Over the last five years, the Qantas Airways Limited (ASX: QAN) share price has been on a tear, rallying 370% from $1.16 to $5.45. The company’s strong balance sheet has allowed it to reinstate its dividend and buyback 25% of its shares during that time.
Qantas’ primary business is the transport of both goods and people, domestically and internationally. The brand is one of the oldest and best known in Australia, having become synonymous with travel.
Why has the Qantas share price been a strong performer?
Qantas targets both the premium and budget customer, via its dual-brand strategy. Through the use of the Qantas and Jetstar brands, Qantas has been able to apply outsized pressure on the profitability of its main competitor Virgin Australia Holdings Ltd (ASX: VAH). Unfavourable oil price movements are going to affect the whole airline industry, however, Qantas has shown that it has some pricing power and can pass a portion of these costs onto consumers.
One of the (sometimes forgotten) key profit drivers for the company is its frequent flyer loyalty program. The program has more than 10 million members and consistently delivers around 25% of Qantas’ profit. The program not only makes consumers more likely to fly with Qantas but provides Qantas with a number of profitability levers and partnership options.
Qantas currently trades on a P/E ratio of about 10x earnings – similar to most international peers. This is a significant discount to the ASX 200 average, however, it is worth noting that the airline industry historically trades at a discount to the market, due to the unfavourable long term economics experienced until recently.
Qantas offers a healthy fully franked dividend yield of 4% or 5.7% grossed up. With so many external factors and a capital intensive business model, investors need to understand that there may be fluctuations in the company’s dividend.
Another nuance with the airline industry is the apparent lack of liquidity within the businesses. Because customers book and pay for tickets ahead of time, Qantas and its peers must account for this income as unearned and a liability on the balance sheet. An increase in this figure can actually be a positive sign, so long as these customers fly with the company and don’t require refunds.
The airline industry will always be heavily impacted by consumer demand, oil price movements and strong competition. Qantas has shown in recent years that it has the brand power and operational efficiency in order to deal with these external factors, which make it an interesting option for investors.
If the airline industry doesn’t interest you, take a look at these ASX growth stocks instead.
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Motley Fool contributor Lloyd Prout has no position in any of the stocks mentioned and expresses his own opinions.
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 Scott Phillips.