The battle between the two big airlines listed on the ASX – Qantas and Virgin Australia – is hotting up, and it makes for one of the most interesting business stories in the financial press.
But that is the only level on which an SMSF proprietor should be interested in the Qantas-Virgin arch-rivalry, because neither stock belongs anywhere near your SMSF.
In fact, it is possible to argue that unless you are a Persian Gulf country with a humungous sovereign wealth fund backed by oil revenue, you should not own an airline business.
According to industry body, the International Air Transport Association (IATA), since 2003 the global airline industry has finished in the red six years out of nine. (Global Gross Domestic Product (GDP) growth is the major driver of airline profitability.) And even in the profitable years, margins were alarmingly low.
Between 2003 and 2011, says IATA, airlines lost a total of US$47.9 billion, more than they had made in the good years.
Over the last 40 years, the global airline industry has been in the black – but with a pitiful 0.3% margin. As IATA director-general Tony Tyler has put it: “This industry is about turnover with very little left over”.
In 2012, the organisation predicts carriers across the world to make total profit of about $4.1 billion, down from $7.9 billion in 2011.
Qantas
Qantas has traditionally been one of the few consistently profitable airlines, helped by its strong domestic market share of 65%. It has had a few free kicks along the way: in September 2011, when the rest of the airline industry was plunged into turmoil by the terrorist attacks on the USA, Qantas had its major domestic competitor at the time (Ansett) fall over.
The resources boom at home has helped it, as has exposure to the developing Asian economies. Also, the strong Australian dollar made Qantas’ costs – for example aircraft purchases and leases, spare parts (including engines) and capacity hire – cheaper, and to some extent has ameliorated rises in jet fuel costs, the bugbear for airlines.
But Qantas has flown into turbulence in recent years, partly because of a long-running industrial dispute – with a range of unions that cover its workforce – and heightened competition from its arch-rival Virgin Australia, which is making a determined move into Qantas’ lucrative business and leisure travel markets.
The cumulative effect of these pressures caused Qantas to report a net loss in 2011-12,of $245 million, a half-a-billion dollar turnaround on the previous year’s profit. Before higher fuel, restructuring and industrial action costs, the company says it was profitable. On the back of the result, the company cancelled an order for new Boeing Dreamliners.
But the bottom line for Qantas investors is that the shares, which were trading above $6 in late 2007, plunged as low as 97 cents in June 2012. Qantas has not paid a dividend since 2008. An investor who bought the shares five years ago has suffered a return of -24% pa.
Qantas’ international operations haemorrhage money: it is a high-cost operation, at the end of the line in geographical terms, up against deep-pocketed competitors with newer fleets operating out of centralised hubs. (Qantas has proposed a partnership deal with Emirates, to operate through the latter’s Dubai hub, but it has not yet received regulatory approval.)
Qantas domestic and Jetstar make money, but the company’s most profitable business is actually its Frequent Flyer Program, which earned $230 million last year.
No capital gain, no dividend because of the massive spending requirements on new planes; and an eater of shareholders’ funds. There is simply no reason for a SMSF to hold Qantas shares.
Virgin
The same goes for Virgin Australia, which has only paid a dividend in three of the nine years of its life as a listed company. (Virgin Blue was listed on the ASX in December 2003, majority-owned by Virgin Group of the UK: it changed its name to Virgin Australia Holdings in May 2011). Virgin Australia has also not troubled the dividend scorers since 2008. The stock has had a good 2012 so far – up from 28.5 cents to 46 cents – but its longer-term record is almost as bad as Qantas: someone who bought Virgin Australia five years ago has lost 23% a year.
Under former Qantas senior executive John Borghetti, who took over from founding CEO Brett Godfrey as CEO in May 2010, Virgin Australia has aggressively chased corporate and government customers. In October 2012 it bought a stake in low-cost carrier Tiger Australia from its parent, Singapore Airlines, and took over Perth-based Skywest. Virgin Australia now has its own brand taking on Qantas, Tiger Australia taking on Qantas’ Jetstar operation and Skywest competing with Qantas’ regional operation QantasLink.
Internationally, Virgin Australia has done deals with Singapore Airlines, Air New Zealand, Etihad and Delta Air Lines – all of which are shareholders –to give it the network reach business customers demand.
In the year to 30 June 2012, Virgin Australia made a net profit of $22.8 million, a much-improved result from the $67.8 million loss it reported a year earlier. Revenue rose almost 20% to $3.9 billion. But the nature of the airline business was starkly revealed when the company said when reporting its profit that “economic uncertainty” did not allow it to offer any profit guidance for 2012-13.
The bitter – and intensifying – competition between Qantas and Virgin Australia is great for Australia’s flyers, in all categories; and it makes for riveting reading in the business pages. But these businesses cannot be sure they will be profitable in a given year, let alone pay a dividend. These stocks might make good trading opportunities for those so minded, but they should not be core holdings within a SMSF portfolio.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
