Danger: Qantas is not for amateurs

But the 26 per cent slide in Qantas's share price in the past year is a reminder that the airline is substantially owned by small private investors and really shouldn't be.

Qantas was sold in July 1995, at $1.90 a share to private investors, and $2 a share to institutions. Only 75 per cent of the company could be sold, because British Airways had bought 25 per cent in 1993.

Ahead of the 1995 float, the Government had also decided that Qantas should be majority Australian-owned. That meant that three out every four shares in the $1.45 billion float needed to be bought by locals.

It was always going to be too much for institutional investors to swallow, so the Government aimed the Qantas sale at mums and dads. The retail sale price was discounted and celebrities including Olympians Hayley Mills and Jane Fleming were enlisted to encourage them to buy a piece of a dinki-di Australian icon.

The result is that many small investors are exposed to an industry that is, in investment terms, rather dangerous.

The number of small investors in Qantas has been growing. There were 98,888 shareholders with 5000 shares or less at June 30, 1997, and they owned 10.9 per cent of the company. The number with 5000 shares or less had risen to 138,130 by June 30 last year, and they controlled 15.5 per cent of issued capital.

The global airline industry is estimated to have lost about $US18 billion in 2001. It lost another $US13 billion in 2002, and could lose more this year as the Iraq war and the SARS epidemic affect passenger numbers.

Against that background, Qantas shines out like a beacon. The airline is professionally run and profitable.

Its shares were floated at an attractive dividend yield of about 6.5 per cent and there have been special dividends in 1998-99 and 1999-2000.

Qantas delivered an outstanding result in the year to June 30, 2002: a profit of $428 million, up from $415.4 million.

The group was a bit lucky: its international routes were shielded from the worst of the passenger demand slump that followed the September 11 terrorist attacks and its domestic earnings jumped after it picked up market share in the wake of the collapse of Ansett.

But the result was also a pointer to Qantas's overall strength and it will be on display again this year. The SARS virus and Iraq will knock airline profits world-wide; of the two, SARS will be the biggest drag on Qantas, because the airline's international routes are strongly focused on Asia, where the SARS outbreak is most advanced.

Qantas will still make lots of money, however. Citigroup Smith Barney's Australian transport industry analyst, Jason Smith, for example, has lowered his estimates of earnings in the current year and 2003-04 by 25 per cent to take into account the recent slowdown, but is still forecasting that net profit after tax in the current year will be comfortably above last year's at $489 million, and higher still in 2003-04, at $573.8 million.

But the inescapable fact, as Smith says in his report, is that airlines always operate in a high- risk industry. The danger of overcapitalising or under-capitalising the businesses is high, because the main capital outlays aircraft are fixed, infrequent and very large. For carriers in this part of the world there is also foreign exchange risk, because aircraft are acquired overseas.

The cost of fuel is another item capable of producing big swings in airline profits.

And, as Qantas's shareholders have been once again reminded, there is also event risk in the airline industry: that incidents such as SARS or terrorism can suddenly depress passenger demand.

The practical effect of all this is that airlines are best viewed as sharemarket investments for professional investors. Industry profitability and industry share prices tend to gyrate and that makes the shares most useful as a trading counter, not a long-term investment.

Profits tend to come not so much from buying airline stocks and holding them long-term but from strategies involving moving in and out shares in the industry: buying cheap, selling high, and usually doing it more than once.

Even Qantas, a brilliant performer in the global industry, has been behaving in the sharemarket in a way that is almost tailor-made for trading, not holding.

Its shares moved from about $3 to a high of $5.22 and then back below $4 in 1999. In 2000, they traded between $3.12 and $4.17, and the share graph looked like the chart of a patient with a faulty pacemaker. In 2001, the shares ranged between $2.43 and $3.68, and last year they climbed from below $3.80 a share to a high of $4.88 a share in August, and then fell to a low of $3.40 in October. This year the range has been between $4 (January 21) and $2.97 (March 31).

As I said, small investors in Qantas are still ahead. But the ones who did best sold during one of the periods of share price strength after realising that the nature of the airline business meant that Qantas's share price would fluctuate.

The unhappiest Qantas shareholders, big and small, are those who stumped up $800 million ($200 million of which was reserved for small shareholders) last August at the now formidably high price of $4.20 a share.

Sign of the times: A week ago, the world's biggest burger chain, McDonald's, announced that it was slashing capital spending this year, from a scheduled $US1.9 billion ($3.1 billion) to $US1.2 billion. The number of new restaurant openings would be halved, Maccas said.

McDonald's shares, which had fallen by almost 50 per cent in a year, jumped almost 9 per cent on the news, which raised hopes on Wall Street that the group would be directing more funds into dividends and buybacks.

The market, in other words, has greeted the prospect that McDonald's will turn itself into a cash cow and is not overly concerned that a group that has traditionally relied on physical expansion to grow its revenue and earnings has basically decided to dig into the trenches.

It's one more sign that yield is king in this bear market. It is also a sign that in the world's biggest economy, investment by companies won't be leading the economic recovery.