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Airline industry facing turbulence -

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ELEANOR HALL: Investors may have been surprised that Qantas didn't pay a dividend but one industry
analyst says the surprise should be that the airline turns a profit at all.

Roger Montgomery is a former fund manager who now runs an investor website.

He says the global airline industry is struggling with billions of dollars in losses and he told
Michael Janda that if airlines had to properly account for the true cost of their businesses they'd
never make any money.

ROGER MONTGOMERY: Airline profits are the result of an accounting construct. What that means is
that they're costing their planes based on what they paid for those planes two decades ago in some
cases. Yet a new plane costs significantly more.

If they replaced the charge on their accounts called depreciation with some sort of a provision for
the replacement cost of the planes you would find that there would be no profit reported and as a
result they wouldn't be able to fund their dividends.

The only reason why Qantas has been able to pay dividends in the past and like many airlines have
been able to pay dividends is simply because they have been raising capital and borrowing money and
that's again reflected over the last decade in Qantas's annual reports.

MICHAEL JANDA: But I guess that catches up with you at some point. Do you expect Qantas to be
having a lot more half years with no dividend?

ROGER MONTGOMERY: There are a lot bigger problems than just the dividend. Airlines operate on the
charitable giving of their shareholders and lenders because it is such a tough business. And if
they hand the hat out and it comes back with nothing in it there are bigger problems for owners of
Qantas shares or any airline shares than just the dividends.

MICHAEL JANDA: And how come airlines can continue to operate making losses or making very small
profits and not paying dividends? Most other companies would be finished by now.

ROGER MONTGOMERY: Well many airlines are finished. That's why many airlines have gone broke and no
longer exist.

The airline industry lost many billions last year. It'll be the same again. And they only continue
to operate because they're able to borrow money or raise fresh capital from shareholders.

You can't make money flying someone to Melbourne for less than it would cost them to ride their
bike there.

People are buying their tickets not based on the brand of the product; they're buying it simply
based on price. They go online, they find what's the cheapest price I can get to Melbourne, what's
the cheapest price I can get to Bangkok or Singapore or wherever it is you're going.

You're selling a product where nobody really cares about the brand so it's hard to charge a high
price for that.

MICHAEL JANDA: Airlines do provide what is quite an essential service for a lot of people. How come
it is that this industry doesn't make profits?

ROGER MONTGOMERY: Look I think the only way that airlines collectively can make any money would be
if there was a lot fewer of them and it went back to being a luxury form of travel with a luxury
price attached to it.

But trying to ferry people around on planes for less than it costs to catch the bus isn't a recipe
for profit.

ELEANOR HALL: That's share analyst Roger Montgomery speaking to business reporter Michael Janda.