Funny how they are all silent while the dollars were flowing in .
Brokers slash Qantas valuations as cost of reputation damage mounts
Kylar Loussikian and
Ayesha de KretserSep 26, 2023 – 11.51am
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ShareQantas shares fell on Tuesday after brokers began downgrading the stock, concerned higher spending on repairing its relationship with customers and higher fuel expenses will end a run of higher profits.
CLSA became the first major broker to recommend clients sell Qantas shares in a year, while Citi analysts cut the company’s valuation by 14 per cent to $6 per share. Qantas fell as much as 2.7 per cent in early trade on Tuesday.
On Monday, Qantas announced it would spend at least an extra $80 million to resolve service issues even while fuel costs have risen by $200 million. It’s the first hit to profits from initiatives put in place to resolve mounting customer acrimony about delayed flights and poor service.
Qantas’ new spending will hurt profits, with brokers downgrading the company’s share price target. Oscar Colman Senior executives are expected to face a Senate inquiry on Wednesday. The inquiry is investigating why the government blocked Qatar Airways, a major Qantas competitor, from flying more services to Australia and what role – if any – was played by the national carrier in lobbying for that decision.
While investors have benefited from a surge in airline profits as demand for travel increased following the COVID-19 pandemic, disquiet is growing at how much Qantas will have to spend to retain customers and deal with legal and regulatory issues that accumulated under the company’s former chief executive, Alan Joyce.
Mr Joyce left two months before he was due to depart, handing over to chief financial officer Vanessa Hudson this month.
Ms Hudson has
flagged the company would consider bringing call centres back to Australia, opening up more frequent flyer seats, and making other changes to rebuild its reputation.
“There has been no shortage of press related to poor customer service which Qantas is starting to respond to with new initiatives and incremental spend,” said Barrenjoey’s Matt Ryan and Annie Zhu in a note to clients, downgrading its share price target 17 per cent to $7.20. “We have assumed the $80 million called out ... will grow again in future releases, and we have factored in a total of $200 million per annum to account for this.
“We have factored some cost mitigation in for Qantas from [the second half of this financial year] but acknowledge that some of the customer service initiatives will flow through to the bottom line on a permanent basis.”
‘Higher risk premiums’
At Citi, Samuel Seow said that there were already questions around Qantas’ earlier guidance that last year’s $4.5 billion “would be the structurally higher earnings base”. The investment bank has incorporated “higher risk premiums into our discount rates/multiples to account for upcoming regulatory, legal, and political overhangs,” Mr Seow told clients.
CLSA advised its clients to sell, reducing its price target to $5.60.
Qantas shares were trading at $5.14 late on Tuesday morning, down 1.7 per cent. They have slid almost 16 per cent in the last month alone.
Totus Capital portfolio manager Ben McGarry told
The Australian Financial Review last month that Qantas had a “sniff of AMP” to it –
a reference to the years of regulatory scrutiny, higher costs and brand damage that affected the one-time financial services giant after a decade of strong profits ended.
Qantas faces
potential fines of as much as $250 million after the Australian Competition and Consumer Commission alleged it sold tickets on thousands of cancelled flights. It has already decided to scrap the expiry date on $570 million of flight credits, and could be forced to pay up to $200 million in penalties after the airline was found to have illegally sacked 1700 workers.
Qantas will hold its annual meeting on November 3. The airline’s pilots have already called for the company’s chairman, Richard Goyder, to resign over the sackings, while large superannuation fund investors have flagged they want more accountability for the sinking share price from directors.