The Qantas Airways Limited (ASX: QAN) share price is flying higher after a positive upgrade from the brokers at Macquarie Group Ltd (ASX: MQG).
What’s happening to the Qantas share price?
Qantas shares are rising in response to an upgrade from Macquarie – an upgrade is when the broker thinks the share price is going to do better over the next 12 months than it previously thought.
According to reporting by the Australian Financial Review, Macquarie rates Qantas shares as a buy/outperform.
The reason for the upgrade is the improving situation with the domestic tourism market. In-particular, Qantas is on course to benefit from the federal government’s recently announced discounted airline tickets. Under the scheme, the government is going to pay for half of the cost of airfares for 800,000 domestic travellers that go to destinations that are normally supported by international tourists.
Destinations that are being supported include: Gold Coast, Kangaroo Island, the Whitsundays and Mackay region, Cairns, Merimbula, Avalon, Alice Springs, Uluru, Launceston and Broome.
Macquarie reckons Qantas is going to have almost all of its pre-COVID-19 domestic capacity back in FY22. Qantas is already back to breakeven with all of its domestic flights, at worst. Profit could still be subdued because of short term price discounting.
It’s not such a rosy picture for the international operations with Macquarie predicting operations performing at a 37% capacity level in FY22 and 80% in FY23.
The broker pointed out that the vaccination success in places like New Zealand, the US, Singapore and Hong Kong are important because they made up more than two thirds of Qantas’ capacity before COVID-19.
Macquarie thinks that Qantas is a higher quality business than before with how it has improved over the last year, along with cost reductions. The broker also said that Qantas is generating more earnings from its domestic and loyalty businesses.
Does Macquarie think the Qantas share price is a buy?
It seems to, with a price target of $6.35 which suggests a possible return of around 17% over the next 12 months. I’m not sure how much weight to put on broker share price targets – but for Qantas shareholders it’s nice that market commentators are becoming more optimistic about the travel sector.
If the international travel can return to sizeable portion of pre-COVID levels in FY22 then Qantas could still be an opportunity. However, there is now a lot of expectation of a recovery of the domestic market. It’s not exactly cheap, with the share price higher than most of what it traded at during the 2010s.
