Airfares Double will Airline Stock Prices Follow?

Do you have plans to go to another country? Get ready to dig your claws into the sludge that sits at the bottom of the piggy bank. The price of international airfare has more than doubled as a result of soaring demand and falling capacity, both of which have enabled airlines to hike prices in order to offset rising fuel expenses.

According to Graham Turner, the chief executive of Flight Centre, even in the face of a raging new wave in the COVID-19 pandemic, rising interest rates, and fears of recession, consumers traveling in business class are shelling out more than $18,000 to get to Europe and the United States while those in the economy are paying fares of around $5,000. This information comes despite the fact that there are concerns about a recession.

(And for those travelers sitting on large reward point balances, redemptions for airline seats, particularly in business or first class, are nearly impossible to come by and highly expensive. Customers have complained that journeys to Europe can cost as much as 1.5 million loyalty points.)

And it isn’t just the business market, which was the first to experience a recovery in demand, that is coming back to life; the consumer market as a whole is as well. The first group of people who traveled abroad to see relatives has given way to a larger population of people who take their vacations abroad on a more consistent basis as the international leisure market has started to take off.

The revenue forecast at Flight Centre was raised on Monday as a result of a demand surge that was significantly stronger than anticipated. The travel agency reported that it has been profitable after accounting for interest, taxes, depreciation, and amortization for the six months leading up to June 2022, thereby reversing a previous loss.

Although the company anticipates that it will still post a loss for the entire year of 2022, the amount is less than what was originally anticipated by the business.

Flight Centre’s total transactional revenue increased to $10 billion for the 2022 financial year (from $3.95 billion in 2021), thanks to the higher airfares, but in order for it to return to its pre-COVID levels, airlines will need to boost their capacity.

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The more optimistic projections are similar to those made by Qantas, which has recently confirmed that its underlying earnings before interest, tax, depreciation, and amortisation for the second half of the 2022 fiscal year will range from $450 million to $550 million. This is the case despite the fact that the company will have paid down $1.5 billion in debt during that time period.

During the entirety of the 2023 fiscal year, it is anticipated that both Flight Centre and Qantas will make an underlying profit.

The good news is that there are already indicators that the price of fuel has partially retreated from highs of close to $US130 a barrel to around $US94. This is good news because it indicates that the price of fuel is beginning to stabilize. The bad news is that Australian airlines are once again being affected by employee shortages, which is creating yet another bottleneck that prevents capacity from being increased.

Having said that, Turner is negotiating on capacity returning to more typical levels by the time Christmas rolls around, and he hopes that the rates will fall along with it.

Although the share prices of Qantas and Flight Centre responded significantly to Flight Centre’s latest earnings upgrade by going up by 2% and 5% respectively, this industry has been threatening excellent news for quite some time.

In recent broker updates on Qantas, there is evidence of analysts warning of upside earnings risk despite the multitude of operational problems, employee shortages, and customer complaints. This is despite the fact that Qantas has been facing all of these issues simultaneously.

UBS stated in a report that it sent out to investors the previous week that “On the balance of probabilities, we think the potential upside for QAN considerably surpasses the negative.”

It was stated that Qantas would be vulnerable to the economic downturn, but it was felt that the company was more resilient than it had been in the past due to the fact that it had lower fixed costs and the ability to adjust its capacity according to demand. It set a price objective for the next 12 months at $6.55, which is 42 percent higher than where it is presently trading.

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Macquarie included Qantas on its list of stocks that it expected would come in with earnings that were higher than the consensus expectation.

The fact that there have been no closures of international or domestic borders is an important qualification for all of this recovery. In the event that this scenario plays out, businesses in the aviation industry will face a precipitous decline in their earnings.

However, there is no enthusiasm for restricting air travel in Australia because local governments are unwilling to even impose mask use.

And according to Turner, there is no evidence that the new COVID wave that has struck our shores has caused a slowdown in bookings. This is what the company says. Instead, he thinks that susceptible travelers have avoided the market, while those who are ready to take the risk have not been discouraged by the mountain of new COVID cases.