Is Qantas’s dividend-miss surprising?
Qantas reported its half year profit today and the oft’ heard investor refrain “but Roger, its pays me a good dividend” was dealt a heavy blow with the company announcing no dividend would be paid for the half year.
As you all know by now, an airline profit is an accounting construct. If the depreciation charge was replaced by “a provision for replacement cost of aircraft” (my own accounting invention), the charge would be a lot higher and no profits would exist. Indeed, even though I have been saying this since the 90’s, it was evidenced again in Qantas’s half yearly report with $142 million of “additional depreciation”
So how are dividends ever paid?
A quick look at the debt and equity over the year reveals it is the charitable nature of banks and shareholders that keeps the planes in the air. As I write this, the total market value of the company is less than all the money that has been injected into it and left in it over the last decade and a half.
Can you believe a private equity group wanted to pay $11.1 billion for Qantas, or $5.45 per share? Can you believe that the stock market price went as high as $6.06, valuing the business momentarily at $12.3 billion? And they say the stock market and that its participants are rational!
The world’s airlines have accumulated aggregate losses of almost $54 billion over the last decade and in 2010 will lose another collective $5.8 billion[1]
Now don’t get me wrong. I am not saying Qantas isn’t a great Australian icon. Nor am I saying that the team isn’t doing a world-class job. Indeed, Qantas is regarded as the most profitable airline in the world. But you can see yourself that it would be very painful financially to own Qantas outright. From a purely capitalist perspective, I would rather own something else. A term deposit perhaps.
Here is a link to todays ABC Radio Interview about Qantas on The World Today: ABC RADIO qantas interview
[1] International Air Transport Association (IATA) Report 2009
Posted by Roger Montgomery, 18 February 2010.
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.
Des Laffy
:
Dear Roger. Iwas very impressed with the result of IOOF.Have you ever done a valuation of this business. I do own shares in this company and it seems to have an exciting future. Regards Des.
admin
:
Hi Des,
I remember when it floated! I will put it on the list of company valuations requested and if I receive a few more requests will post something here on the blog.
Damian
:
I agree Roger that it’s difficult to see airlines making consistent profits unless they charge more.
It’s interesting to me that when I fly to Melbourne, if I booked early, the cost of the flight from Sydney to Melbourne could actually be cheaper than the cost of the cab fare from Melbourne airport to the city!
Roger, have you ever looked at REX?
http://money.ninemsn.com.au/shares-and-funds/research-a-company/results.aspx?inforeq=historical&code=REX
It’s debt and ROE aren’t too bad, but they’re not consistent enough for me to consider investing.
admin
:
Hi John,
It seems the only way Airlines can make real profits is if they can charge more. That can only happen if new players stop popping up, when another goes bust. Perhaps air travel needs to become, once again, a luxury travel option. A smaller industry, fewer players and monopolies on routes. Flying someone to Melbourne for less than it would cost to ride a bike, isn’t ever going to work.
JohnC
:
Free market capitalism clearly not so good for airlines! This reminds me of what’s happening in telecommunications too, i.e. broadband and mobile. Monopolies… as investors we could all use more of those. We’ll just have to settle on buying airports.
You may have something going there with the luxury travel option. I see at the heart of your suggestion, a need for airlines to meaningfully differentiate – to raise the costs of switching for customers. For example, what if Qantas secured exclusive alliances with key traveller accommodation and vehicle hire businesses? Patrons of these businesses gain access to perks (for example, frequent stay at so-and-so hotel lets passenger enjoy first-class travel) that other travellers do not get access to.
Instead of ripping out first-class seats from planes, why not retain them as rewards for repeated patronage, i.e. these benefits cannot be purchased? In the short-term, they will lose money from the big-spenders but in the long-term, even the thrify will start to feel that much more loyal to one airline than another if they are more likely to get first-class seating that cannot be purchased or gifted. There cannot ever be empty first-class seats because they will always be provided to the most frequent airline patrons on any flight.
What do you think of these ideas?
admin
:
Hi John,
These are really good ideas, but of course before we get too carried away I have to remind myself that I am no airline operator. I am an investor who currently chooses not to invest in them.
Scott
:
Roger are you able to do a valuation on Alumina (AWC).
Thanks
Alex
:
I agree.
Thanks
admin
:
Hi Scott,
I will put it on the list.
JohnC
:
The world awaits with baited breath for the long-heralded global airline consolidation. For a hugely capital-intensive business, it still seems far too easy for new entrants to appear and compete (at least in the medium-term).
Qantas and every other big airline in the world are finally beginning to reconcile themselves, post-GFC, to the fact that they are just operating expensive taxis, a fact that their more profitable cousins like Ryanair and Southwest Airlines have embraced to Walmart-like conclusions. The last two examples are only marginally better though, at 7% and 6.25% ROE respectively.
JC
:
Best way to become a millionaire?
Start as a billionaire and then buy an airline.
admin
:
Hi JC,
Or; how do you make a lot of money in the airline game? Start with a lot more.