Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

Thursday, 27 February 2014

Free book excerpt

A sad day for Qantas (ASX: QAN), with the company finally announcing that it will shed 5,000 jobs.

The share price was clobbered by more than 9% to close at $1.15, a world away from the $5.00+ seen before the financial crisis. 

Some investors have lose four-fifths of their money.

Today, I am reproducing a short free excerpt from my book, an excerpt which discusses investing in airlines in particular, and why you shouldn't do it.

If you've read my books you will know that I talk about:

-being smart with your income and spending less than you earn

-going hard into income-producing equities (shares) products such as Listed Investment Companies through using a regular buying plan

-acquiring well-located investment properties in cities like in London and Sydney.

And, one of my golden rules: don't invest in airlines!

The book excerpt below explains exactly why.

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"Investing in airlines?

Qantas (QAN) is one of Australia’s household company names having been established for more than 90 years. While today the company has its head office close to the airport in the suburb of Mascot in Sydney, as the original name of the company suggests (Queensland and Northern Territory Aerial Services Ltd) the airline originated from the sunshine state of Queensland.

While I was on my travels in 2011, one of the most interesting places in the whole of Australia that I visited was the small town of Winton in Queensland. Winton is well known for the nearby 95 million year old dinosaur stampede footprints which you can visit, but also for being home to the founding headquarters of Qantas in 1920, with operations being moved along slightly to Longreach in 1921.
Return on investment in airlines has been historically poor.

The Qantas story is an interesting tale and a quintessentially Australian one, comprising the founding of the Flying Doctor service in 1928, a relocation of the head office to Brisbane in 1930, the first economy tourism flights to the UK in 1953 and the introduction of the jumbo, being the Boeing 747 in 1971. Qantas was also responsible for the evacuation of a record 647 passengers from Darwin’s Cyclone Tracy over the Christmas period in 1973.

In 1988, Qantas became an incorporated public company and in 1991, Prime Minister Keating announced that the Government had sold Australian Airlines to Qantas for $300 million. Qantas now can be fund under the ASX stock code of QAN.

 Qantas 10 year share price history


Source: Australian Securities Exchange, www.asx.com.au

As for many companies domiciled in developed countries, Qantas is going through a turbulent period, if you will please pardon the awful pun. Employers in Australia are increasingly discovering that employing staff is a very expensive business. When a new employee is recruited today, the employer does not only have to consider salary payments but also the on-costs associated with employment.

Today, a package might include a salary, a bonus, share option schemes, Workers Compensation insurance, superannuation contributions, Work Cover insurance and more. The actual cost to the company can easily be 50% more than the basic salary which is advertised to the employee.
Australian companies are suffering from expensive employment costs.

Whilst I was on my travels, part of my trip was a world cruise with one of the top cruise lines, travelling from Australia to the UK, via Asia, the Middle East, North Africa and Europe. While the cruise ship officer positions were often staffed by the English, the waiting staff, administrative workers and the cleaners seemed to hail almost exclusively from the Philippines.

Cruise ship companies have had to adapt to the expensive cost of employing staff from developed countries by employing Filipinos (who work long hours and for months at a time while on board, before returning home for an extended break) and by domiciling their companies overseas.

We are starting to see similar trends from companies based in London, New York, Sydney and Melbourne. We will all be familiar with phoning service companies and the phone call being taken in India from a call centre. This is a direct consequence of the cost of employment in Australia and other developed nations. The implication of this is that Australian-domiciled businesses need to be able to move with the times in order to keep their costs down.

Do airlines make for good investments? If past history is reflective of the future, the answer is clear: no. It is said that throughout the entire history of aviation, airline companies have made a sum total of net losses. Of course, Warren Buffett cautions us to be wary of past history proofs in finance, for if history could tell us everything about future financial trends, the richest people would be librarians, as he noted drily.

Famously, even Buffett and his Berkshire Hathaway colleagues invested in US Airlines and initially made painful losses although Berkshire later recouped its investment as is generally their way. Even the ‘Sage of Omaha’ himself, as Buffett is known, was shocked at the cut-throat nature of the industry. Tongue-in-cheek, he now claims to have a toll number which he calls to warn him off investing in aviation ever again: ‘Every time I feel like buying airlines I phone the toll number and they shout me down!’.

Why might airlines not be great investments? 

As a general rule, then, aviation is not a good industry to invest in. Here are just five of the reasons why:

Sector disadvantage 1 — Competitive industry

Do you remember the demise of Ansett in Australia? Aviation is an incredibly competitive industry and the weak companies will be ruthlessly spat out. Europe has seen a significant rise in the number of low-cost airlines competing for slots. Some new entrants have been a success, including EasyJet and Virgin, but others have fall by the wayside, such as Sir Freddie Laker’s airline in Britain.

Sector disadvantage 2 — Huge aviation fuel and tax costs

Governments can raise taxes on fuel and are likely to increase further levies in a bid to curb carbon emissions. This does not bode well for a profitable future for those involved in aviation.

Sector disadvantage 3 — Anti-monopoly legislation

Brits may remember Sir Richard Branson’s endless campaigning against the British Airways ‘monopoly’ (British Airways must have been the first monopoly in the history of the world with less than a 50% market share!). We know that Buffett likes to invest in companies which operate effective monopolies and can raise their prices as they see fit. Airlines have no such luxury and are often forced to compete on price by increasingly discerning consumers.

Sector disadvantage 4 — Black swan events

A black swan event is an unforeseen, random or unexpected event which can have major consequences on the investment markets. The term was coined by the English when they believed that black swans did not exist and refers to an occurring event which had seemingly represented an impossibility.

Black swan events can spook the aviation industry. For example, the industry suffered an unprecedented setback in the aftermath of the September 11 terrorist attacks in 2001 as customers became too fearful to travel. Similarly, the more recent volcanic eruption in Europe grounded flights across a huge area which cost the aviation industry dearly. We don’t yet know what the next black swan event will be — only that at some point there will be one.

Sector disadvantage 5 — Highly regulated

For obvious reasons, airlines are heavily regulated. Safety is paramount for the ongoing success of an airline. A major accident can destroy the reputation of an airline very quickly which introduces a different risk of loss of capital for investors. Due to the importance placed on safety, the aviation industry is very heavily regulated which brings with it a cost to the operators.

Had you invested in a portfolio of airlines stocks in the US 20 years ago you would today have made a net loss, as compared to a huge return had you simply invested in the wider S&P 500 index. If you are interested in aviation, you may well be better to invest in companies which service the airports and airlines rather than the airlines themselves. It’s a tough industry to consistently generate profits in.

Summary: There are better places than airlines to invest your money!"

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