On the face of it, Qatar Airways’ £3 billion bet on the future of British Airways makes little sense.
Banned from taking over BA’s Spanish-based owner IAG by European Union rules, Qatar moving its stake up from 21% to 25% today achieves zero strategic business advantage.
But then, this move — and its other big stakes in global airlines — are not really about business. They’re actually about helping secure the economy of Qatar.
For Qatar Airways is a private company only in name. One hundred per cent owned by the ruling royal family, it is, in fact, a tool of the state. And that is a state whose economic wellbeing is almost entirely at the whim of the global price of gas and oil. Even after its attempts to diversify, its vast energy resources make 70% of the nation’s income.
So, as any decent fund manager would advise, it needs a hedge — an asset that rises as oil falls. And what does that? Shares in fuel-guzzling airlines.
It hasn’t worked so brilliantly lately. Energy prices have fallen, but coronavirus and overcapacity have kept a lid on airline shares.
But of all the airlines IAG is the one to back. Thanks to its careful cost controls and acquisition strategy, it is the best-positioned, most undervalued stock in the sector.
As analysts at Peel Hunt argue, IAG’s current valuation barely covers the replacement value of its fleet. Consider that it’s returning about three times its cost of capital and you have what looks like a serious bargain.
Qatar has its own good reasons to gobble up the shares, but the rest of us should tuck in, too.
