confidence in the outlook and pencilled in a $1.3 billion profit before tax in financial 2023. Others such as Pendal investment analyst Sondal Bensan praised chief executive Alan Joyce for slashing pandemic-era costs.