Forum Topics Qantas - bull or bear
NewbieHK
3 years ago

NEUTRAL: I am not an investor in airlines however, Qantas have Alan Joyce. If you want anyone running your airline surely it's Alan Joyce. He makes decisions other avoid. I think his record speaks for itself. Virgin might well return back to their early days (virgin blue) when they focused on that area of the market that wanted value for money with no frills. They made money and were successful. REX is an unknown quantity. They have come out of their comfort zone where they were a profitable regional airline (with a bit of government support at all levels to encourage them to maintain a service) to battle against the big boys on the major routes. Many have tried and most have failed. We will see how deep their investors pockets are.

One of the key component is the all important link up with international routes to bring people onto your domestic route (Qantas almost has a monopoly on this).

If everyone checks there ego and the system runs 70:20:10% (Qantas:Virgin:Rex) domestic share then all 3 can be very profitable. However, if like we saw with virgin they decide to pick off a little more the result could be terminal.

I am looking forward to seeing how the challengers come out to battle the reigning champion and what tact they take in the battle for $$$.

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umop3pisdn
3 years ago

For a little more colour on how Qantas do business, looking past the jazzy reports released to the ASX, Qantas also release an annual Data Book. This years has not yet been posted.

It's very interesting to see which other businesses they have a major stake in. I only went looking for this information as I was delving into Alliance Aviation's major shareholders for a straw I'm working on (privately) and discovered that Qantas is their largest shareholder at almost 20%. The operational deal between Qantas and Alliance of Alliance's newly purchased Embraer E190 aircraft certainly makes more sense.

Having looked through the 2020 document, in addition to the Qantas Domestic and Qantas International airline revenue, the business also creates revenue through subsidiaries: QantasLink, Qantas Loyalties, Qantas Freight, Jetstar, Jetconnect and Express Ground Handling.

In addition to these subsidiaries, Qantas also owns the majority stake in Taylor Fry (51%), the pre-stated ~20% ownership of Alliance Aviation and an ~46% ownership of Fiji Airways. The document also states Qantas acquired a 29% ownership of Jetset Travelworld Limited in 2010. This company then amalgamated with Harvey World Travel, Travelscene and Travelworld to form Helloworld Travel, with no mention in the Qantas Data book of how many shares Qantas retained. I couldn't find any further information on transactions, other than a MF article from 2018 which states that Qantas retained an ~15% holding in the company.

As for reporting this information on their company balance sheet or updating how these investments are performing, I'm unable to ascertain this information without diving deeper.

Qantas also have multiple network partnerships, government and community initiatives, affiliations with partner loyalty programs and a plethora of other partnerships.

I'm not drawing any conclusions from this information but hope it can help to make a more informed opinion on the company.

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Dominator
3 years ago

As someone who works in the industry I would love to see all airlines thrive, sadly however, I think Qantas comes out of the pandemic in the weakest position of the major airlines. My reasons for why I wouldn't invest in QAN this is below:

  • All of the airlines are bleeding cash right now. They have been since July and won't stop until November. The golden triangle (BN-SY-ML) is effectively shut at the moment and the same with international flights. My understanding is the golden triangle is a big money maker for the airlines.
  • Qantas will be the highest cost producer.
    • Virgin has been able to remove all the of the non-profitable parts of the business. Some rumours I have heard is that they were able to re-lease B737's at a very significant discount to what they were paying before. Another example is how they removed the A330's from the fleet which I don't think were making money.
    • REX has always been an efficient operation and profitable pre-pandemic. The Singaporean owners run a very tight ship.
    • Qantas has been able to reduce costs such as contracting out baggage handling but still has higher staff costs in general.
  • Australia has always had an effective duopoly. Qantas vs Ansett then Qantas group (Qantas + Jetstar) vs Virgin (Virgin + Tigerair). Tiger didn't last that long before becoming part of Virgin. REX is the new airline in the mix. Who is the loser out of the new three way battle? REX is likely due to its relative size but they are at least an established airline that is run well from a profitability perspective.
  • Look at the equity statement... Investors money normally disappears when invested in an airline. Very few are successful long term. Qantas now has a lot of debt to repay!
  • Airlines are effectively a commodity business. Consumers pay to sit in a moving seat from A to B.

Positives for Qantas:

  • Brand name by far the best.
  • Cornering Virgin and REX with both Jetstar and Qantas to under/overcut.
  • Biggest airline that owns a lot of their assets.

Overall, I can't tell which airline is the winner and which is the loser coming out of the pandemic so I thinking investing would be just taking a punt.

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Duffshot38
3 years ago

I agree with all of the above and add the following.  

Qantas has done a good job of maximising the current environment to reduce costs - but unfortunately shareholders rarely get to see the benefit in an airline like Qantas. 

In Qantas far and away its best business is the  premier frequent flyer program in a country which is addicted to frequent flyer points which gives it an incredible business in the frequent flyer business.  I dont expect that to change too much and I imagine in the touch and go environment post covid there are even more points earning credit card transactions than normal and it will continue to be that way.  This business  is the best performing segment in the group and the best business model.

Unfortunately the airline part of the airline is not a good business despite the advantages Qantas has as the premier airline in Australia which is isolated from the rest of the world and is full of keen travellers (At least it was pre-covid).  It also has the premier safety record in the world (even if it has had to do some unusual "maintenenace" of "incidents" not "accidents" to maintain this record).  Just have a look at the balance sheet and the equity line. over the past 5 years.

Culture is still the biggest issue.  Management Vs Unions, Pilots, Cabin Crew,.....  The priorities for management / staff are are generally on maximising entitlements / personal reward not shareholders.  There are huge ongoing liabilities for previous staff and management entitlements, etc etc etc.

On top of that, while there are definitely advantages in being the national carrier for Australia, but as a business we are at the end of the line geographically not the centre of all the action.  ie  there are more advantages in have in a hub and spoke model based in the ME or Asia than Sydney and those airlines also offer a better product to both business and leisure travellers.  Domestically they were rejoicing the demise of Virgin but the reality is there are now new owners in Virgin and a new offering from Rex to compete with.  

I think there are much lower risk and better businesses which dont chew your capital up as frequently as Qantas as an investment 

Still love to use it as a customer though

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Dominator
3 years ago

Qantas has let go staff that will reduce cost but I am talking more from a unit cost. The pandemic let Qantas cut costs I think were politically to hard during normal times (such as the baggage handlers). From a unit cost perspective some places where I think Qantas is blotted compared to Virgin and REX:

  • Main Fleet:
    • Qantas Group - A320/A321, A330, A380, B737, B787, Dash 8-2/3/4, F100 with wet-lease of B717, E170. Not including smaller numbers of other aircraft types.
    • Virgin Australia - B737
    • REX - Saab 340, B737
  • Debt:
    • Qantas - $5.8b offset by $2.2b in cash
    • Virgin - just got to wipe away its debt for cents on the dollar
    • REX - $28 mil debt, $44 mil convertible notes but $30 mil in cash for comparison.
  • Culture:
    • Qantas - from the outside us vs them mentality between management and staff. Constant talks of strikes.
    • Virgin - administrators noted how good the company culture was and the way the staff backed the company during administration.
    • REX - Poor culture, management squeeze every little bit they can.
  • Staff costs (note from what I have heard only no hard facts):
    • Qantas - Qantas is known for having the highest wages and good conditions. Jetstar is more on par with Virgin. Salaries for some long-haul captains can be very high from what I have seen, more than executives at smaller ASX listed companies...
    • Virgin - Similar to Qantas but I think they are in renegotiation.
    • REX - The minimum possible. They probably picked up the B737 crews on pretty favourable terms.

An important point on fleet, the most profitable airlines in the world are airlines like Virgin. One operating type. The cost efficiencies of this structure is proven.

Using TIKR.com, I looked at the EV of Qantas over the last 10 years. Qantas has an EV of around $15-16 billion. Never has it been so high! So by investing in Qantas today at current prices you are telling me Qantas shares are worth more than when it was consistently profitable with an NPAT of around $800 mil to 1 bil... When it was consistently profitable:

  • There was no global pandemic.
  • There was stability and predictability to the future.
  • Business travel was common and the business world hadn't discovered how to Zoom, Skype, Teams etc...
  • Had competition that was weak. Virgin was struggling with high debts. Nice duopoly with Virgin.

Today conditions are different:

  • We are in a global pandemic that isn't stopping anytime soon.
  • No ability to predict the future income and impacts on the operating environment.
  • Business will be cutting travel costs as they have discovered new ways of working.
  • A potential 3-way battle and major competitor has become much more focused and leaner.
  • Virgin has the ex-Jetstar CEO running the company so she knows how Qantas group operates but they don't have the same advantage.

The maximum EV/EBIT ratio Qantas had at its peak profitability was around 11, very well valued for an airline. So to return to that ratio at current valuation Qantas needs a record EBIT equal to the previous record EBIT figures. During the greatest period of uncertainty the company has every faced.  I guess this comes down to if the cost savings are enough that will produce the profitability required to justify the current price?

@jwrostagno27 well done on picking QAN up at the bottom. If you didn't think it would go under it was always going to be a winner at that price. I guess my question to you is how much more do you think Qantas is worth than the current valuation the market is pricing it at?

EDIT: Realised I used EV/NPAT at first rather than EV/EBIT valuation. Change in italics.

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Dominator
3 years ago

Please note my error reference the required EBIT to match previous best EV/EBIT. I have updated post above. A more normalised EV/EBIT of around 8-9 would require an even higher EBIT than previous records.

 

@jwrostagno27, fair enough different objectives we are talking about then. You are working on the basis of a profitable momentum trade. My assessment is based on looking to be a long term holder of the business.

 

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barney
3 years ago

Kaboom - thanks for the response, will put some more thought into my bear case. Your points about Qantas being the strongest in the market are not lost on me. Rex into the mix will upset Virgin and JetStar, assuming they can stay vaible. I do agree with you there are other things that make better investments.

One thing that surprised me is that no one that is a bull is treating it as a long term hold. I think everyone has said they are treating it as a trading sock. 

Glad I made you laugh about the Dash8, and thanks again for the constructive post. 

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