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Wirraway
14th Feb 2003, 17:17
Pic Qantas 767-200 VH-EAJ departing BNE rwy 01.
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Photo by Wirraway (Ian Sharp)

Sat "Melbourne Age"

The Qantas smarts
February 15 2003

A potential war, rising oil prices, competition. No. 1 airline Qantas is facing some hurdles. Fleur Leyden asks Ian Myles, of Macquarie Equities, how turbulent the ride could be.


Q: Qantas seems to have ridden out the impact of September 11 on international travel. How are traffic numbers going since the attacks? What effect are the threat of a war and rising oil prices having on the airline?

A: Across Australia traffic numbers were slightly up. More importantly for Qantas is internationally they've been able to successfully take market share from their competitors since September 11 through to now and that has clearly aided their performance. The impact of a war and rising oil prices are yet to be seen in the statistics at this stage. Clearly, the uncertainty of a war may have some impact at a later date, (but) it is hard to quantify. On the whole, we wouldn't expect a reaction any worse than previous shocks have been, namely the Gulf War or September 11.

Q: Will Qantas' decision to impose a credit card surcharge have a material effect on its cost levels? How else is it addressing costs?

A: It doesn't have a dramatic impact. Roughly, Qantas has domestic-orientated revenues of $6 billion. Of that, it is probably fair to assume that $3 billion of that is done with credit card sales and others done via other means because there is corporate traffic and not everyone buys their international services on credit card. When you look at it from that perspective you are probably looking at about a $30 million saving on the cost base. The airline is reducing costs by upgrading their fleet. The new planes and the efficiencies they deliver both in the maintenance, fuel usage and staffing levels are aiding them. Secondly, they are running this airline carrying a lot more passengers, with similar numbers of people (staff) so the productivity that has been achieved over the past 12 months is phenomenal.

Q: Ansett's gone, but Virgin Blue says it will secure a one-third share of Australia's aviation market. To what extent is this a concern for Qantas' market share? Is there the chance of a third competitor entering the domestic market? Who would be likely new entrants?

A: Competition is always good and it will take some share from Qantas. The question is where the natural levels are. At this stage it is hard to estimate those exact levels but a 70:30 split in a narrowly defined jet market is quite plausible. In the broader Australian domestic market including regional services Qantas will remain the major player as it provides significant regional services. In the short term, we don't see a high probability of a third entrant into the Australian domestic market. Medium to long-term we would expect to see a third entrant arrive, naturally just reflecting the growth of the overall market. At this stage, given it is a long-term proposition it is hard to identify who it would be but it is more likely to be orientated at the low-cost end of the market than a full-service carrier.

Q: What is the outlook for the Air New Zealand/Qantas alliance? Will it gain regulatory approval? What are the benefits for Qantas?

A: There is a lot of water to run under the bridge regarding the alliance. Until all submissions have been made and the regulators have come back with some draft ideas, it really is too hard to call. The benefits are significant for both parties and make a lot of logical sense. If it is to be consummated it will be a significant positive for Qantas in the order of about 50 a share.

Q: Qantas is widely held by retail investors. What can they expect in terms of dividends?

A: I think the dividend will be reasonably stable. I wouldn't expect to see a massive amount of dividend growth in the next 12 months, simply reflecting that Qantas is in a major capex (capital expenditure) cycle at the moment and only once that capex cycle has been completed would you start to see any increases to the dividend. I think it will maintain a dividend of 17 a share.

Q: What are you expecting in terms of profit when the company delivers its December-half results on February 20? Your valuation on the stock?

A: We are expecting an EBIT (earnings before interest and tax) profit in the order of $600 million. The bottom line profit will probably be about $400 million but that really reflects a very low net interest expense. Our valuation for the stock is $4.20 over the next six to 12 months.

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