After being thrown into turmoil by the COVID-19 pandemic, the last couple of years has been wild for the Qantas Airways Limited (ASX: QAN) share price.
Now up nearly 150% from its March 2020 low, is Australia's pre-eminent airline out of the woods? Or, could it be teetering on the edge? Ultimately, it all comes down to balance sheet health, cash flow, and outlook.
Let's dive straight into it.
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Cause for concern
When it comes to investing, there are few aspects of a company more important than the balance sheet.
I like to think of it as the cardiovascular system of a business — a poor one, clogged up with debt, can be compromised by a minor mishap. Whereas, a healthy one — loaded with cash (and little debt) — will keep pumping strong even when under severe strain.
That's where the worry begins for Qantas shares…
The airline operator flew into the pandemic with a debt-heavy balance sheet, carrying $3.641 billion in net debt. For reference, debt-stacked balance sheets are not uncommon in the airline industry.
As travel effectively ceased to exist in 2022, Qantas had no choice but to drastically cut costs and use more debt for sustaining its ongoing obligations. At its worst, the company was lugging around $4.609 billion in net debt at the end of FY2021.
Fortunately, the world has reopened and Qantas has been able to reduce its debt burden. However, the damage of the pandemic has left its mark.
According to the company's FY22 results, Qantas now has negative equity of $190 million. This is to say, the sum of its parts is less than zero if all of its assets were sold off and liabilities repaid. As you might have guessed, this is a major red flag.
After trawling through all of Qantas' annual reports — dating back to 2001 — there has not been a time when the company has been in this position previously.
Could this mean the end for Qantas shares?
The Aussie airline's financial position is less than optimal, but that is probably to be expected after emerging from a company-collapsing pandemic. Not all ASX-listed airlines were as lucky… RIP Virgin Australia.
Importantly, the ability to generate more reasonable revenue (and earnings) has been re-enabled for Qantas. Instead of burning through $3.47 billion from its operations — as it did in 2020 — Qantas bagged $2.67 billion in FY22.
Furthermore, the airline recently informed the market that business conditions give it optimism in the near-term outlook. As a result, the company is now expecting between $1.2 billion and $1.3 billion in underlying profit before tax for the first half of FY23.
All in all, if the strong demand for travel remains, Qantas could return to bottom-line profitability and improve its balance sheet.
The Qantas share price is up a market-beating 15.2% in 2022.
