qantas - bust or boom?, page-13

Imagine if in 1999 I got together with a few wealth mates and decided to start an airline. We threw in about $3B and borrowed an additional 2.9B. (We also arranged an additional 1.3B in off balance sheet lending, but we will ignore that for the time been.)
In our first of operations we made a 500K profit which is pretty good. A return on investment of circa 16%, Pretty good you may say. But fast forward to 2012 and we have managed to lose 250M. OK OK a tough year. You won’t see that again I hope. But if we forget 2012 and average the prior 3 years profits we have averaged about $150M. Not very good on our initial investment I hear you say. But if you scratch the surface this devastating performance is actually much much worse. What if I told you to achieve this 250M loss( or if we ignore it and average the prior 2 years profits to get to an average of 150M profit) we put in or kept in and additional $2.9B in equity and borrowed an additional $2.4B
During that time depreciation has gone from about $560M to $1.3B. But the replacement cosy of the airlines have increased at an even greater rate.
These are sobering facts but the worst part of this story is that this is the Qantas story.
Qantas has shown an accounting profit regularly on a year in year out basis but it has never (or hardly ever) shown an economic profit.
This is clear by the increasing debt levels and the amount shareholders have to keep in the business.
With the cost of depreciation growing higher every year( but still lower than the economic depreciation rate) Qantas is not in a good space.
By simple maths it is easy to see the company can not ever pay a dividend ever again and the share buy back should be viewed as pure folly bordering on incompetence.
IMHO this company is not investment grade and will totally destroy your wealth over time.

Happy investing (but hopefully not in QAN)