Capt Kremin
25th Mar 2008, 03:06
I am surprised that the following AFR article has not attracted any comment in here:
Qantas keen to stretch wings
James Hall
There was a subtle but significant shift in language at Qantas Airways's first-half result last month:senior executives spoke more freely than ever of their interest in taking part in industry consolidation.
As the airline restructures, a deal to create an alliance that would form the bedrock of the new Qantas would be quite the parting gift for chief executive Geoff Dixon to bequeath to his successor.
And if the debacle around Airline Partners Australia's failed takeover bid last year did nothing else, it proved the strength of Dixon and his team's desire to pursue such a transformation.
A merger with another carrier has always been logical and exploratory talks are part of everyday life in the industry as airlines attempt to work out the best way forward.
But they are moving to the front of Qantas executives' minds as the company prepares to complete a structural overhaul that includes floating its Frequent Flyer unit, backing its holidays business into Jetset Travelworld and spinning off other businesses.
Until a few years ago, Singapore Airlines was the most likely candidate - quite detailed discussionstook place about an equity sharing deal - and the logic remains for Qantas to look first to the Asia Pacific for a partner.
But the bitter relationship with Singapore Airlines given Qantas's campaign against its biggest international rival's 2006 attempt to get access to the lucrative trans-Pacific route has made that route harder.
Moreover, Singapore Airlines is a shareholder in Tiger Airways (as is its own biggest shareholder, Singapore's sovereign investment group, Temasek Holdings), and Tiger is now a competitor to Qantas in Australia.
Therefore, a Singapore Airlines-Qantas merger would not only create conflicts of interest, it would also potentially trouble the Australian Competition and Consumer Commission.
And, as witnessed by Singapore Airlines's interest in beating Air China and Cathay Pacific to buying a stake in China Eastern Airlines, the Asian region's big beasts have other priorities.
When that increasingly messy battle is over, it's quite possible either side could turn its attention to Qantas, but sitting around waiting is hardly an option; Qantas needs its own deal.
Already it has tried and failed twice to get closer to Air New Zealand, but this has fallen foul of regulators in that country.
Besides, striking a deal with the carrier on the other side of the Tasman Sea at a time when the rest of the industry is embarking on unprecedented consolidation would be tantamount to fiddling while
Rome burns.
Today, Qantas needs to think big: such as a deal with British Airways (its one-time cornerstone shareholder and biggest global collaborator), United States-based ally American Airlines or both.
The three face similar challenges.
There's the spectre of increasingly powerful Middle Eastern and Asian carriers with sovereign backing and lower operating and financing costs such as Emirates, Etihad Airways and Singapore Airlines.
There's the growth of low-cost operators such as Ryanair, Southwest and Air Asia, at the same time as fuel costs are soaring and airlines have to invest more in new product.
And gradual liberalisation - as witnessed by so-called "open skies" agreements between the United States and both Australia and the European Union - is breaking down the traditional country barriers
that legacy carriers have enjoyed while making it easier for airlines to collaborate.
The reality is that sovereign carriers with their own discrete fleets, maintenance and other service operations are too expensive and unnecessary.
Hence the alliance between Air France and KLM of the Netherlands, which is also close to swallowing Alitalia.
A tie-up between Qantas and British Airways and/or American Airlines would not only go some way to addressing these challenges, it would also create the world's pre-eminent airline group.
Its route network would be unrivalled, while the pooling of non-flying services such as catering, distribution, fleet management, maintenance and training would present potential multibillion-dollar
synergies.
Politically, it also would be preferable to an alliance with one of the new carriers such as Etihad, which is run by an Australian, James Hogan, who no doubt would love to own a stake in Qantas.
Exactly how to structure a deal is complex.
All three airlines are members of the Oneworld marketing alliance, while Qantas and British Airways already operate a joint services agreement, allowing them to co-ordinate on prices and scheduling between Australia and Britain.
With American Airlines, Qantas already has a wide-ranging commercial alliance that allows for extensive code-sharing and co-operation between the two carriers.
But Qantas could also benefit from owning a stake in a joint venture company that managed and provided services to the alliance and in turn owned a stake in each of its members.
Qantas is now well along the path to carrying out the restructuring to which Dixon has alluded for some years and truly came to light after the failure of the Airline Partners buy-out.
Qantas's deal to back its holidays and business travel assets into Jetset will take effect in May or June, assuming Jetset's shareholders vote in favour of the deal.
More significantly, it's accelerating its plan to revamp and spin out Frequent Flyer.
Investment banks are chomping at the bit to get the mandate to handle an expected initial public offering of the business - sharemarket conditions permitting - which analysts value at about $2 billion.
Qantas is less advanced with plans to spin off its freight business - being in need of acquisitions to make it a truly appealing separate investment - but it harbours plans for a similar structure to the loyalty business.
The company has also been upfront about its desire to emulate Airline Partners' plan to place its fleet into a tax-effective leveraged trust that would also have the flexibility to lease aircraft to other carriers.
While the change in debt market conditions has caused the airline to put this plan on hold, it remains very attractive in the longer term, especially if Qantas can formalise alliances with other airlines that allow for better utilisation rates for planes.
Likewise, a plan to gradually crank up the amount of third-party work Qantas's other non-flying businesses, such as maintenance, training and catering, carry out also lends itself to greater alliances.
It also remains possible that Qantas could revisit previous plans to spin off fast-growing budget unitJetstar as a separately listed unit.
This would leave the listed Qantas owning 51 per cent of Jetstar, QantasLink, Qantas Freight Enterprises and Frequent Flyer, and a 58 per cent stake in Jetset.
If Qantas, British Airways and American Airlines engineered a tie-up, they would each own a 33 per cent stake in the alliance business, which might in turn own 33 per cent of each of the carriers.
Any such deal would be momentous in scale and complexity and potentially open the door to other investors such a private-equity firms to take part in the transaction.
It would cover a route network that touched all major cities in the world, have combined global revenue approaching $US50 billion ($53 billion) and employ more than 100,000 people, flying more than 1000 planes.
It would also have to navigate foreign investment rules and unions in at least two jurisdictions while also ensuring it did not make Airline Partners's mistake of underestimating shareholders' views.
But the transaction, if managed in the right way, would be an easier sell to the government, unions and shareholders alike than the Airline Partners deal.
It could be presented as strengthening Qantas as part of a powerful alliance, a long-term investment in the company's future viability; but pulling it off may be beyond Dixon and his cohorts.
Qantas keen to stretch wings
James Hall
There was a subtle but significant shift in language at Qantas Airways's first-half result last month:senior executives spoke more freely than ever of their interest in taking part in industry consolidation.
As the airline restructures, a deal to create an alliance that would form the bedrock of the new Qantas would be quite the parting gift for chief executive Geoff Dixon to bequeath to his successor.
And if the debacle around Airline Partners Australia's failed takeover bid last year did nothing else, it proved the strength of Dixon and his team's desire to pursue such a transformation.
A merger with another carrier has always been logical and exploratory talks are part of everyday life in the industry as airlines attempt to work out the best way forward.
But they are moving to the front of Qantas executives' minds as the company prepares to complete a structural overhaul that includes floating its Frequent Flyer unit, backing its holidays business into Jetset Travelworld and spinning off other businesses.
Until a few years ago, Singapore Airlines was the most likely candidate - quite detailed discussionstook place about an equity sharing deal - and the logic remains for Qantas to look first to the Asia Pacific for a partner.
But the bitter relationship with Singapore Airlines given Qantas's campaign against its biggest international rival's 2006 attempt to get access to the lucrative trans-Pacific route has made that route harder.
Moreover, Singapore Airlines is a shareholder in Tiger Airways (as is its own biggest shareholder, Singapore's sovereign investment group, Temasek Holdings), and Tiger is now a competitor to Qantas in Australia.
Therefore, a Singapore Airlines-Qantas merger would not only create conflicts of interest, it would also potentially trouble the Australian Competition and Consumer Commission.
And, as witnessed by Singapore Airlines's interest in beating Air China and Cathay Pacific to buying a stake in China Eastern Airlines, the Asian region's big beasts have other priorities.
When that increasingly messy battle is over, it's quite possible either side could turn its attention to Qantas, but sitting around waiting is hardly an option; Qantas needs its own deal.
Already it has tried and failed twice to get closer to Air New Zealand, but this has fallen foul of regulators in that country.
Besides, striking a deal with the carrier on the other side of the Tasman Sea at a time when the rest of the industry is embarking on unprecedented consolidation would be tantamount to fiddling while
Rome burns.
Today, Qantas needs to think big: such as a deal with British Airways (its one-time cornerstone shareholder and biggest global collaborator), United States-based ally American Airlines or both.
The three face similar challenges.
There's the spectre of increasingly powerful Middle Eastern and Asian carriers with sovereign backing and lower operating and financing costs such as Emirates, Etihad Airways and Singapore Airlines.
There's the growth of low-cost operators such as Ryanair, Southwest and Air Asia, at the same time as fuel costs are soaring and airlines have to invest more in new product.
And gradual liberalisation - as witnessed by so-called "open skies" agreements between the United States and both Australia and the European Union - is breaking down the traditional country barriers
that legacy carriers have enjoyed while making it easier for airlines to collaborate.
The reality is that sovereign carriers with their own discrete fleets, maintenance and other service operations are too expensive and unnecessary.
Hence the alliance between Air France and KLM of the Netherlands, which is also close to swallowing Alitalia.
A tie-up between Qantas and British Airways and/or American Airlines would not only go some way to addressing these challenges, it would also create the world's pre-eminent airline group.
Its route network would be unrivalled, while the pooling of non-flying services such as catering, distribution, fleet management, maintenance and training would present potential multibillion-dollar
synergies.
Politically, it also would be preferable to an alliance with one of the new carriers such as Etihad, which is run by an Australian, James Hogan, who no doubt would love to own a stake in Qantas.
Exactly how to structure a deal is complex.
All three airlines are members of the Oneworld marketing alliance, while Qantas and British Airways already operate a joint services agreement, allowing them to co-ordinate on prices and scheduling between Australia and Britain.
With American Airlines, Qantas already has a wide-ranging commercial alliance that allows for extensive code-sharing and co-operation between the two carriers.
But Qantas could also benefit from owning a stake in a joint venture company that managed and provided services to the alliance and in turn owned a stake in each of its members.
Qantas is now well along the path to carrying out the restructuring to which Dixon has alluded for some years and truly came to light after the failure of the Airline Partners buy-out.
Qantas's deal to back its holidays and business travel assets into Jetset will take effect in May or June, assuming Jetset's shareholders vote in favour of the deal.
More significantly, it's accelerating its plan to revamp and spin out Frequent Flyer.
Investment banks are chomping at the bit to get the mandate to handle an expected initial public offering of the business - sharemarket conditions permitting - which analysts value at about $2 billion.
Qantas is less advanced with plans to spin off its freight business - being in need of acquisitions to make it a truly appealing separate investment - but it harbours plans for a similar structure to the loyalty business.
The company has also been upfront about its desire to emulate Airline Partners' plan to place its fleet into a tax-effective leveraged trust that would also have the flexibility to lease aircraft to other carriers.
While the change in debt market conditions has caused the airline to put this plan on hold, it remains very attractive in the longer term, especially if Qantas can formalise alliances with other airlines that allow for better utilisation rates for planes.
Likewise, a plan to gradually crank up the amount of third-party work Qantas's other non-flying businesses, such as maintenance, training and catering, carry out also lends itself to greater alliances.
It also remains possible that Qantas could revisit previous plans to spin off fast-growing budget unitJetstar as a separately listed unit.
This would leave the listed Qantas owning 51 per cent of Jetstar, QantasLink, Qantas Freight Enterprises and Frequent Flyer, and a 58 per cent stake in Jetset.
If Qantas, British Airways and American Airlines engineered a tie-up, they would each own a 33 per cent stake in the alliance business, which might in turn own 33 per cent of each of the carriers.
Any such deal would be momentous in scale and complexity and potentially open the door to other investors such a private-equity firms to take part in the transaction.
It would cover a route network that touched all major cities in the world, have combined global revenue approaching $US50 billion ($53 billion) and employ more than 100,000 people, flying more than 1000 planes.
It would also have to navigate foreign investment rules and unions in at least two jurisdictions while also ensuring it did not make Airline Partners's mistake of underestimating shareholders' views.
But the transaction, if managed in the right way, would be an easier sell to the government, unions and shareholders alike than the Airline Partners deal.
It could be presented as strengthening Qantas as part of a powerful alliance, a long-term investment in the company's future viability; but pulling it off may be beyond Dixon and his cohorts.