British Airways to sell QANTAS stake?

[Wirraway]

Qantas Asia now clear for take-off

Thurs "The Australian"

Qantas Asia now clear for take-off
Robert Gottliebsen
September 09, 2004

THE decision by British Airways to sell its $1.1 billion stake in Qantas will enable chief Geoff Dixon to implement his master plan to turn Qantas into an Asian airline based in Australia.

Mr Dixon plans to take Qantas's Jetstar discount airline model into the region and gain more regional routes for the full-service airline in partnership with other Asian airlines.

"We will ... seek to further strengthen our commercial position to enable us to take a leading role in any suitable consolidation opportunities that may arise in the Asia-Pacific," Mr Dixon said from London yesterday.

Asia is the biggest airline market in the world outside the US.

The BA decision to sell out of Qantas after 11 years -- it beat Singapore Airlines to the punch with a $665 million investment in 1995 -- took Qantas executives by surprise. It is believed they were not told until Tuesday night.

BA was last night seeking to sell the shares widely to investors, all but ruling out another airline emerging with such a large stake.

It plans to use the funds to lighten a debt load of more than $10 billion as it prepares for a new round of consolidation in the European airline industry.

The first step of Mr Dixon's plan is to use the Jetstar Australia discount model in Asia. Jetstar Asia will be based in Singapore and be 49 per cent owned by Qantas and 51 per cent owned by Singapore investors, some of whom are shareholders in Singapore Airlines.

Jetstar Asia will fly to a string of smaller Asian cities including many in China.

The second step will be to increase the scale of the Qantas full service airline by enabling it to travel on more Asian routes in partnership with Asian carriers, probably led by Singapore Airlines.

Qantas believes that provided the costs of a full-service airline are not too far above the discount airlines, and they offer a better service, they will prosper.

But to lower full-service airline costs will require greater scale and Qantas will therefore participate in an Asian consolidation that will also deliver increased scale to its partners.

Longer term, these co-operative agreements will almost certainly be cemented by equity which could not be arranged while British Airways was a big shareholder because the Qantas overseas ownership limit of 49 per cent would be breached.

Also vital for Qantas's scale is maintaining a 65 per cent share of the Australian domestic market. Mr Dixon has warned Virgin Blue chief Brett Godfrey that he has drawn a line in the airline sand at 65 per cent.

But the lowering of full-service airline costs using greater scale will make it very hard for the smaller country-based, government-backed airlines such as Air New Zealand.

The widely accepted airline industry view is that full-service airlines can't operate discount airlines, but Qantas believes that the early profitability of Jetstar Australia shows it can operate successfully in both markets.

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Thurs "The Age"

The race is on for BA's Qantas stake
By Leonie Wood
September 9, 2004

British Airways is believed to have been swamped yesterday by private and institutional investors wanting a piece of its 18.25 per cent Qantas stake.

Market sources said the $1.1 billion offering would be at least 1.5 times oversubscribed.

With Citigroup due to close a global book-build for distribution of the stake at 4am today, market sources in Australia said the final sale price was likely to be $3.28 or towards the top end of a $3.24-$3.33 indicative bidding range.

Some rival broking firms claimed the pricing was too high and suggested Citigroup would have difficulty filling the book above $3.24, the price it agreed to underwrite BA's stake.

But because Qantas is one of the few global airlines that makes a profit and because it is not permitted under law to have more than 49 per cent of its shares in the hands of foreign investors, the sale of the BA stake was expected to draw strong interest from overseas investors.

BA said yesterday it would sell its Qantas shares, 10 years after it paid $665 million for a 25 per cent stake and convinced the Keating government that it was a worthy foundation investor capable of guiding Qantas through its float.

Over the years, BA has not participated in all Qantas capital raisings and has allowed its stake to be diluted. But it has taken about $600 million in dividends.

British Airways chief executive Rod Eddington said the sale proceeds would be used to trim the airline's £5.6 billion ($A14.3 billion) debt, helping place it "in a robust position for any future European consolidation".

"Consolidation is coming and we need to be well positioned to take advantage of it," Mr Eddington said on a conference call. "The balance sheet is a key issue and we need to strengthen it ahead of time."

What that consolidation entails is not yet clear. But the Qantas sale may indicate that BA believes mergers within the global airline market are better done on a regional basis - perhaps as Air France and KLM have done - rather than by straddling the globe.

Some institutional investors suggested that BA's exit might make Qantas' proposed merger with Air New Zealand more palatable to competition regulators on both sides of the Tasman who have already rejected the airlines' plan. The airlines are appealing against the decisions of the Australian Competition and Consumer Commission and the NZ Commerce Commission.

After lengthy hearings earlier this year, the Australian Competition Tribunal is yet to hand down its decision on the Qantas/Air NZ merger.

An important factor in the tribunal's deliberations is the prospect of Emirates Airlines launching new routes to thread Australian and New Zealand ports. Such a move might mitigate some of the anti-competitive effects of Qantas and Air NZ merging their operations.

BA's close ties with Qantas will continue. They have a joint services arrangement that links their global flight schedules, ticketing and regional operations and effectively divides the responsibilities of each airline by region. How many of the 336 million shares are apportioned to foreign investors will play a big part in the Qantas share price after the distribution.

In short, if foreign investors received a disproportionately small slice, Qantas' share price most probably would rise over the next few months.

This is because Qantas is not a member of the Morgan Stanley Capital Index (MSCI), a benchmark index that assists foreign investors when they apportion funds to regional sharemarkets. The returns of many international funds are evaluated against the MSCI.

One reason for Qantas' exclusion until now has been a lack of liquidity and the cap on foreign holdings.

Because BA's exit dramatically increases Qantas' liquidity, Qantas is almost assured of inclusion in the MSCI when the index is reviewed next year.

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Thurs "Sydney Morning Herald"

Brits out - Qantas looks to Asia
By Scott Rochfort
September 9, 2004

Qantas no longer has a majority shareholder after private and institutional investors rushed to grab a slice of British Airways\' 18.25 per cent stake in the Australian carrier.

The sale - ending an 11-year relationship between the two airlines - is likely to add impetus to Qantas\'s plans to join forces with a strong regional partner, possibly Singapore Airlines, to dominate the Asia-Pacific region.

Citigroup, which was appointed to sell the $1.1 billion stake, last night encountered strong demand for the stock, particularly in Asia, as bids were taken from institutional investors around the globe.

Ending weeks of speculation that a sale was close, BA said it had sold the stake to prepare itself for the next wave of consolidation tipped to sweep through the European airline industry following the recent merger of Air France and Dutch carrier KLM.

BA originally bought 25 per cent of Qantas from the Keating Government for $665 million in 1993 after a bid from Singapore Air was rejected.

Yesterday, BA offered its stake to institutional investors for "not less than" $1.09 billion or $3.24 a share. It is believed investors were bidding closer to $3.30.

Qantas last sold for $3.33 before trading was suspended yesterday morning.

BA said it would use the sale proceeds to reduce debt and ensure it was a "consolidator, not a consolidatee".

Both airlines said the sale would not affect their joint services agreement, which allows them to co-ordinate fares and schedules on flights between Australia and the UK.

BA\'s commercial director, Martin George, said the sale was part of a plan to cut net debt from £3.9 billion ($10 billion) to below £3 billion and take advantage of potential consolidation opportunities, although BA has ruled out increasing its 9 per cent stake in Spanish airline Iberia.

Mr George declined to say whether BA had considered selling its stake to another foreign carrier.

"In deciding how we were going to sell the stake, we looked at a range of options and we decided this was the best thing for BA shareholders," he said.

"We\'re mindful of [Qantas chief executive] Geoff Dixon\'s position and Qantas is still a key partner and we\'re conscious of that."

At Qantas\'s recent full-year results briefing, Mr Dixon said he would rather BA offer its stake to fund managers, not an airline.

From London, where he was meeting several institutional investors, Mr Dixon said the "tyranny of distance between Australia and the United Kingdom" ruled out Qantas and BA joining together in any industry consolidation.

Qantas now has a relatively open share register, giving Mr Dixon and the board more leverage to forge a regional alliance of their own choosing. Qantas and Air New Zealand have been thwarted by competition regulators on both sides of the Tasman in their attempts to take a cross-shareholding.

But Mr Dixon has long expressed a desire to link with Singapore Airlines, creating a super airline for the Asia-Pacific hub. Singapore Airlines, which has been pushing the Federal Government to open up the heavily protected and highly lucrative Australia-Los Angeles route, declined to comment.

Australian Competition and Consumer Commission chairman Graeme Samuel said the "shareholding has not much relevance to the [joint services agreement]" between Qantas and BA.

After a 15-month wait, last month the ACCC proposed extending the agreement for another five years despite citing its detrimental impact on business traffic on the UK-Australia route.

Following objections by Virgin Atlantic, which called the ACCC\'s decision "perverse", the watchdog will hold a pre-determination conference in November to air concerns over the agreement.

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