3 big reasons to avoid Qantas Airways Limited shares

Qantas Airways Limited (ASX: QAN) is Australia’s biggest airline. It has a market capitalisation of $6.52 billion and transports millions of people across Australia and around the world.

Airline businesses are viewed as one of the hardest businesses to make money in. Planes are very capital intensive, consumers are price conscious and there are a lot of competitors. Richard Branson famously said: “If you want to be a millionaire, start with a billion dollars and launch a new airline”. This is the man who has dabbled in many other business sectors.

Qantas looked like it was in trouble a few years ago. It was losing billions of dollars and was forced to lay off thousands of staff. CEO Alan Joyce was not a popular man at that point.

However, his transformation program has worked. Qantas went from a loss of $2.8 billion in FY14 to a $1 billion profit in FY16, quite the turnaround.

The decreasing oil price has also helped Qantas back to profitability. In fact, it’s helped the whole airline industry. Virgin Australia Holdings Ltd (ASX: VAH) and Air New Zealand Ltd (ASX: AIZ) have also reported improved numbers in their latest reports.

There are three reasons why I think Qantas shares may fall over the long term.

Oil price

Falling oil prices help profits, rising oil prices hurt profits. The WTI Oil price fell to its lowest point of US$28.50 a barrel in January 2016, since then oil prices have shot up by 78% to US$50.97 a barrel.

OPEC (a group of oil producing nations) recently announced they are reducing their supply of oil into the market. This should manipulate the economics of supply & demand. This suggests the direction of oil prices is more likely to go up than down.

A reduced supply and the same demand for oil means Qantas could soon have to pay higher prices.

Subdued domestic demand

According to Qantas’ FY16 annual report, its total domestic capacity is expected to be flat to a 1% decline. This isn’t a good sign for Qantas. Fewer passengers result in lower revenues and profit. Investors should keep an eye on Qantas’ capacity growth, a continuing negative trend would be worrying.

Of course, Qantas wouldn’t be the only loser if there’s declining consumer demand for domestic flights, Virgin would suffer too. Sydney Airport Holdings Ltd (ASX: SYD) would also be impacted, with potentially less parking sales, airport-related revenue and passenger fees.

Credit card fees changes

Qantas is going to be one of the big losers from the Government’s change to credit card fees. From September 2016, merchants can only charge a percentage of the actual cost of the transaction – flat fees will no longer be allowed.

From July 2017 the interchange fee charged by banks (and Qantas issued cards) will also be capped to a much smaller percentage.

Qantas generates a significant amount of earnings from its frequent flyer program and credit card fees – in some previous years more than its actual flight business. This could be a sizeable blow to future profits.

Qantas is currently trading at 5x FY16 earnings (source: Commsec), which is cheap by most standards, but who knows what the oil price or Qantas’ profits will do next year? Cheap isn’t necessarily the best value.

Foolish takeaway

I think Foolish investors would be wise to avoid airlines altogether if looking for reliable, long-term growth; it’s very hard to maintain any competitive advantage in the airline industry and the performance is virtually chained to the oil price.

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Motley Fool contributor Tristan Harrison has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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