Qantas: Turbulence in Airline Stocks

There are many things I don’t know. Up high on that list is the mystery of Qantas; how does it manage to convince shareholders, year after year, to invest in it?

Seriously, it’s an absolutely terrible business. Yesterday, the company reported an underlying loss of $646 million (don’t worry though, it was ‘better than expected’) and a headline loss of $2.8 billion thanks to a hefty writedown on the value of its international fleet.

Management usually peddle the line that writedowns are ‘non-cash’ and therefore just an accounting adjustment. That’s sort of true, but it reflects past capital investment (the result of cash expended) that no longer has any value.

In other words, management incorrectly allocated shareholder capital in the past and the writedown is simply a reflection of that.

Airlines are a tough business. You are going to get writedowns from time to time. But ever since the GFC, Qantas has destroyed shareholder value on a regular basis. Until 2009 the airline regularly generated decent (for an airline), if not spectacular, returns on equity, averaging around 12%.

But since the crisis hit, the best it could manage was a return on equity of around 5% in 2011. Last year it was a little over 2% and, well, this year it was nothing. Forecasts for the next few years don’t show much respite.

Qantas’ cost of capital is much higher than 2–5%, so the low returns it generates on shareholder capital represents a steady destruction of value. That’s why its share price looks like this over the past decade:

 

That’s not to say that things won’t improve from here. Stranger things have happened, and the share price chart of doesn’t look too bad. Qantas shares bottomed twice around $1 over the past few years and are now turning higher…

Regards,

Greg Canavan+
For Markets and Money

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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