Shares may face more than a near miss
January 09, 2008
HOW near was the miss? Just another "incident" - or enough to rattle a rampaging Qantas share price?
Qantas had clamped down the information shutters last night -- and to be fair, no one knew what the problem was -- yet "the incident" will throw into stark relief, again, that critical nexus between costs, profits and safety.
The Boeing 747 flying into Bangkok on Monday from London to Sydney had a highly improbable electrical failure and had to resort to the back-up system -- a battery.
This battery, according to pilots and an aviation engineer contacted by The Australian, lasts for about 30 minutes and provides a cockpit light, a radio and the captain's instruments.
The speculation now is twofold: how did four independent electrical systems (four generators on four engines) fail simultaneously? And what would have happened had the failure occurred over an ocean in the dark?
As the Civil Aviation Safety Authority, the Australian Transport Safety Board , Boeing, the Thai authorities and Qantas were investigating last night, no one had any answers.
Neither could Qantas provide confirmation on the age of the aircraft. It's a 747-400 and could be anywhere from five to 25 years old.
This matters. If it is a fair vintage, the "incident" will bring controversy, perhaps even dent the stock price. Qantas has one of the oldest fleets in the developed world at roughly 11 years, while management focus on eliminating costs has brought terrific internal debate on the trade-off between profits and safety.
Three years ago, David Forsyth, the airline's former executive general manager of engineering and maintenance, presented to the executive committee on the challenges of maintenance and the sustainability of the cost-cutting program.
Forsyth left shortly afterwards, said to be dissatisfied with the company's approach and spending on maintenance.
The debate has raged, and so it should, as Geoff Dixon and his team drive billion-dollar profits with their comparatively old fleet. Almost anyone trying to get a ticket overseas knows the yields and load factors are running full-tilt at Qantas, and at most of its competitors.
Besides the age of the fleet is the array of aircraft types and configurations, which make maintenance a difficult job. Bombardiers, 737s, two types of 767s, three types of 747s and the incoming 787s are all in the fleet.
Perhaps the greatest concern in last year's private equity tilt at Qantas was the one least featured in the press. Amid all the debate on price and the role of the board, valid issues all, was the matter of cost savings.
The Macquarie-Allco-TPG consortium plan was to run up debt to drive financial performance and cut costs. The issue of safety was mostly ignored in the public debate, although the chances of an increase in "incidents" may well have risen under a more aggressive management.
There comes a point, however, in aviation when safety can really damage the bottom line. Were Qantas to crash, the premium for safety would be wiped out with devastating consequences for the stock price.
For Qantas, the only positive in the incident is that it may redirect attention from the latest fuel surcharge. Given that management had been telling the market how well the company was hedged for 2008, it's a cheeky outcome indeed that, according to analysts, the latest hike should plonk another $130million on the bottom line.