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

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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.

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.

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