It’s always bad, just not now

Like we’ve been saying all week, reporting season, the season to be jolly, is in full swing, with companies all over Australia reporting to investors how the financial year that’s just been has gone. Qantas, the flying kangroo, gets the nod today for a special mention. And it’s a really special mention. Why? They just announced their second largest profit in the history of the company. So yeah, pretty special.

The airline industry is a terrible industry for an investor….
Investing in an airline as a stock holder is fraught with danger. Only those with some pretty big, as they say, “cojones”  need bother. Why’s that? Well first, competition in the global airline industry is crazy fierce. Pretty much every single

country in the world has at least one, if not more airline companies. That’s a lot of planes competing for your valuable travel ticket. In Australia domestically, you can choose from Tiger, Jetstar, Virgin and Qantas. But if you’re flying overseas, your options are almost endless. And with competition, in general comes reduced prices. Great for consumers, BAD for businesses.

But that’s not why they are a bad industry for an investor… The single biggest cost for an airline is fuel. It trumps all of their other costs. They pay more on fuel than they do on staff costs, airport fees and plane leases combined. So yeah, fuel is a big cost. And this is where the issue lies.

It sucks when things are good
When times are good and the economy is booming, people are feeling good, they have money and they travel. Great for the airlines. HOWEVER, in general, at the same time, when the economy is charging on, there is a big demand for energy, to power all things that people demand, including airline travel. Big demand for energy means a big demand for oil and a big demand for oil means the price goes up. So when times are good and for the airline industry, their single biggest cost, oil, is going up too. And, given there is so much competition, they have limited ability increase their prices to cover the higher oil costs, and so, good times can actually be bad for their business.

And it sucks when things are bad
When times are bad, and the economy is weak, people are spending less money on everything, including travel. Obviously if less people are flying, that’s bad for the airlines. And it is.

So, when things are good it’s bad, and when things are bad its bad. Is it ever good?

So when is it a good time to be in the airline business?
Right now it would seem. Qantas just announced an AUD1.4bn full year profit this morning. Their second biggest annual profit ever. And it’s all thanks to oil and well, the economy. Whilst in any normal world, oil prices tend to go up when the economy is going well, over the last few years this has not been the case. Oil has remained low, and stayed that way for quite some time. Back in 2007 oil actually hit $140 a barrel (more on that another time). Right now, it’s just $50. So with Qantas’s single biggest cost being so cheap, yet demand for flights so high, it is no wonder that their business is doing so well.

But will it last? History says no.

Got a finance question, but short on time? Send us an email at daily@5minute.finance and we’ll help you out

 



Categories: General Finance, Investing

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