Can you believe this? Fundamental analysts are confused, technical analysts note that it was bound to happen, but surely no one could have predicted that Qantas Airways Limited (ASX: QAN) would be one of the best performing stocks in the ASX 300 in 2014?
Amazingly, since early February, Australia's two largest listed airlines Qantas Airways Limited (ASX: QAN) and Virgin Australia Holdings Limited (ASX: VAH) have easily outperformed the ASX 200 and All Ordinaries to be up 37% and 14% respectively.
But Why?
Virgin and Qantas are the two largest carriers in Australia and have been fighting an all-out war for the best part of the last 12 months to gain market share from each other. Virgin's strategy has been to increase supply to the market, driving down per-seat costs for customers to levels that Qantas theoretically cannot sustain.
Qantas chose to sustain the low prices and subsequently warned the market in 2013 that it expected to make a huge loss for the 2014 financial year. Virgin also has the advantage of being backed by powerful international airlines such as Etihad, Singapore and Air New Zealand. It also won the most recent battle after Qantas announced a change in strategy away from increasing supply to the market, as well as a restructure aimed at improving return on assets.
Investors are pleased that Qantas has given up on the capacity war as it should mean that the company can return to profitability. I suspect traders have switched from Virgin to Qantas after the change in strategy, pushing up the company's share price up.
What Now?
Investors have rewarded Qantas' management for abandoning the useless capacity war with Virgin to instead focus on returning the group to profitability, a wise choice in my opinion. In the short term, Virgin has a lower cost base than Qantas and consequently is in a better position to trade profitably, but over the longer term we could see Qantas repair its reputation through better service to corporate customers and more competitive fares.
I believe the 2014 performance of both companies is purely a reaction to both becoming oversold in 2013. I also note that some of the best investors in the world believe that airlines should simply be avoided.
High Profile Concerns
Two of the best quotes about investing in airline stocks come from Warren Buffett and Richard Branson. Mr Buffett noted recently that: "Investors have poured their money into airlines and airline manufacturers for 100 years with terrible results," while Mr Branson famously noted that: "If you want to be a millionaire, start with a billion dollars and launch a new airline".
