Bloomberg
Wed, 25 Sep 2002, 06:36pm EST
Qantas May Spend $14 Billion on New Planes, Seeks Overseas Investments
By Margreet Dietz
Sydney, Sept. 25 (Bloomberg) -- Qantas Airways Ltd., Australia's dominant airline, may spend as much as A$25 billion ($14 billion) on new planes and services over 10 years, extending plans to renew its fleet and offer new services.
Sydney-based Qantas, which competes on domestic routes with Virgin Blue Airlines Pty, may also spend about A$2 billion upgrading its regional QantasLink fleet over the next decade, Chief Executive Officer Geoff Dixon told an Australia-Israel Chamber of Commerce luncheon.
The new estimates extend the airline's plan to spend an average A$2.5 billion a year on new planes until 2005 as Qantas replaces aging jetliners with newer models. The carrier's expansion effort worried some investors already concerned about the airline industry's rising jet fuel prices and the threat that a war against Iraq may deter air travel.
"Nobody has that (A$25 billion target) in their numbers,'' said Gavin van der Wath, who helps manage A$1.2 billion of assets at Allianz Asset Management including Qantas shares. Van der Wath said he hasn't changed his holding of Qantas shares recently and doesn't plan to soon.
To help pay for the upgrade of its fleet, Qantas last month raised A$600 million by selling new shares to investors, while retail investors have until Friday to take up their portion of a A$200 million new stock offer, priced at A$4.20 each.
Qantas shares today had their biggest drop in four weeks, falling 4.4 percent to A$3.67. Most airline shares in the region dropped in part because jet fuel rose, reaching $34.20 a barrel yesterday in Singapore, the highest in a year.
Debt Load
Qantas's Dixon gave no indication how the carrier planned to secure funds for the 10-year plan. At the A$800 million rights offer last month, he said the airline wouldn't need additional fundraising until June 2004.
The airline had A$4.2 billion of net debt outstanding as of June 31. About A$841 million of the airline's bonds, or more than half of its outstanding fixed income debt, will mature next year, according to Bloomberg data.
Qantas, which is 19.5 percent owned by British Airways Plc, is also looking for overseas investments including equity partnerships and wants to pursue closer relationships with other carriers, Dixon said.
Talks with Air New Zealand Ltd. about Qantas buying a minority stake in its New Zealand government-controlled rival are continuing, Dixon said. Both airlines would benefit from pursuing stronger links with other competitors in the region, he said.
"Although we will always remain principally an Australian airline, we are going to need to undertake investments overseas,'' Dixon said. "A strong Australasian airline grouping that includes, but not necessarily only includes, Qantas and Air New Zealand would be very good for this region.''
Singapore Link?
Dixon's comments may fuel speculation of a possible link with Singapore Airlines Ltd., Asia's most profitable airline.
The Singaporean carrier has tried for a decade to get a part of Australia's domestic aviation market. It missed out against British Airways to buy a stake in Qantas from the Australian government and lost its indirect link with Australia when Ansett Holdings Ltd. failed in the past year.
"If rational behavior remains the key focus in all negotiations, I suspect that somebody like Singapore Airlines would be a good partner,'' van der Wath said. "Some sort of agreement between the two of them might allow Qantas to continue with its dominance over the domestic market as well as rationalize some international routes.''
Almost all of Qantas's fleet are now Boeing Co. jetliners, although it has ordered some Airbus SAS aircraft including the A380 aircraft to come into service after 2006.
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AAP
Aviation situation 'serious'
September 25, 2002
QANTAS Airways Ltd chief executive Geoff Dixon has said the global aviation situation was serious.
"Frankly there is also a real question mark over the structural sustainability of the whole (aviation) industry," Mr Dixon said.
He said Qantas was likely to have to adapt rapidly to short term shocks.
"We have had to adapt rapidly to very dramatic short term shocks and experience tells us we will need to do so again in the future," he said.
"These may be negative shocks requiring defensive measures, they may also be positive opportunities that we must move quickly to take advantage of."
Mr Dixon said it was fair to say Qantas faced a far broader and more complex range of conditions than in the past.
He said Qantas would not be immune from a major conflict in the Middle East.
"Now we face a real prospect of a conflict in the Middle East and Qantas obviously will not be immune," he said.
"As you have seen crude oil prices have already risen in anticipation and airline stocks worldwide, including Qantas, have been heavily sold."
However, he added Australia's image as a safe haven and Qantas' sound reputation had in the past provided some respite from the effect of major international conflicts.
He added the company was also better capitalised than its competitors and had substantial stand-by lines of credit in the event of any major prolonged downturn.
"Our fuel hedging program also provides a substantial level of cover at more favourable rates over the next few months," he said.
Mr Dixon also criticised the federal government's recent decision not to lift its foreign ownership restriction.
"Qantas is now one of the few airlines on the planet that is not either partly government owned or government subsidised in any way.
"Not only are we not subsidised but the Australian government's recent decision not to amend the Qantas sale act actively disadvantages Qantas relative to other Australian companies and international competitors in terms of price and access to capital." Mr Dixon, in a veiled warning to the possible entrance of a third domestic competitor in Australia and also rival Virgin Blue, said he was surprised that business discourse about sustainability always somehow bypassed the Australian domestic aviation market.
He said most countries much bigger than Australia did not have even two major airlines operating let alone four as in Australia last year.
"However, this not about the number of airlines, it is about the number of seats that commentators, consumer groups, expect to be sold below the cost of providing them," Mr Dixon said.
"I should have thought the collapse of Ansett offered a potent lesson on the economics of airlines yet there are still calls for cheaper and more plentiful seats through pricing wars to a level where the supply of services exceeds demand at unsustainable prices."
Mr Dixon said there was no doubt about what happened in Australia last year.
"Qantas was not making money, Ansett was losing hundreds of millions of dollar on an annual basis while Impulse collapsed and Virgin Blue was struggling and probably ultimately saved by Ansett going under," he said.
"But right up until the end the focus was on cheaper and cheaper fares at all costs.
"Surely no-one is suggesting that it would be desirable to go down that path again, or perhaps they are."
Mr Dixon said in regional Australia it was even more difficult to get aviation sustainability.
"We operate a significant number of marginal or loss making routes," he said.
One of Qantas' next most important decisions would be a possible $2 billion re-equipment of the QantasLink fleet over the next two years in regional Australia.
"Our ability to commit to this investment will depend on a sustainable business case and such a case is proving very difficult to achieve," Mr Dixon said.
"More so following the government's recent decision on foreign equity in Qantas that limits our access to global markets.
"Our final decision on re-equipment will have a profound impact on the level and breadth of services in Australia."
Meanwhile, he said the launch of Qantas' Australian Airlines leisure airline next month was looking very good.
"It has more than 60 per cent load factor through until April and the first month of its operation is nearly booked out," he said.
Mr Dixon concluded by saying Qantas would keep working very hard to continue to deliver excellent performances and to ensure its performance was sustained.
AAP
Last edited by Wirraway; 25th Sep 2002 at 09:21.