There are many things I don’t know. Up high on that list is the mystery of Qantas; how does it manage to convince shareholders, year after year, to invest in it?
Seriously, it’s an absolutely terrible business. Yesterday, the company reported an underlying loss of $646 million (don’t worry though, it was ‘better than expected’) and a headline loss of $2.8 billion thanks to a hefty writedown on the value of its international fleet.
Management usually peddle the line that writedowns are ‘non-cash’ and therefore just an accounting adjustment. That’s sort of true, but it reflects past capital investment (the result of cash expended) that no longer has any value.
In other words, management incorrectly allocated shareholder capital in the past and the writedown is simply a reflection of that.
Airlines are a tough business. You are going to get writedowns from time to time. But ever since the GFC, Qantas has destroyed shareholder value on a regular basis. Until 2009 the airline regularly generated decent (for an airline), if not spectacular, returns on equity, averaging around 12%.
But since the crisis hit, the best it could manage was a return on equity of around 5% in 2011. Last year it was a little over 2% and, well, this year it was nothing. Forecasts for the next few years don’t show much respite.
Qantas’ cost of capital is much higher than 2–5%, so the low returns it generates on shareholder capital represents a steady destruction of value. That’s why its share price looks like this over the past decade:
That’s not to say that things won’t improve from here. Stranger things have happened, and the share price chart of doesn’t look too bad. Qantas shares bottomed twice around $1 over the past few years and are now turning higher…
For The Daily Reckoning Australia