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Investors told to ‘sell’ Qantas stocks as profit forecast falls

written by Hannah Dowling | August 5, 2022

Qantas Boeing 737-800 VH-VZA, captured by Victor Pody

A Citibank investment advisor has downgraded its assessment of Qantas stocks from ‘neutral’ to ‘sell’, as the airline continues to battle scrutiny over poor customer service, increasing flight disruptions, and staff shortages.

The investment bank also revised its profit forecast for the Flying Kangaroo for the 2023 financial year from $740 million down to $514 million, a drop of over 30 per cent.

The airline’s share price dropped 0.9 per cent to $4.56 at market close on Thursday following the advisement.

According to Citi Bank analyst Samuel Sow, as Australia’s only premium airline, Qantas must address its operational and service shortfalls.

“Qantas charges a premium for tickets so we expect performance will be a key priority,” Seow said. “However, doing so economically appears to be difficult.”

“How much would it cost to improve performance?”, he questioned.

It comes after the Qantas Group collectively reported the worst flight cancellation rate in the country in June, 8.1 per cent of all services cancelled. Meanwhile, nearly 40 per cent of all Qantas flights were reported to have been delayed throughout the month.

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It also comes as Qantas was named among the global airlines with the worst cancellation rate by Cirium.

Seow said compared to US airlines, which face similar operational issues to Australia, Qantas’ performance remains poor, with US carriers boasting an average cancellation rate of around 2 per cent.

“In the last few months, Qantas appears to have hired around 3 per cent more staff, and reduced capacity by 10 per cent,” Seow added.

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“We expect this trend to continue and as a result we see higher costs and lower capacity. As an example US airlines are holding capacity at 80 to 90 per cent while staffing at approximately 95 to 110 per cent.”

He also noted that Qantas could be over-scheduling flights in order to cancel and consolidate passengers onto other flights. While this practice increases Qantas’ overall load factors, he said the practice could be undermining performance by impacting turnaround times, and driving up consumer angst.

“While we are optimistic about the long term recovery in travel, we believe the environment is becoming more challenging economically due to fuel and staffing constraints,” the analyst said.

“We expect in the short term, higher fuel prices and overstaffing will put pressure on margins, decrease capacity, and increase difficulty for management.”

It comes just weeks after Qantas domestic and international chief executive, Andrew David, penned an op-ed to defend the airline after months of bad press and growing customer dissatisfaction.

In the piece, David admitted the airline is “absolutely not delivering” on service but argued its problems are being replicated around the world.

In 2022, Qantas has faced a string of problems, including huge delays at Easter, hours-long call wait times, and even a revelation that the cabin crew of a Qantas A330 were made to sleep across passenger seats in economy. Last year, the Federal Court ruled the Flying Kangaroo had illegally outsourced 2,000 ground handling roles and subsequently rejected an initial appeal.

Most recently, the airline has been accused of failing to board bags onto aircraft and losing or damaging them in the process, as well as leaving passengers stranded at airports around the world after cancelling flights last-minute.

However, David — Qantas’ Domestic and International chief executive — wrote on Sunday there have been a “number of factors” that have led to its problems.

“Restarting an airline after a two-year grounding is complex and aviation labour markets, as with many others, [is] extremely tight,” he said.

“Compounding that is the fact that COVID-19 cases are steeply on the rise again at the same time as the winter flu season.”

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