Qantas faces more tailwinds than headwinds, UBS says, who adds the national carrier would underperform the market in an Australian recession scenario.
The broker rates Qantas a buy with a 12-month share price target of $6.55. In late afternoon trade, Qantas was down 1.1 per cent to $4.56.
"We think the current price of $4.61 per share is pricing in either a mid-cycle multiple of a cyclically low EPS scenario or a cyclically low multiple of a our post-recovery FY24E EPS," UBS says.
Pent-up demand because of limited travel over the past two years means that Qantas' earnings per shares may be more resilient than in previous cycles.
"Given the pent up demand, combined with low unemployment, accumulated household savings, and mortgages on fixed rates, it may take longer than usual for activity to slow down in response to monetary policy," analysts say.
"This gives Qantas more time to plan capacity, schedules, staffing, and marketing for such conditions."
In previous economic downturns, with a higher fixed cost base, less ability to adapt capacity plans, and more competitive intensity, UBS says Qantas was more inclined to keep
growing capacity but drop fares/yields to continue filling seats.
"This strategy better sustains volume and market share but it can be devastating to profitability," UBS says.
The broker however says that if a downturn happens in the near future, then with lower fixed costs, more ability to adapt capacity plans, and less competitive intensity, it thinks the airline would be more inclined to slow/reduce capacity to burn less fuel and keep yields higher at a profitable load factor.
"Combined with the greater contribution from loyalty, this strategy would be more stable for profit even if it opens up some [minimal] risk to market share," UBS says.
UBS forecasts Qantas to return to profit in the current financial year with an estimate with a group profit before tax of $822m, before expanding that to $2.07bn in FY26.
