Investors’ scepticism grows as Qantas management sells strategy
Some of Qantas’ biggest investors are pushing the airline to explain exactly how it will keep returns flowing while spending more than $3 billion on new planes, in the first major test for new chief executive Vanessa Hudson.
The company is also struggling to convince sceptical major shareholders it will meet the earnings margins it touted several times last year, amid increasing competition and more spending to repair a fraught relationship with customers caused by higher fares and poor performance.
Qantas chief executive Vanessa Hudson at the airline’s half-year results in February. She has been meeting with investors since that time. Louise Kennerley
The airline’s largest investor, Pendal, accounts for some 5 per cent of the register and has raised several issues with management. Pendal declined to comment, but sources directly involved in the discussions said the fund manager believed Qantas still needs to articulate how it will be able to maintain the high levels of capital returns expected in the next financial year as spending on fleet increases.
Separately, sources said Pendal also believed Qantas had created confusion in the market by announcing a share buy-back, then deciding to defer it until changes to the loyalty program were announced.
The feedback, which has been discussed internally, comes in the midst of an investor roadshow which began after the company’s financial update in February. But Qantas’ chief financial officer Rob Marcolina has since pulled out of presentations scheduled for New York, with sources indicating the move was partly to give management more time to consider how it would meet its earnings forecasts.
Under Ms Hudson’s predecessor Alan Joyce, Qantas committed to increasing margins on its domestic business this year to 18 per cent, and on its international services to 8 per cent. Those targets were reaffirmed in August, at the airline’s full-year results, days before Mr Joyce quit under pressure from regulators, customers and investors.
At the time, Ms Hudson told shareholders the profit performance that year was “not as good as it gets”. Since then, however, she has committed to spending at least $230 million on customer improvements, and Qantas is expected to roll out changes to its loyalty program that will make it easier for travellers to use points to book seats. Brokers have warned there is great uncertainty about how this will affect the airline’s overall margins.
The arrival of new aircraft like the Airbus A350 are central to a strategy to expand margins in the long term. Qantas has told investors they would grow to between 10 per cent and 12 per cent on international services.
But operating margins fell for both the domestic and international businesses in the first six months of the financial year. Ms Hudson, in a call with investors at the time, was asked to reconfirm the airline’s margin targets for this financial year and the next. She said she was committed to those “in terms of the long-term margin targets”, although Qantas has not specifically said whether it will meet the forecasts for 2023-24.
L1 Capital is another major shareholder; in June, the fund’s co-chief investment officer Mark Landau described the airline’s shares as a “bargain”. Since then, Qantas shares have fallen more than 17 per cent, and sources close to the airline said L1 had also expressed concerns to management. Mr Landau declined to comment.
As part of the company’s outreach, Ms Hudson and other executives briefed brokers this month.
RBC Capital Markets’ Owen Birrell is one broker who met with Qantas executives at a management roundtable last week. Mr Birrell said Ms Hudson “reaffirmed Qantas’ commitment to the margin targets and sustainable profit growth, a major part of which she said was to be underpinned by rebuilding the carrier’s social licence”.
While the company may have difficulties reaching its targets, the revamp of the frequent flyer program could offer a margin opportunity. That would happen, brokers who spoke on the condition of anonymity said, if the company’s Qantas Loyalty division passed on some of its margin to the flying businesses. It currently buys seats from the airline at-cost.
Some brokers remain very bullish: Jefferies’ Anthony Moulder told clients on Friday that Qantas had raised domestic base fares by 2.7 per cent last week, following a 1.8 per cent increase in February, which would improve revenue.
The increases “highlight an ongoing recovery in domestic demand, and some assumed confidence in the outlook for the domestic market, despite competition expected to remain strong”, he said.
But, Mr Moulder added, capital expenditure was expected to grow to more than $3.7 billion in the next financial year, and concerns about how to balance that spending were “understandable”.
Qantas declined to comment. Shares closed at $5.16 on Friday, having fallen about 4 per cent since the start of the year.
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