Wirraway
23rd Sep 2004, 04:57
"Business Review Weekly"
Cleared for take-off
Now that British Airways is off its back, Qantas can finally spread its wings in Asia.
By Adele Ferguson
BRW. 23 September 2004
When Geoff Dixon got over his initial outrage at not being told in advance of British Airways' decision to sell its 18.25% stake in Qantas, he and the rest of the board started celebrating. The decision has great significance for the airline's share price, its board and, most importantly, its strategy. In terms of its share price, the removal of British Airways is good. It increases the company's S&P/ASX 200 weighting from 0.73% to 0.90%, which immediately brings an extra $70 million of interest from index funds and makes Qantas eligible for inclusion in the Morgan Stanley Capital Index (MSCI) for Australia. The MSCI is an important index that assists foreign investors when they allocate funds to regional stockmarkets. The investment returns of many international funds are evaluated against the MSCI. If Qantas is included in the index at full market capitalisation, it will boost foreign investor interest in the stock.
The removal of British Airways from the share register and the board will have a big effect on the company's strategy. For example, the Qantas Sale Act prevents foreign investors from holding more than 49% of the company. With British Airways gone, the level of foreign ownership is likely to drop below 30%, which would allow Qantas to seek additional equity tie-ups with its regional peers.
In addition, the share sale opens the way for the Qantas board to replace the two British Airways representatives. This is good news for Dixon because British Airways and Qantas have been at loggerheads over Qantas's expansion into the low-cost carrier business. British Airways believes it is foolhardy for a full-service airline to own and operate a low-cost carrier, but Dixon and the rest of the board believe it is essential for survival. Having two directors on the board who disagreed on such fundamental strategic issues has been a big impediment to the company's growth.
With the board clear and the share register open, Qantas can boost its presence in Asia by starting up, or buying into, carriers in Asia and joining an Asian freight venture. It has already dipped a toe into the region by injecting $80 million into Jetstar Asia, a low-cost carrier in Singapore that will be launched by the end of the year. Qantas will own 49.9% of the new airline. Four aircraft were originally set down for the initial stage, and Qantas has the freedom to turn this into a much bigger investment now that British Airways is off its back.
But before it does that, it will have to decide whether Jetstar Asia will be a truly low-cost carrier or will be integrated with Qantas. It is understood that Qantas is still trying to work out the best model to adopt. If it integrates the new airline, Qantas will be able to link customers' global flight schedules, baggage handling and ticketing. To help make its decision, Qantas will be monitoring other low-cost carriers in Asia. On September 15, Singapore Airlines launched its low-cost carrier, Tiger Airways, offering $S2 ($3) return tickets from Singapore to Bangkok. Another low-cost carrier, AirAsia, has a S29¢ deal for a one-way ticket from Singapore to Phuket.
If Dixon plays his cards right, he could use Jetstar Asia to bring in some of its new aircraft and take advantage of Singapore's generous capital depreciation rules, to write down the capital cost of the aircraft in the first three years then send them to Australia. That would let Qantas turn over its fleet every three years. Qantas has forecast $6 billion of capital expenditure over the next three years to renew its aircraft. If it put, say, 25 aircraft through Jetstar Asia in that time, it would cut its tax bill considerably.
Qantas can also take advantage of other areas in the region, including China, Japan, India and Thailand. This is being made easier as Asian governments become more liberal in their encouragement of tourism. Thailand and China recently announced an "open-skies" policy, and in early September, Australia and India negotiated a bilateral agreement that immediately doubles the seat capacity between major cities and opens both markets to unlimited freight operations.
Qantas has been debating the merits of expanding into Asia since 2000, when it first put together Project Calypso, a plan that outlined what a start-up would look like. The plan finally won board approval earlier this year, but on a much smaller scale.
Until September 20, the airline was hoping to buy a stake in Air New Zealand to promote synergies. But this was shelved after the New Zealand High Court rejected an appeal for the deal to go ahead. With this now out of the way, Qantas will have little option but to get on with life and beef up its Asian strategy.
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Cleared for take-off
Now that British Airways is off its back, Qantas can finally spread its wings in Asia.
By Adele Ferguson
BRW. 23 September 2004
When Geoff Dixon got over his initial outrage at not being told in advance of British Airways' decision to sell its 18.25% stake in Qantas, he and the rest of the board started celebrating. The decision has great significance for the airline's share price, its board and, most importantly, its strategy. In terms of its share price, the removal of British Airways is good. It increases the company's S&P/ASX 200 weighting from 0.73% to 0.90%, which immediately brings an extra $70 million of interest from index funds and makes Qantas eligible for inclusion in the Morgan Stanley Capital Index (MSCI) for Australia. The MSCI is an important index that assists foreign investors when they allocate funds to regional stockmarkets. The investment returns of many international funds are evaluated against the MSCI. If Qantas is included in the index at full market capitalisation, it will boost foreign investor interest in the stock.
The removal of British Airways from the share register and the board will have a big effect on the company's strategy. For example, the Qantas Sale Act prevents foreign investors from holding more than 49% of the company. With British Airways gone, the level of foreign ownership is likely to drop below 30%, which would allow Qantas to seek additional equity tie-ups with its regional peers.
In addition, the share sale opens the way for the Qantas board to replace the two British Airways representatives. This is good news for Dixon because British Airways and Qantas have been at loggerheads over Qantas's expansion into the low-cost carrier business. British Airways believes it is foolhardy for a full-service airline to own and operate a low-cost carrier, but Dixon and the rest of the board believe it is essential for survival. Having two directors on the board who disagreed on such fundamental strategic issues has been a big impediment to the company's growth.
With the board clear and the share register open, Qantas can boost its presence in Asia by starting up, or buying into, carriers in Asia and joining an Asian freight venture. It has already dipped a toe into the region by injecting $80 million into Jetstar Asia, a low-cost carrier in Singapore that will be launched by the end of the year. Qantas will own 49.9% of the new airline. Four aircraft were originally set down for the initial stage, and Qantas has the freedom to turn this into a much bigger investment now that British Airways is off its back.
But before it does that, it will have to decide whether Jetstar Asia will be a truly low-cost carrier or will be integrated with Qantas. It is understood that Qantas is still trying to work out the best model to adopt. If it integrates the new airline, Qantas will be able to link customers' global flight schedules, baggage handling and ticketing. To help make its decision, Qantas will be monitoring other low-cost carriers in Asia. On September 15, Singapore Airlines launched its low-cost carrier, Tiger Airways, offering $S2 ($3) return tickets from Singapore to Bangkok. Another low-cost carrier, AirAsia, has a S29¢ deal for a one-way ticket from Singapore to Phuket.
If Dixon plays his cards right, he could use Jetstar Asia to bring in some of its new aircraft and take advantage of Singapore's generous capital depreciation rules, to write down the capital cost of the aircraft in the first three years then send them to Australia. That would let Qantas turn over its fleet every three years. Qantas has forecast $6 billion of capital expenditure over the next three years to renew its aircraft. If it put, say, 25 aircraft through Jetstar Asia in that time, it would cut its tax bill considerably.
Qantas can also take advantage of other areas in the region, including China, Japan, India and Thailand. This is being made easier as Asian governments become more liberal in their encouragement of tourism. Thailand and China recently announced an "open-skies" policy, and in early September, Australia and India negotiated a bilateral agreement that immediately doubles the seat capacity between major cities and opens both markets to unlimited freight operations.
Qantas has been debating the merits of expanding into Asia since 2000, when it first put together Project Calypso, a plan that outlined what a start-up would look like. The plan finally won board approval earlier this year, but on a much smaller scale.
Until September 20, the airline was hoping to buy a stake in Air New Zealand to promote synergies. But this was shelved after the New Zealand High Court rejected an appeal for the deal to go ahead. With this now out of the way, Qantas will have little option but to get on with life and beef up its Asian strategy.
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