It’s been particularly instructive to note the delivery and aftermath of this year’s Qantas full year results announcement on August 20. The results were nothing short of fantastic. A turnaround in performance of $1.6 billion. An underlying profit of $975 million. And a capital return to shareholders of $505 million, with 23 cents per share to be paid out in early November. Plus the promise of the latest new B787-9 aircraft to excite customers about the future.
The Qantas share price had been rising strongly and steadily in expectation of this strong result and had closed at $3.76 on 19 August - a massive increase in value over about a year, although still well below its historic peak.
On the morning of 20 August Alan Joyce delivered a short and jubilant speech. He gave a potted history of the decisions taken since February 2014, when he announced that the company was forced by crisis conditions to sack 5,000 people. Having quickly run through his “tough decisions,” Joyce concluded his remarks by saying of himself that it was a “a good feeling” to be at the helm of “this great company as it begins the first phase of a remarkable turnaround”.
Mission accomplished! It seemed that Qantas had now finished with ‘transformation’ and had moved on to ‘turnaround’ – all in the course of a remarkable 18 months.
The analysts wrote glowing reports, recommending hold or buy for Qantas shares. The media also reported the story in positive terms. I imagine Qantas executives were telling each other that the share price would hit $4.00 by the end of that day.
But then things went sadly awry. The share price on the day tanked by more than 6 per cent, closing at $3.53. Even analysts couldn't understand what went wrong. "Analysts were last night struggling to explain a 6.1 per cent slump in the Qantas share price despite a $1.6 billion turnaround that delivered an underlying pre-tax annual profit of $975 million," wrote Steve Creedy in The Australian. The next day was even worse, with shares closing on Friday 21 August at an embarrassing $3.45.
This awkward situation was only compounded over that weekend when various interviews with Alan Joyce appeared in the weekend papers (see Damon Kitney in The Australian on 22 August) clearly undertaken in advance of the results announcement, and in expectation of a surging share price - with Alan saying that he was thankful that a private equity offer in 2007 of $5.45 per share had failed, and proclaiming that after eight years he would be staying on as CEO of Qantas as long as he enjoyed the job and the Board wanted him to stay. This was clearly designed to accompany a warm investor reaction to the results, setting the scene for a positive reception for the announcement of the $12 million annual pay-packet that would make Alan Joyce one of the best remunerated CEOs in Australia.
Monday 24 August dawned brightly, but the Qantas share price went on to close at a humiliating $3.30 in the context of the dramatic broader market sell-off.
The whole thing was a bit of a fizzer. So what could possibly have gone wrong?
Well, I reckon it’s pretty simple. Investors buy on the future, but they judge on the past. And they don’t just look at the aspects of history that suit the company at that particular moment – such as, in Qantas’s case, the hard work of the prior 18 months - they look at the entire track record of the leadership team. Alan and his team made the mistake of appearing to deny – or ignore - their own record.
In Alan’s case that record is unusually complex. In November 2013 Qantas was in such dire straits, as a result of the poisonous competitive environment with Virgin, that it went to the Government seeking a debt guarantee. Two years before that, Alan Joyce grounded the airline in response to industrial action.
Investors can’t afford to view individual results – no matter how grand - in isolation. Given the company’s volatile recent history, these latest Qantas results, wonderful as they were, suggested a company that was swinging dramatically - perhaps even erratically - between extremes. There was no clear narrative that positioned the 2015 results within the framework of the decisions of the past and a stable strategic trajectory towards the future.
The machine cranked into action. Leigh Clifford, the Chairman of Qantas, bought 40,000 shares on 21 August at $3.60 and another batch on 31 August when shares were at just $3.29. Qantas Director Paul Rayner bought 30,000 shares at between $3.43 and $3.45 on 27 August.
Helpful rumours and predictions emerged. On 1 September a UBS analyst said that Qantas was expected to announce a $500 million buyback at its annual meeting in October or at the latest, at its half-year results in February, as well as a further $1 billion in 2017.
Alan Joyce gave an interview on 7 September urging the passing of the China-Australia Free Trade Agreement, saying the Qantas partnership with China Eastern had the potential to be the airline’s largest, ahead of the Qantas-Emirates partnership that serviced Europe and the Qantas-American Airlines relationship for the Americas.
On September 10, Macquarie analysts were forecasting that in 2016 Qantas would distribute 45.2 cents per share on top of a 2.5% share buyback.
Despite the dramatic fall in the Australian share market, some key indicators were also working in Qantas’s favour, including the lower oil price and the drop in the Australian dollar, which deters international competitors and encourages domestic travel.
Yet as I write this, on Friday 11 September, the share price has just closed at $3.54. Which just goes to show that it doesn’t matter how great your numbers are, and how sound your analysis is, if you can’t communicate a clear and credible narrative that explains the past and points to an even better future, then the likelihood is your company share price will, at least temporarily, under-perform.