Is Qantas’ 30% fall an opportunity?

Qantas doesn’t appear to be a very Foolish investment.

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There have been many colourful quotes over the years relating to airline stocks. Notable mentions go to Richard Branson who answered the question: “How do you become a millionaire?” with: “It’s simple, start as a billionaire and buy an airline.” Warren Buffett once declared his investment in U.S. Airways due to “temporary insanity”.

Warren Buffett, in particular, has been one of the most vocal critics of airlines for years and in 2013 noted that: “Investors have poured their money into airlines and airline manufacturers for 100 years with terrible results,” and that the airline industry “[has] been a death trap for investors”.

With this in mind, most long-term investors will avoid airline stocks as a general rule, but the team at the Australian Financial Review have considered whether ASX-listed Qantas Airways Limited (ASX: QAN) and Virgin Australia Holdings Ltd (ASX: VAH) have any place in a well-diversified portfolio.

Poor long-term performance

True to Buffett’s assessment, both Qantas and Virgin have been terrific at destroying shareholder capital. Over a 10-year period, Qantas is down 71% while Virgin is down 85%. Interestingly, over the past five years Qantas is down 54% while Virgin is actually up 12%. These performances have come when the companies have actually been making reasonable profits.

Loss-making operations

Qantas is forecasting a loss in the hundreds of millions in FY 2014, while Virgin is expected to lose less than one-hundred million. In FY 2015 Morningstar expect Virgin to return to profitability, however Qantas may well lose another $100+ million if Virgin maintains the current attack on Qantas’ domestic market share. These numbers are highly variable, and investors could see both swing to profits, should competition ease up, fuel prices decrease, or domestic tourism pick up.

Strong management

Since being overlooked for the Qantas CEO role, Virgin CEO John Borghetti has transformed the company from the long-term second placed airline, into a potential national number one by encouraging investment from overseas airlines.

Conversely, Alan Joyce of Qantas has made a number of controversial decisions and managed to turn a lot of public opinion against the national airline. His strong stands against unions and the foreign investment of Virgin have not endeared him to the nation’s leaders or some shareholders, however the AFR analysis considers that his leadership is exactly what the embattled airline needs.

Investment worthy?

The analysis concludes that both airlines could be considered as small speculative punts in a diversified portfolio. Qantas’ management team received more negative press than almost any other in 2013. It also faces some significant competition and demand-based hurdles, and appears a long way from receiving any meaningful assistance from the Government, however this and much more may well be factored into its share price.

Foolish takeaway

After hitting an all-time low of 95 cents in December, Qantas’ share price has recovered to $1.10 at the time of writing. The AFR analysis believes that all of the current issues and potential new problems are largely factored into the battered share price. The airlines are not classic examples of Foolish investments due to their poor competitive advantages over peers, lack of stable and growing earnings, and commoditised product. The AFR concludes that it’s a trading opportunity and this Foolish investor believes it’s probably not a great long-term investment.

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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned.

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