Despite gaining the opportunity to expand in its domestic market, we believe that the opportunity cost of acquiring Qantas (OTCPK:QUBSF) shares is too high right now. While the bankruptcy of Virgin Australia, which controlled 31% of the Australian domestic market, will certainly help Qantas to establish a stronger foothold in its home turf, the recovery of air travel to its pre-COVID-19 levels will take years. To this day, the Australian border continues to be closed to most foreigners, and it’s unlikely that we’ll see the ease of movement restrictions, considering that we’re experiencing a spike in new active cases of COVID-19 around the globe. For that reason, we stick to our opinion that the majority of airlines are uninvestable at this stage, and Qantas is one of those companies that investors should avoid and look for other investments with a better risk/reward ratio.

No Recovery In Sight

As a legacy carrier with an interest in the low-cost market, Qantas has a sizable market share in the Australian airline business. In recent months, the company consolidated its domestic and international operations and after the bankruptcy of Virgin Australia, which had around 31% of market share in Australia before the pandemic, and it’s now able to establish a stronger foothold on its home turf and grow its market share from ~60% to up to 70% in the foreseeable future. However, despite the fact that Qantas now has an opportunity to expand at home, the resurgence of COVID-19 around the globe will prevent its business from fully recovering to its 2019 profitability levels anytime soon. Also, we should not forget that even though Qantas has numerous competitive advantages against its rivals, the airline’s revenues and earnings have been declining in recent years. Considering this, it’s safe to say that if the airline wasn’t able to show a meaningful performance during normal times, it’ll not be able to drive growth in the current environment, even though the competitive advantages of its main rival are now gone.

In addition, Qantas suffered its first annual loss in the last six years, and in FY20, the airline’s statutory loss was $2.7 billion. While the company has a total of $4.5 billion in liquidity and is on track to achieve an ongoing $1 billion in savings from FY23, the opportunity cost of holding its stock at this stage is still too high. With $4.7 billion in net debt, most of which matures in the next few years, it’s likely that the airline will raise even more debt or dilute its shareholders to boost its liquidity position.

Source: Quantas

In addition, Qantas at this stage has much worse margins than the rest of the industry, and its stock trades at a negative EV/EBITDA ratio of -34.29x, which is way below the industry’s median of -8.86x. Also, the table below clearly shows that the whole airline industry is in a state of disarray, and right now, it’s better to avoid the majority of airlines due to the unattractive risk/reward ratio.

Source: Capital IQ

While it’s safe to say that the domestic market will recover quicker in comparison to the international market, there are still lots of hurdles that will prevent Qantas from fully recovering back at home. The biggest hurdle is the inability to freely travel inside Australia. In recent months, Australia imposed numerous interstate movement restrictions, such as the need to self-quarantine for 14 days, which prevented people from freely moving within the country. Qantas has been publicly opposing those restrictions, and only a few days ago, they started to ease. However, they have not been fully eased to this day.

As for international travel, Qantas is able to fly only to New Zealand, as the Australian border is currently closed for the rest of the world. The airline believes that the international travel activity will stay at the current depressed levels at least until the middle of 2021, and Qantas’s CEO even said in late August that without a proper vaccine, it’s unlikely that the airline will fly to the United States in the foreseeable future. Considering that IATA expects the travel activity to return to its 2019 levels only in 2024, it makes sense for Qantas to prepare for the worst-case scenario, as it’s likely that international travel will not recover anytime soon.

The latest data shows that Qantas is flying at 20% of its capacity, which means that the absolute majority of its fleet is still grounded to this day. With that in mind, it’s safe to say that like the majority of other airlines, Qantas will not be able to create additional shareholder value in the following quarters. For that reason, we believe that it’s better to avoid the airline’s shares at this stage and look for other stocks with a more attractive risk/reward ratio.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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