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Monday 28 April 2014 by FIIG Research Legacy

Qantas Airways Ltd research report 2014 - retail

Executive Summary

Qantas was founded in 1920 and has grown to be Australia’s largest domestic and international airline
Whilst the key business remains the transport of airline passengers, the group has grown to include a number of complimentary segments: Qantas domestic, Qantas international,Qantas freight, Jetstar and Qantas frequent flyer
Qantas retains a dominant position in the Australian domestic airline sector with a market share of circa 65% through its Qantas and Jetstar brands
The company has employed a duel branding strategy between Qantas, which offers a full cost service and Jetstar, its low cost carrier airline which has driven significant growth over recent years including its international expansion
The successful differentiation allows the Group to hold the largest market share in both the business and low cost ends of the Australian market simultaneously however the group has come under increasing pressure from its key competitor domestically, Virgin, and increased competition on international routes
The company announced a significant cost cutting program at the same time as delivering its half year 2014 results, reflecting the loss for the half. Total savings of $2bn over three years have been flagged by management
With $2.4bn in cash and a further $630m in available facilities Qantas maintains a very strong liquidity position. Its ability to defer significant capital expenditure can also provide further capacity over the short term
The company has pursued a significant expansion program in Asia through its Jetstar brand and is now the largest low cost carrier in the Asia-Pacific region. With the recent poor result this expansion will be slowed, freeing up some cash flow
The nature of the airline industry presents a risk for bond holders due to it being cyclical, competitive, capital intensive and exposed to the cost of jet fuel and significant FX-risk exposure
Investors in Qantas bonds enjoy stronger returns than bonds from similarly rated corporate. Their returns also show strong relative value to the company’s international peers. With a significant cost saving program, strong liquidity and a major asset base (a number of which would be attractive acquisitions should the company require further cash injections) there are a number of positives for Qantas, despite the recent results, which helps make Qantas bonds one of the best high-yielding buys in the Australian bond market.

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