freddyKrueger
9th Jun 2008, 05:31
Fewer flights and frequent rises ahead
Adele Ferguson | June 09, 2008
AUSTRALIANS will face increased airfares and fewer flights from Qantas and Virgin Blue as the airlines either park, sell or re-route up to 10 per cent of their domestic aircraft in a bid to hold profit margins as oil prices continue to blow out.
Both airlines are hurrying to introduce new strategic programs that include restructuring their frequent flyer business and reviewing their dividend policy.
As early as tomorrow, Virgin Blue is expected to outline a series of strategic measures to alleviate pressure on earnings from fuel price rises, which jumped another 8 per cent on Friday night to a record $US139 a barrel.
This is expected to include cancelling and/or deferring some of the seven 777s Virgin Blue has on order, moving a minimum of three on to the US route and reducing domestic capacity by up to 10 per cent. It is also believed to be considering selling a stake in its loss-making frequent flyer business, Velocity.
Qantas boss Geoff Dixon announced last week that the airline had cut 5-6 per cent of its total fleet, with a report by one of Merrill Lynch's top analysts, Kevin O'Connor, estimating the cuts were equivalent to a 10 per cent reduction in capacity on the domestic market and a much smaller reduction in its international fleet.
If both airlines reduce domestic capacity by a combined 20 per cent, it will automatically lift airfares, load factors and yields.
This is not the first time customers have copped fare increases. On April 28, Qantas announced it would increase domestic and international fares by 3.5 per cent and 3 per cent. Then on May 22 it announced a further 3 per cent rise in domestic fares and 4 per cent rise in international fares.
This is happening against a backdrop of flight cancellations and strikes caused by the seemingly endless industrial relations disputes between the unions and airline over pay.
What is fascinating about the industrial relations disputes is that its toxicity is believed to have spread inside the company. The reason is simple: he Australian understands that one of the key architects of Qantas's industrial relations strategy is an outsider, former ACTU official Ian Oldmeadow, who is renowned in union circles for being confrontational.
The Australian understands that Qantas pays Oldmeadow Consulting $3 million a year to help run its industrial relations strategy, including attending important meetings with key union figures.
During calm times it makes the job of a human resources manager easy to outsource key aspects of industrial relations, but when things turn sour, as they have now, it highlights the need for internal control of the policy.
It would no doubt make the job of Qantas's human resources manager, Kevin Brown, all the harder.
Dixon confirmed that Oldmeadow had worked for many years with Qantas's internal industrial relations team on a range of issues, but said: "Any allegation of friction in the company is mischief-making, which often raises its head when we get into disagreements."
While it is taking a significant hit from the fuel prices, as well as industrial disputes, the national carrier still stands to make a $1.5 billion profit this financial year. The big question mark is over the 2009 and 2010 profits if oil prices continue to rise and strikes intensify. But the high fuel costs and the battle with unions over pay rises are only two of the challenges facing Dixon, who is due to retire next June. Qantas is also facing big capital expenditure programs to replace some of its fleet. About 25 per cent of the fleet (by seat capacity) is of 1990s vintage or older. Old planes are costly to run and inefficient.
There are estimations that Qantas's capex over the next three years will average $3.5 billion a year, which would result in a negative free cash flow over that period. This means that if it wants to keep paying a dividend, it will have to borrow the money to fund it.
Indeed, Merrill Lynch estimates that dividends will be cut from an estimated 25c in 2009 to 9c a share, and from 30c a share in 2010 to 17.5c a share.
Against a tumultuous backdrop, Qantas has confirmed it is on track to launch its "any seat" redemption option on frequent flyer points on July 1. The board will make a decision on its ownership structure in August and later in the year it is expected to outline those plans to the market.
Any seat redemption will effectively allow members to book any seat using frequent flyer points. It will take far more points than the current system but will allow members to book a seat in the same manner as a customer who pays cash.
In an accounting sense, this spending of points will be revenue in Qantas's accounts and may help reported net profit if it allows Qantas to sell more seats.
A sell-down of the frequent flyer program would see Qantas receive cash and also record a one-off accounting gain on the sale.
For this reason, the most likely scenario is to spin it off and form a strategic alliance and sell a strategic stake to American Express or the listed loyalty program company in Canada, Aeroplan, which was spun out of Air Canada a few years ago and listed in 2005. That business has now morphed into a retail operation that manages the loyalty programs of more than 60 companies. More importantly, Aeroplan now has a much bigger market capitalisation than Air Canada.
Dixon will keep a majority stake in the business, because the last thing the airline would want to do is lose control of this business, given that it has 5 million customers.
Qantas currently earns a revenue stream from selling non-flight rewards to its 5 million Qantas Frequent Flyer members. This business generates between $100 million to $175 million a year in pre-tax profit. If these earnings are re-rated as a retailer at 20 times instead of the airline's seven times, it would be worth between $2 billion and $3.5 billion.
So, for the next six months Dixon has a lot of decisions to make, including whether he stays on or retires earlier than the expected June 2009.
Sources close to Dixon say he had hoped to be gone this year, but that was before all the industrial relations problems. In the meantime, camps are forming around the three contenders: Peter Gregg, John Borghetti and Alan Joyce.
Whoever gets the job will be taking it at a time when conditions are about to get a lot tougher for Qantas: record high fuel prices, a blowout in debt from the need to replace its ageing fleet over the next decade, vigorous competition on the international sector from carriers such as Emirates. Worse still, the Qantas share price has been dropping like a stone since the private equity deal failed just over a year ago.
Source:The Australian (http://www.theaustralian.news.com.au/story/0,25197,23831633-23349,00.html)
Adele Ferguson | June 09, 2008
AUSTRALIANS will face increased airfares and fewer flights from Qantas and Virgin Blue as the airlines either park, sell or re-route up to 10 per cent of their domestic aircraft in a bid to hold profit margins as oil prices continue to blow out.
Both airlines are hurrying to introduce new strategic programs that include restructuring their frequent flyer business and reviewing their dividend policy.
As early as tomorrow, Virgin Blue is expected to outline a series of strategic measures to alleviate pressure on earnings from fuel price rises, which jumped another 8 per cent on Friday night to a record $US139 a barrel.
This is expected to include cancelling and/or deferring some of the seven 777s Virgin Blue has on order, moving a minimum of three on to the US route and reducing domestic capacity by up to 10 per cent. It is also believed to be considering selling a stake in its loss-making frequent flyer business, Velocity.
Qantas boss Geoff Dixon announced last week that the airline had cut 5-6 per cent of its total fleet, with a report by one of Merrill Lynch's top analysts, Kevin O'Connor, estimating the cuts were equivalent to a 10 per cent reduction in capacity on the domestic market and a much smaller reduction in its international fleet.
If both airlines reduce domestic capacity by a combined 20 per cent, it will automatically lift airfares, load factors and yields.
This is not the first time customers have copped fare increases. On April 28, Qantas announced it would increase domestic and international fares by 3.5 per cent and 3 per cent. Then on May 22 it announced a further 3 per cent rise in domestic fares and 4 per cent rise in international fares.
This is happening against a backdrop of flight cancellations and strikes caused by the seemingly endless industrial relations disputes between the unions and airline over pay.
What is fascinating about the industrial relations disputes is that its toxicity is believed to have spread inside the company. The reason is simple: he Australian understands that one of the key architects of Qantas's industrial relations strategy is an outsider, former ACTU official Ian Oldmeadow, who is renowned in union circles for being confrontational.
The Australian understands that Qantas pays Oldmeadow Consulting $3 million a year to help run its industrial relations strategy, including attending important meetings with key union figures.
During calm times it makes the job of a human resources manager easy to outsource key aspects of industrial relations, but when things turn sour, as they have now, it highlights the need for internal control of the policy.
It would no doubt make the job of Qantas's human resources manager, Kevin Brown, all the harder.
Dixon confirmed that Oldmeadow had worked for many years with Qantas's internal industrial relations team on a range of issues, but said: "Any allegation of friction in the company is mischief-making, which often raises its head when we get into disagreements."
While it is taking a significant hit from the fuel prices, as well as industrial disputes, the national carrier still stands to make a $1.5 billion profit this financial year. The big question mark is over the 2009 and 2010 profits if oil prices continue to rise and strikes intensify. But the high fuel costs and the battle with unions over pay rises are only two of the challenges facing Dixon, who is due to retire next June. Qantas is also facing big capital expenditure programs to replace some of its fleet. About 25 per cent of the fleet (by seat capacity) is of 1990s vintage or older. Old planes are costly to run and inefficient.
There are estimations that Qantas's capex over the next three years will average $3.5 billion a year, which would result in a negative free cash flow over that period. This means that if it wants to keep paying a dividend, it will have to borrow the money to fund it.
Indeed, Merrill Lynch estimates that dividends will be cut from an estimated 25c in 2009 to 9c a share, and from 30c a share in 2010 to 17.5c a share.
Against a tumultuous backdrop, Qantas has confirmed it is on track to launch its "any seat" redemption option on frequent flyer points on July 1. The board will make a decision on its ownership structure in August and later in the year it is expected to outline those plans to the market.
Any seat redemption will effectively allow members to book any seat using frequent flyer points. It will take far more points than the current system but will allow members to book a seat in the same manner as a customer who pays cash.
In an accounting sense, this spending of points will be revenue in Qantas's accounts and may help reported net profit if it allows Qantas to sell more seats.
A sell-down of the frequent flyer program would see Qantas receive cash and also record a one-off accounting gain on the sale.
For this reason, the most likely scenario is to spin it off and form a strategic alliance and sell a strategic stake to American Express or the listed loyalty program company in Canada, Aeroplan, which was spun out of Air Canada a few years ago and listed in 2005. That business has now morphed into a retail operation that manages the loyalty programs of more than 60 companies. More importantly, Aeroplan now has a much bigger market capitalisation than Air Canada.
Dixon will keep a majority stake in the business, because the last thing the airline would want to do is lose control of this business, given that it has 5 million customers.
Qantas currently earns a revenue stream from selling non-flight rewards to its 5 million Qantas Frequent Flyer members. This business generates between $100 million to $175 million a year in pre-tax profit. If these earnings are re-rated as a retailer at 20 times instead of the airline's seven times, it would be worth between $2 billion and $3.5 billion.
So, for the next six months Dixon has a lot of decisions to make, including whether he stays on or retires earlier than the expected June 2009.
Sources close to Dixon say he had hoped to be gone this year, but that was before all the industrial relations problems. In the meantime, camps are forming around the three contenders: Peter Gregg, John Borghetti and Alan Joyce.
Whoever gets the job will be taking it at a time when conditions are about to get a lot tougher for Qantas: record high fuel prices, a blowout in debt from the need to replace its ageing fleet over the next decade, vigorous competition on the international sector from carriers such as Emirates. Worse still, the Qantas share price has been dropping like a stone since the private equity deal failed just over a year ago.
Source:The Australian (http://www.theaustralian.news.com.au/story/0,25197,23831633-23349,00.html)