Qantas flies on sentiment

While this was an impressive result management made a point of highlighting just how competitive conditions were expected to be during the first few months of fiscal 1999. At the AGM it was stated that "it would be difficult to match the 1997/98 record profit of $304.8m during the current year. There are recent signs that yield deterioration may be accelerating".

Why the share price rise?

So what has sparked the recent interest in the stock? Apart from the success of cost cutting initiatives, a better than expected start to the year has lead a number of analysts to upgrade prospective FY99 earnings forecasts. We too have upgraded ours slightly from $275m to $290m. Recently released traffic and capacity figures for November show that passengers carried on domestic routes actually increased by 3.1% over the same period last year while the number of passengers carried on international routes declined by 6.3%.

There are a few other factors pushing Qantas along. Growth on the US and UK routes has been strong and the boost from the Sydney Olympics should help over the next two years. A low oil price, which isn't likely to rise any time soon, and the fact that investment valuations are hardly demanding (the stock is trading on a prospective FY99 PER and yield of 14.9 and 4 respectively) and you can see why Qantas is flying ahead.

Cyclical and capital intensive

Nevertheless, while these factors to some extent reduce our original concerns, they don't eliminate them. History shows that it's very hard for large airlines to consistently make money. They are capital intensive with large fixed cost bases and have little control over their operating environment. This explains why airlines traditionally trade at a discount to other industrial stocks.

During coming months the stock may well remain on the right side of sentiment, particularly if the broader market continues rising. But we still remain wary about Qantas' long term ability to continue earnings growth (just look at its recent history) and would caution investors against holding the stock as a core part of their portfolio. Sure, if you are looking for yield or believe that its share price has some legs in it yet, which is quite possible, then HOLD. Otherwise there is MORE CERTAIN VALUE ELSEWHERE.