The Qantas Airways Limited (ASX: QAN) share price crashed 5.09% lower to $5.59 at the close of trade as oil prices surged higher today.
The two major oil futures, West Texas Intermediate (WTI) and Brent, rose 2.5% and 2.2% to $53.31 and $61.22 per barrel, respectively. The latest jumps were caused by the US government's continued political pressure on Venezuelan leader Nicolas Maduro, with expectations of lower oil supply as a result of sanctions imposed on the state-owned oil firm PDVSA earlier today.
Qantas' (Non) Hedging Policy
Qantas' policy of being completely unhedged is well-known, one which paid off last year as it rode lower global crude oil prices (and a hefty tax break which it has now used up) to a net profit after tax of $980 million for FY18.
However, with oil prices seemingly on the up this could see Qantas take a profit hit in the next 6-12 months, particularly if these levels are sustained or increase further.
An Ageing Fleet
Another issue facing Qantas is that of its fleet metrics, with lower capital expenditure on its aircraft replacement being a key contributor to its recent run of record profits.
By not purchasing new aircraft, Qantas is able to boost its key shareholder metrics such as return on assets, as revenue from flight sales remains unchanged, but the book value of assets (i.e. older planes) is reduced, increasing key ratios.
However, at some point, this must come to an end. In my view, Qantas will need to substantially increase its new investment in its fleet in the coming years as these existing planes reach the end of their useful lives.
This could be a substantial hit for Australia's flag carrier and will mean that funds that have been used to generate strong shareholder returns in recent times are instead pumped back into costly new aircraft.
The Case for Virgin
There is little doubt that the Qantas share price has been an absolute winner in recent times, increasing 16.06% last year to well and truly outperform the ASX200. However, my pick in the airline industry would be key rival Virgin Australia Holdings Ltd (ASX: VAH) which has a newer fleet and has recently turned around its debt-related woes. Virgin has a stronger balance sheet in 2019 following significant capital raisings in 2018, and I think it might be due for its first statutory profit since 2011/12.
