Qantas Airways has struggled in the past, particularly in 2014 when the company recorded a $2.8 billion loss. Since then, the company has announced aggressive cost-cutting plans and is now 3 years into this revival. I believe Qantas is a good company and will continue to be a leader in the Australian airline industry; however, I don’t think the price of the stock offers a good enough margin of safety to make the leap and invest.
Qantas Airways Ltd offered long-suffering investors hope that the Australian flagship carrier’s loss-making days may be over, saying earnings were getting a boost from easing domestic competition and falling fuel prices. Qantas turned a profit in the first quarter of its fiscal year, Chief Executive Alan Joyce said at the company’s annual shareholder meeting in Melbourne on Friday, without giving specific figures. The update, covering the three months through September and linked to pretax underlying earnings, comes only two months after the airline reported an annual net loss of 2.84 billion Australian (US$2.49 billion)—the worst in its history.
Easing competition on domestic routes has helped facilitate the turnaround. Qantas said there were signs of fatigue in its lengthy, cut-throat battle for market share with Virgin Australia Ltd. , which had been eroding ticket prices, mainly in business travel.
Fares on flights between major cities such as Sydney, Melbourne and Perth have tumbled in recent years, as Qantas put more planes in the sky to defend its market share—roughly 65%—from its smaller competitor. Virgin Australia had begun aggressively adding capacity after getting backing from deep-pocketed investors, including Air New Zealand Ltd. and Singapore Airlines .
At its annual results briefing in August, Qantas forecast domestic capacity growth of just 1% in the six months through December, but on Friday said it now expected no growth at all. “The domestic industry is stabilizing,” the company’s chairman, Leigh Clifford, told shareholders. Qantas’s shares, which have lost almost three-quarters of their value since late 2007, closed 3.6% higher Friday. Falling jet-fuel prices are helping airlines everywhere, as oil prices decline in response to slowing global growth and a boom in U.S. production. The declines are more than offsetting upward pressure on Qantas’s fuel bill from a concurrent fall in the Australian dollar, Mr. Joyce said. A weaker Aussie, which has plunged some 15% since last April, has the added benefit of scaring global competitors away, since they’re unable to make as much money from selling tickets Down Under.
Qantas’s recent difficulties have partly stemmed from an expensive three-year cost-cutting strategy that has included sacking thousands of workers, cancelling aircraft orders, and terminating poorly-performing routes, such as to and from Germany. Redundancy costs, in particular, have dragged on earnings. But with the turnaround plan now almost complete, investors are looking forward to a dramatic flow-through of cost savings. Last year’s big loss also included a huge writedown on the value of Qantas’s fleet, which while painful at the time paves the way for lower depreciation charges in subsequent reporting periods.Top