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Gordon Gekko had a point when declaring to his protege Bud Fox in the hit 1987 movie Wall Street that airlines make lousy investments. Airlines have had a roller-coaster ride over the past decade. Volatile oil prices, difficult relationships with unions, SARS, terrorism and lately the global recession - all have wreaked havoc within the industry.

Qantas has fared relatively better than many of its international competitors but Australia's largest airline still faces some difficult headwinds. The second-half result revealed costs had blown out along with a sharp increase in debt levels. Forward booking revenue has been under severe pressure because many have decided to cancel travel plans in 2009. The Australian dollar's high volatility has also had an impact and made international travel less affordable for Australians.

The outlook

Qantas has provided guidance of about $500 million in pretax profits for the second half of the financial year. While disappointing compared with previous financial results, the airline is faring much better than other competitors in Europe and the US.

The issue with forecasting in the present environment is that there is little margin for error. A further fall in passenger numbers or an increase in fuel costs could easily throw this forecast off course.

Other headwinds include the airline being placed on a negative credit watch by the debt-rating agencies. The recent placement to institutions, raising $500 million, has helped boost the balance sheet but the rating could be jeopardised by any deterioration in cash flow. Qantas faces escalating capital expenditure as it modernises an ageing aircraft fleet.

Price

It seems a very long time ago since a consortium lead by Allco bid more than $5 a share for Qantas, yet this occurred less than two years ago.

Since peaking at about $6 in December 2007, the stock has significantly underperformed the index, falling to a 10-year low in recent weeks of about $1.80. Trading on a forward PE of about 7.5 times and a dividend yield of close to 8 per cent, the numbers on the surface look attractive but near-term risks remain.

Worth buying?

There is definitely value in Qantas at current price levels. The airline is one of the best-run in the world and enjoys a strong market position. However, the challenges facing Qantas and the industry in general are significant. While much of this uncertainty is reflected in the stock price, sharemarket volatility will continue during the near term in line with a slowing economy.

Trading conditions will be difficult over the next 12 months, although 2010 is likely to be a better year. Qantas will eventually be re-rated in line with an improving economic outlook. However, this might be some time away. For investors contemplating buying Qantas we recommend standing aside for now.