Qantas Airways (ASX: QAN) has lived up to airlines' reputation for being bad businesses to invest in.
There's the joke that goes, "What's the best way to become a millionaire?" with the answer "Start off by being a billionaire and buy an airline." Unfortunately for shareholders who buy into airlines, the results are no joke.
Today, the Flying Kangaroo announced that it would report a loss of up to $300 million for the six months to end of December, thanks to what the company describes as a 'marked deterioration in trading conditions and weaker passenger loads and yields'. As a result, shares in the airline have plummeted, down 15% to $1.025 in lunchtime trade.
So what can investors learn from the news?
- No matter what management do or how good their pedigree, airlines are bad business models. Seats are a commodity item, with lowest price most often winning over customers. But that's bad news for airlines – competition effectively harms all the players.
- There are untold external forces on airlines that are beyond management's control. As Qantas boss Alan Joyce said, "The challenges we now face are immense". Unfortunately, that's always going to be the case for an airline.
- Airlines are highly capital and people intensive. Planes and related infrastructure are expensive. Fuel and employee costs are two of an airlines major cost components. Foolish investors would be wise to avoid investing in highly capital intensive businesses.
- A lack of a competitive advantage means companies like Qantas are at the mercy of their competitors. There's pretty much nothing Qantas could do to stop losing $300 million in six months, as competitor Virgin Australia (ASX: VAH) embarked on a drive to steal market share, by increasing seat capacity and lowering fare prices. Virgin had the backing of major shareholders Air New Zealand (ASX: AIZ), Singapore Airlines and Etihad – all three partly owned by sovereign entities.
Foolish takeaway
No matter what the share price is, investing in an airline is likely to lose an investor their hard earned cash. With plenty of other companies to choose from, why take the risk?
