Last week m’colleague Gaurav Sodhi made the case that there was a price for everything, even Qantas, although ‘the price wasn’t quite low enough yet.’
He’s right of course. Even hopelessly managed businesses in awful industries can make for good investments if purchased cheaply enough. Where I’d depart from Gaurav’s view is in the idea that Qantas will ever trade at a price low enough to warrant an investment in this particular hopelessly managed business.
Australians remain confoundingly attached to Qantas, a function of its foundational role in the life of the country since white settlement and a hugely successful advertising strategy that implies flying anyone but Qantas is un-Australian (unless it’s Emirates, in which case no problem).
In February this year Essential Research found that almost half those surveyed wanted the Government to buy a share in Qantas and 42% supported full nationalisation. Whilst just about every government business has been flogged off, as far as the ‘national’ airline is concerned Australia remains stuck in the ‘70s.
Earlier this year I wrote two columns on Qantas for Fairfax, criticising Alan Joyce and the board for the mismanagement of the airline. Nothing I’ve written before or since has received anywhere near as much attention, although that might just be me.
But the point is that people love Qantas and are desperate for it to succeed, perhaps to the point of buying shares in it at prices not ‘quite low enough’.
So if the 12% price increase since the announcement of a $2.8bn loss last Thursday isn’t a financial expression of misplaced patriotism, what is it?
According Brand Directory, in 2013 the country’s leading brands included Woolworths in top spot, followed by BHP Billiton, Telstra, Coles and the big four banks. Despite grounding the airline in 2011, massive losses, old aircraft, declining customer service and a shrinking network, Qantas still came in at 14, above AMP, Westfield and JB Hi-Fi.
In a brand sense, Qantas keeps impressive company. But as an investment it’s a long way from high class. My guess is too many investors place Qantas in the blue chip category along with the likes of Woolies and Telstra because they falsely associate brand strength with business quality.
That’s a potentially expensive mistake because the business risks to an airline are far deeper and more extensive than they are to a supermarket chain or telco.
There is no equivalent to an air crash, terrorist attacks, a rapid appreciation in the oil price, SARS and volcano eruptions for Woolworths and Telstra, to say nothing of the awful economics of the airline industry in general. That makes Qantas more like a speculative gold stock than a grocery or banking giant, and yet people see it as a blue chip due to its brand strength and iconic status.
As Intelligent Investor Share Advisor’s resources analyst, Gaurav is comfortable and familiar with speculative situations and how to handle them. He isn’t making this mistake.
My guess is most people can’t make that comparison. Thoughts of the red ‘roo send their patriotic hearts swooning and before you know it they’ve pressed the Buy button after a $2.8bn loss because Alan Joyce has told them once again ‘the worst is over’.
In an industry where the worst is almost never over the case for ‘intelligent speculation’ will often be weak. But if you can think of an investment in Qantas as you might a gold explorer or biotech stock rather than a blue chip like Telstra or Woolworths, you’ll be going in with your eyes open.