Qantas - takeover target?

[Sunfish]

While I am sure that Qantas Board and Management are doing things perfectly legally and to the best of their abilities, if I was a Qantas shareholder, which I am not, I wonder if I could be forgiven for not understanding how the recent actions of the Board and Management could be seen as increasing shareholder value?

To me, warring with ones employees and making inflammatory statements to the press, apparently unsupported by facts, about them appear counter productive for shareholder value.

I do not understand how Qantas can run Two or more airlines without them cannibalizing each other? I do not believe anyone else in the world has made that idea work either. I do not think that employing offshore crews is a good idea as it endangers the brand in my untutored opinion.

To put it another way; has the Board and Management done anything to talk up the share price recently?

I don't understand why the latest addition to the Board was made, nor do I understand the apparent composition of the Board. The skills mix appears to be unrelated to running an airline, apart from One or Two obvious appointments.

I wonder if I can be forgiven for believing that there is nothing positive in the market assessment of the airline at present because it appears that the company is valued at less than its asset backing?

To put it another way, I do not understand what the Board and Management are trying to do, it makes no sense to this bear of very little brain.

In the normal course of events, such a perception makes the company a takeover target.

I mentioned previously that Qantas is now a good buy, since a predator is likely to appear if they believe they can manage the airline better than the current incumbents, and there is ample anecdotal evidence on Pprune that appears to suggest that Qantas management are duffers, at least in the perceptions of One or Two Qantas employees.

It would appear that Andrew Sissons of Balanced Equity investments may have come to the same conclusion, as it appears he has increased his shareholding in the company. My suspicion is that an on market takeover bid will not be long in coming.

[limelight]

I suspect that you are on the money Sunny, there can be no other explanation for the recent actions of the inept management.

Where the hell are the shareholders when you want then, do they like to see their investment devalued?

[Mud Skipper]

I think you are being kind calling the management inept, some other terms come to mind but could result in just another thread being locked.

My take on the two brand strategy is it gives any new owner an asset which can be quickly flipped and a large chunk of change equally quickly returned on the investment, huge bonuses for all management involved, improved variation on what occured in BA with GO, high fives all around the board room. Singapore Airlines the likely purchaser and the resultant company integrated with Tiger but now with the much coverted rights accross the Pacific. Follows with the reasoning for keeping the companies so separated and then allows for the miraclous turn around in mainline, crew which have been hamstrung for last 7+ years finally able to get back to work and performance bonuses for the board once again, high fives all around again:rolleyes:

[7378FE]

I do not understand how Qantas can run Two or more airlines without them cannibalizing each other?

QANTAS are not running two airlines, they are only running one namely Jetstar.

QF mainline does not figure in future plans, QF management will just let QF mainline fade away, at least BA had the nous to jettison GO when it started having an adverse effect on their mainline European operations.

QF are doing the opposite.

[What The]

I would say that there is so much attention now being paid to the actions of the Qantas Board and management that any attempt to orchestrate a leveraged buyout will attract considerable interest from ALL parties.

The fact that MANY of the original players are still involved either directly or indirectly in the business has a lot of people watching the goings on.

[standard unit]

Yes but we've seen how completely shameless these filth are before......

[Howard Hughes]

What if Virgin bought Qantas?

[emal140]

The question begs, where is ASIC whilst all this is becoming extremely obvious to the general public? The same question can be asked of the Shareholders Association...where are they when you need 'em!!

Don't think Virgin would have the money. Besides, Virgin are moving forward with the times. Why would they want to set themselves back 20 years by buying an inept QF managment that cannot think beyond how they did things in the past!

[Captain Sherm]

Yes-takeover potential for sure.

I was taught many years back that that good buying opportunities (including takeover) exist when the following three things are evident:

• A good, defensible, long term brand, oversold and underperforming in the short term
• Believable product growth opportunities in the longer term
• Poor current management and/or board but believable candidates available

This is now.

There are many reasons why the Qantas share price is tanking. Perception is very important. I suggest that the market does have a view about Boards who have a “Glass Half Empty” approach to life versus the “Glass Half Full” theme. Because there are two ways to look at the resources entrusted to the board, on behalf of the shareholder owners.

First is the "Glass Half Empty" board that says, “How little do we have to spend to run the business we have?” This is usually the thinking in pure or near pure commodity businesses where there is little opportunity to add value or build margins. Having said that some companies do better than others because they finesse with skill and never cut into muscle, only fat, however hard they have to look for it. There are airlines who happily inhabit this thin margin high turnover “Woolworths of the Air” world, not just the LCC types but charter operators who sell all their seats to the retail travel industry. They are essentially price takers so they simply get very good at what they do and think hard before making what could be expensive mistakes, whether with leadership, people, fleet, routes, IT, suppliers, out-sourcing, branding, strategies. You can make money in this world, but you have to be very good.

Then there’s the "Glass Half Full” board that says “With the resources we have, how much revenue can we generate?” They do everything well but never forget that their customers buy a whole product with price and important driver but not the only one. Value, reliability, image, product range etc: they all play their roles.

Now the distinction between this board and the above “Glass Half Empty” board, is never pure and there’s a lot of cross-over. because despite the value focus of the “Glass Half Full” business it may still face the threat of increased competition in price sensitive, low-yield relatively untapped markets. This is the Qantas world. It has a great brand and target markets well versed in the price/value trade-off. Qantas can’t stop idiotic pricing and capacity behavior by others but because as a full service business it has a higher cost base than the LCCs it is vulnerable to a bit of cannibalism of its traffic base by other LCC competitors and to lose revenue faster than it can hive off the costs of producing that revenue is a real challenge. So margins fall and the board has to do something. Not unusual. No doubt Myer faced this years back when it started the Bargain Basement-DJs and other do it with their DFOs.

Airlines historically coped with yield “dilution” with restricted fare discounts, aimed at growing and defending their markets while ensuring that business travellers wouldn’t migrate. That’s where the “Saturday night” stay-over became popular in the US as it wouldn’t attract business people but the VFR and leisure mob wouldn’t care. But over time the price sensitive portion of the market grows and this is where the rubber really hits the road, when the whole of the business, or even most of it, has customers who think of price as a significant and often major driver. Real yields in markets, especially routes up to 3 hours have been falling, not only because business passengers are becoming more price sensitive but because of the massive growth in the lower yield areas.

Let’s put this into perspective: Today, right now, Southwest, Jet Blue, Easyjet and Ryanair will put close to 1,200 jets into the sky and will be the largest carriers of point-to-point passengers in Europe and the US, unstoppably dominating routes up to 3 hours. And there’s plenty of room left for them to expand even further. Paradoxically the biggest threat facing them on the routes up to 75 minutes will be high-speed rail, a medium once decimated by “shuttle” airlines.

So the “Glass Half Full” board has to manage its future to cope with this hard reality. Denial is not an option, for shareholders, management or staff. The organisation has to be sure to invest more in cost-lowering equipment, internalize and control costs as much as possible and seek ever newer, slimmer, more flexible and better ways to operate without lowering the offering of its basic product suite which will be value to some, price to many, and a mix of both to most. This approach involves using staff as a resource, not a threat. Without being blind to cost-saving opportunities in labour. That would be silly. There is just no doubt that some parts of renovating the Group Business suite will involve hard, possibly painful but responsibly and rewarding pro-active choices, on all sides.

The solution is not to wind the clock back. The genie is well and truly out of the bottle. The days of long-haul S/Os being paid more than Q400 captains is well and truly over. Ditto the KPI obsession that offers hideous bonuses for short-tem gimmicks. The paradigm has to change. If you have time, get out the old QF annual reports and AVSTATS reports (on both respective websites) and see how the magnitude of change there's been over the years in ratios like "seats in the sky per day per employee", "real revenue earned per dollar of employee labour costs", "real revenue earned per dollar of board and Exco remuneration", "ASKs generated per real $ of labour", "Fuel burned per RTK", "Qantas share of passengers and ASKs on international routes". The numbers present an interesting set of learning opportunities to help understand why there is no "do nothing" option, amply repaying a rainy afternoon and an Excel spreadsheet, plus the odd G & T.

The progressive “cover your back while polishing the product” attitude is what brought the world innovations such as Business Class when the economy market was willing to pay a little more but the First Class market was dying. Similarly Apex fares met the demands of price-sensitive passengers while quarantining the yield drain from traditional full fare markets. This form of pro-active leadership and vision can lead to massive game changing innovation at times even though introductory costs can be high. Reduced margins are the traditional impetus for “Glass Half Full” boards to get creative, not defensive.

(As an aside I often think that “Zulu” is the sort of movie that a good board should watch occasionally to get into their heads the idea of how to behave when a threat arises and all you have is the folks you drove up with. "Thank goodness the bulk of our troops are well trained and the rest can be well led to join in and do what they do best, confront the enemy as an actual team". I do recall that in that battle there were no un-necessary layers of management….sure there's a message there. Just a thought?)

So, after all that rambling where are we?

Much as some would hope, it cannot be said that properly managed, Jetstar is the problem. In fact, if managed well it was always (and could still be) part of the solution. When many of your own passengers, plus those who don’t even fly yet, are driven by price alone, you can either pull up the draw-bridge and shrink your cost to suit a defensible revenue base (never really been done) or work out how to cater to the market without un-necessarily losing your own revenue by ensuring that if there is a drift of passengers and rapid growth in untapped areas it would be to your own Group’s coffers, not someone else’s.

In this model even if Qantas got it wrong and ended up only getting 80 cents in the dollar from a price-chasing passengers it had anyway that’s a lot better than the nothing they would get if Tiger/Virgin/anybody else got the passengers. So you use your size, buying power, infrastructure etc to run your LCC just like the “Glass Half Empty” mob do. But properly and without ideology. You might for example include a “Jetstar Class Cabin” in the A380 and B744, a genuine no-frills product, say 100 seats. No difference at all to offering First, Business and Premium Y cabins; all offer a focused price/value trade-off. With the "Jetstar Class Cabin" you might tweak the yields with space available gate upgrades to full Y class, credit card only plus the normal things (now) like pay extra for seat choices and booked bags.

Thin margins demand that you do things really well for price driven passengers, getting the absolute maximum out of every dollar spent, but never neglecting the chance to polish the product in ways that cost little yet add perceived value. Think of the "on the house" glass of port after you've paid the tab at a restaurant, or the dinner mint on the pillow at a 2.5 star motel. Big difference, cost near zero.

Lets just pause for a second and see a case study in wrong thinking. KPI driven amateurs would say: "But we have 100 customers a day, and the port/mint costs 11 cents per customer plus 13 cents in labour, that's $24 a day, thats say $8,760 a year and I can get 20% of that as my bonus, thats $1752 a year for me, and if, just say, sales fall off, no one will blame me".

Good thinking would be "Wow, feedback says that the customers like that little touch, and repeat business seems to show that they do vote with their feet. Now, maybe we can get a port/mint maker to do this as a joint venture with us, maybe putting their name on the port glass, or joint branding the mint packaging. Let's also invest in a little customer research to see what else they'd like that costs little but makes their visit attractive enough that they choose us when considering their next purchase. First stopping point will be our staff suggestion scheme because our own troops on the ground know best what the customers like".

Then there’s the long haul business itself. There is one main reason why Qantas long-haul is bleeding. It’s called the Boeing 777, or lack of it in the mis-matched QF fleet. And lack of enough A330s too.

Go to the AVSTATS website. Easy to find. Calendar 2010, 75% of all international movements at ML, BN, SY were NOT B744 and B767. The B744 is only 17% of movements for those 3 ports. The B777 and A330 are each about 30% of all movements and between them constitute 70% of the movements not flown by a B744. Contrast that, and the known fuel and maintenance advantages of the big twins, with the QF international fleet.

Behind that fleet and cost imbalance of course lies the “Glass Half Empty” board unwilling to get the structure right, or feeling any real pressure to do so. There are many reasons why the board has been able to ignore the hideous fuel, maintenance and perception costs of failing to fly the 777. Had there been a second Sydney airport, and/or more competition on the Pacific, the board might have felt that blow-torch at their backsides and got with the programme that the 777 suite of aircraft offers. And more A330s.

Enough: this is giving me a migraine and the Asics shoes (no pun intended) are yelling at me to get out on the road before the afternoon thunderstorms come.

Looking ahead (the past is just dead weight, except for the lessons learned) lets assume that the next generation of leadership which the markets in some way or another will install (and I mean "Glass Half Full" leadership at the Group) adopts and actually believes in a global mission statement something like this:

“Generate a competitive return for our shareholders by offering safe, efficient and enjoyable air travel to business and leisure travellers on routes within Australia and around the world; and doing so in an environmentally responsible manner with workplaces that are rewarding, engaged and enthusiastic”

Having written that, the board that some form of take-over or board blood-letting will install, will have to follow the most basic rule of business, indeed every enterprise since the Egyptians started building pyramids, “Let the Structure follow the Strategy”.

Much to be done, but rich rewards for those who do it. Right now, Qantas is little different to Singapore in 1941 with strategies and structures from the past. Big guns facing the sea, and the HMS "Prince Of Wales" and HMS" Repulse" steaming to help save the day. Both were strategies with less than hours until their use by dates become sadly real. Never did quite finish the forts, never did properly used the trained troops who just might have made a difference. Yes, I hear the cry of one or two little accented voices in the back row-"But they were great ships!". I can only add to that "Yes, and they're still there".

(As another aside, but not unrelated to the thinking mind, it's exactly 80 years since General William Mitchell showed the US Navy the supremacy of air power over unprotected battleships. Mitchell was eventually court-martialed over his efforts to get the Admirals to see the new and coming paradigm. Thank goodness President Truman awarded Mitchell the rank of major General, sadly posthumously. Mitchell remains the only American to have a military aircraft named after him, the famous B-25. Then, as now, professionals with actual aviation dirt under their fingernails, were only too often "Prophets without honour in their own land")

That’s the start and when and if your correspondent gets some time, I will write more of my humble guesses about what the incoming board and management will do to get the structure right, looking at fleet, routes, marketing, people and management.

In the meantime for those too young to know these things already, look up the fall of Singapore, study General Billy Mitchell, watch "Zulu" and reflect on how many Victoria Crosses will be won by Qantas management in this, the fight of their lives.

Safe flying

[packrat]

After the first salvo is fired the board will look at what they can take out of the business for themselves.Once that is settled the white flag will be run up the nearest tall pole.
An outstanding piece of work Capt.Sherm

[Stationair8]

In a statement to the Hobart Stock Exchange, Tasair have advised that they will be taking over Qantas and offering the remaining mum's and dad's shareholders 10 free hour ICUS in a Chieftain. A Qantas spokesperson said that the management had looked at various options but due to volacnic ash, sars, bird flue, avgas shortages, the demise of Ansett, floods in Queensland, the sale of Qantas to Tasair looked to be the best option for management to move forward and turn the corner.

[PPRuNeUser0198]

What if Virgin bought Qantas?

With what money...

[ampclamp]

Virgin buy Qantas? Now that is funny. They are not mad.

[teresa green]

Jeeesus, as if the Australian people don't have enough to deal with at the moment, with Rudd trying to nick his job back, refugees on the road to a hiding, catttle refusing to go OS and now someone wants to nick their airline! Enough already. Settle down people, The Australian people will never allow Qantas to be sold to a overseas airline, its like flogging the War Memorial to the Japanese, it ain't going to happen.

[SOPS]

Having just flown out of Australia, with a full 777, I will put this forward. What if one of the ME airlines bought Qantas? I had a long talk to one of our passengers in First, he was flying with the wife and 2 kids (all in F), was a QF high mile FF but no longer uses them, because of the poor connections into Europe QF (read LHR centric) they offer, and they wont consider the Jetstar option at all. Qantas needs to get back to what Qantas used to do...and fly to some places ISO hoping everyone loves Jetstar..or just give up, and although I have never worked for them, I feel that Qantas just "giving up" would be just unbelievable, I am worried that is what is going to happen:{

[Sunfish]

I love your work Captain Sherm!

I wonder if someone else has already done the analysis you have done, but has not shared that idea with the current shareholders, as apparently was the case with the stinking APA bid.

[WannaBeBiggles]

I wonder why the pilot union doesn't try to float the idea of an internal take-over again. Wasn't it something like 50k worth of shares per pilot to get a majority shareholding a few years back when the last takeover bid came through?

With the shares about half that price, it does become a more attractive proposition now.

[unionist1974]

Don't hear much from those large shareholders who opposed the APA bid , these days . $5.60 looks very attractive compared to what is on offer today . Most small shareholders were robbed by nitwits and egotists . Why would anyone with an ounce of sense buy into this much troubled Company . No future boys and girls , time to salvage what you can . If VR is out there grab it.

[standard unit]

No future boys and girls , time to salvage what you can . If VR is out there grab it.

I've a better idea onanist1974.

Having got us into this mess how about you and the trough feeding pigs you represent fcuk off so the real stake holders in this company can do what they can to rebuild it.

The staff.

[standard unit]

Airports traffic booms as $A soars, visitors jump (http://www.smh.com.au/business/airports-traffic-booms-as-a-soars-visitors-jump-20110620-1gam6.html)