Qantas/QAN

QAN, the national carrier, had a good result, overall.

The consumer is in good health, it seems, with an appetite for travel, such that demand for QAN services remains strong, even as other airlines (e.g. over in NZ) have downgraded.

Worries over the consumer, which we have held for a while, don’t seem to impacting QAN, just yet.

Still, neither the market nor the brokers loved the result. The key below is the need to lift investment, as planes age and service levels need to improve.

A more detailed breakdown below. Planes, wifi, seats, systems.

QAN goes through big capex replacement cycles, over time, a) to replace planes with newer, more modern ones, b) to expand the fleet over time in line with demand growth (from population growth, from rising incomes that permit more travel, etc).

And so, for the next few years, the QAN capex bill will be absolutely enormous. What we tend to dislike about such capex cycles, is that if demand drops, for any reason, over that time frame, it can be quite bad for returns, profits, dividends, and ultimately shareholders.

QAN is also facing pressure on revenue in the form of lower airfares, as global capacity comes back, and, to some degree, public scrutiny over expensive airfares, that limits the ability to maintain higher prices.

Now at any given time, we will hold a bunch of stocks that have that characteristic. Think of a utility company trying to roll out a green grid (massive capex) or an energy company bringing on a new reserve (massive capex) and in the interim the wholesale price of electricity, or the price of oil and gas, is doing its usual thing of being volatile and unpredictable.

So, we aim to have only a few stocks, like that, in the direct equities sleeve. If the Aussie economy weakens, as we think it is, consumer discretionary luxury items (and travel is, to a large degree, a discretionary item) should weaken.

So, whilst we think it a good high risk high reward play, it’s not one for our more conservative flagship just now.

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