The Qantas Airways Limited (ASX: QAN) share price has risen over 7% in the last month and is trading at $5.72 at the time of writing (up from the $5.34 level hit on March 26). This has been good news for Qantas shareholders but anyone who bought into the airline at the $6.83 level it was trading at in August of last year is still underwater.
However, Qantas investors should be used to this (forgive me) turbulence. A six-month graph of the share price looks more like a roller-coaster than anything else, but if you were lucky enough to pick up Qantas shares in 2014 for under $1.15, you would be sitting on a 400% gain on today’s prices (not including dividends).
As you may know, Qantas is Australia’s flagship airline carrier. The ‘Flying Kangaroo’ began life as the Queensland and Northern Territory Aerial Services and was actually a government-owned service until its privatisation beginning in 1993. As a matter of fact, many of Qantas’ international competitors, such as Emirates and Qatar Airways are still at least part-owned by respective foreign governments. Interestingly as well, Qantas as a company by law must retain over 51% Australian ownership
Today, Qantas is headquartered at Sydney’s Kingsford-Smith Airport and operates both domestic and international flights. The company also owns the budget Jetstar brand and the popular Frequent Flyers program. Its main source of domestic competition is Virgin Airlines, run by Virgin Australia Holdings Ltd (ASX: VAH).
In 2011, CEO Alan Joyce embarked on a controversial cost-cutting program that involved outsourcing and laying-off staff. This was hard-fought by the Transport Workers Union but has seemingly left the company in a much leaner and financially healthy state. This is proved by Qantas’ trailing Return on Invested Capital rate of over 24%, which is a very impressive number.
With a lean business structure and tight control of capital, Qantas has proven its strength to the market over the last 8 years. The biggest factor affecting the Qantas share price is the price of oil, as it directly affects one of Qantas’ largest fixed costs – jet fuel. I would hazard a guess that this is the reason why Qantas has pulled back over the last 3 months in particular (the price of crude oil has risen 46% over this period).
With US sanctions over oil-producers Iran and Venezuela, I would be hesitant to buy Qantas shares at the current price. Qantas is undoubtedly a well-run company, but I believe it is one best purchased at a significant discount to intrinsic value due to its exposure to the crude oil market.
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Motley Fool contributor Sebastian Bowen has no position in any of the 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 Scott Phillips.