Shares in Qantas (ASX: QAN) ended the week up 2.5% overall as shareholders made bets on the government stepping in to provide financial support. Qantas has been facing declining revenues for a number of years and is estimated to post a loss in the vicinity of $250-300 million this year.
Fellow Motley Fool writer Mike King covers the structural issues facing Qantas (and the Australian airline industry at large) admirably in this article.
Long term shareholders may be misguided in their faith in Qantas, and those buying for a short-term spike in profits may be misguided in their faith in the government. I quote Federal Treasurer Joe Hockey, responding to an interview with reporters in Canberra: "If you think we are being dragged kicking and screaming on this one, you're right" … "we are not in the business of giving taxpayers' money to private enterprise".
Qantas is low on the government's list of priorities. Perhaps this is unfair to the airline, which is burdened by essentially anti-competitive legislation in the form of the Qantas Sale Act, which prevents foreign ownership exceeding 49%. Given its unique position, Qantas does deserve at least an attentive ear and an open mind from the Abbott government.
On the other hand, Qantas also has the appearance of a financial black hole, with Moody's ratings agency recently downgrading the company's credit rating to 'junk' status. The government is not (and should not) be in a rush to give money to prop up the airline, bearing in mind the size of the deficit and the prospect of a slowing economy. A debt guarantee will have no immediate costs, although if the airline fails it could potentially land the government with a gigantic ($5 billion-plus) snowballed debt in a couple of years' time. I believe it is in the government's best interests to steer away from both options.
Foolish takeaway
I would recommend those chasing a profit to get out quick, before the treasurer has a chance to say 'no'. Those holding long term may also wish to consider selling, bearing in mind the old adage that 'your first loss is your best loss'. Continuing to hold the shares through the company's down times will have to yield a commensurately greater reward in the future to compensate for the risk and stress. With Qantas, I simply don't see that happening within the next five to 10 years; there are better prospects out there.
