Morningstar forecasts Qantas and Flight Centre will reach pre-covid metrics by fiscal 2024 as border restrictions ease and travel returns. But expect the route between now and then to be bumpy.

Flight Centre (ASX: FLT) will post another loss in fiscal 2021, but Morningstar senior equity analyst Brian Han says earnings will reach pre-covid levels by 2024. It’s a similar trajectory of recovery for Qantas (ASX: QAN), with domestic and international passenger capacity expected to reach pre-pandemic levels by 2022 and 2024, respectively.

But until then travel operators such as no-moat Qantas will be wedged between the virus and government attempts to suppress it, says Morningstar equity analyst Angus Hewitt.

“At this point, we anticipate a steady recovery in air travel demand, with international borders gradually reopening from late calendar 2021 and Qantas returning to profitability in fiscal 2022,” Hewitt says.

“However, we expect the recovery of air travel will prove highly volatile and we reiterate our very high uncertainty rating.”

Uncertainty returned this week, with Victoria announcing new covid restrictions, while other states such as Western Australia imposed domestic travel requirements in response.

Reopening concerns have dogged both Flight Centre and Qantas this year. Qantas ended Wednesday down 4.9 per cent year to date, after having been up 12 per cent in mid-March. Flight Centre had risen almost 24 per cent just before the end of Q1, before closing Wednesday down almost 6.9 per cent year to date.

Share price, Qantas and Flight Centre (YTD - 25 May)

Share price, Qantas and Flight Centre (YTD)

Source: Morningstar Premium

But Han cautions against fixating on the “barbecue shopping habits of covid-19 patients” or “endless government projections”. Instead, keep the eventual reopening in mind, and those eager travellers waiting to get out.

“We see such a reactive, short-term exercise as futile in estimating the longer-term earnings potential of Flight Centre,” he says

“We prefer to pay attention to the sheer pent-up demand for travel, among corporate and leisure consumers, and its longer-term normalisation.”

Han and Hewitt have maintained their fair value estimates for Qantas and Flight Centre. Qantas closed Wednesday $4.67, slightly off the $5 fair value estimate. The airline has a “very high” uncertainty rating. Flight Centre closed Wednesday $14.89, a 17 per cent discount on the fair value estimate of $18.

Passenger traffic through Sydney airport (April 2020 – April 2021)

Passenger traffic, Sydney Airport

Source: Sydney Airport

A return to profit

Both firms are expected to burn cash until fiscal 2022, by which time profits are forecast to return.

For Qantas, Hewitt anticipates a fiscal 2021 pre-tax loss of $2.2 billion. In the case of Flight Centre, one of the largest travel agencies in the world, Han expects it to lose about $496 million pretax, nearly even with its fiscal 2020 loss.

But capital raising in 2020 means both firms have sufficient liquidity to hold out until they’re back in the black.

The return of domestic travel will help both firms back to profit. Hewitt expects Qantas to fully recover domestic capacity by fiscal 2022.

Already this quarter, domestic capacity for the airline is running at 95 per cent of pre-covid levels. Qantas usually takes about two-thirds of the domestic market.

Domestic passenger traffic at Sydney airport is up 33 per cent in April versus March, according to data from Sydney Airport. Monthly traffic is now 75.2 per cent of the pre-covid level, up from 49 per cent in March, 29 per cent in February.

“This illustrates the willingness to travel when borders open, despite the risk of snap lockdowns,” says Han.