27 September 2020
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Would you buy an airline stock?

Would you buy an airline stock?

Tony Featherstone
11 February 2019

Large airline stocks are hard to buy at the best of times. They are capital hungry and affected by the oil price, weather, intense global competition, price discounting, business-travel cyclicality, safety and terrorism risks.

US investment legend Warren Buffett once described airlines as the “worst kind of business” because they need high fixed investment and deliver low profit margins. But even he became bullish on the sector in 2017, when Berkshire Hathaway Inc bought into three US airlines.

Qantas Airways defied the airline bears when it rallied in 2017 and the first half of 2018. Its gains were deserved: Qantas’s Return on Equity (ROE) has improved from barely positive a decade ago to 26% at the end of FY18 – an excellent result, especially for an airline.

CEO Alan Joyce, one of Australia’s best business leaders, has led the airline’s transformation. Also, the airline’s Frequent Flyer programme, once touted as a multi-billion-dollar spin-off, showed the latent value in Qantas and its potential to become a technology business of sorts.

I became bullish on Qantas in June 2016 at $3 a share, writing for this Report: “On some valuation metrics, Qantas is one of the world’s cheapest large-cap airline stocks”. Qantas hit a 52-week high of $6.92 in 2018, buoyed by better passenger volumes and margins.

After that rally, I became bearish on valuation grounds and nominated Qantas in January 2019 as a stock to sell.

To read Tony Featherstone's full article, including his analysis of Alliance Aviation Services and Regional Express Holdings (REX), click here to take a free 21-day trial to the Switzer Report.

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