The airline industry has buckled itself in for turbulent times amidst the coronavirus pandemic. Virgin Australia Holdings Ltd (ASX: VAH) has tragically tumbled into voluntary administration. Qantas Airways Limited (ASX: QAN) has continued to strengthen its ability to deal with the impacts of the coronavirus through increasing its liquidity position and employee stand downs. Could the recent recovery of the Qantas share price and its leading position in the market make it a buying opportunity?
What has been priced in?
It’s a very important question. Whether it is the broader S&P/ASX 200 Index (ASX: XJO) and All Ordinaries (ASX: XAO), or individual shares, has the market priced in a recovery before it has even happened? Or do asset prices reflect a more pessimistic outlook?
The newly announced easing of lockdown measures is a reflection of Australia’s improved coronavirus situation. Some changes that Victorians can look forward to on 1 June include overnight stays allowed at private residences, accommodation, campgrounds and caravan parks, community sport and a suite of leisure-related activities reopening. New South Wales residents will also be able to travel and holiday anywhere within the state.
Unfortunately, this does not mean that people will boarding planes. But it does show that there is a light at the end of the tunnel. If sectors such as sports, recreation, community spaces and retail can open successfully without a second wave of infections, then we can look forward to further easing measures in the coming months. This easing will no doubt include domestic travel.
Domestic flights
Qantas’ domestic flights have been a key driver of its earnings. In 1H20, domestic flights delivered an underlying EBIT of $645 million compared to group international underlying EBIT of $162 million. My key concern is if domestic travel was allowed, are consumers eager to travel or still cautious about going outside?
The Australian Financial Review (AFR) reports that Australia’s biggest hotel operator, Accor, has started to see new bookings exceed cancellations. The AFR quotes Accor’s chief operating officer Simon McGrath as saying that its main booking platform, pre-pandemic, would “bring in about $1.6 million in bookings a day. That got back down to $100,000 but this week it went up to $400,000 to $500,000 a day.”
Will cheap oil help?
Oil has made a significant recovery following its absurd dip to -US$40 a barrel. Current prices are approximately US$33, which is still down 40% since March and down 50% since January.
Qantas’ first half FY20 fuel expense accounted for $1.975 billion of $8.564 billion total expenditure, or approximately 23%. I believe a combination of significant employee stand downs and cheaper oil prices should see improved margins should domestic flights continue.
Foolish takeaway
Potential pent-up domestic travel demand, cheaper oil prices and much leaner business could be driving factors of a Qantas share price recovery. While much is still unknown today, I would rather be for, than against a Qantas share price recovery.
There are many misunderstood or hidden gems like Qantas that could experience a swift share price recovery following easing lockdown measures. Check out our free report for cheap ASX shares that are ready to recover.
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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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