SMH 26 May 2007
by Alan Kohler
"THE idea that Qantas chief executive Geoff Dixon has suddenly discovered all these excellent new ideas for running Qantas after talking to Macquarie bankers, Bob Mansfield, David Coe and the others behind Airline Partners Australia, which the company may be putting about, is, to say the least, unbelievable.
It was, of course, the other way around. Dixon's existing strategy became APA's - except, perhaps, for the new wheeze of borrowing some money and giving it to shareholders (claps hand on forehead - "Borrowing to replace equity - brilliant!").
Shareholders might like to ask Dixon and the rest of the board why they're only now putting on a happy face and spruiking an upbeat vision of Qantas's future, instead of all the glum warnings about business risks, and impending share price collapse, with which they have been trying to frighten shareholders into the arms of APA for the past five months.
Why not do it last year before the offer, to head it off? Why not publicly talk up the company's prospects after the bid was announced? And why not put this week's presentation in the target statement? Thank goodness, small shareholders will now be saying, Andrew Sisson of Balanced Equity and Paul Fiani of UBS had their own view of the company's prospects - now vindicated.
On Friday morning, after listening to Dixon's investor presentation on Thursday, Macquarie Equities aviation analyst Andrew Wilkinson upgraded his 12-month price target for Qantas to $7.05 - $1.60 more than the offer price.
So on the basis of its own analyst's numbers, Macquarie and its partners were trying to steal Qantas from its shareholders for $3.1 billion - 20 per cent - less than it is worth.
This shows several things: how clever they were to have seen that opportunity; how stupid they were to declare the bid "final" at the start (they could have easily got Qantas for $6 a share, which is still $2 billion less than the company is worth) and how mistaken the board was to support them and keep supporting them.
This week's presentation contained little that was new - but what was really new was the tone. As the headline on the Macquarie Bank research report said: "Glass finally half full."
Exactly. During the offer Dixon and the board were gloomy gutses, trying to justify their support for it and get shareholders to sell. Their sudden conversion to optimism now that the bid has failed does them no credit at all.
Macquarie's new $7.05 a share valuation on Qantas is simply based on a comparison of its valuation with two other airlines, Singapore Airlines and Cathay. They sell for 5.5 times enterprise value while Qantas is selling at 4.5 times EV.
Qantas has sold at more than 5.5 times EV in the past and, Wilkinson says, it probably will do so in future as airlines continue to be rerated.
The biggest threat to the company's value, apart from the unpredictable prospect of terrorism and oil shocks, is the entirely predictable entry of the Singapore Airlines-controlled Tiger Airways into the Australian market.
This week Melbourne Airport agreed to let Tiger use terminal four, which was Virgin Blue's first terminal in Melbourne before Ansett went broke and it was able to move into the deceased estate known as terminal three.
A Sydney Airport spokesman told me yesterday that it was talking to Tiger about Sydney's common user terminal - number 2 - which would be shared with Virgin Blue and Jetstar.
More important for Tiger is an air operator's certificate; the process for getting that is under way with the Civil Aviation Safety Authority. The regulator has made an estimate of the cost of the "job" (at $160 an hour), and Tiger is about to cough up a 50 per cent deposit, imposed to discourage fly-by-nighters. A CASA spokesman said
yesterday it should take three to six months to issue the certificate, including inspections of facilities, after which Tiger will be free to fly passengers around Australia.
So by September or October there will be an airline price war, possibly like nothing we have ever seen before.
Dixon jammed his flag in the ground on Thursday when he said Qantas would do whatever was necessary to defend 65 per cent total market share. At the moment, according to Dixon, Qantas has 51.9 per cent and Jetstar 15 per cent - a total of 66.9 per cent.
How much will this price war knock off Qantas's bottom line? Well, Tiger plans to launch in Australia with five planes, and hopes eventually to grow that to 30. The initial five will increase the capacity on the routes involved by 3 per cent.
Adding the planned growth by Qantas and Virgin Blue, that will lift total domestic capacity by 12 per cent, which compares with the long-term average growth of less than 5 per cent.
That should lead to lower yields and profits, especially if a new cut-price airline is trying to gain initial market share. But some believe (hope?) the extra capacity could produce weaker loads (more empty seats) instead.
But at this stage local institutions are buying Dixon's new upbeat story and, so far at least, are happily soaking up the stock that hedge funds are selling, which they had bought from the people they are now selling to.
Qantas's chairman, Margaret Jackson, thought the hedge funds would be squeezed by the locals as they crammed the exits, and would have to take losses of up as much as $1 a share. But she wasn't counting on the new, upbeat Geoff Dixon, and the fact that Qantas's prospects actually do look pretty good".
Alan Kohler publishes Eureka Report, an investment newsletter financially backed by Carnegie Wylie & Co, an adviser to Qantas. The views expressed here are Kohler's alone.
Thank goodness for Paul Fiani and Andrew Sisson
Time to have a good look ASIC et al
