Shares in Qantas are down 1.7% today, trading at $5.22 as the company embarks on a heavy spending campaign to improve its services and regain public confidence after a slew of scandals and poor flight performance has left the airline out in the cold.
The iconic Australian airline has announced a substantial commitment to improving its services, with an additional investment of over $80 million.
This expenditure comes when the airline faces a staggering laundry list of extra expenses, including a $200 million increase in fuel costs.
In the past year, the company’s share price is up just 1.75%. That small gain looks under threat as the company shed 15.92% in the past month alone, with ex-CEO Alan Joyce stepped down early to try to mitigate some of the damage done as Qantas remained in the spotlight for all the wrong reasons.
So what were some of the scandals, and what are the main costs for the airline moving forward?
Source: TradingView
Qantas pays for its sins
In a statement released today, Qantas detailed its plans to allocate a total of $230 million toward new initiatives during the current financial year.
The revelation follows recent comments by Qantas’ CEO, Vanessa Hudson, in which she outlined potential changes to rejuvenate the airline’s reputation. These changes included repatriating call centres to Australia, enhancing Frequent Flyer seat availability, and implementing various other strategies to rebuild trust with its customers.
This move comes after a nightmare couple of months for the company — culminating in the abrupt early retirement of ex-CEO Alan Joyce, who held the post for 15 years.
The list of scandals and regulatory gaffs is a long one; some of the highlights include:
- Competition watchdog threatens a record $250 million fine for allegedly selling thousands of ‘ghost flight’ tickets to cancelled flights.
- The High Court rejected Qantas’s appeal in a case where it was found to have illegally sacked 1,700 workers during the pandemic — they now face a $200 million payout for the workers.
- ACCC is investigating Qantas for what it calls ‘slot hoarding’ at Sydney airport, which involves blocking competitor’s time slots for takeoff and landing.
- Qantas is accused of using the government to run a ‘protection racket’ in its blocking of 21 additional Qatar Airways flights into Australia.
- Qantas was forced into a u-turn after customer backlash from customers after threatening to cancel $370 million in-flight credits due to expire from the pandemic.
It’s enough to damage the airline’s reputation and customer trust, which incoming CEO Vanessa Hudson admitted in recent weeks.
‘We know we have a lot of work to do to win back the trust of our customers,’ Hudson said in a statement. ‘This investment is a significant commitment to improving our customer experience and making Qantas the airline of choice for travellers.’
The decision to ramp up spending reflects the urgency of addressing long-standing issues within the company. Investors have profited handsomely from the resurgence of the airline industry as travel demand rebounded in the wake of the COVID-19 pandemic.
Just before Joyce’s exit, the company posted an impressive $1.7 billion profit as consumers returned to the skies en masse.
But it seems the company’s decade of lower spending and robust profits has ended, and a big bill is ahead.
The additional expenditure will primarily address various customer grievances, including bolstering contact centre resources and training, expanding the availability of seats that can be redeemed through the Frequent Flyer program, enhancing support for passengers during operational disruptions, reassessing long-standing policies for fairness, and elevating the quality of in-flight catering.
There is also a looming concern around soaring fuel costs, which have spiked 30% since May.
This is attributed to a combination of higher oil prices, expanded refiner margins, and a weaker Australian dollar. Qantas anticipates that if these conditions persist, its fuel bill for the first half of 2024 will rise by approximately $200 million, reaching a total of $2.8 billion.
For now, Qantas intends to absorb these heightened costs but remains vigilant, stating that it will ‘look to adjust its settings’ if the current economic conditions persist.
Outlook for Qantas
Qantas is embarking on a substantial journey to revamp its services and customer relations, investing heavily to address persistent issues.
Many commentators have drawn comparisons to companies that have faced heavy scrutiny in the past — such as AMP or Star Entertainment Group, who subsequently saw cost blowouts.
A good example of this for Qantas is the huge costs the airline is facing to replace and renew its ageing fleet of planes.
Early forecasts peg the cost at approximately $15 billion over the next five years, a significant change from the $7 billion it has spent in the previous five.
Source: Qantas FY23 Report
While financial challenges loom, the airline remains optimistic about the future and said it’s taking proactive measures to ensure its long-term profitability and success.
Thankfully, Qantas’s demand remains high as consumers’ appetite for travel remains high post-pandemic, which could allow the company to ride out the turbulence.
Qantas and its subsidiary Jetstar expect to carry over 4 million passengers over the September/October school holidays — an 8% increase from last year.
For now, the company looks intent on absorbing these higher costs, but its medium-term outlook could be challenging if costs continue to rise at anywhere near this rate.
Before you go, here’s a sneak peek
Editorial Director and investment veteran Greg Canavan is giving readers a free view under the hood this week.
If you follow this link, you can read a free portion of Greg’s Fat Tail Investment Advisory service.
Here, he will outline his ideas about intelligent investments you can make as energy markets shift.
We can see some of that pressure today as Regular unleaded prices have reached a never-seen-before average of $2.22 per litre.
Investors are looking at the energy transition’s economics and seeing holes.
Greg thinks he’s found a few and is sharing his insights in a video you can find here.
These are certainly views you won’t find in the usual press.
Give it a look and see what you think.
Regards,
Charles Ormond
For Money Morning
