Qantas set to outline fleet renewal plan at profit update
Ayesha de KretserSenior reporterAug 6, 2023 – 4.15pm
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KEY POINTS
- Qantas is expected to update on plans to replace A330s
- The airline could replace the fleet with Dreamliners and A350s
- Analysts are split on how pending capex will impact returns
Qantas is expected to update the market on phase two of its fleet renewal plans when it reports this month, and expectations are mounting that the airline will be compelled to order the same Dreamliners it once held purchase options over and subsequently tore up.
Incoming chief executive Vanessa Hudson said last month that the airline would start a process to replace its 24 ageing A330 aircraft in the second half of this year, acknowledging that slots to receive new planes were filling up quickly in the
post-pandemic aviation rebound.
The Boeing Dreamliner is an option for Qantas to replace its A330s. James D. Morgan Airbus and Boeing have both said new aircraft will not be delivered until the end of the decade, given big delays and manufacturing constraints that started with COVID-19.
Analysts said Qantas could evaluate ordering Boeing Dreamliners or the larger A350 from Airbus, rather than the A330 neo, depending on availability, as part of its flagged plans to streamline maintenance and promote interoperability between its long-haul domestic and international flights.
Ms Hudson will need to negotiate new terms in a white-hot market for new planes, after current chief executive Alan Joyce cancelled orders for 35 Dreamliners, which had a list price at the time of $8.5 billion, in 2012,
and later cancelled options to buy 50 more.
Qantas will look to sell its A330s, or convert them to carry cargo, but one analyst said the potential to recoup much was less than it would have been six months ago, given the freight market is tipped to enter oversupply and lengthy conversion queues.
Analysts are divided on whether the upcoming spending will derail capital management plans, after Qantas returned $600 million to shareholders via buybacks in fiscal 2023.
Pent-up demand
Morningstar analyst Angus Hewitt said Qantas’ capital expenditure, including fleet renewal, maintenance and other costs, would more than double from $7 billion over the previous five years to $15 billion.
“Over the long term, we expect fleet expansion, replacement and refurbishment to absorb meaningful cash flow and constrain returns to shareholders,” Mr Hewitt said.
He said the idea of “stronger for longer” travel spending, or the notion that an economic downturn would not prompt a decline in spending on travel, was yet to be tested given pent-up demand from the pandemic and excess savings.
“Anyone that sells a discretionary good or service wants to talk about how their discretionary good or service is the least discretionary of discretionary goods or services,” Mr Hewitt said.
“I’m not buying that argument [about air travel]. It is discretionary. There is a lot of pent-up demand at the moment and that’s really driving tremendous profitability. We think this is about as good as it gets for airlines.”
However, JPMorgan analyst Anthony Longo said Qantas was the broker’s preferred pick this year, and “structural advantages domestically” would underpin earnings resilience.
“We are of the view Qantas’ fundamentals are unquestionably strong and aided by a rational domestic market and supply side constraints which are likely to keep airline yields high,” he said. “Additionally, Qantas Loyalty remains resilient, generating earnings growth and strong cash flow.”
Mr Longo said Qantas’ balance sheet was robust enough to support capital expenditure and maintain returns to shareholders.
“Qantas is targeting net debt of $2.7 billion to $2.9 billion for June 2023. With adherence to its financial framework, we believe this is strong enough to not only fund fleet refresh capex but also regular capital management,” he said.
WORD IS 14 x 787s and 12 more A350s for what it is worth.