I'm not sure how many times we can repeat this, but airlines, including Qantas Airways Limited (ASX: QAN), have been bad businesses for investors since they listed on exchanges around the world, many years ago.
That is unlikely to change, despite all the enthusiasm and upbeat reports spewing out of investment banks currently.
What they conveniently overlook are the external factors that management have no control over, the accounting issues that mean a reported profit is not a reflection of an airline's profitability, and the best management has to continually run fast just to stand still.
External factors
Qantas is enjoying a surge thanks in part to the falling oil price. But despite an annual bill that currently runs over $4 billion, Qantas says the falling oil price will only contribute $30 million in benefits in the first half of the 2015 financial year. That's because the airline hedges much of its fuel bill, so prices are virtually locked in.
The domestic air war with Virgin Australia Holdings Ltd (ASX: VAH) appear to have abated for now, but that's not to say it won't suddenly respark. Virgin is still trying to turn around Tigerair, which has been losing millions since the airline took flight in Australia, and there's always an airline somewhere prepared to charge uneconomical fees to gain market share. Virgin also has some rather substantial airline shareholders on its books, including Singapore Airlines, Air N.Z. FPO NZ (ASX: AIZ) and Etihad, which it has to contend with – and all three would probably like to see Qantas become the second tier carrier in Australia, behind Virgin.
The airline has also reportedly grounded three flights within 24 hours, with two international flights and one domestic flight making unscheduled landings.
Accounting issues
Thanks to the airline writing down the value of its international fleet by $2.8 billion last financial year, depreciation charges going forward will be around $200 million less per year. The problem is that Qantas's depreciation charges are based on the price of the old planes, not on the price of the new ones it has to buy. Unless the company retains much of its earnings in cash to buy planes in future, it will always be forced to raise debt or equity to fund the new purchases.
As famous investor Sir John Templeton said, "the four most dangerous words in investing are: 'this time it's different'". Is this time different for Qantas? Unlikely.
