Just thought I share my views on Qan vs Rex.
The second part of your last sentence captures a key the strength of Rex. On a very large proportion of their routes, they are the sole provider. I don't know which company will perform better for this financial year but IMHO, in the long run Rex has the following advantages over Qan:
1) Monopoly routes and the power to set pricing. Although Rex's passengers numbers fell by 20% from 2008 to 2017, revenue increased by 18% over this period. This was achieved through higher fares. Qan on the other hand, faces tremendous competition on the international routes (competitors like Emirates which receive fuel subsidies) and competes with Virgin on the domestic routes. Qan's ability to benefit from fare increases is nearly non-existent.
2) Airlines are capex heavy businesses. The price of a second hand Saab is cheap (circa $3 million) which is a key reason why Rex is nearly debt free (HY2018). Qan however, has to purchase new Boeing 787s which are priced at US$240 million a pop. As a result, Qan has $4.7 billion of debt (FY2017), its debt to EBIT ratios is 3.5x as compared to Rex of 1.2x. Although 3.5x looks good, this ratio actually overstates Qan's ability to repay its obligations because Qan also has non-cancellable operating leases of $2.2 billion on top of its bank loans that is not classified as debt under the accounting standards. Assuming these non-cancellable leases are debt, the ratio then deteriorates to 4.1x.
If you think that Rex's "old" Saab 340 fleet will soon need to be replaced with new planes which will make it take on debt, see
here.
3) Turboprop planes are more fuel efficient than jetplanes. In FY2017, Rex and Qan's fuel cost as a percentage of revenue was 10.1% and 18.9% respectively.
This is an important point because if you look at Qan's FY2014 results, it incurred fuel cost of $4.46 billion and on a pre-impairment basis, broke-even for that year. In FY2017, Qan reported net profit of $853 million and incurred fuel cost of $3.04 billion. This shows that the fuel cost saving of $1.42 billion was the primary driver of the improved result.
Rex also benefits from the fall in oil price but because the fuel cost as a proportion of revenue is less than Qan, oil price fluctuations has a lesser impact on its bottom line.
The main disadvantage for Rex is the constraints in expanding the network and that the profitability margin on each flight is very tight. The loss of a few passengers on a flight may turn a profitable flight into a loss.
Having said that, I still think that over the long term, Rex is a safer bet in an overall volatile industry.
My 50 cents.
http://chasingvalue.com.au/
(20min delay)
