- Valuation only one variable for airline stocks - Moelis suggests a number of other factors are also important - Stockbroker initiates coverage on both Qantas and Virgin Blue with Hold ratings

By Chris Shaw

For some time both Qantas ((QAN)) and Virgin Blue ((VBA)) have received favourable ratings from either a majority (QAN) or some (VBA) of the equity brokers in the FNArena database, in both cases because of evidence of valuation support relative to existing share price levels.

The database currently shows Qantas is rated Buy seven times and Hold once, while Virgin Blue scores three Buys, three Holds and one Underperform recommendation.

But as stockbroker Moelis points out, a number of recent market shocks such as ash clouds, floods, earthquakes and the potential for industrial action means earnings in the sector remain volatile. This suggests an airline stock being cheap on earnings based multiples should be only one factor driving any investment decision.

Other factors needing consideration according to Moelis include structural issues, the cost structure of the airline, macroeconomic drivers, earnings sensitivity and financial leverage. Moelis suggests structural issues include capacity increases coming at the expense of yields, an inability to pass on increased fuel costs and different regulations for airlines in different countries.

Fuel costs in particular have been an issue in recent years, as having been equal to about 10% of group revenues in 2000, fuel costs for Qantas have risen to about 25% of revenues in 2010. Moelis also notes in 1965 the lowest airfare from Sydney to London and return was equal to about 21 weeks wages, now it equates to around 1.7 weeks average wages.