The Australian economy is beginning to resemble what it once was prior to COVID-19, with promising vaccine announcements and easing domestic border restrictions.
Investing is easy in hindsight. If you picked up shares in Qantas Airways Limited (ASX: QAN) in March, this would’ve returned more than 100% since the lows.
QAN share price chart
It’s yet to be seen if the recent surge in travel and other recovery stocks was an overreaction by the market and if some of those lows might be tested again, or if we are in fact on the long and steady road to recovery.
What will play to Qantas’ advantage
While I did just mention that buying shares in Qantas for $2 in March would’ve been an attractive investment proposition, it’s important to remember that there was no guarantee that airlines were going to come out alive. The fall of Virgin Australia into administration is a stark reminder of how the situation could’ve possibly played out.
Right now, it seems that Qantas is in a good position to emerge as the stronger player as Virgin may now become a “mid-market” focused carrier. While Qantas has typically had around 70% of market share, I see some potential for market share gains in both the low-end (Jetstar) and premium segments of the market.
The majority of Qantas’ revenue is from domestic travel, so I also see some quicker upside in Qantas compared to other ASX travel-related companies such as Sydney Airport Holdings Ltd (ASX: SYD)
Is the Qantas share price a buy today?
There’s no doubt the situation is looking better, but I don’t think Qantas is completely out of the woods yet. People may start to travel much more with open borders, but the state of the company’s financials is more likely to be a much slower process.
Qantas has been able to get through this period alive by using elevated levels of debt and issuing more shares to raise equity capital. While there is a dilutive effect on existing shareholders, I’m more noticing the fact that net debt has risen from $4.7 billion at 30 June 2020 to $5.9 billion at 30 November 2020.
While cash burn might be reduced as domestic travel picks up, it seems unlikely that this will flow through to significant earnings growth until international travel also resumes. In Qantas’ recent trading update, management commented that international travel is likely to be at a “virtual standstill” until at least July next year.
While I would be happy to pick up some shares in Qantas today, I think it will be interesting to see if these ASX travel shares pull back slightly from current levels. There is more than likely some potential upside in Qantas shares, it just depends on how long you’re willing to wait.
If you’re looking for shares that might have some more upside in the meantime, here are 3 ASX shares I’m liking at the moment.
