The Qantas Airways Limited (ASX: QAN) share price closed yesterday's trading session at $3.64, down more than 50% from its December highs. The volatile price action is the result of Qantas cutting capacity due to reduced demand from the coronavirus pandemic.
Although this may affect the short-term operations of Qantas, is the airline's share price a long term buy?
How has Qantas responded to the coronavirus pandemic?
Earlier this week, Qantas announced that the company will increase capacity cuts from 5% to 23% in light of the coronavirus pandemic. International capacity reductions will be extended until mid-September of 2020, with Asia, the US and UK routes facing the biggest reduction.
In order to further reduce costs, Qantas has chosen to ground 8 of its largest aircraft (Airbus A380), with smaller aircraft servicing their routes. Qantas also increased its domestic capacity reductions from 3% to 5%, which will be extended to mid-September.
How will this impact Qantas financially?
According to Qantas management, the impact of the cost reduction methods is hard to determine given the dynamic and uncertain nature of the situation. Despite the uncertainty, Qantas assured its shareholders that the company remains in a strong financial position with $1.9 billion in cash. To help maintain this position, the board decided to cancel the off-market buyback that was announced earlier this year in order to reserve around $150 million in cash.
The capacity cuts will also mean that Qantas will require approximately 2,000 fewer staff. Qantas CEO Alan Joyce has suggested offering staff the option to take paid leave and then unpaid leave in a bid to avoid potential redundancies. In addition, management have also agreed to make various concessions, including the Qantas Chair to take no fees and the CEO to take no salary.
Qantas also noted that the drastic drop in oil price will provide the company with a significant cost-benefit with total fuel costs now expected to be $3.47 billion.
Should you buy?
In my opinion, the coronavirus outbreak may only be a short-term issue for airlines like Qantas. Despite the World Health Organization declaring the virus a pandemic, the market only needs one piece of good news to improve consumer confidence.
However, I would not rush into buying shares yet. Qantas has planned to reduce its operating capacity for 6 months and, given the uncertain nature of the pandemic, it's hard to determine the full financial impact. Although the Qantas share price is trading at a discount, I think a prudent strategy would be to keep the company on a watchlist along with other airlines and wait for the share price to consolidate.
