Qantas makes us queasy

We don’t cover Australia’s largest airline too often these days. But we hope subscribers get the message loud and clear—we don’t like the airline business. Qantas’ new discount carrier, Jetstar, may be doing well—it’s certainly hurting competitor Virgin Blue—but we don’t believe that’s necessarily good for Qantas shareholders. An intensifying battle at the discount end of the market can’t be helping Qantas’ full-service business. And whether the group can turn a good profit on Jetstar remains to be seen. This low-cost carrier’s current advertisement praises the fact that it’s spent more than $1bn on new aeroplanes—‘and that’s just the beginning’. If we were shareholders, we’d be praying that management misplaces its cheque book quick smart.

The other thing keeping Qantas in the headlines is the sale by former cornerstone investor, British Airways, of its 18.25% stake. Institutional shareholders gobbled up the stock but, whether owned by another airline or by fund managers, Qantas is still in a tough business.

That said, in the year to 30 June 2004, the company achieved earnings per share of 35.7 cents, up a whopping 79% on the prior year. Yet the final dividend of nine cents, and yearly total of 17 cents, were the same as last year. Given the capacity to pay a higher dividend, perhaps the restraint is a sign that management doesn’t think the good times will last. And we wouldn’t argue with that. A yield of less than 5% isn’t enough to attract us into the airline game, despite Qantas’ tough and talented management. The stock is down 10% since issue 146/Mar 04 (Sell—$3.81) and we’re a long way from turning positive on this one. AVOID.