Has Qantas made a profit worth celebrating?

A bit of fun digging into some historical Qantas figures today. Back-of-the-envelope stuff worth keeping in mind...

Qantas has recently upgraded its profit forecast for the first half of 2023.?Its underlying profit is now expected to be between $1.35 and $1.45 bn, which is $150 million higher than the company’s previous guidance.

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And of course, the commentariat is wasting no time crowing about the upgrade, which is of course due in no small part to the exceptionally high airfares being charged.?

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Qantas has noted, thanks in part to the higher profits, that its net debt will also fall between $2.3 billion and $2.5 billion by December 31, about $900 million more than previously guided.

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The question of course is whether an airline is a great business to own.?The shares have been on a tear and so it might be easy to conclude Qantas is a terrific business.?Since the lows of $1.10 in late 2013 and early 2014, the shares have surged 438 per cent at the time of writing to $6.28, putting the company on a market value of $12bn.?

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Buying and selling, or ‘trading’ Qantas shares may indeed be lucrative but what about investing for the long-term??Back on 13 October this year (barely a month ago) Qantas’s share price was unchanged from its price in August 1999 - in other words, no capital appreciation in all that time. It's worth also keeping in mind today's market cap of $12bn is only a little more than the $11.1bn offered by Private Equity fifteen years ago, in 2007. So over the longer term, the share price performance isn't so exciting.

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Now, while I’d prefer to own a business whose value rises over the decades (Qantas hasn't), many long-term investors may point out that Qantas dividends are another valid source of returns. So, let's examine those and find out whether owning the Qantas business has been a solid purchasing decision.

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Since 2002 – two decades ago – Qantas has paid $3.5 bn in dividends.?On the surface of it, it sounds acceptable.?One note to make is that no net dividends have been paid between 2010 and 2017 inclusive, nor in 2021 or 2022.?

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One should also investigate how these dividends were funded because the total profit generated (according to the balance sheet changes in equity) over the 20-year period is only $1.5bn, a full $2bn less than the dividends paid.?And if the change, from $1.1bn of statutory retained earnings in 2001, to an accumulated loss of $4bn in 2022, is anything to go by, the company has lost $5.5bn over twenty years, and the answer to the question of how dividends have been funded is even more curious. If you were the sole owner of the business, how did the business produce those dividends?

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One possible answer to how the dividends over the last two decades were possibly funded is obvious. The company has increased debt over the same period by $2.6bn and it has also raised a net $971m in equity.?If we can agree accounting profits for airlines are an artful 'construct' aided by the ineffectiveness of the depreciation accounting charge to accurately account for the real economic cost of running aircraft, which of course become more costly to replace as time passes (or we believe the change in retained earnings over the period), then we find the dividends over the last twenty years have been 27 per cent funded by capital raisings and 73 per cent funded by an increase in debt. That's 100% funded by outside money.

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On one view therefore, in the absence of generous banks and altruistic shareholders willing to tip more money into the company, there’d be no ability to fund the dividends.

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Over 20 years then, we find a business peddling its heart out to produce a revolving door of cash, raising money from banks and shareholders to fund distributions to shareholders.?

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This year of course may indeed be one to celebrate for Qantas.?A very large profit allows the poor long-term economics of owning an airline to be somewhat disguised.?History however suggests the good years are relatively few and far between and given the share price is now on a near-term and long-term high, in anticipation of a great year, investors should probably be more circumspect about the prospects of a generous long-term return from here.