Parachute may slow qantas descent

Published in the Geelong Advertiser, February 2014 by Dale Gillham

It appears the Government may be about ready to throw Qantas a lifeline after the companies Chief Executive, Alan Joyce announced last year that the airline was heading for a half-year loss in the order of $300 million. 

On this result, Mr. Joyce also signaled measures for cost cutting of around $2 billion over the next several months which unfortunately included the culling of around another 1000 jobs from the iconic airline.

These measures however weren’t enough however to avoid yet another ratings agencies downgrade to junk status, citing that the outlook for Qantas was increasingly negative.

I have to say that this really doesn’t come as much of a surprise. 

Airlines have a notorious reputation for being terrible investments. 

Not only are airlines capital intensive, requiring billions to pay for fuel and the planes themselves, they supply a commodity product – air travel with no real product or service differentiation between one airline to the next and the overall profits margins are super tight.

Warren Buffett himself has mentioned on a numerous occasions his dislike for investing in airlines. 

His comments that... "The airline business has been extraordinary. 

It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in" came on the back of his ill-fated investment in US Air Group (now US Airways) back in the 1980’s.

Although the Government may be able to inject fresh capital into the Qantas business, you have to seriously ask whether this will do anything but prolong a painful road to the company’s demise.         

So what do we expect in the market?

This week our market continued to recover as good performance numbers were released by some of the country’s largest listed companies. 

Commonwealth bank recorded yet another stellar profit, registering over $4 billion in gains for the final three months of 2013. 

ANZ also published solid numbers. 

Investors were mostly pleased with results released, pushing the market above last week’s high and also back above the high of May 2013 that forms part of key support/resistance level for our market.

Should the market continue to rise over the coming weeks, back above 5350 points this will tell me that we are more than likely to see the market head higher toward my target of between 5600 and 5800 points. 

However should this not occur soon, we may see the market drift lower into the second half of 2014. 

Right now is the time to sit tight and or be selective in what you buy as eventually the market will top in the first half of this year and start to fall away.

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