Why Qantas' corporate culture might be a sign of turbulence ahead

On this recent Rules of Investing podcast hosted by David Thornton, his guest Dr David Allen of Plato Global Alpha Fund, identified corporate culture as one of factors that he is particularly interested in

“I mentioned the importance of people and team and culture - how do you gauge that for a company from the outside? One of the ways we do this is to look at online review systems, where employees can place a review saying ‘Oh, it’s great working at Livewire. They’ve got a great culture’. They evaluate it and it gets a star rating.”

The example he used - 3rd party employer review sites with employee comments - is an example of an unobtrusive indicator of culture (UIC). This phrase was coined by London School of Economics researcher Tom W Reader. They're unobtrusive because the employer is not engaging the employee directly.

UICS have been picked up by prudential regulators such as the Financial Conduct Authority in the UK as one way to identify cultures that indicate risky behaviour that, left unchallenged, would compromise the prudential soundness of a financial institution. As the FCA says

“If culture is so crucial, then it needs to be managed. If it needs to be managed, then it needs to be measured.”

Measuring culture

Some of the more commonly used methods for measuring culture aren’t UICs but employee surveys and net promoter scores. If you’ve ever worked in a medium to large organisation, you likely know the drill as regards employee surveys. Net promoter scores for employees measure how likely the employee is to recommend the company as a place to work.

Take Qantas (ASX: QAN). 

I wrote in this wire how the customer measure in the short-term incentive plan was reduced to zero for FY2023. Employees are included in the measure Workplace and Operational Safety. For workplace health and safety, it measures total recordable injury frequency rate, lost work case frequency rate and fatalities.

Qantas measures much more around its culture than this suggests.

For employees, it measures voluntary turnover rate (8.6 % at 30 June 2023, down from 10.4% for FY22). It conducts employee surveys at key moments in the employment cycle (such as onboarding, starting a new role, work anniversaries and returning from parental leave), but also more generally via bi-annual surveys. It tracks various diversity statistics, including gender pay gap.

What about the customers?

Yet the other important part of the corporate culture equation can be seen via customer metrics. 

Qantas FY23 Sustainability Report only discloses one metric, on-time performance (67.9% for FY23, down from 73.9% in FY22 and 85.5% in FY21). In prior years they have disclosed brand preference as measured by Reputrak (68% for FY22).

Customer complaints data isn’t disclosed in Qantas’ sustainability report but the Customer Charter indicates that Qantas has a complaints mechanism so collects this information. The Airline Customer Advocate hears complaints that aren’t resolved by the airline. For 2021, the top 5 complaints about Qantas were:

• a refund request

• flight delay or cancellation

• fees or charges

• baggage services and

• Loyalty/Frequent flyer program.

Each of these dimensions tells you something about Qantas operations and that, in turn, tells you something about its corporate culture.

Operating update and its impacts on customers

Qantas provided an investor update earlier this week, guiding to higher investment spend and expenses funded by capital to be used to help regain consumer trust. Before we consider what a selection of brokers are saying about their share price targets in light of this news, the chart below gives you an idea of where it has been to its close at $5.16 on Tuesday 26 September 2023.

Morgan Stanley notes 

“Continued strong demand is a positive, but $250m of fuel-related charges [which Qantas says it intends to absorb, at least in the short term] and $80m of customer-related initiatives [which is on top of the $150m previously announced] provide a more direct 1HFY24 cost increase. We expect modest consensus downgrades.” 

It has the stock as OVERWEIGHT, with a price target of $9.00, up from $8.50. 

Citi notes 

“Looking forward, the company (at least on paper) appears to be balancing the recovery of higher costs with the importance of affordable travel in this environment and appearing to show what may be the first sign that recent negativity/politics can impact earnings.” 

It has lowered its price target to $6.00, from $6.95. It remains NEUTRAL on Qantas.

Goldman Sachs has revised its earnings estimate for FY24 downwards by 12%. Its thesis is that Qantas’ stock “is not even pricing in a generic recovery, let alone improved earnings capacity." It has a BUY rating on the stock, having lowered its 12 months price target to $8.25, from $8.75.

CLSA notes the med-term outlook remains encouraging, offset by short-term headwinds. With Qantas focusing on rebuilding brand confidence through customer initiatives, they believe the brand damage can be repaired, with structural profitability achievable. They have lowered their price target to $5.60, from $7.30 and has downgraded its rating to UNDERPERFORM from outperform.

Jefferies sees Qantas announcement as signalling it's reinvesting to restore customer trust. IT calls out that the acknowledged brand damage is fixable, supported by strong demand for flights. It too has lowered its price target to $7.79 from $8.78, and maintains BUY.

Barrenjoey focuses on the higher fuel costs, noting the statement indicates Qantas will absorb these and not pass them to its customers. They note there is still strong demand for its services, although mitigation may include capacity adjustments and lower yields. It has lowered its price target to $7.20 from $8.70 and maintains OVERWEIGHT.

Jarden notes Qantas' statement that it is unlikely to pass on costs from higher fuel prices as increasing its earnings exposure: action may be needed in 2HFY24 to preserve profitability. It has lowered its price target to $6.90 from $7.00 and maintains OVERWEIGHT.

E&P sees that Qantas is resetting its cost base, but is unlikely to remove service costs. And while strong demand allows mitigation of the customer service impact, it has lowered its price  target to $7.77 from $8.69 and maintains POSITIVE.