Amidst all the doom and gloom on the ASX of late, Qantas (ASX:QAN) has certainly managed to defy the broader trend. And how; shares in the Flying Kangaroo have climbed 50% over the past month. For the year, shares are up a whopping 169%.
Encouragingly, the share price isn't the only thing to have improved; Qantas recently revealed that it expected to report its best first half results since 2010, with operating profit expected to come in as high as $350 million.
The market is certainly embracing the fact that oil prices have fallen a lot recently, but the business' fortunes are also due to the group's ongoing transformation program which seems to be having great success in removing costs and enhancing operations. Indeed, the benefits account for much of the expected first half profits.
With more than 2 years left in the program, and further big savings expected, it's easy to see why investors' views of Qantas has seen a marked turnaround.
Not so fast
Though the improvement is certainly impressive, investors must remember that they are being achieved off a very low base. Moreover, much of the improvement can be accounted for by some accounting conventions, which have seen a big reduction to depreciation charges after Qantas wrote down much of the value of its fleet.
Investors should also remember that unless lower oil prices are here to stay, cheaper fuel prices won't actually make that much of a difference to the bottom line — Qantas hedges much of its exposure to fuel costs.
The longer term history for Qantas is far more instructive, and sadly it is a rather dismal tale. Group profits, even on an underlying basis, have dropped by a third over the past decade. Revenues are essentially flat.
Flying into the wind
It's unfair to blame the airline's woes on poor management; it simply operates in a very tough industry which suffers from some substantial structural challenges.
A major problem is that what the airlines sell — seats — are essentially an undifferentiated commodity. And like all commodities, customer choice tends to be driven by price alone. In these markets, it is the lowest cost producer that wins, if you call survival 'winning'.
However, if being the lowest cost producer was all there were to it, Qantas' size and scale may be enough to see it do eke out a decent living. Sadly though, it's not as simple as that.
As iron ore and oil producers are now discovering, commodity industries tend to suffer, significantly, when there is excess supply. And with airlines a dime a dozen, the industry faces rather meaningful overcapacity.
If all airlines were rational, even that problem could be overcome. Sadly, there are plenty of irrational operators out there, most of whom attempt to solve their problems by increasing scale and hence adding to the overcapacity. Besides, even if airlines did choose to better cooperate it could be considered collusive behaviour.
