Is Qantas Airways (ASX:QAN) Undervalued Amidst a Strong Recovery Outlook?

The airline industry, long a barometer of global economic health, has endured a tumultuous decade. For Qantas Airways (ASX:QAN), the past five years have been particularly volatile, marked by the pandemic-induced collapse of 2020 and a subsequent rebound driven by pent-up demand and strategic cost discipline. As the company emerges from this period of uncertainty, the question of whether its shares are undervalued hinges on a rigorous discounted cash flow (DCF) analysis. This article examines Qantas's financial trajectory, projected cash flows, and intrinsic value to assess its investment potential in the context of a recovering global aviation sector.

A Resilient Recovery: Historical Performance and Free Cash Flow

Qantas's FY25 results underscore a robust recovery. The company reported an underlying profit before tax of $2.39 billion, a 15% increase from prior years, and a statutory profit after tax of $1.61 billion, up 28% year-on-year. Operating cash flow reached $4.3 billion, reflecting strong liquidity despite capital expenditures tied to fleet modernization according to the company's financial statements. However, free cash flow (FCF) has shown variability. While FY25 FCF totaled AU$1.1 billion, Q4 2025 saw a negative FCF of AU$317 million, highlighting the cyclical nature of the industry as financial data shows.

Historically, Qantas's revenue growth has been uneven. From 2019 to 2024, revenue expanded from $12.3 billion to $14.4 billion, but the pandemic caused a 21.5% drop in 2020. The subsequent rebound-60% growth in 2022-demonstrates the company's resilience, though it also underscores the fragility of its business model in the face of external shocks.

Discount Rate and WACC: The Cost of Capital

The weighted average cost of capital (WACC) is a critical input for DCF analysis. As of November 2025, Qantas's WACC is estimated at 7.85%, derived from a cost of equity of 8.87% and a cost of debt of 5.74%, with debt comprising 32.75% of its capital structure according to financial modeling sources. Other sources, such as GuruFocus and Finbox, report WACC figures ranging from 7.4% to 9.5%, reflecting differing assumptions about risk premiums and tax rates as reported by market analysis platforms. For the purposes of this analysis, a WACC of 7.8% is adopted as a reasonable midpoint, balancing the company's leverage and equity risk.

Projected Free Cash Flows: A Decade of Growth?

Looking ahead, Qantas's FCF is projected to stabilize and grow. UBS forecasts annual FCF between AU$357 million and AU$651 million from 2026 to 2030, driven by improved aircraft utilization, cost discipline, and a fleet renewal program valued at AU$20 billion. These investments, including 48 Airbus A321XLR aircraft, are expected to enhance fuel efficiency and reduce maintenance costs, thereby bolstering margins as detailed in financial projections.

The company's strategic focus on domestic and international route optimization, coupled with its loyalty program's revenue contribution, further supports these projections. However, the FY26 domestic unit revenue forecast has been revised downward to the lower end of the 3–5% growth range, citing slower recovery in non-resource corporate travel. This adjustment introduces caution but does not negate the long-term potential of Qantas's operational improvements.

Terminal Growth Rate: A Conservative Assumption

The terminal growth rate, a key variable in DCF analysis, is typically aligned with long-term inflation or GDP growth. For Qantas, a terminal growth rate of 0.5% is assumed, consistent with one DCF model that values the stock at 14.36 AUD, implying a 46.3% upside from its current price of 9.81 AUD as calculated by valuation models. This conservative rate reflects the expectation that Qantas's growth will eventually mirror broader economic trends, rather than outpace them indefinitely.

Intrinsic Value and Market Price: A Divergence?

Using the projected FCF and terminal growth rate, the intrinsic value of Qantas can be calculated. Assuming an average FCF of AU$500 million annually from 2026 to 2030 and a terminal value based on 0.5% growth, the present value of these cash flows, discounted at 7.8%, yields an intrinsic value per share in the range of 14.36–29.88 AUD as determined by financial models. The current market price of approximately 10.05–9.81 AUD according to valuation data suggests a significant undervaluation, depending on the model used.

However, this conclusion is sensitive to assumptions. A higher WACC or lower terminal growth rate would reduce the intrinsic value, while stronger-than-expected FCF could justify a premium. The variability in analyst projections-ranging from 5.82 AUD to 29.88 AUD as reported by financial analysts-highlights the inherent uncertainty in DCF modeling for cyclical industries.

Risks and Considerations

While the DCF analysis points to potential undervaluation, investors must consider several risks. Fuel prices, regulatory changes, and competitive pressures in the Asia-Pacific region could erode margins. Additionally, Qantas's heavy investment in fleet renewal may strain short-term liquidity, as evidenced by the negative Q4 2025 FCF as financial data indicates. The company's ability to execute its cost-reduction initiatives and maintain pricing power will be critical to realizing the projected cash flows.

Conclusion: A Compelling Case for Value?

Qantas Airways stands at an inflection point. Its strong FY25 results, coupled with a disciplined approach to fleet modernization and cost management, position it to benefit from the global aviation recovery. The DCF analysis, while subject to the usual caveats of forecasting, suggests that the stock is undervalued, with intrinsic value estimates significantly exceeding the current market price. For investors with a long-term horizon and a tolerance for industry volatility, Qantas offers an intriguing opportunity-provided the company can navigate the challenges of a still-fragile sector.