Qantas Airways (ASX: QAN) has been a topic of controversy ever since it went public in 1995. Warren Buffett made the memorable statement that, "If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright." That's because many airlines the world over do not reward shareholders but rather destroy capital in the long term.
Since listing on the Australian Stock Exchange, Qantas has been nothing but a disappointment, peaking at $6.06 in October 2007 and reaching its lowest point at 95 cents last year. The peak was prior to the Global Financial Crisis, when a consortium led by Macquarie Group (ASX: MQG) led a failed attempt to takeover the company. Today the price is $1.14.
The company and its share price are both very vulnerable, since draconian measures have been announced to dramatically reduce staff by 5,000 and the Federal government's attempt to allow foreign entities to own a controlling interest in the company.
Many an adverse wind blows against an airline such as Qantas. The need to replace aircraft with ever more expensive models is a huge capital outlay. Even spare parts are very expensive. An airline is a price-taker when it comes to fuel cost, which is historically very high. Labour costs are very high compared with other service industries, as so many more workers are employed to provide the service. Also, there are numerous overhead costs relating to airport access and compliance with government regulations.
The main rival on domestic flights is Virgin Australia Holdings (ASX: VAH). Late last year, Virgin was able to raise capital from Etihad Airways, the flagship carrier of the United Arab Emirates, and Singapore Airlines. Both of these airlines are backed by their respective governments. Qantas is not. There are no restrictions on investment on Virgin. Qantas, however, is not operating on a level playing field and cannot raise capital in such a manner. Despite these advantages, Virgin, like Qantas, had a considerable loss last year.
Foolish takeaway
Qantas provides an outstanding service domestically and internationally but in no way have its shareholders been adequately rewarded since the company listed over 20 years ago. Thus, it can only be of benefit to shareholders if traded, not held for the long term.
Now it's up to the Senate to allow legislation that would remove restrictions on foreign ownership. There are some pretty big vultures circling, including national airlines from other countries. They may swoop to buy a controlling stake if legislation is passed. If the Senate releases the shackles on Qantas, then the company would come into play for merger and acquisition activity and I would be keen to buy it but only as a trading proposition.
