REX Warns Aviation Disaster Imminent
Regional Express Holdings Limited (ASX:REX), Australia’s largest independent regional airline, released a profit warning on Friday evening in which the Chief Operating Officer used very strong language to warn of the sector’s imminent collapse.
Regional Express has warned that first-half profits are likely to be around 40 per cent of the corresponding 2013 period. In prior years, Regional Express benefited from the fly-in fly-out of workers to mine sites, but business conditions have deteriorated significantly, and so too has the company’s viability.
It is rare for a company to mention its competitors when providing announcements, yet the COO Garry Filmer went on to discuss the prospects of Qantas Airways (ASX:QAN) and Virgin Australia (ASX:VAH).
“The entire aviation industry is financially haemorrhaging right now and approaching collapse. Qantas’ first-half profits are expected to be registering a decline of over $450 million from a before-tax profit of about $140 million in the prior period, to an expected loss of over $300 million. Virgin Australia shows a similar trend, with a decline of about $80 million from a before-tax profit of about $25 million, to an expected loss of more than $50 million.”
“Regional aviation is even harder hit, as the profit margins are slimmer. We have already seen the collapse of two of Australia’s oldest regional carriers during this financial year – Aeropelican and Brindabella – and in today’s toxic aviation environment, more [collapses] will likely follow suit. In the past decade, there was an average of one regional airline collapsing every year.”
Montgomery Investment Management has been very vocal in its aversion to investing in the aviation industry for many years, as the fundamentals simply do not provide attractive long-term prospects. Unless competition declines, pricing is rational, capital intensity eases and fuel prices can be controlled, the outlook for flying people on planes will not change.
Regional Express’s comments do not come as a surprise to us, or any long-term value investor, and hopefully they also serve as a timely reminder to speculators who might seek to trade such shares short-term.
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.
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Graeme Robinson
:
I feel the Board of Qantas should be held responsible for the current position. Seems to me they have let their ego get in the way – they are going to keep their 65% of the domestic market at all costs. Thus when Virgin add one additional flight, Qantas adds two! Thus all these empty seats and bugger the bottom line.
Daniel Rosenthal
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Quick thoughts on Ansell Limited? Taken on some debt, but earnings profile looks bright.
Kindest Regards
Daniel
Roger Montgomery
:
My be a blog post in that. Stay tuned.
Justin Hamman
:
Ben, I would be interested to know if you would put Alliance Aviation (AQZ) in the same bucket. Seems they have done comparatively well in this space by creating contracts with large companies.
Roger Montgomery
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Taking a look at the mining services sector, you have to be very careful about contractors.
Adam Novek
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Wow this isn’t good. I remember when you came to UOW to lecture us at the start of last year and one thing you said was how bad the aviation industry is for investing. I give credit to your predictions.
Andrew Legget
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Airlines, car manufacturers and sporting teams generally do not make very good investments. Sounds like the REX announcement will be hard to beat when it comes to a complete lack of optimism. You have to give credit to management though, they are giving shareholders a fair version of what is happening instead of trying to hide it in the name of promoting.
Actually flown REX a few times, good honest airline. No real bells and whistles just good at getting you to places in the middle of nowhere.