News reports in the Fairfax press today suggesting that the Liberal government is considering opening up domestic routes in Northern Australia to overseas airlines may be trouble for Qantas Airways Limited (ASX: QAN) and Virgin Australia Holdings Ltd (ASX: VAH).
I would be surprised if the Abbott government is seriously considering this as an option without some sort of quid pro quo from a reciprocal overseas nation for Australian interests. Sovereign states are notoriously zealous in protecting domestic routes for local airlines and this would be another left-field policy if enacted.
Fairfax is reporting that some Cabinet members are in favour of the proposal as it would "open up northern Australia to more tourism opportunities". That may be true but its worth seems unlikely to outweigh the potential consequences for Australian airlines and workers in being effectively undercut out of their own market by budget airlines from areas like Asia.
In my opinion the idea seems unlikely to get off the ground, while it would also potentially put a hole in the remarkable recent turnaround of Qantas as the highest margin domestic carrier. The market does not seem overly concerned either with both stocks trading relatively flat in trade today.
Qantas recently swung into a spectacular profit and the stock has doubled in value over the last six months on the back of falling fuel prices, increased passenger loads, and a savage internal cost-cutting program still taking effect.
Today's share price of $3.49 reflects the fact that investors now expect Qantas to make good on its recent hints at shareholder returns in financial year (FY) 2016, with fuel costs already partly hedged at discounted rates out to FY16. The business said it will provide an update on its progress in becoming a dividend wonder at its full-year results in August.
Virgin Australia shares have failed to find the updraft Qantas hit, but Virgin did also swing to a $10.2 million profit before tax in its recent half year thanks in part to a declining fuel bill. Virgin's shares have effectively gone nowhere since 2009 and their poor performance a reflection of why airlines make little sense as long-term holds.
High costs of capital, no competitive advantages, and competitors generally waging price wars to attract customers does not make for a good business model, which is why investors like Warren Buffett are unlikely to ever own stocks like these.
