View Full Version : Qantas attracts a terrorist rating

8th Dec 2002, 15:39
Mon "Sydney Morning Herald" 9/12/02

Qantas attracts a terrorist rating
By Mark Todd
December 9 2002

Salomon Smith Barney has become perhaps the first investment bank to incorporate concerns about terrorism and global security into a local stock recommendation, putting Qantas on a "high risk" rating.

Salomon transport analyst Jason Smith said in a note to clients that Qantas was on target to produce a record half-year profit but after the Bali attack and government travel warnings it was hard to ignore the possibility of acts of terrorism occurring in Australia.

The broker fears that any domestic incident could lead to a substantial drop in demand on key in-bound markets, especially Japan and the UK.

"The risk profile of Qantas is rising," Mr Smith said. "One only has to walk around major landmarks in Sydney to see a very noticeable increase in the number of police and security officers."

Salomon raised the risk profile of Qantas from "medium" to "high". Despite that, the bank maintains a valuation for Qantas shares of $5.20 as well as an "outperform" rating.

All other aspects of Qantas are sound: its fuel costs are well hedged, inbound traffic is increasing at a "robust" rate and international yields are strong. A rise in foreign ownership disclosed last week, up 1.4 percentage points to 44.3 per cent, was "a sign of offshore support and a positive for price momentum," Mr Smith said.

Qantas shares have eased 6.9 per cent since the airline announced a $520 million alliance with Air New Zealand. Analysts attribute the decline not only to uncertainty about the deal proceeding, but concerns about international security.

"The Qantas share price has had a significant amount of war risk built in," said one analyst. "The recent traffic statistics suggest the first-half result will be phenomenal.

"You can only conclude the share price has weakened based on risk."

However, the managing director of the Centre for Asia Pacific Aviation, Peter Harbison, said there were many other issues of greater importance for Qantas. The list includes increased competitive activity by Virgin Blue, a possible open skies agreement with Singapore, an economic downturn and rising oil prices.

"I would think in the array of risks that Qantas is facing, terrorism is probably pretty low on the list," Mr Harbison said.

Meanwhile, Qantas and Air New Zealand will today lodge with competition regulators on both sides of the Tasman their economic arguments in favour of their alliance. The carriers have promised benefits worth $680 million will accrue to Australia over five years while New Zealand can expect a $NZ1 billion ($892.7 million) fillip.

Many observers suggest Qantas and Air New Zealand may also have to give ground on issues such as pricing and capacity to win approval from the Australian Competition and Consumer Commission and the New Zealand Commerce Commission.

Salomon said the most likely concessions were the introduction of pricing regulations on the trans-Tasman route and Qantas and Air New Zealand allocating capacity on their planes for Virgin Blue to sell or codeshare. The issues weren't "deal breakers", Salomon said.

Sources said Qantas would fight fiercely against any proposal to make an open skies agreement with Singapore a condition of the deal.

A decision by the regulators may take six months.