Wirraway
9th Sep 2004, 17:45
Fri "The Australian"
After BA, a courtship closer to home?
Steve Creedy
September 10, 2004
QANTAS chief executive Geoff Dixon and British Airways boss Rod Eddington may not agree on low-cost airlines but they both sing the same tune when it comes to industry consolidation.
This week's decision by BA to sell its 18.25 per cent stake in Qantas and end an 11-year equity relationship has emphasised once more that old expectations of global consolidation have been replaced by a regional emphasis.
But the $64,000 question remains the same. Who eats whom?
Financially strong airlines are on the prowl for possibilities, and weaker ones are trying to bolster their position to avoid being consumed.
Europe and the US have already seen the beginnings of regional consolidation, with Air France acquiring Dutch carrier KLM, and American Airlines swallowing TWA.
This week's decision leaves Qantas free to enter a deal with another airline without running it past BA and much speculation has centred on Singapore Airlines.
This was further fuelled when Qantas entered into a partnership with the Singapore Government's investment vehicle Temasek, the major shareholder in SIA, to start a Singapore-based low-cost carrier currently dubbed Jetstar Asia.
Temasek, which owns 57 per cent of SIA and 11 per cent of SIA's competing low-cost carrier, Tiger, took a 19 per cent position in the Qantas operation.
However, Qantas is still pursuing through appeals a tie-up with Air New Zealand that would see it take a 22.5 per cent stake in the airline and share some routes and services.
Competition agencies on both sides of the Tasman rejected the alliance as anti-competitive. Any proposal to consolidate with Singapore would almost certainly hit similar problems.
Then there is that question about who would captain a joint ship.
SIA has been burnt in the past by minority investments, and executives said earlier this year they were reluctant to buy into another airline where they did not have control.
Dixon has a similar view and last month expressed a preference for an open share register over another airline owner if BA sold its stake.
When asked at the Qantas annual results about consolidating with another airline, he said: "We have no particular desire for any other partner or anything like that, but we've been very open all the time that we will look at any opportunities we can."
This does not mean that neither will co-operate: Singapore handles Qantas at Changi Airport and has an inter-line agreement to transfer passengers to the Australian carrier.
Both airlines have confirmed they are also looking at joint maintenance of the new A380 aircraft, due for delivery in 2006.
But there are also conflicts, such as Singaporean pressure to open up the Australia-US route, and Qantas's campaigns to thwart previous SIA attempts to gain an Australasian foothold.
"Singapore now is really focusing on services out of Singapore," says Centre for Asia Pacific Aviation analyst Ian Thomas.
"They have the option with longer-range aircraft to really develop that type of service and that's really geared into that end of the market as a premium operator.
"They'll keep investing in Australia, I'm quite sure, and they'll probably keep the deal going with Qantas on the inter-lines.
"But when it comes down to it, I really don't see them committing to Australia and that includes the idea of some sort of cross-shareholding structure."
The other question, Thomas says, is whether Qantas really needs SIA.
The Jetstar Asia exercise, a smaller Qantas-run freight joint venture in Thailand and the airline's sometimes overlooked all-economy international offshoot, Australian Airlines, suggest Qantas is also attacking Asia from another angle.
Even Eddington observes: "Qantas is now a substantial global airline and, personally, I don't think it necessarily needs a strategic airline owner."
For its part, BA again signalled its determination this week not to be a "consolidatee".
It will use proceeds from the Qantas sale to reduce its £3.8 billion ($9.75 billion) debt and strengthen its balance sheet in preparation for the changes its sees looming over the horizon.
BA's likely vehicle for consolidation is Spanish carrier Iberia, in which it has a 9 per cent stake, although it says it has no immediate plans to boost that interest. Instead, it is beefing itself up to take advantages of changes in European ownership and control laws.
Airlines with a strong balance sheet, says BA commercial director Martin George, are airlines that have options for the future.
"We're starting to see some movement towards consolidations," George says.
"It is very early days but one thing's for certain: we have to be financially robust in order to be an active consolidator, rather than a consolidatee, in the process.
"We want to be in control of our own destiny and if you've got this millstone of excessive debt, it makes it very difficult to do that."
Despite the surprise timing – Dixon and chief financial officer Peter Gregg were not told of it until Tuesday night Sydney time – the BA sale is a logical progression in the relationship between the two airlines.
That the British carrier did not bale out when the share price was higher probably relates more to the timing of an Australian Competition & Consumer Commission draft decision on the Joint Services Agreement than the rumoured cooling of the relations between executives.
When BA bought into Qantas for $665 million in 1993, former chief executive Colin Marshall was convinced global consolidation was on the way.
The Australian government was at that time seeking a strategic airline partner to help get the float of Qantas away, and BA outbid Singapore Airlines for a 25 per cent stake.
Marshall also bought into several other airlines, including US Air, as he attempted to set up a global aviation empire.
But the global consolidation concept fell foul of nationalism and bureaucratic inertia. Expected liberalisation either failed to eventuate or occurred at such a snail's pace that the first moves towards global airlines were taken over by other events.
BA sold its interests in other airlines but it had already forged an agreement with Qantas that helped it compete on the increasingly difficult but still important kangaroo route.
The deal allowed both airlines to reduce costs on the route by sharing services but, equally important, helped overcome the disadvantage they faced competing against strong Asian hub carriers.
The Joint Services Agreement allowed the airlines to fix prices and share schedules, sales and operations on the route.
First signed in 1995, it was initially underpinned by the equity relationship but has evolved to become a force unto itself. The ACCC's draft deci sion extends the JSA for five years, although Virgin Atlantic has objected and prompted a determination hearing in November.
While Eddington agrees that the interests of the airlines have drifted apart and are now concentrated in their own regions, he says the JSA remains important to both.
"We clearly have some key common interests and they embrace the kangaroo route," he says. "The Joint Services Agreement captures those interests very sensibly, in my view."
There is also the fact, says CAPA's Thomas, that it would be extremely costly for the two carriers to unwind the deal.
"It would cost them the earth. And Qantas has been able to reduce costs partly on the basis of the JSA, plus it's a large reason that route is profitable."
===========================================
After BA, a courtship closer to home?
Steve Creedy
September 10, 2004
QANTAS chief executive Geoff Dixon and British Airways boss Rod Eddington may not agree on low-cost airlines but they both sing the same tune when it comes to industry consolidation.
This week's decision by BA to sell its 18.25 per cent stake in Qantas and end an 11-year equity relationship has emphasised once more that old expectations of global consolidation have been replaced by a regional emphasis.
But the $64,000 question remains the same. Who eats whom?
Financially strong airlines are on the prowl for possibilities, and weaker ones are trying to bolster their position to avoid being consumed.
Europe and the US have already seen the beginnings of regional consolidation, with Air France acquiring Dutch carrier KLM, and American Airlines swallowing TWA.
This week's decision leaves Qantas free to enter a deal with another airline without running it past BA and much speculation has centred on Singapore Airlines.
This was further fuelled when Qantas entered into a partnership with the Singapore Government's investment vehicle Temasek, the major shareholder in SIA, to start a Singapore-based low-cost carrier currently dubbed Jetstar Asia.
Temasek, which owns 57 per cent of SIA and 11 per cent of SIA's competing low-cost carrier, Tiger, took a 19 per cent position in the Qantas operation.
However, Qantas is still pursuing through appeals a tie-up with Air New Zealand that would see it take a 22.5 per cent stake in the airline and share some routes and services.
Competition agencies on both sides of the Tasman rejected the alliance as anti-competitive. Any proposal to consolidate with Singapore would almost certainly hit similar problems.
Then there is that question about who would captain a joint ship.
SIA has been burnt in the past by minority investments, and executives said earlier this year they were reluctant to buy into another airline where they did not have control.
Dixon has a similar view and last month expressed a preference for an open share register over another airline owner if BA sold its stake.
When asked at the Qantas annual results about consolidating with another airline, he said: "We have no particular desire for any other partner or anything like that, but we've been very open all the time that we will look at any opportunities we can."
This does not mean that neither will co-operate: Singapore handles Qantas at Changi Airport and has an inter-line agreement to transfer passengers to the Australian carrier.
Both airlines have confirmed they are also looking at joint maintenance of the new A380 aircraft, due for delivery in 2006.
But there are also conflicts, such as Singaporean pressure to open up the Australia-US route, and Qantas's campaigns to thwart previous SIA attempts to gain an Australasian foothold.
"Singapore now is really focusing on services out of Singapore," says Centre for Asia Pacific Aviation analyst Ian Thomas.
"They have the option with longer-range aircraft to really develop that type of service and that's really geared into that end of the market as a premium operator.
"They'll keep investing in Australia, I'm quite sure, and they'll probably keep the deal going with Qantas on the inter-lines.
"But when it comes down to it, I really don't see them committing to Australia and that includes the idea of some sort of cross-shareholding structure."
The other question, Thomas says, is whether Qantas really needs SIA.
The Jetstar Asia exercise, a smaller Qantas-run freight joint venture in Thailand and the airline's sometimes overlooked all-economy international offshoot, Australian Airlines, suggest Qantas is also attacking Asia from another angle.
Even Eddington observes: "Qantas is now a substantial global airline and, personally, I don't think it necessarily needs a strategic airline owner."
For its part, BA again signalled its determination this week not to be a "consolidatee".
It will use proceeds from the Qantas sale to reduce its £3.8 billion ($9.75 billion) debt and strengthen its balance sheet in preparation for the changes its sees looming over the horizon.
BA's likely vehicle for consolidation is Spanish carrier Iberia, in which it has a 9 per cent stake, although it says it has no immediate plans to boost that interest. Instead, it is beefing itself up to take advantages of changes in European ownership and control laws.
Airlines with a strong balance sheet, says BA commercial director Martin George, are airlines that have options for the future.
"We're starting to see some movement towards consolidations," George says.
"It is very early days but one thing's for certain: we have to be financially robust in order to be an active consolidator, rather than a consolidatee, in the process.
"We want to be in control of our own destiny and if you've got this millstone of excessive debt, it makes it very difficult to do that."
Despite the surprise timing – Dixon and chief financial officer Peter Gregg were not told of it until Tuesday night Sydney time – the BA sale is a logical progression in the relationship between the two airlines.
That the British carrier did not bale out when the share price was higher probably relates more to the timing of an Australian Competition & Consumer Commission draft decision on the Joint Services Agreement than the rumoured cooling of the relations between executives.
When BA bought into Qantas for $665 million in 1993, former chief executive Colin Marshall was convinced global consolidation was on the way.
The Australian government was at that time seeking a strategic airline partner to help get the float of Qantas away, and BA outbid Singapore Airlines for a 25 per cent stake.
Marshall also bought into several other airlines, including US Air, as he attempted to set up a global aviation empire.
But the global consolidation concept fell foul of nationalism and bureaucratic inertia. Expected liberalisation either failed to eventuate or occurred at such a snail's pace that the first moves towards global airlines were taken over by other events.
BA sold its interests in other airlines but it had already forged an agreement with Qantas that helped it compete on the increasingly difficult but still important kangaroo route.
The deal allowed both airlines to reduce costs on the route by sharing services but, equally important, helped overcome the disadvantage they faced competing against strong Asian hub carriers.
The Joint Services Agreement allowed the airlines to fix prices and share schedules, sales and operations on the route.
First signed in 1995, it was initially underpinned by the equity relationship but has evolved to become a force unto itself. The ACCC's draft deci sion extends the JSA for five years, although Virgin Atlantic has objected and prompted a determination hearing in November.
While Eddington agrees that the interests of the airlines have drifted apart and are now concentrated in their own regions, he says the JSA remains important to both.
"We clearly have some key common interests and they embrace the kangaroo route," he says. "The Joint Services Agreement captures those interests very sensibly, in my view."
There is also the fact, says CAPA's Thomas, that it would be extremely costly for the two carriers to unwind the deal.
"It would cost them the earth. And Qantas has been able to reduce costs partly on the basis of the JSA, plus it's a large reason that route is profitable."
===========================================