On December 2006, Airline Partners Australia - a consortium that included Allco Equity Partners and Macquarie Bank - made a bid of A$5.60 ($6.00) per share for Qantas. It was hard to believe then, and even harder now.
OPINION: But for a hedge fund missing a deadline, the debt-laden airline may have folded when the GFC hit a year later. Instead, Qantas survived, only to endure a slow death under current management. Since the APA bid, the shares have now fallen about 80 per cent. They are currently trading around A$1.12.
If you have to own an airline - and believe me, we're not forcing you - Qantas, with a host of natural advantages, should make the shortlist.
The domestic airline industry is a natural oligopoly with the dice so loaded that any potential competitor would be mad to challenge the established players. Assuming 'rational' behaviour - yes, we'll get to that - both incumbents should be able to eke out respectable returns.
The Sydney/Melbourne air corridor ranks as the world's fifth busiest route. Australia's cities are a long way from each other and roads, incredibly, are worse than airports. If ever there was a country built for air travel, this is it.
Qantas also has an iconic brand, a part of the national identity to the point where many still ache for its re-nationalisation, and an enviable safety record.
These factors make Qantas a high-quality airline business, at least domestically where it dominates. But in the airline industry, there's rarely a price cheap enough to offset the ever-present risks.
There are simply too many things beyond an airline's control - fuel prices, the continual need to renew fleets, unionised labour, competitive irrationality, weather and economic downturns - for investors to get a respectable return on their capital.
Given these features, airlines need great management to produce average returns.
Unfortunately, Qantas has woeful management delivering worse than no returns at all.
The primary job of an airline is to get passengers safely from A to B. That's taken for granted, which is why lost baggage, rude staff and faulty entertainment units leave such a bad impression. The small stuff matters because the big things, like arriving in one piece, are taken for granted.
On October 31, 2011, in an attempt to win an industrial dispute, Alan Joyce trashed the Qantas brand by grounding the airline entirely. Even Joyce described it as an 'unbelievable' decision. Passengers were stranded, the story made headlines worldwide and the episode cost Qantas shareholders A$70 million.
Virgin Australia, already in the ascendant, saw its chance. Lounges and routes were expanded, attractive deals were made to frequent flyers and new alliances were announced.
Since losing out to Joyce in the race to lead Qantas, John Borghetti, CEO of Virgin Australia, has done a convincing job of proving the Qantas board made the wrong choice.
Virgin has been transformed into a full service airline, successfully targeting the business segment and stitching together an international alliance network with foundation shareholders. Joyce created the opportunity and Borghetti took it willingly.
Joyce's second fatal error was to persist with his predecessor's 'line in the sand' approach, insisting that Qantas would not let its domestic market share drop below 65 per cent (it's now 64 per cent).
This locked Qantas into a deeply unprofitable capacity battle with an invigorated competitor with a lower cost base. Qantas's famous declaration that 'where Virgin puts on one aircraft we will put on two' is a textbook definition of business irrationality, an MBA case study in the making.
At the October AGM, Joyce said that Qantas had the 'right strategy for a bright, successful future' but the recent half year pre-tax loss of A$300m gives the lie to that.
Joyce recently declared a state of emergency, retrenched another 1000 jobs, made a rent-seeking appeal to the Australian government that would shame everyone but a global carmaker and 'put all options on the table', except his own removal presumably.
In Asia, Jetstar seems to be a sinkhole and the idea of a premium Asian-based carrier called Red Q was a stupid idea to begin with. At home, Jetstar now competes with Qantas and Virgin in a pointless and expensive capacity war.
So much for a successful future. If one could locate the epicentre of shareholder unfriendly management, Alan Joyce would be standing atop it, middle finger raised at all beneath him.
Joyce will go, probably sooner rather than later, at which point we can expect a more rational, less confrontational approach. Some members might like to dip their toe in then but we'd advise against it.
Even with a more considered and well-executed strategy, Qantas, like almost all airlines, is a poor business.
While the frequent flier business might be worth around A$2 billion, the capital demands of continually having to renew an expensive airline fleet mean this shouldn't be the basis of valuing Qantas. The airline itself could have a negative value.
- Nathan Bell is Research Director of Intelligent Investor Share Advisor.
- Sydney Morning Herald