In Greek mythology Icarus is a famous character who ignored his father’s warnings and flew too close to the sun.
The heat from the sun melted the wax holding his wings together, and Icarus tumbled out of the sky and into the sea.
The tale is told as a lesson against both complacency and hubris.
The Qantas share price is flying
Which brings me to Qantas [ASX:QAN].
Its share price has doubled in the past year. In fact, it’s approaching nominal all-time highs. And while some of this gain is no doubt justified, it could also be a case of flying too high, too soon…
History has not been kind to airline owners. Airlines are famously bad investments. In the US there have been over 100 airline bankruptcies over the past century.
‘It’s been a disaster for capital,’ Warren Buffet recently said of airlines on CNBC.
The reasons are pretty simple.
It’s a very capital-intensive industry. And there is lots of competition.
Some of these competitors are well-funded, semi-government organisations like Singapore Airlines and Emirates.
They have a large cost base which has to be satisfied by near constant passenger numbers on each flight.
That leads to their infamous overbooking practices. The fallout of which we saw recently in the US, when a passenger was forcibly dragged off a flight.
The increasing dominance of the low-cost carriers has put pricing pressure on every carrier, even ‘full service’ ones.
Good tailwinds for Qantas shares
But Qantas is navigating the industry turbulence well.
Its subsidiary JetStar is dominating the low-cost market. And Qantas has a bit of a monopoly over many routes for Australian travellers.
In fact, its earnings share is 86% of the Australian market.
Virgin Australia [ASX:VAH] figurehead, Richard Branson is not happy. In todays Australian Financial Review, he states,
‘We’ve had Qantas throw everything they can at us and it has cost them more than it cost us.’
I’m not sure if this is actually true, as Qantas is currently one of the most profitable airlines in the world and Virgin is languishing at share price lows.
Moody’s just increased Qantas’ credit rating, citing domestic dominance and some good hedging and financial controls.
The macro conditions for airlines in general have improved. Low oil prices, increased travel and a lower dollar are all contributing factors.
An increasingly affluent Asian middle class is also a big opportunity.
Already Chinese tourism is up 45.1% from the same time last year. Vietnam is up 102% and Malaysia up 31%.
At the same time Australians are going in the other direction in record numbers.
Commsec Chief Economist, Craig James said the rate of departures was growing at 13% per annum.
And in the last 12 months 452,740 Australians left for overseas for an extended period.
All good news for airlines.
Why even Buffet is backing airline stocks
Despite Buffet’s earlier quote, even he has turned the corner. This year he has invested US$10B in US airlines such as Delta, Southwest, American and United.
And his reasons for changing his mind in an industry he previous labelled a ‘death-trap’?
‘They just got a bad century out of the way.’
In other word’s, he is betting that the lessons of the past have been learned.
Be mindful of Icarus
The key issues for Qantas investors is twofold.
Are we really in a new reality for airlines?
And can Qantas maintain its dominant domestic position?
The competition is certainly not standing still.
Virgin have just launched a new direct Hong Kong to Melbourne route, and has applied for 21 new take-off and landing slots in Hong Kong. They are looking to roll out further options for both Sydney and Melbourne as part of a broader Asian expansion.
The Qantas share price may have risen too fast, too soon. Investors at today’s prices need to heed the lessons of Icarus, and make sure they don’t come tumbling down.