‘Higher costs and lower capacity’: Why this broker tips the Qantas share price to nosedive

A top broker believes the Qantas Airways Limited (ASX: QAN) share price could be dinted as disappointing service, reduced capacity, and higher costs take their toll.

Citi asked, “How much will it cost [for Qantas] to improve performance?” The broker refers to large numbers of delays and cancellations experienced by the airline in June.

The Qantas share price closed Thursday’s session trading at $4.56 and is currently swapping hands for $4.62 in early trade. But Citi doesn’t believe that will hold.

Let’s take a closer look at why the broker is bearish on the S&P/ASX 200 Index (ASX: XJO) travel staple.

Broker tips Qantas share price to tumble 6%

Citi has slapped Qantas’ shares with a ‘sell’ rating and a lower price target on concerns the company will be forced to fork out extra cash and drop capacity in a bid to improve its performance.

“Overall, we expect improved on-time performance and cancellation rates from Australia’s premium airline,” the broker said before continuing:

However, we estimate this will likely come at a cost of higher staffing levels and lower capacity.

Subsequently, we forecast lower capacity growth and higher [cost of available seat kilometres] than the market is expecting.

The broker said Qantas upped staff numbers by around 3% and cut capacity by around 10% over the last few months amid higher costs, reports The Australian. It quoted Citi’s Samuel Seow as saying:

We expect this trend to continue and as a result we see higher costs and lower capacity. 

The broker also holds a “cautious” view of Qantas’ upcoming full-year earnings, set to be released on 25 August. It expects the airline’s guidance to be muted after a slow start to the financial year 2023.

Indeed, the company admitted the spread of COVID-19 and flu saw 15% of domestic flights cancelled or delayed for more than an hour during July’s busy school holiday period.

Citi’s new price target for Qantas shares is reportedly $4.28. That represents a potential 6.1% downside for the stock.

Citi also downgraded its financial year 2023 earnings expectations for the company.

It now expects Qantas to post a $514 million underlying profit, a 30% drop on its previous prediction, according to The Australian.

The post ‘Higher costs and lower capacity’: Why this broker tips the Qantas share price to nosedive appeared first on The Motley Fool Australia.

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Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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