I would like to re-visit my newsletter from the 30/09/2011. Below is my recommendation on QANTAS, I wrote that article after reading a buy recommendation on this stock from my old dealer group RBS Morgan’s.
Today as I write this article QANTAS has grounded it planes and is preparing to lock out its work force over ongoing rolling strikes.
For me this is the start of a fundamental change which is about to happen in Australia regarding big business. On one side we have the Unions (Labor) pushing big business to give more to the workers. On the other, companies who employ Australians trying to make sure that the company will be around for share holders for the long term.
I find that the ignorance and struggle for power by the Unions and Labor party have blinded them to the facts.
The fact: QANTAS is a $3.5 billion market cap company. Its profit last year was $240 million.
The grounding of its planes will cost the company $20 million per day; ongoing union strikes over the past months have already cost the company $60 million. If the planes are grounded for 9 days the company is making a loss for the year. If is it longer then the company will go under, all of the workers striking for higher wages will have no wages.
It is easy to look at a $240 million profit and assume that there is plenty of fat, but the facts are it is a tightly run business. The return on the $3.5 billion invested is 6.8% per annum. Term deposit returns are 6%.
Ask yourself, if you had $3.5 billion to invest would you take the risk QANTAS is taking to make the same return as a term deposit. Not me.
At the least minute the Fair Work Tribunal ruled in favor of QANTAS banning any more Union action for 24 days. This should get the planes back up in the air, but once again shows how the current government and its legislation is ineffective.
Fair Work legislation does not work and will not work. Big business can be crippled by this sort of legislation. Hopefully this is the first step in getting rid of it.
My prediction is that QANTAS domestic will close over time and just run Jet Star. QANTAS International will move off shore. Jobs will be lost and other companies will follow suit.
For all of those out there who are rallying against the 1%, keep in mind that they are the ones paying the bulk of the taxes. This is where the money comes from for the stimulus hand outs the government is giving you. If they leave our quality of life will be affected. Big business is the grease which makes the world turn. Once it's gone things will stop quickly.
In regards to investing in QANTAS I continue to stay out of this sector always have and will, my money as detailed above is safer and returns just as much in a term deposit.
For more information on QANTAS please contact us on 07 4771 4577.
Qantas – Do I Stay Or Do I Go (30-9-11)
I never really liked the idea of Airlines. Sure back in the 70's and 80's it was a growth business and seen as a mode of transport of the rich. Now, they are glorified bus services with massive competition and a heavy regulation burden.
QAN is now look to take operations off shore. Keep in mind that this is a private business but the government is looking to get involved. They are currently dealing with rolling strikes which happen to coincide with the AFL and NRL finals.
For this company to stay in the air in a very competitive business they need to move off shore. This is being blocked by staff and government, the end result is that shareholders will lose out.
QAN is aggressively reducing costs despite complex fleet and labour relations.
New management is relatively inexperienced though capable.
QAN will remain profitable but subject to volatile cyclical demand.
It is still to prove it can deliver sustained returns to justify longer-term investment.
Massive capital expenditure typical of the high fixed cost/commodity nature of the airline business will preclude dividend payments, at least in the medium term.
Given leverage, both ways, to the oil price and global growth, QAN is only suitable for investors understanding the high risks of this business, helped by occasional buy-backs.
For the sensible investor I would stay out of this stock for now.