It's an interesting question. Given the double digit returns on equity that have (at least until today
)been available from sectors like resources and banking, you have to ask the other obvious question "why invest in an airline at all?" Take a look at the stats - ICAO estimates that international airlines lost a net $4bn last year (mainly as a result of US carriers losing $10bn, whilst the rest of the world's airlines were at least marginally profitable, making around $6bn). In this context, you'd have to concede that QANTAS did pretty well up to June 05 - NPAT (profit) up 18% on revenue growth of 11.4%. This year's results are of course looking an awful lot bloodier on the back of the oil price.
Still, as anyone who's done Business 101 knows, making a profit is not the same thing as providing an adequate return on the funds invested in the business. Given that QANTAS has such a good credit rating, and therefore enjoys relatively cheap access to debt, it should have a major cost of capital advantage (although this is limited to some extent by the foreign ownership millstone). Even though QANTAS won't disclose what its actual cost of capital is, it's widely known that the company's return on equity of less than 12% is less than its cost of capital - and hence by definition, the company has not been adding shareholder value.
Fortunately, the company generates so much cash from operating sources that it hasn't had to conduct an equity raising to fund the aircraft purchases etc - because if it did, the negative spread on its cost of capital would probably be quite embarrassing.
To go to the question that was asked though - is this the fault of QANTAS management? Looking at the historic figures for operating ratio (net profit or loss as a percentage of revenues), the global airline business has rarely averaged above 3-4%. (By comparison, the global car industry has averaged around 12%). Revenues have been declining in real terms for 30 years. There is constant downward pressure on yields because of cyclical over-capacity and the advent of low cost carriers.
Yields can be raised in one of two ways - increase load factors or cut costs, and preferably both. With fuel and personnel comprising an ever increasing percentage of total costs, is there any alternative but for management to look for more areas for efficiencies or cuts? This is why those who moan about Jetstar,
VB and the other LCC's are wasting their breath - they might as well demand that the CEO stop the tide from coming in tomorrow.
There's a line in the Lord of the Rings that I think is apposite. Talking about the "doom of choice", Aragorn says of Rohan : "None may now live as they have lived - and few shall keep what they call their own". Sums up the future of the airline business over the next 20 years pretty neatly I reckon...
SW