QAN 2012 RESULTS CONTINUED
Last week’s reporting results flop for the flying kangaroo set the social web alight, with a mixture of sentiment from followers of this blog, the general public and the mass media alike. The first shots were fired during my impromptu guest appearance on Bloomberg…
The below follows the tale through social media curation platform Storify.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Andrew Legget
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I said in a previous post that QAN’s problem was simple. It is an airline and like the car manufacturing industry it is a high cost, capital intensive commodity style business where price is the major determinant in the decision as to which airline they fly.
This is why when it comes to getting exposure to the tourism sector i will instead look towards Flight Centre and Webjet as they offer services that link to the areas people will happily spend money on.
If i am going on an overseas holiday and can save $1000 by flying a different airline than i am going to do that as that $1000 has a higher intrinsic value in allowing me to enjoy my actual holiday (as exposed to travel). The opportunity costs by choosing a high priced airline are taken into account and people will instead choose a cheaper airline, this leads me to my next point.
People will choose a cheaper airline however they will still take into account some non-price factors. They will still need to feel that they are in safe hands and will be reasonably comfortable. The problem with Qantas is that they have competitors who are just as cheap and cheaper than they are and also have a reputation for excellent service and safety. Etihad and Emirates have great reputations and are cheaper in most cases i have seen.
Now that the qualitative aspects have been discussed, we can go to the easier problem with the financials.
As we have heard from yourself and is easy to see, depreciation plays a major role in whether Qantas make a profit or not. If depreciation didn’t exist and they had to book the whole cash outflow of buying a new plane as a cost of doing business than the results would look absolutely terrible. If they were to do as you have mentioned roger and book an inflation adjusted charge or impairment (for replacement cost of aircraft) it would still be a lot worse than what they have been reporting and their first loss would have already have come.
The fact that they haven’t paid dividends for a while i think shows the true picture of the company, they don’t have the cash to distribute.
To summarise the problem for Qantas can be summed top as follows, it is in a commodity industry where the costs of doing business are quite burdensome and don’t get the same support in Australia as some airlines overseas that are nationally backed or sheikh backed. The politics of being the national carrier means it is quite a task for them to move some of their more expensive operations to other cheaper countries. Qantas is at a competitive DISadvantage in quite a number of areas and as long as this is the case than they will continue to struggle. The fact it is a national carrier and has a good reputation has probably saved it from being even worse especially as i think aussies are very very price motivated.
The mixture of the commodity stye market, expensive costs reveal an inherent problem, prices charged need to go down to compete whilst costs go up. decreasing prices + rising costs= squeezed margins. Now i may have missed some things but i think i covered a fair bit of it, can anyone point out to me something that i have written that makes a positive investing case for Qantas?