How to fix Qantas

[hotnhigh]

How To Fix UP Qantas
Australasian Investment Review

Sydney, May 8, 2007 (ACN Newswire) - Forget the machinations of the desperate mob at Australian Airline Partners, Macquarie Bank and their mates. Even if they manage to wangle a loophole they are the laughing stock of the Australian financial markets and deservedly so.

They were too greedy, although the business plan for Qantas, excluding the gearing up and borrowing billions of dollars, contained somesolid ideas.

Before that the Qantas board (assuming APA loses) should sack chairman Margaret Jackson, CEO Geoff Dixon and CFO Peter Gregg, and director, former CEO, James Strong should be appointed acting chairman and CEO to stablise the company and make sure it doesn't lose its way.The trio are conflictedby their strong support for the APA bid.

Then a search for a new CEO and chairmanshould be started. John Schubert, the chairman of the Commonwealth Bank would make a good longer term head of the board. Strong has the chairs of IAG and Woolworths and chairing Qantas other than on a temporary basis, is not on.

First up the board and management should produce an immediate update on earnings, revenue and the outlook.

Secondly the board and management should call a meeting of shareholders to discuss the future, and all members of the board should be prepared to resign, if need be; not immediately but to have the offer there.

Thirdly the board should explain why CEO Goff Dixon and CFO Peter Gregg attended the two board meetings at the weekend to discuss the failed bid when they were in the takeover group and had no right being at the meetings. The APA bid is still active with the appeal against the Takeovers Panel's ruling.

The board should also request that the Federal Government either enforce the Qantas Sale Act and limit foreign shareholdings to 49 per cent.

The Federal Government has written to the airline on this very point.

Fourthly the board should put in place processes that all future corporate approaches are to the chairman and the non-executive members of the board and not to the CEO (Geoff Dixon received the first approach from Nicholas Moore at Macquarie Bank, which was wrong).

Fifthly if there was one thing exposed by the bungled bid for Qantas from APA it was how the present board and management have built up a collection of assets that are weighing down the balance sheet.

So a planned exit/sale of non aviation and essential assets should be started, which is what APA was planning to do.

APA planned to raise at least $4 billion by gearing up the business and paying itself (and other shareholders) an early dividend, and of course cutting their equity contribution to virtually nothing.

In the wake of the bid's failure that's something Qantas should now be examining: selling those unwanted assets and either using the money to finance its much needed re-equipment program, repay shareholders, or a combination of both.

The Sydney and Melbourne domestic air terminals should be sold into a specially created property trust (not involving Macquarie Bank which led the failed bid and controls Sydney airport and is conflicted as a result). Valuations for those two assets are around $1.3 billion and rising.

The 50 per cent of Star Track Express freight business (and the airline's existing Australian Express business) should be restructured and put up for sale or floated off: Qantas is a passenger operation with a tiny bit of freight.

Australia Post is the other shareholder in Star Track and together they paid $750 million for it. In this market a billion or more could be obtained in a float or a merger with say Linfox which is looking to float.

That would set up a major competitor to the Toll Holdings group.

Qantas had the best part of $3 billion in cash (probably more now) on its balance sheet at December 31. APA planned to cut that to two billion. Qantas can do that.

Qantas Holidays and catering can be quite easily sold.

The full update on the 2007 profit and sales picture and a forecast for 2008 should be without the 'chicken little' warning so beloved by Mr Dixon and Ms Jackson.

The Qantas balance sheet is lowly geared: that should either be changed or an explanation made to shareholders of why it is necessary to have a gearing level that is even low by Qantas' past record.

There is no reason why the board can't follow some of the script outlined by APA. They were prepared to recommend it to shareholders, so presumably the board has no objection to asset sales and higher gearing levels.

Only this time shareholders will benefit, not a bunch of smarty-pants private equity buyers and lurk merchants.

Qantas shares remained suspended yesterday. They could be back today after yet another statement from APA.

AIR publishes a weekly magazine. Subscriptions are free at http://www.aireview.com.au

[podbreak]

Get Fyfe or Norris in.

[lowerlobe]

I honestly do not see the need to sell everything including the kitchen sink.James Strong started that ball rolling and sold assets left right and center.
If a division of QF is making money why do you need to sell it?

Airlines are in themselves precarious as they are vulnerable to factors that other company's are not.

If you face another major downturn such as SARS or another 911 and you have sold every asset then you have nothing left to use to get through.

One of the very reasons that Qantas is such an attractive buy is that it is low geared.One of the reasons though that we have so much cash in the bank is that the board have not spent any money of major assets such as new aircraft.

This fetish to sell everything off is short sighted.

[B A Lert]

James Strong started that ball rolling and sold assets left right and center.

Wrong. The sale of Qantas assets started long before he appeared on the Qantas scene. And no, I don't hold a brief for JBT - he continued to do what for years before was becoming standard Qantas practice.

[chimbu]

I think LL was referring the econonic rationalism at TAA, subsequently Australian Airlines during the '80s, BA!:)

[freddyKrueger]

YesTAM in another thread suggested there were a lot of hollow logs lying around. My guess would be that these subsidiaries / joint ventures are the vehicle for this hidden cash. Because they are not listed entities, there is no "mark-to-market" valuation, just a Qantas book value, which would no doubt be extremely "conservative". I suspect the arguments for all the joint ventures to "smooth" profits was spurious.
At the end of the day Qantas flies planes, and perhaps selling these assets to have a sensible gearing level on future aircraft would be better than it ending up in the pockets of a handful of opportunists with the (inevitable) next raid & a sh!tload of debt on the aircraft.
Whats your take YesTAM?

[priapism]

Gary Twoofme could fix it- ABSOLUTELY!!!!

[B A Lert]

Does anyone have any idea about the profitability of QantasLink? Qantas publishes results for International, Domestic and Jetstar but it appears that QantasLink are bundled into Domestic.

[YesTAM]

If a division of QF is making money why do you need to sell it?Many many years ago when I was wet behind the ears as a management consultant, I ran into a few mates who had gone to McKinsey's.

In our discussions they mentioned the iron law of business - companies that make above average returns over long periods of time are companies that 'stick to their knitting".

That means that they are in one business and everyone in the company from the Board down, lives and breathes that business and nothing else.

The reason for it is not obvious, and it relates to the quality of Board level and very senior management decisions - and its quite simple - you cannot be a total expert in more than one field. If you are across two or three fields of business, then your decisions are not going to be of the same quality as those of a competitor focussed on just one segment. Over time that means lower quality (and less profitable) decisions compared to the rest of the competition.

Classic cases include BHP - which got across, oil, gas, coal, steel. copper and gods knows what other minerals, before it fell apart under its own weight (remember Magma copper? what a duff buy that was). Can any of you imagine a Board meeting where the Board is asked to consider competing investment opportunities from oil, gas, coal, steel and copper divisions? I can tell you Board meetings are sometimes not pretty when there is only one business to run, let alone four or five.

Another classic case is Coles - subject to takeover offers right now, that weakened its brand by starting Bi-lo, Kmart, a liquor discount chain and of course the entire Myer retail group. These entities simply cannot make consistently good decisions.

So yes, there may well be profitable divisions of Qantas, but they are profitable at the expense of the decision making time of the Board who should be concentrating on mainline, not some stupoid joint venture with Australia post or an Asian subsidiary. Qantas would be far better off, in my humble opinion, in rolling everything back into mainline, selling off anything that is not directly airline related, as suggested in the financial press, and focus on their core business which is flying people around.

P.S. In addition you could strip out a layer of "executive group general managers" and save some real money.

[Recline]

This has exposed the limitations of the Qantas Sale act in that foriegn share holdings in excess of 49% only have to be acted on when Qantas finds out about it. In a takeover, we could see the limit exceeded and control of the airline being determined by foriegn interests, even if its sorted out later.

I see a need for some amended legislation to prevent this happening.

It will be interesting to see what the register shows in the next few days.

9.(1) Qantas must on and after the day on which Qantas first becomes aware that a person, other than the Commonwealth or a nominee of the Commonwealth, has acquired voting shares in Qantas, maintain a register of:
(a) shares that are acknowledged in writing by the registered owner of those shares to be shares in which a foreign person has a relevant interest; or
(b) shares that the directors of Qantas have, after reasonable inquiries,
declared to be shares in which a foreign person has a relevant interest.

(2) If the Minister gives Qantas a written request that Qantas give to him or her the register or a copy of the register at such reasonable time and reasonable place as the Minister specifies, Qantas must give the Minister the register or the copy of the register, as the case requires, in accordance with the request.

[bushy]

I wonder if they have the mechanism to keep up to date, accurate information on who holds what shares. Is there a time lag which would allow the foreign shareholding to go over 50% before they find out about it?
I think the only safe way is to set the limit for foreign holdings at 40%. Then they would have time to see what is happening, and do something about it before it gets over 50%.

[Clipped]

So yes, there may well be profitable divisions of Qantas, but they are profitable at the expense of the decision making time of the Board who should be concentrating on mainline, not some stupoid joint venture with Australia post or an Asian subsidiary. Qantas would be far better off, in my humble opinion, in rolling everything back into mainline, selling off anything that is not directly airline related, as suggested in the financial press, and focus on their core business which is flying people around.

YT - I used to enjoy your comments .. up until now. No, I think you are wrong when saying the airline would be best managed as only a flying operation. All supporting businesses are vital to the everyday operation and should remain in house .. IMHO.

[cobber_digger_buddy]

I wonder if they have the mechanism to keep up to date, accurate information on who holds what shares. Is there a time lag which would allow the foreign shareholding to go over 50% before they find out about it?
I think the only safe way is to set the limit for foreign holdings at 40%. Then they would have time to see what is happening, and do something about it before it gets over 50%.

ASiC or FSA (in the UK) state that the % holding by any single entity must be assessed, measured , counterparty matched(i.e who owns what) and reported on the daily position, This in Europe is an essential and non negotiable requirement to meet Basel I & II, not totally familiar with the ASiC req's here, but it is highly unlikely that Macbank would not be aware of their holding on an hourly basis. (Given that they have a vested interest in the current environment).

Short answer, is yes they do have a mechanism, infact they(the IB's) devote entire departments to it.