Stocks In Focus: Qantas, June 25 2025

0:29A listener production. dot com forward slash fool au or the motley fool money podcast if you do go to the podcast feed if you're there already you know what we're doing if not there's two motley fool monies there's one from our friends in the states one from us here in australia so look for the australian version of motley fool money all right i'm joined by darrys zagami darrys g'day g'day scott how you going mate i'm very very well we're going to talk about speaking of uh popular and on people's minds one of the i don't know if it's the best brand anymore in australia certainly one of the companies that we all kind of feel like we love, that the flying kangaroo, the spirit of Australia, call it what you want, the romantic notions and connections we have with airlines have been around as long as planes have.

1:07So it's a company I know people care a lot about. And of course, this is in the shadow, in the wake of Virgin's IPO. Now, full disclosure, we're recording this in advance. I have no idea how the IPO went near that as Darius, but it's certainly topical and a good time to be talking about airline companies. Mate, I normally start this with saying, hey, what does the company do? I think everyone knows what Qantas does. But anyway, give us a bit of a rundown of Qantas the business, if you would. Yeah, I don't think the Flying Kangaroo really needs any introduction. It's Australia's flagship airline.

1:35It's been around over 100 years. A little bit of history on it. It was founded in Longreach just over 100 years ago. And I didn't know this before, but Qantas actually stands for the Queensland and Northern Territory Aerial Services Limited, but they leave the limited part off, obviously. But today, though, I think the company services a little bit more than just Queensland and the Northern Territory. It actually services over 1 ,300 destinations across Australia and around the world through its partners and code share flights that it offers. Everyone's no doubt familiar with its two core brands.

2:16So you've got Qantas. That's the full service brand. And full service basically just means things like baggage, food, drinks, seat selection, all that sort of stuff is just included. It's more of a high quality offering, I guess. But Qantas basically services short haul flights, domestic short haul, right up to the ultra long haul flight. So they actually have a flight direct from Perth all the way to London. I think it goes for about 22 hours. It doesn't sound like the most thrilling flight to me, but if you want to go to London and you want to get there quickly, that's a great way of doing it.

2:53And then next up is its low-cost offering, which is, of course, Jetstar. This one, low-cost, all those perks, seat selection, baggage aren't included. You have to pay more for those. This one doesn't service ultra-long haul. It does the same domestic. I find it mostly flies to Asia. At least when I've flown Jetstar, it's always been into Japan or Asia. Yeah, so seats are generally cheaper though. But beyond this, Qantas actually operates a number of subsidiaries, each that kind of services a specific niche. So there's QantasLink, the company's regional airlines that's used by a lot of FIFO workers.

3:31Qantas Freight, which is actually Australia's largest independent air freight services business. So this sort of, it ships freight to around, And I think it's 500 or so destinations around the world. And then lastly, and I will say this is my favorite subsidiary of Qantas's, is its Qantas loyalty program. So this includes its frequent flyers program, its business rewards program. I've been a member of this for years. Absolutely love it. Used it to get a bunch of cheap flights, business class flights overseas. But this has about 17 million active members. It's a real data-led business. People might think of it as just, I guess, getting points and using points for flights.

4:15It's much more than that. It's credit cards, it's insurance, it's home loans. It's anything that Qantas can kind of market through its partners, which, yes, the members get points, but Qantas also gets a lot of money. But that's Qantas in a nutshell, basically. That's a great summary, mate. By the way, the Qantas loyalty business, often the standout, when the air travel business is doing particularly well, Qantas loyalty has carried the company to have profitability very, very, very frequently. By the way, you mentioned Longreach. If you get up there, the Longreach Qantas Museum is fascinating.

4:48I've been up there a couple of years ago, and it's well worth a look. Longreach isn't really out of the way anywhere in particular as you're going north. I suppose if no one's heading south. But if you find yourself in the area, you, Darius, or anyone watching, do yourself a favor. Really, really, really cool. There's even a plane that you can actually walk in. And fun fact, not run by Qantas, run actually by a separate organization. But the Qantas Museum, very, very cool. Hey, that's about the company. And you've done a great job summarizing it. Thank you. Let's talk about the investment itself, because great companies aren't necessarily great investments.

5:17Bad companies, hard to be good investments. But generally speaking, it's not the same thing. So we've talked about the company itself. By the way, as I say that, I want to remind people two things. Firstly, we don't give personal advice. So when Darius talks about Qantas, he's giving his view on the investment, not whether you should buy it. you have to decide for yourself. That's the personal advice, but we have to do general advice. So you need to decide for yourself. Secondly, this is not a formal recommendation either way. I don't know what Darius is going to say. I don't know if he's going to say it's worth buying or not.

5:42We'll get to that in a minute, but it's not a formal recommendation. It's a view. We're trying to cover a range of companies. Most of the companies in Stocks and Focus, by the way, aren't formal recommendations of The Motley Fool. And that's largely why we do this bit of extra content, both for our members and for our non-members, which is, hey, here's our view on a company. Here's a bit of a look under the hood, a look under the bonnet. Here's what we think about it. So there's that. Lastly, we're recording this at a particular point in time. It's kind of mid-June we're recording this. And frankly, things change.

6:08The price changes, quality changes, competitors change, investment views will change just because they do. So again, if you're watching this weeks, months, years afterwards, the internet's forever. So maybe you're watching or listening to this and it's 2022 or 2032, not 22, 32. And our views may well have changed. So just kind of putting that out there before we then talk about the investment. I mean, let's talk to the pros, the reasons why our viewers and listeners might consider an investment in Qantas? Yeah, I think there's lots to like about Qantas. There's really no denying its leadership position domestically.

6:39Qantas and Jetstar combined carried 63 % of all the domestic passengers in 2024, and that's well ahead of Virgin's 32%. The company's segmenting of the market into a premium offering and a low-cost offering through Jetstar, that has enabled greater fleet utilization than competitors. And it's also limited the scope a lot for rival low-cost competitors to enter the market as well. So we saw Rex, which tried to enter the market and hasn't done too well. But as it stands right now, the market's practically, at least in Australia, is practically a duopoly. So you've got Qantas and Jetstar and Virgin.

7:20and I think that should really translate through to strong pricing power in the near term and as that sustains into potentially the medium term for Qantas. This is certainly proving to be the case though for Qantas. Its domestic operating segment is actually one of its highest. Loyalty program is its highest but it posts margins of about 17 % and it produces the majority of the company's earnings before interest in tax. that was in the most recent half year. Looking more internationally though, while not as dominant of course as Qantas's domestic business, its international business also has plenty going for it.

8:01There's been two recent initiatives that the company has brought out. The first one is what it's calling Project Sunrise. Now this won't start until next year but basically this is Qantas' plan to connect Australia to the rest of the world through ultra-long-haul flights. You'll remember that I mentioned that Perth to London flight. What they're basically looking to do now, they've invested or in the process of investing into a fleet of Airbus A350-1000s. These are capable of extended flying, really comfortable extended flying. They're looking to bring out next year a few different routes. They'll have Brisbane, Sydney, and Melbourne going to places like London, New York, Paris.

8:46So these will be probably 24, 25 hour flights, really long. But what they're also doing, rather than you won't be just sitting in your seat the whole time, they're inputting larger seats, which is always good, but also something called a wellbeing zone that's going to have refreshments, stretching areas, places to relax during the flight. And I think this is a really great initiative. I think it's going to be quite successful. The direct flights from Perth to London, which I guess were the, not the teaser, but the trial of this, have been really popular. And so I can see these direct flights from Brisbane and Melbourne and Sydney really taking off.

9:26No pun intended there. But yeah, the next recent initiative coming out of the company is its closing of Jetstar Asia. It's Jetstar Asia business. This one really serviced intra-Asia routes, so things like Singapore to KL, Singapore to Vietnam, Singapore to Bangkok. It was based out of Singapore. It doesn't impact Jetstar's international flights, though. So things like Brisbane to Japan, which is an incredibly popular route, those will stick around. Melbourne to Japan, also a very popular route. Those aren't changing at all. But what it does do is it frees up a lot of capital and a number of planes that are going to be redeployed domestically for Jetstar.

10:14And the good thing about this, these flights, these routes intra-Asia were very low margin. The competition in Asia for flights is insane. You've got companies like AirAsia. You've got a number of local carriers for each airline. You've got Malaysia Airlines, Singapore Airlines. and they had the dominant position in the market, not Jetstar Asia. Jetstar Asia was just a small player in that market. From my experience, it was rarely the best option flying around Asia. So I think it's a really good move from Qantas to close that one down. But the last thing I like about Qantas, and this one should go without saying, I said it's my favorite subsidiary.

10:52It's the loyalty program. It practically prints cash. It's the highest margin segment with an EBIT margin of about 19%. It's been growing really strongly. So frequent flyer members rose 8 % in the most recent half. Points earned, which is points earned by members, rose about 10%. And the company's also unveiled what it calls its classic plus option. So there's classic rewards and there's classic plus. Classic Plus is basically a more valuable version for Qantas of the Classic Rewards flight. So what they do is they take the cash price of a flight and they convert it to points and then people can redeem their points for the flight that would have costed cash.

11:44And they've already seen about 22 billion points redeemed for Classic Plus Rewards flights, which is incredible and much higher margin for the company than its classic rewards program, which sadly for me, it slowly seems to be phasing out. But this is really good. And as I mentioned before as well, the loyalty program isn't just about flights. It's really an ecosystem of spending with partners of Qantas for things like items, services, and it's really just, it's almost like an e-commerce store that runs on points rather than cash. But to get those points, you have to spend cash. So I can see why it's such a high margin segment.

12:30And I can see why it's like the main segment for Qantas in my view. But those are all the things I really like about Qantas. Nice. That's a really, really good summary. By the way, even better for Qantas, they announced just recently that their increasing number of points required for international flights by about 20%, domestic by 5%. So unfortunately, if you're watching this, you got frequent fly points. They're a little less valuable now. The benefit for Qantas is, of course, they get the value of that. So yeah, the Qantas loyalty program got even better only a couple of weeks ago. Motley Fool Money.

12:59For more, subscribe to the free newsletter at fool.com.au forward slash listener.

13:07Mate, so you've done the prize. You've done a really good job. Thank you. You've painted a pretty good picture. That being said, it's not all rosy for Qantas. What are some of the cons? What are some of the things that our listeners and viewers might think about? But maybe just taking a bit of a, not exactly a step back, but contrasting with those pros before they consider an investment. Yeah, there is a few things that should be raised. As I mentioned, in regards to Qantas's decision to close Jetstar Asia, this was driven by competition pressures. COVID was somewhat of a reset for the airline industry.

13:36And while Qantas has emerged in quite a strong position, so have many of the other airlines around the world. International airlines have been building capacity and they're at levels that are above pre-COVID levels, especially when it comes to Australia. So these foreign carriers are also continuing to add flights just like Qantas is. And what that's doing is that's pushing fare prices and freight yields down rather than up. Really in such a globalised world, air travel, it's essentially a commodity now. It has been for some time. And what that really means is we can expect intense price pressure moving forward, I think.

14:17Similar to this, though, as prices come down, though, you'd hope that costs would come down too. But one of Qantas's biggest costs is its jet fuel. Jet fuel, when oil prices are low, the margins can rise quite quickly and it can be very profitable for Qantas. But if we did see an increase in oil prices that were sustained, that could erode Qantas' margins quite quickly. Even with the hedging processes that it has in place for fuel, it can be eroded quite quickly. This could also see patronage fall if Qantas did have to increase its prices significantly to counter for this, which then could also open the door for global carriers to take market share from Qantas.

15:04The next one, I think you mentioned previously Qantas being a very trusted brand in Australia. It's interesting. It actually lately hasn't been a particularly trusted brand. Studies have been showing that it's not one of the most trusted brands in Australia anymore. Its reputation has really taken a nosedive in recent years. Before COVID, the company Qantas averaged around 10th on the Skytrax World's Top 100 Airlines. But in 2023 and 2024, that actually dropped to, at first, 17th on the list. And then in 2024, it was 24th on the list. That's quite a drop from the 10th that it was at. And similarly, Roy Morgan polling has actually shown Qantas is currently Australia's fifth most distrusted brand in Australia.

15:59and that's only behind Coles, Woolworths, Facebook and Optus. So it's not a great position to be in. This was really driven by things like, I don't know if you've heard about it, the ghost flight lawsuit that happened with the ACCC a while back. Basically, Qantas was found to be selling tickets on flights that it had already either planned to cancel or had already cancelled. I think I was impacted by one of those flights and it did erode my trust to the company a little bit uh importantly though Qantas's trust with the Australian public has been uh it's been showing signs of improvement and they've been taking steps they're they're really improving their uh their customer service offering they've increased improved their initiatives there but trust is very quick to lose and very hard to gain so that that is a big risk for the company um and then finally i think this one kind of goes without saying we saw it during covid there's many macro events that can see qantas's fleet grounded for an extended period of time we saw it during the pandemic but we should also be mindful of things like wars natural disasters cyber cyber events that can kind of ground a fleet there's just no shortage of things that might ground a flight.

17:19We've also seen a few instances of this recently. I can't remember which airport it was. Was it Sydney or Melbourne that had a power outage or something that just grounded flights for the whole day? They had a system outage that grounded flights. So even these smaller disruptions can mean a big hit to margins, I think. But those are a few of the risks that you should really consider before you invest in Qantas. Very nicely done, mate. That trusted brand thing is astonishing how much it is to torch one of Australia's favorite brands us by acting so horribly. All right, let's get to the bottom. I said, this is a formal recommendation.

17:50I'm not going to ask you for a buy or sell, but I am curious as to your thoughts. We're long-term investors here at The Motley Fool. Our listeners and viewers know that. Mate, do you reckon Qantas is likely to beat the market over the long term, over say five or 10 years? Is it a market beater, do you reckon, or might it lag behind? I think over the long term, it's probably not a market beater for me. I think near term, I like the initiatives that it's bringing out, like Project Sunrise, closing the Jetstar Asia business. That's two really great initiatives. But over the long term, it's not a massive airline.

18:26Compared to the world stage, Qantas is still only a small airline. And so I think if any of these other airlines that are much more trusted, higher in the list of the Skytrax, and consistently higher. Companies like Singapore Airlines and Qatar Airlines have consistently been in the top five. I think those airlines could, if given the opportunity, and we did see Qatar Airlines try and enter the Australian market, got pushed back, unfortunately. If they did manage to make it into the Australian market, I think they could dominate. And I think that would really hurt Qantas. So I think a lot of whether Qantas beats the market depends on its ability to maintain that duopoly position that it has right now.

19:07If it loses that, I don't think it beats the market. Very good, Darius. Thank you for a very thorough and interesting review of Qantas. Q-A-N is the code for anyone playing along at home. Fools, while you're here, if you're watching this on the podcast, listening to this on the podcast, I should say, thank you for doing that first. You're probably already subscribed because normally how you get it. But if you're not yet, make sure you do subscribe to the pod. Also, jump on the Fools YouTube channel. It's Facebook. YouTube.com, man, slash FoolsAU or just search Motley Fool Australia. you'll find it.

19:36We get to see Darius in his resplendent blue jacket. I gave him a compliment on it before the video, mate. So nicely done. I'm interested in the old suit jacket. So not holding my end of the bargain up. But if you are on the YouTube channel while you're here, do us a favour. Like the video if you did like what Darius has been through. And of course you did. You did a great job. Also, subscribe and hit the notification bell. Why? So you get all the great content we produce. If this is your first time here, you might not know. We do Stock of the Month once a month. We do Stocks in Focus every week.

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