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Time to rejoyce
The unpopular boss of Australia’s biggest airline has quit. Does his departure create an opportunity for value investors?


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“A Qantas crash landing” by DALL•E

Qantas, Australia's largest airline, was created by a small group of pilots in outback Queensland. Now, it's the biggest and most hated airline down under. The Flying Kangaroo, as locals call it, is mired in scandal. The share price has fallen, and the boss has quit. That raises the question: With the company facing so much turbulence, is now a good time to buy the stock? While the shares look cheap, the answer will depend on how much special treatment you think the airline will continue to get.

The company is stuck in a sticky quagmire of selfish-looking scandals. The ACCC, Australia's consumer watchdog, has accused the airline of mis-selling tickets. They say Qantas sold tickets for over 8,000 flights that the company had already cancelled. That is illegal and means fines. It also hangs a dark cloud over the integrity of their financials.

Pundits have criticised the company's lobbying efforts. They took A$2.7bn of government subsidies during the pandemic with no stipulation to repay. But, on the back of this, announced A$2.5bn in profit before tax, a record. There's a funky smell in the cabin—and some talking heads think the company should pay back the money.

There are also accusations of poor working conditions and horrid customer service. The firm owes refunds, but customers say they've been left in the lurch. As a result, the public and press have ratcheted up the pressure on the company, and rivets have started to pop. Alan Joyce, the company's former boss, was the first to go. The Irishman announced last week that he would leave immediately, bringing forward his retirement by a couple of months.

His replacement, Vanessa Hudson, the CFO under Mr Joyce, has taken control of a nose-diving plane. Qantas faces hundreds of millions—or even billions—in fines. These fines and problems will continue to tug on the firm's value for the foreseeable future. Still, the shares look cheap.

My modelling assumes the regulator slaps the company with a A$750m fine, and profit margins will decline to their long-term average. I suspect the airline will always receive special treatment from the government and customers, and that will show up on the bottom line as slightly higher-than-industry-average margins. As a result, I value the shares at A$7.30-7.70 each, with a 38% upside from their current level. The shares are cheap in 89% of the scenarios I modelled. That suggests some margin of safety. But, the value depends on what happens to profit margins. And rising costs and disgruntled consumers should squeeze these.

However, my assessment is downbeat compared to the 17 analysts covering Qantas. They've put an average price target of A$8.10, with a 50% upside and a Strong Buy rating on the stock. In the past, Qantas-covering analysts have been decent forecasters. The shares have done better in the 12 months after they said it was cheap than otherwise.

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If you believe Qantas will continue to produce margins above the global industry average of 4.6%, then the shares look cheap. The firm's privileged position in a captive market makes this likely. But if you think margins will drop to or below the average, the stock is fair value or even expensive.

Regardless, Mrs Hudson is flying into the wind. The company has a fleet of dusty old planes that need upgrading, and jet fuel prices are rising. On top of this, consumers have turned against the company. According to Skytrax, an airline reviewer, Qantas is now the 17th best airline in the world, down from 5th last year. And, given its mistakes, the firm is in regulators’ crosshairs.

Mr Joyce has a lot to answer for. There are likely more problems than we're aware of. Either way, his A$22m golden parachute will give him a soft landing, even if the stock doesn't recover. His legacy is more Spirit of Alan than Australia.
QAN (September 11th 2023) - Google Drive

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