The Qantas Airways Limited (ASX: QAN) share price is down again. The ASX airline share has seen declines since the beginning of COVID-19, and over the past few weeks.
At the time of writing, Qantas shares are down 16% since 8 June 2022.
A lot has happened in the last couple of months, including significant interest rate hikes by the Reserve Bank of Australia (RBA). It has implemented back-to-back 50 basis point (0.5%) rises.
That certainly can affect the valuation of assets. Interest rates can act like gravity on asset prices. The higher the interest rate, the harder it pulls downward on the price. Billionaire Ray Dalio once said about interest rates:
It all comes down to interest rates. As an investor, all you're doing is putting up a lump sum payment for a future cash flow.
But there's a lot more to understanding the Qantas share price situation. Management and investors have been waiting for demand to come back after more than two years of disruption from the pandemic.
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What's the latest from Qantas?
Comments from the airline could indicate what medium-term demand and financial growth may look like.
The last update we heard from the ASX airline share was a market update in June 2022.
It said that "travel demand remains strong across all categories". Indeed, the demand may have been more than Qantas was initially prepared for as it thanked customers for their "patience and understanding while the airline works through what has been a challenging restart for the industry globally".
But, fuel prices are hampering things. Fuel is one of the biggest expense items for Qantas.
The airline has reduced its domestic capacity for FY23 to assist with the recovery. For July and August, a further 5% of capacity will be removed on top of the 10% announced in May. The 15% total will also apply to September. A reduction of 10% will be applied to schedules from October to the end of March 2023.
This means that Qantas' planned domestic flying will be brought down 106% of the pre-COVID level for the second quarter and 110% for the third quarter.
Qantas explained that these reductions, combined with "robust" international and domestic travel demand, are expected to help the airline recover the elevated cost of fuel. If this helps profitability, it could help the Qantas share price.
There are no changes to international capacity plans, with flying steadily increasing from around 50% of pre-COVID levels in June to around 70% by the end of the FY23 first quarter (30 September 2022) to meet demand.
Qantas says that capacity growth will continue as additional A380s return to service. International capacity is expected to reach 90% of pre-COVID levels by the fourth quarter of FY23, which is the three months between April 2023 to June 2023.
What will the airline do with the profit it's making?
The ASX airline share said that it expects net debt reduction. The improved demand is expected to reduce net debt to around $4 billion by the end of FY22.
In the second half of FY22, it's expecting to report underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of between $450 million and $550 million.
Is the Qantas share price a buy?
Brokers are somewhat mixed on the business.
UBS and Morgan Stanley both rate the company as a buy, with price targets of $6.55 and $6.60 respectively. This implies a possible rise of more than 40% over the next 12 months. The brokers were pleased with the better net debt expectations.
However, Credit Suisse rates the airline as 'underperform', with a price target of just $4.35 because of concerns that higher fuel prices will hit potential profit.
Using Credit Suisse's profit expectation, the Qantas share price is valued at 22x FY23's estimated earnings. The Morgan Stanley profit projection puts the Qantas share price at 19x FY23's estimated earnings.
