Thurs BRW
Dixon delays departure
The Qantas chief has extended his contract at a critical time for the airline.
By Adele Ferguson
BRW. 25 May 2006
There is plenty of uncertainty at Qantas at present, including finding more costs to cut to fund a blow-out in its fuel bill, rising tensions among its 38,000-strong workforce on the eve of the expiry of some key enterprise bargaining agreements, and a decision by the board to expand its revenue base by moving into land transport such as general freight. With so much uncertainty it is no surprise that Geoff Dixon will extend his contract by another year to 2008.
What is surprising is that the company has been very low-key about Dixon's decision. When he extended his original contract from December 2005 until July 2007, the company trumpeted the news. This time it was mentioned casually in response to a question from BRW to the chief financial officer, Peter Gregg, about Dixon's imminent retirement. Gregg replied: "I think you will find Geoff is staying until 2008."
Dixon has little choice. The next couple of years will be some of the most challenging in Qantas's 85-year history, requiring an experienced chief executive to oversee them.
One of the biggest challenges will be renegotiating six enterprise bargaining agreements at a time when it is busy slashing costs and cutting its workforce to pay its fuel bill, blown out by record oil prices and a limited hedging policy. The potential for industrial action is high and it requires negotiation by a chief executive who is not going to step down six months after the negotiations are complete. In a business that produces a gross profit margin (earnings before interest and tax expressed as a percentage of sales) of about 7%, a strike by one of the many unions representing Qantas employees could put a big dent in profits. Industrial relations is a key issue for the airline. Not just the cost of labour is at stake; it is also the flexibility of staff and the productivity gains that flexibility brings.
With labour and fuel now making up 60% of the airline's total costs, it is no surprise that margins are being squeezed and the company is searching for more productivity gains.
Qantas must also look for new revenue streams to try to halt the crunch on its margins, and Dixon thinks he has the answer: general freight.
To this end he is talking to the country's second biggest general freight operator, Lindsay Fox, to buy his trucking business Linfox. The only question is the price and whether Australia Post will be involved. Fox is believed to want more than $1.1 billion for the business, but the rest of the industry thinks it is worth between $700 million and $1 billion, depending on whether the Armaguard cash logistics business is included.
Fox is a seller. He had hoped to swap the company for shares in a consortium led by Macquarie Bank to offer a counterbid for Patrick Corporation. The deal fell apart, and Fox is now trying to find a new buyer.
Besides a generational change going on at Linfox, where Fox's children want to pursue other business opportunities, land transport will only get tougher as Toll Holdings and Patrick Corporation merge to create a one-stop shop, providing clients with everything from ports to road and rail. Such an enterprise will put further pressure on freight forwarders and trucking companies to get bigger or get out. Companies such as TNT Australia, Linfox, Scott's Transport Industries, trucking group K&S Corporation (which is 70% owned by Scott's), SCT Logistics and Sadleirs Transport are already being squeezed.
The Department of Transport forecasts that freight transport in Australia will increase 73% by 2020, growing in volume from 375.3 billion tonne-kilometres (btkm) in 1999-2000 to 648.5 btkm, worth $130 billion. Qantas wants to get a slice of the pie.
A move into general freight makes sense. The airline, in partnership with Australia Post, already has a big interest in land transport services, following the joint purchase of express freight operator Star Track Express for $750 million in December 2004. Qantas and Australia Post are also the dominant providers of domestic air-freight services through their joint Australian Air Express business.
Adding general freight and freight forwarding to Qantas's business mix would expand its service offerings to freight customers. In addition, it could improve Qantas's share price. Macquarie Bank recently argued in a note that Qantas's foreign ownership cap of 49% means that, as a pure airline, its pool of potential investors is artificially limited.
If the airline becomes more of an industrial company, by expanding into land transport, the pool of potential Australian investors might increase.
General freight operators trade on higher price/earnings (p/e) multiples of 15 or 16, compared with airline stocks, which trade on a p/e of 10 or 11.
If a move into other areas helps to boost the share price, the company will be keen to pursue it. In the past five years, its share price has been a perennial underperformer of the S&P/ASX 200 index. Over five years it has fallen 5.3%, compared with a 54% increase in the S&P/ASX 200. Over two years, Qantas has risen 3.5%, compared with a 32% rise in the S&P/ASX 200, and in the past three months Qantas's share price has dived 17%, compared with an 8.7% rise in the index.
Qantas is no stranger to Fox. When it launched its low-cost carrier, Jetstar, in Australia, Dixon decided to use the Fox family's Avalon Airport instead of Melbourne Airport. Then in March this year it announced it would move its heavy maintenance operation for jumbo jets from its 55-year-old Sydney base to Avalon.
Dixon is also keen to expand the airline's revenue base by taking Jetstar to the global scene. This will not be as easy as it sounds and is another reason why Dixon will want to stay on until it is up and running.
Qantas has not had a good record with its extra overseas operations. Australian Airlines was a flop and the brand will be gone by the end of June. Jetstar Asia, in which Qantas holds a 44% stake through Singapore's Orangestar Investments, is bleeding - in the six months to December 31, it lost $27.4 million. In March, Orangestar announced it was raising $S36 million in fresh equity to help fund the business, and the airline is cutting back its fleet from eight to six.
On April 26, Qantas lodged a 19-page authorisation application with the Australian Competition & Consumer Commission (ACCC) to allow it to co-operate with Orangestar. Because Qantas is only a 44% stakeholder in Jetstar Asia, it is not a "related company" of the Qantas group, and therefore is not allowed to participate in things such as scheduling, capacity or price decisions for Jetstar Asia without breaching section 45 of the Trade Practices Act. The submission, obtained by BRW, is more telling in not what Qantas is applying for, but the reasons for it. Clearly, the operation in Asia is bleeding cash and is a far cry from the original business plan drafted in 2004.
In its submission to the ACCC, Qantas says: "Subject to commercial and regulatory considerations, Qantas would be more likely ... to place its QF code on Orangestar services. This could significantly improve trade and relations between Australia and countries such as Vietnam, India or Cambodia. Furthermore, Qantas could also extend the scope of the Qantas frequent flyer program to enable Australian consumers to earn and/or redeem points on more intra-Asian services."
In other words, Jetstar International, which will have a cost structure as much as 40% below Qantas's, will displace Qantas services on routes that are only marginally profitable at the moment. This would give Qantas a chance to open a lot of new markets that until now have been too tough for it to fly.
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