I wouldn?t want Alan Joyce?s job for quids. Okay, maybe his pay packet might be enough to tempt me to assume the Qantas (ASX: QAN) CEO?s position for a year or two, but it?s not a job I?d wish on my worst enemy.
John Borghetti of Virgin Australia (ASX: VAH) doesn?t have it much better.
In the blood
I assume working for ? and aspiring to run ? and airline must be something that gets in your blood, the way sky divers and bungy jumpers keep going back for more. It must be the case ? or just that Messrs Joyce and…
To keep reading, enter your email address or login below.
I wouldn’t want Alan Joyce’s job for quids. Okay, maybe his pay packet might be enough to tempt me to assume the Qantas (ASX: QAN) CEO’s position for a year or two, but it’s not a job I’d wish on my worst enemy.
John Borghetti of Virgin Australia (ASX: VAH) doesn’t have it much better.
In the blood
I assume working for – and aspiring to run – and airline must be something that gets in your blood, the way sky divers and bungy jumpers keep going back for more. It must be the case – or just that Messrs Joyce and Borghetti can’t resist a seemingly-insurmountable challenge.
Here are companies in one of the most competitive businesses in the world, fighting against state-owned airlines on one hand and irrational optimists on the other. (For some reason, there’s no shortage of rich people who end up with a small fortune after blowing a large one by investing in airlines.)
It’s an industry characterised by excess capacity – more seats than can be profitably sold – leading to seemingly endless losses and a roll call of failed airline companies. We’ve had our share of failures here – Compass (Mark I and II), Ozjet and, most famously, Ansett. And by comparison, we’re doing well. Some US airlines have been through bankruptcy more than once!
Damned if you do, and damned if you don’t.
It’s an endless cycle – profit margins are low due to price competition, so the response is to grow in size, thus taking advantage of economies of scale. You can already see the problem – growing means adding capacity, exacerbating the problem. The alternative, shrinking the airline to remove the excess capacity, means your costs per seat kilometre increase, making you less profitable.
Heads, you lose – tails, you still lose.
And yet, rumours persist that former Qantas CEO Geoff Dixon wants to take over the company. I guess it’s in his blood, too.
Remember, Qantas shares are now trading at a fraction of the price that a consortium was prepared to pay in 2006. You’d have to imagine they’re still thankful every day that the deal fell through.
Amputation won’t solve the problem
There’s an argument that a break-up of Qantas, or a spin-off of part of the company (likely the Frequent Flyer division) would provide a nice return for Qantas shareholders. As a one-off benefit, that’s likely to be true, with some estimates putting the Frequent Flyer program’s stand-alone value at almost Qantas’ current market capitalisation. Using that logic, you’re getting the airline itself for free at today’s share price.
The problem is that ‘free’ is pretty close to all an international airline is worth. In aggregate, the whole industry has struggled to break even over the last decade – and that’s not exactly the type of performance that should have investors beating down the door.
Maybe this new consortium can earn a return by breaking up the company. If they can achieve that, I guess they’ll have achieved their (short-term) aims.
But unless a clearly enunciated strategy can demonstrate how the airline can be more profitably run in future, the underlying problems remain. You can sell off some of the Titanic’s deckchairs, but you are still left rearranging the ones that are left.
Oil, copper, and gold continue to be in high-demand — and their popularity doesn’t look to be slowing. We’ve uncovered three companies poised to benefit from the rising prices of these commodities. Get our brand-new report — “3 High-Risk/High-Reward Resources Stocks” — FREE!
- Car trouble: Handouts not the answer
- 7 million mobile phone users experience ‘bill shock’
- More retailers to collapse says Gerry Harvey
- Avoiding the ASX potholes
- Eliminate credit card debt for good
Motley Fool analyst Scott Phillips doesn’t own shares in any companies mentioned. The Motley Fool ’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.