Qantas looks to Asia for international future
Qantas is planning to drastically cut costs by forming two new airlines and cutting 1,000 jobs in Australia. Roger Montgomery reveals his thoughts on Qantas. Read the transcript.
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.
David Martin
:
THe airline busienss is crazy. High capital cost and the apparant differentiating factor is price and as a consequence there is always another carrier that will do it cheaper. The fact is the fares are too low.
20 years ago the standard fare between Mel and Syd was $660. Mel to BNE was around $1600. That was economy! With all of the input costs increasing over a 20 year period how is it now possible to provide the same seat for $200 and improve service. Its not and never will be.
As a consuemer however, i am happy with the low fares becasue i will never own shares in a business that is unsustainable.
Only my view
DAvid
Andrew
:
Completley agree David and good post. Not a very attractive industry at all.
Whilst the main factor in decision making is where can i get the cheapest price for a plane that is not going to fall out of the sky than the companys operating in this space will struggle as the ticket prices will always struggle to meet the capital needed to run one of these businesses.
Prices down and costs up are never a good indicator of industry attractiveness.
Its a shame, i can see some aspects that could lend to a differentiating factor and equal higher sustainable ticket prices (safety/on flight service etc) but the customers just don’t want a bar of this as they want more money to spend during their holiday and not on their holiday.
Like you said, i will never own an airline, but happily travel on one.
Brad
:
MCE, DCG, ZGL, any thoughts?
ken fraser
:
Brad, DCG dissapointing but still trading below 2011 IV. ZGL dissapointing but still trading well below 2011 IV. TSM negative cash flow of $9 million. I could be doing things wrong though. What do other value.able investors get? Where`s Rogers A1 service when you need it? I still hold ZGL but sold DCG and TSM and put the money into GNG and TGA.
PaulS
:
Hey Brad,
A few stats I have for DCG:-
free cash flow $8,716,000.00
Book Value 0.9164
EPS 18.9 (23,480,000 net profit / 124,214,568 shares on issue)
ROE 20.62
2011 IV $2.78 at 10% RR
Looks pretty good to me, they have another $670m dollars worth of contracts they are currently tendering for, in addition to the $300m they have currently on their order book and have added to their cash pile this year.
Would be interested in anyone else’s feedback on DCG.
Cheers,
PaulS
Ash Little
:
Hi Paul
Just my view but 10% rr is too low.
It fails the stability of earnings test to use 10% rr for me…….About 12%for this one for me
Roger Montgomery
:
Quote: “I’d rather a lumpy 15% than a smooth 8%”
Ash Little
:
Very true,
But smooth 8% would still have lower rr than a lumpy 15%
Ash Little
:
Not saying the smooth 8% is any good though.
What is the RR on Govy Bonds?????
ken fraser
:
Brad, DCG dissappointed on what I was expecting for 2011 but I`ve had another look after hearing Roger say his IV is $2.56 ( referring to 2012 probably) and looking at their order book of $300m so will probably buy back in on Monday lucky to still stay in front after making a decision without enough consideration.
Ron shamgar
:
Hi brad,
MCE- results due on Tuesday. According to zicom the future is bright. They are very cheap.
ZGL- update wasn’t so good as some parts of their business are slowing down.
DCG – IV is $2.20 rising to $2.50 but I was worried about rising labour costs and their results came below analysts forecasts.
Luckily I sold several months ago out of ZGL and DCG at almost double today’s prices but I still hold some of my MCE as I believe they will have a good result and healthy order book.
Cheers.
David Martin
:
Hi Ron, I’ve never found a broker that cover’s Decmil – which one and what were their forecasts?
Agree – looking forward (hopeful) at MCE announcement.
David
Greg Mc
:
G’day David,
Austock Securities Ltd, E.L.& C. Baillieu Stockbroking, Hartleys Ltd, Moelis Australia Securities produce forecasts for DCG. On Comsec, the forecasts have been updated to 2012 and 2013 so 2011 is no longer available but from memory the average forecast equated to a ROE of 29%. DCG produced a comparable ROE to the previous year on an expanded equity base which I thought was ok but the brokers were expecing more.
Scott W
:
In other news speaking from the inside as a supplier to Qantas and other global Airlines they are really tightening their belt. I have worked for a couple of companies supplying in-flight snacks and Qantas have pushed to the level where they request we make no margin selling to them and consider it to be marketing exposure to be on the planes.
Whatever, sure they can say that but they still expect to make profit.
Ron F
:
Hi Roger,
Airlines are the highest capital intensified industry and their company cash balances were under strain before the GFC. It was a time of buying and ordering larger expensive airplanes in an environment of highly competitive on-going fare price cutting.
The industry have been impacted financially more by the GFC than other industries that has led to the current strategies of alignments and repositioning.
Without the GFC, what is occurring now would have eventuated in time. Even with higher load capacity – yield per plane, it comes to a time a company cannot keep on reducing prices on more expensive equipment and this applies to lower cost equipment.
Think of the pay back time ratio, the longer the payback period is the longer the ROE is affected.
Over priced acquisitions is another example of pay back period and the affect on ROE, the more you pay for it to earnings the longer the ROE will be affected.
Westfarmers is the first to come to mind on over priced acquisitions affecting ROE. The question still remains will they ever be able to achieve the ROE pre Coles acquisition, if so how long will it take.
Regards
Ron
Roger Montgomery
:
That’s a helpful framework Ron.
David C
:
A write down of the Coles assets would improve the ROE going forward but would be an admission of failure/error.
Craig B
:
With current management at the helm the danger is always that they go out and do it again: massively dilute your existing holding via a capital raising, and pay way over the odds for an acquisition.
Where do they think the value is for shareholders (thinking especially of those who held prior to Coles)? And why are people willing to pay 17-20 times earnings for them?
Scott W
:
In some ways Roger you could posture that Qantas are simply doing with John B has already put in place for Virgin Australia. While many have not noticed what is going on at Virgin clearly Qantas have and if you look at the network and partners they have in place the reality is that Virgin Australia is tied into many of the best airlines around. As they improve the local service as they seem to be doing, and the ownership is probably at least as much Australian as Qantas (interesting to compare the relative share registers) you would have little left to argue reasons not to choose Virgin above Qantas. Myself working in international trade I think about Airlines too much, and although I had been a regular bum on a Qantas seat, the network that Virgin offer now means I can see the future of where my points will be accumulating. Not only that, in terms of using points if you care about that side of the business, there is no comparison, the Virgin program eats Qantas everytime.
Having said that one of my investing lessons remains buying shares in the Virgin float. I was not Value Able then…
Roger Montgomery
:
Hey Scott,
I cannot speak for everyone at the blog but I, for one, am very interested in the FF business. I think it is the jewell in the crown. I would be delightted to hear more of your insights about the FF business.
Simon Anthony
:
I second that proposal!
Scott do you believe that Virgin Australia points program is so good/or good enough to overcome any brand loyalty an Australian would have flying Qantas? If so is the competitive advantage of Qantas FF business overstated by analysts and is it (IYHO) no longer a discernible advantage ?
Scott W
:
In a quick observation that genius of the Virgin program is that is is essentially unlimited. Unlike Qantas where they allocate a limited number of seats per flight which may then be increases if the flight is not full, Virgin allow you to book any seat on any flight, and in the case that the flight is on sale you can book using a discounted number of points.
The allocation of points is also fair as they award the number of point relative to the dollars spent on the ticket. This removes the burden on the airline of carrying the program and as a consumer you can hardly whinge when you buy a $5 fare and get almost no points can you?
So if you were running the Virgin Program you know that the revenue from the ticket sales are going to be directly proportional to the liability you inherit in the form of points earned.
As a member you know you can book the seat you want when you want it, you might need more points in peak periods, but at least you can get a seat, Try getting a Qantas international economy seat in the Christmas holiday not going somewhere stupid like Hong Kong via Perth for a transfer. Coupled with the massive membership base due to the Woolies card, the attractiveness of the program now needs to follow the Canadian example and move away from flights, because in terms of flights they are too hard to get and Virgin will eat them once people like myself consider how much better their program really is.
Simon Anthony
:
Thankyou very much Scott for your insights.
Chris L
:
Yes, I got QAN’s “we’ve changed” ‘personalised’ email …
Sorry, guys, I will choose another carrier any chance I have until you change your attitude towards your customers. Individual employees are nice enough, and I feel sorry for them, but corporately Qantas is stuffed.
Michael Leslie
:
Yes, Chris, when I got that stuff from QAN it was the last straw. I immediately “unsubscribed”. Besides I had stopped flying with them a few years ago after a couple of unpalatable experiences. Until Qantas management treasures their passengers they will not make the grade. My daughter and family (four of them; 2 adults and 2 kids aged 2 and 4 years) did a Singapore to Heathrow leg with them recently and had nine seats to share. Of course they were thrilled as the kids slept most of the way but where were the other passengers? No doubt they were on Singapore Airlines or some other where they are treasured.
Roger Montgomery
:
I feel we as a nation should be doing more for our Australian enterprises. Going for the cheapest price will eventually see us all out of work.
Jim
:
I agree Roger, however the comments about Qantas’ culture are very valid.
My wife and I are travelling to Europe next month and when we were offered the opportunity of a much lower fare on business, we grabbed it and also thought how glad we were that we didn’t own the shares. We were contemplating another airline until this fare was released during the Australian Grand Prix. Now similar fares have been released for Dec-Jan, a peak season.
The best investment I’ve ever made in Qantas was getting life membership of the Qantas Club in the mid-90’s – again good for me personally but not for shareholders.
Cheers
Jim
Craig
:
Australian enterprises may find it difficult to be the cheapest, but there is no reason they cannot be the best value for money.
PaulS
:
Hey Roger,
How about manufacturing, we are now principally a resource nation, we don’t produce anything other than what we dig up or what we cut down. I hear another australian manufacturer, this time Silex who was our own home grown producer of photovoltaic solar panels, now cannot compete against the cheaper inferior chinese panels because again we are looking for the cheaper alternative regardless of the quality. Job losses and the closure of this business seems to be it’s future. Photovoltaic cells were actually developed originally by the University of NSW, so another ingenious product developed in this country that has been sold to overseas interests to profit from. We all lose when this is continually allowed to happen.
Cheers,
PaulS
David King
:
What next? Remember blankets? AWA TV’s? Next stop mattresses. Wait & see.
Peter M (Mully)
:
Well said Roger but unless and until Australian business receives the support of government policy that encourages innovation, productivity, and efficiency, I’m afraid it may not be too long before a whole lot more people are out of a job.
Manny
:
Offcourse we all want Aussie companies as well as small business to prosper and be the envy of the world but they have to be competitive. I don’t think we should expect the consumer to fork out extra $’s to keep Aussie companies afloat whilst the political system (at local, state and federal) is letting them down or the businesses themselves have been used to pocketing huge margins for decades.
Finally thanks to high Aussie dollar and awareness (which took ages to come to all of us- thanks to internet) to what prices overseas people pay in other similar developed countries for goods, services has ensured Aussie’s will not get ripped off anymore by business either pocketing huge margins (DJS, MYR as examples) or businesses being let down due to lack of govt support (min wage issue, high rents, bureaucracy, red tape and cost of doing business).
In the short term I think it will be a very rocky road for Aussie businesses and many will close, jobs will be lost but I am hopeful sanity will prevail in the medium to long run and we will survive
Roger Montgomery
:
Hi Manny,
Sanity cannot prevail without action.
Chris L
:
I had a dinner last night with some colleagues from other companies, and (because we are all in Indonesia) the topic of airlines, and especially flights back to Australia and New Zealand came up. ALL used to choose Qantas first, NO-ONE was choosing Qantas first anymore, in some case they were ending up with them because of particular flights, but they’d always took another airline if there was a choice.
A lady commented that on her last (and she meant last!) flight, she’d had a bottle of water thrown at her by a Qantas flight attendant.
Another comment was that in the past this person had chosen Garuda for cheap flights on older planes and Qantas for more expensive, but more comfortable flights, but that that this was now reversed as the Garuda planes were newer, and the service much better, and the only reason he now flew Qantas at all was cheap flights Bali to Melbourne, but that he was regretting taking them, as they were now full of pissed bogans on cheap Bali packages.
Apparently we’re supposed to get excited that they want to go further down this route of cheap (in the nasty sense) airlines. Jetstar is a monstrosity and they want more … greaaat …