The Flying Kangaroo’s share price has hit turbulence again, after hitting a late-April high of $1.90. It’s currently trading over 30% off those heights as investors worry about the effects of the dropping Aussie dollar on the airline’s business. Aviation fuel, priced in US dollars, is one of the biggest expenses for airlines and the Australian dollar’s plunge will result in substantial knock-on costs for the airline.
Qantas (ASX: QAN) will be hoping to offset this headwind with the continued expansion of its Jetstar Asia business. It is awaiting regulatory approval for its Jetstar Hong Kong joint venture, and hopes the island’s proximity to mainland China will provide a ready-made market for a successful local low-cost carrier. Qantas owns 33.3% of Jetstar Hong Kong, alongside local Hong Kong property conglomerate Shun Tak and China Eastern Airlines.
The Jetstar brand remains strong in Asia and the successful take off of Jetstar Hong Kong would add to an already significant presence there. The group also has shareholdings in Jetstar Singapore, Vietnam and Japan. Asia remains a key growth market for its low-cost flights business.
Qantas has been facing stiff competition from Virgin Australia (ASX: VAH) in the low-cost market domestically. It will need to remain competitive, price wise, in the leisure market in particular. Internationally, Qantas continues its restructuring efforts in an attempt to draw a line under mounting losses.
Qantas is an iconic Australian business once again trading towards all-time lows. A high cost base remains a structural issue and the group continues to trade on a P/E over 20, suggesting it is fully valued even at today’s prices. The airline business remains a tough one and Qantas investors should be in it for the long-term.
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Motley Fool contributor Tom Richardson does not own shares in any of the companies mentioned in this article.