Qantas health and share price - do I smell a rat?

[juddles]

Hi all, this thread was born due to a sequence of thoughts that were triggered in my head whilst reading the thread on "Does anyone know how many Qantas Platinum members there are?"

As some will know here, I often defend Qantas. And I am certainly not one to believe in conspiracy theories and so forth. I do not think it is morally wrong for a company and its shareholders to profit, nor am I against huge bonuses being paid to CEO's if that is what the shareholders have allowed. But am starting to feel a tad uneasy about three specific aspects of the current Qantas reality.

I will go on to explain these doubts, but may I state at the outset that my interest in posting this is to hear feedback and opinions from all sides, especially from business people who understand company activities far more than a lay person like myself.

(1) There was recently much coverage and debate about AJ earning a substantial amount of money, mostly based on the increased share price. At the time I had no adverse feelings about this - Qantas appears by many metrics to be doing fine, and a hell of a lot better than what it had been. But one argument against the recent QF path has been the aging of its fleet. I saw from Qantas investor stats posted by CaptJCool in a thread that the fleet, over the past 5 years, has essentially aged a year for every year that goes by - effectively a zero replacement strategy. I am of two minds about this - on the one hand seeing there may be wisdom in this, in the savings of money, but on the other knowing that eventually this will have to be addressed.

(2) In the FY19 year Qantas did a share buy-back of over $600,000,000 - again, am not sure how to interpret this - I get that it can be a great use of surplus cash to reduce share numbers, but can it also be interpreted as simply propping up the share price?

(3) But the main new idea that is worrying me relates to that other thread and the complete mystery that is the number of WP's out there. Why is this such an amazingly protected piece of information? It seems to be a secret more closely guarded than nuclear sub missile access codes. Why? Someone said they had heard from a QF staff person that there are over 250,000 WP members. That number seemed too high to be credible, but as I pondered various ways of considering this, it is actually feasible. But then a different concept became apparent to me - in this age of huge numbers of business travel, huge FIFO activity, and a couple of solid years of DSC offers, etc, there must not just be legions of WP's, but far more importantly to this thread, there must be LTG members amassing at an enormous rate. So that is to me an even more interesting number - LTG's today and expected in the near future....

So I am seeing a buy-back that props share value in the short term, a fleet that is being left to age to defer costs in the short term, and a sales frenzy via loyalty/status/LTG/DSC offers that improves cash flow in the short term but leaves a legacy of perpetual cost.....

Am I thinking right??

 

[levelnine]

You don't have to believe in conspiracy theories to accept the basic premise of your post.

Indeed, it is CEO 101. Pump up your KPIs while in the role to gain huge bonuses at the expense of the long-term viability of the company, which will be some future CEO's problem.

This is exactly what AJ is doing. Pumping up his KPIs (short-term profit, boosted loyalty figures (eg number of WPs), etc) at the expense of Qantas' long-term viability (increasing fleet age/sweating the assets, declining long-term customer satisfaction as lounges degrade, etc). It's a very smart strategy from a personal enrichment point of view.

 

[RooFlyer]

(2) In the FY19 year Qantas did a share buy-back of over $600,000,000 - again, am not sure how to interpret this - I get that it can be a great use of surplus cash to reduce share numbers, but can it also be interpreted as simply propping up the share price?

Not necessarily the share price - any boost to that could be wiped out by external events or just 'market sentiment'. The biggest impact is to the earnings per share - a key financial ratio that companies are judged on. The effect in your argument is the same.

 

[moa999]

Off-market buy-backs are a tax effective mechanism for returning franking credits to shareholders who most value them.

QAN shares seem to average 5-10 million shares traded per day.. or $35-70m.. per day.
So a buyback is such a small percentage of that, that it's unlikely to move the share price.
The market price is the interaction of buyers and sellers.

As for WP numbers - why does Qantas have to release it? Plenty of numbers they don't release publicly, and there haven't been that many DSC offers (and other than in this forum i expect many just delete the email)

Qantas has (or will shortly have) taken 11 787s in 24 months (and another 3 by mid next year), and retired a bunch of 747s. That's definitely reducing age, and even at the usual discounts I suspect over A$1.5bn in cost.
yes before that they'd had a bit of a holiday on the QF side.

 

[hm520]

Are you suggesting
1) Short the price when AJ gets a hefty severance package
2) Go long when the new CEO arrives, shares tank and the cycle begins again
3)....???
4) Profit

 

[moa999]

Also remember back in 2013/2014 when AJ got all of the options that have become valuable, Borghetti would also have received a chunk of VAH options.

Then QAN traded under $1. Now about to hit $7. VAH traded at about 40c, now about 16c.

Almost all CEOs will have options as part of long-term incentives to increase the share price. It doesn't always happen

 

[RooFlyer]

Almost all CEOs will have options as part of long-term incentives to increase the share price. It doesn't always happen

Yes, it's 'aligning executive's prosperity with that of shareholders' which is fair enough, as long as it's on a long term basis! That is hopefully done by not having the options vest for some years, as well as being a decent exercise price.

 

[p--and--t]

I don't really understand a lot of this (consider the stock market to be another form of legalised casino) but I did read somewhere a few months ago (not sure where) that QF have a detailed asset replacement plan in place.

A figure was quoted of $2B, I think that was pa, not sure, and that the plan was considered by some pundits to be very sustainable in their current financial position. Only taking the information at face value as I have no real clue.

Maybe someone can clarify that recollection?

 

[tdimdad]

This is exactly what AJ is doing. Pumping up his KPIs (short-term profit, boosted loyalty figures (eg number of WPs), etc) at the expense of Qantas' long-term viability (increasing fleet age/sweating the assets, declining long-term customer satisfaction as lounges degrade, etc). It's a very smart strategy from a personal enrichment point of view.

Plus there's the "look how profitable I made this company" halo effect to elevate him into the hall of fame of CEO's who lift companies up. Whether the uplift was sustainable and the company is, in fact, in a good position may be a different story. We're just looking to see when AJ decides is the optimum time for him to exit stage left for another "look here" adventure.

I recall reading that about 85% of senior executive decision-making is based on emotion - despite how we tout the analysis and facts presented in board meetings. How good something feels in your future prosperity and fame is probably a powerful motivator in some plans and actions...

 

[dajop]

On the fleet age question, QF’s fleet age is not an outlier compared to many other comparable western legacy carriers, such as BA, DL, LH etc. Airlines definitely need newer, fuel efficient aircraft to service the ultra-competitive medium-long haul international routes. However, especially for less competitive domestic markets, the fleet doesn’t need to be quite so fuel efficient (which is less important on short sectors), so can be much older, and be quite profitable.

Delta’s domestic operations have become very profitable on the back of an older narrow body fleet, most of which is fully depreciated.