The Motley Fool

Should we let Qantas Airways crash and burn?

John Hempton, fund manager at Bronte Capital has argued that it is time to let Qantas fail.

At this stage, it seems Qantas is not going to get any help from the government, with both Labor and the Greens opposed to any changes to the Qantas Sale Act, and the Coalition unwilling to give the airline a loan or even a debt guarantee. Qantas appears stuck trying to sort its own issues out.

In his blog, Mr Hempton says the company has been mismanaged for many years.

“Decades of incompetence has left them with the most amazingly heterogeneous fleet in the world. This airline deserves to go bust,” he says.

Mr Hempton cites one example where Qantas uses ageing four-engined Boeing 747s on the Sydney to Los Angeles route, whereas most other airlines are using more advanced twin engine planes, that are much more fuel efficient.

Fuel is a huge cost for airlines, Qantas’s fuel bill for the last six months was $2.3 billion alone. Perhaps no surprise given the airline still uses gas-guzzling 747s.

Add in the fact that Qantas flies 11 different types of aircraft, and you can imagine the cost in spare parts, maintenance and training are likely to be much higher than if the airline had say just five or less different types.

Qantas CEO Alan Joyce says they are trying to rationalise the aircraft fleet, reducing the number of types down to 7.

In my view, that’s just one of the issues plaguing the airline. Buying new aircraft is hugely expensive, and airlines typically use debt or equity to buy new planes. The problem is that at the end of their active life, the planes are virtually worthless, and newer planes are much more expensive than they were previously.

As a result, most airlines build up huge piles of debt, which costs them hundreds of millions in interest costs each year, and they have no real way of making a significant dent in the debt pile. That is, unless they raise cash from shareholders of course.

Virgin Australia Holdings (ASX: VAH) has split itself into two companies to cope with this issue. The domestic operation can now have significant foreign ownership, and Air New Zealand (ASX: AIZ), Singapore Airlines and Etihad have wasted no time taking control of over 60% of Virgin. They have also injected much needed capital into Virgin, but are likely to be forced to continue injecting capital.

Foolish takeaway

Qantas is heading for an almighty crash unless the federal government changes its tune or comes to some sort of deal with the opposition parties to bail the airline out in some way, shape or form. If we do nothing, Qantas is unlikely to survive.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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