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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.

airtags
25th Mar 2008, 03:25
Postion and hold Capt K: given the "story" (opinion) only ran in the AFR I suspect it's more of a posturing piece where the writer is given 'a little direction' from Q and provided with a suggested pathway.

The critical success factor for any such deal/structure is the dismantling ...or should that be 're-positioning' of the Q Act. No matter how passionate GD & the Board may be, the legislative instrument is the primary barrier.

I would tend to believe the piece has been fed to James as a way of 'testing the waters' with the markets, the punters and importantly the govt strategists. Perhaps this is why it's largely been a solo run?

Gingerbread
25th Mar 2008, 03:58
Seems the AFR is no longer flying solo? The SMH article below probably confirms what others think about the James Hall's 'flag'.

Sydney Morning Herald Aviation Business by Fred Brenchley,25 March 2008

European Open Sky

AFTER a successful US deal, Australia is pushing the European Union to negotiate an open skies agreement that would forge more competitive aviation links.

The Prime Minister, Kevin Rudd, is expected to raise the prospect of an open skies agreement in Brussels next week.

Peter Harbison, executive chairman of the Centre for Asia Pacific Aviation, believes an EU-Australian agreement could be a boon for Qantas's Jetstar in opening up new low-fare routes into the northern hemisphere. Earlier bids by Australia and Europe to negotiate an open skies agreement stalled after some EU members, particularly France, deemed it too favourable for Qantas.

Australia now argues times have changed since the days when air services agreements between countries were written to protect national airlines.
European airline mergers, the impending arrival of new aircraft capable of direct flights from Australia to southern Europe and the open skies deal between the EU and US, freeing up 65 per cent of global air traffic, have changed the equation.

Apart from the US deal, the EU is negotiating aviation agreements with several countries after the European Court of Justice decreed the nationality restrictions of the old horizontal agreements between countries were incompatible with EU law.

Australia hopes an open skies agreement will remove restrictions on cargo and code-sharing between airlines, opening up the Kangaroo route for new entrants. British Airways and Virgin Atlantic are the only European airlines now servicing Australia, with KLM, Alitalia, Olympic, Lauda and Austrian pulling out since 2001.

Mr Harbison says an ideal new agreement would give Australian airlines, including Jetstar, access to any point in Europe without restrictions on capacity or frequency, similar to the access now given US airlines.
Australia sees an open skies agreement fitting the drive to create a new "key partnership" with the EU emphasising shared issues in foreign policy, trade, security, energy and climate change and moving away from past squabbles over European agricultural protectionism.

As part of this, Australia and Europe shortly will sign a new agreement that overcomes European privacy law and enables European companies to provide Australia with the passenger records of airlines that store their records with EU service providers. :D

Wod
26th Mar 2008, 04:37
I'm with airtags

This is a re-run of two themes which QF has been consistently stressing for a number of years.

1 Long term the international aviation business will comprise five or six
global conglomerates and a myriad of minor niche operators.

2 The Qantas Sale Act forces QF to pay more for its borrowings than its
competitors.

The QF game plan has been to keep arguing the inevitability of the former and the handicap imposed by the latter, in an attempt to remain a meaningful player.

The James article is part of that policy.

FWIW I'm with QF. It is at risk of being a wonderful, but irrelevant, Australian icon.

halas
26th Mar 2008, 05:56
Do BA and AA really need QF?

halas

HIALS
26th Mar 2008, 06:09
I am amused by the notion that a combined QF/BA/AA entity could be created with each having a 33% stake.

It seems quaintly parochial and wildly naive to think that the value of QF and BA are even remotely equitable.

It is down right laughable to think that the value of QF can even be compared to that of AA.

Jabawocky
26th Mar 2008, 06:56
HIALS

Hmmmm not sure of their respective asset values, but BA and QF seem to make a lot more money than AA

J

LeadSled
26th Mar 2008, 07:51
HIALS,

Don't kid yourself, or alternatively, you don't know much about market capitalisation.

If it wasn't for national restrictions on airline ownership, Qantas has the market capitalisation to mount a (probably successful) takeover for AA.

Have a really good look at the net market value of AA v. Qf, you might surprise yourself.

Get rid of the cringe, and stop thinking like the "Little Australian".

Tootle pip!!

PS: Halas, that goes for you, too, get onto a few web sites, and update yourself about the relative size of such as SQ, CX, etc, QF is no longer the defenseless little operator in the SW corner corner of the Pacific.

Capt Kremin
26th Mar 2008, 07:54
AA parent company is AMR and has a current Market Cap of 2.4 Billion USD.

QAN current market cap is 7 billion AUD

BA was a bit hard to find but total shareholder equity last July was 2.4 billion pounds.

Jabawocky
26th Mar 2008, 08:31
thats a clear win on BA's behalf for return on investment......I think:\

airtags
26th Mar 2008, 09:18
don't forget to look past the mkt/cap~yeild eq's and remember that a lot of the posturing also is about drawing potential lines in the sand around the China jigsaw.

[jump in here Pinky anytime] - While the china landscape is forthright and direct in putting up the hurdles to externals, the defensive line for those large teams in the backplay is the potential lockout of EU/US/Pacific alliances.

As I posted before, there is certainly logic to the deal(s) but at the moment it's really more about getting others to do the spruiking and to measure the reactions- hence the afr's story which was followed by others.

Again, note all the stories use third parties rather than the proponents.

Crystal ball:
The next round of open skies might be more of an east vs west contest with the Prime Minister unwitingly kicking off the first half early next week

Sunfish
26th Mar 2008, 21:49
It's just another way of QF maintaining its monopoly.

Going Boeing
26th Mar 2008, 22:23
Sunfish
It's just another way of QF maintaining its monopoly.

Give it a break. Your anti QF baseless diatribe is wasting Danny's PPRuNe storage allocation.

HIALS
27th Mar 2008, 03:17
Market Capitalisation is not a measure of the size of the airlines in question.

American Airlines - 680 aircraft and 260 destinations. The largest airline in the world in terms of passenger miles transported and the largest passenger fleet size. In 2005 AA offered 138 billion RPK per annum.

British Airways - 235 aircraft and 147 destinations. Carries approximately 33 million passengers annually.

Qantas - 140 aircraft and 80 destinations.

My point was simply that the article tends to indicate a simple merger of equals is being contemplated - which is ridiculous.

No one would seriously suggest Citibank and Bank of Bendigo could merge as simple equals. (I hope not anyway.)

Ultralights
27th Mar 2008, 05:28
qantas? restructuring? again? or is it the same restructuring started decades ago?

Sunfish
27th Mar 2008, 05:32
It's the same old game. Reduce competition by merging three firms.

One less competitor on the route to Heathrow....and one less to the USA.

Tell us your holiness Boeing, exactly how does this not disadvantage the consumer?

IN addition, it's usually companies that have mounting financial problems that do these sort of overtures.

Open the skies and cut Qantas adrift.

Dragun
27th Mar 2008, 10:18
One less competitor on the route to Heathrow....and one less to the USA.

I think you'll find the competition to the US will remain the same. If you buy an AA codeshare then you end up on a Qantas aircraft. United is the only US carrier currently flying the route.

Kwaj mate
27th Mar 2008, 11:51
Texas Air had about 5 or 6 old DC9's with a very limited network & bought out CO. Who was the 'big-shot' in that buy-out?
UTA bought AF (many times larger than UT) but due to unions & national pride, the AF handle was kept.
Back in the late 90's there was a senior QF manager sent to the UK to introduce commonality to AA, BA & QF fleets; increasing buying power of these carriers with resulting lower (new) airplane costs.
We well remember the clapped out ex BA 747's arriving under the Rat's logo as the group cycled aircraft through the 3 carriers.
A merger or buy-out is not out of the question today.
Finally, at the introduction of deregulation in the US it was commented that the industry would have 2 major civil manufacturers and four major airlines. Perhaps this was over simplifying the position.