It seems that the Qantas Board has accepted a private equity buyout from a consortium that goes under the moniker of Airline Partners Australia chaired by Bob Mansfield, AO, formerly Chairman of Telstra.
CEO Geoff Dixon on the 7.30 Report looked like the cat who ate the cream, but I wonder whether he should look so pleased. I agree with derrida derider that a large part of the value of Qantas is bound up with the 57 international agreements that protect Qantas from open competition. Australians won’t feel the same about an airline that profits a few wheelers and dealers. Already there are signs that the attitudes of backbenchers are changing.
As I expected, the deal has been structured to slide through the regulatory hurdles.
Airline Partners Australia comprises Allco Equity Partners, Allco Finance Group (a combined 46%), Macquarie Bank (15%), Texas Pacific Group, Onex (Canadian) and other foreign investment funds (combined 39%). I understand that if the foreign component is less than 40% and if each foreign investor had less than 15% then FIRB approval is not necessary. Almost certainly the individual investments have been structured to avoid the inconvenience of the FIRB.
Similarly, the Macquarie Bank investment has almost certainly been trimmed to avoid competition problems with the ACCC.
Ironically, I’d lay odds that the received story in voterland is that yet another Aussie icon has been sold of to the marauding foreigners. Prior to the buyout Qantas was 46 to 47% foreign owned. Now it will be 39% foreign.
Much has been made of promises to keep maintenance facilities in Australia, to maintain regional routes and not to break the airline up. I would take all these promises with a grain of salt.
Back in 1993 a firm called Austoft was floated on the sharemarket. It’s principal asset was a factory in Bundaberg that made sugar cane harvesters. Later it was taken over by the American firm Case along with a heap of commitments to keep operations here. If you go to Bundaberg now you won’t find a factory making sugar cane harvesters. For that you’d have to go to Brazil.
As an aside I owned shares in Allco Finance Group for 13 months up till about two months ago. I sold them because they’d run up by 57% and my advisor was worried that too much of their business was in low margin aircraft financing with one customer (Qantas) and I’d owned them a year so capital gains liability was halved.. That was a month before the Qantas deal hit the deck. Now they have gone up a further 10%.
They say you should always leave a bit on the table for the next bloke!
Brian, I see the Reserve Bank governor made some comments recently about possible problems ahead with private equity. I’m still hoping you’ll find time to write a post on the broader issues! Perhaps it’s one for the Xmas break!
If we are thinking of the same thing, the Reserve Bank had been testing the viability of our banks in a simulation where everything went wrong. Private equity was not included in the exercise. Next time it certainly will be as there is naturally some concern about the level of risk.
I heard that Qantas is now on credit watch with the prospect of taking it down multiple notches. The debt is said to be 80%.
Can’t say I have a problem with this. The airline industry is rooted long term anyway. It’s a good time to cut and run.
Bring on the competition!
What goes up must come down. For some it just keeps going up.
“Texas Pacific Group. ‘Business week Online’, October 22, 2001
Predicting Bonderman’s next move isn’t easy–and it never has been.
The 58-year-old lawyer-turned-investment whiz is known for flouting
conventional wisdom. He made his first splash in the investment world
in 1993, when he led a recapitalization of then-bankrupt Continental
Airlines Inc. (CAL ) Bonderman engineered a restructuring that yielded
him and his partners $644 million, 10 times their initial investment.
In fact, he’s still making money from his Continental investment. Over
the summer he signed options agreements covering 885,000 shares owned
by himself and a group of other investors, guaranteeing them a minimum
of about $43 per share. About half those shares have now been sold. In
the meantime, Continental shares have plunged to $17.”
One interesting aspect is that Macquarie now owns the country’s biggest airport and the airline that is the biggest single user of that airport. Different businesses, technically, but hard to have one without the other and both are important economically.
Hard to imagine what might replace them. If Macquarie had been thwarted over this deal, airports might have set up their own branded ‘airlines’, similar to own-branded products in supermarkets.
Also: if Macquarie and Allco are jumping into bed over this deal, what other non-compete, you-scratch-my-back deals might arise to the detriment of a competitive economy?
$10 billion has now got to find a home as the investors coming out of Qantas look for a place to park the loot.
A melt up in the stock market, Brian?
As a hedge fund manager buddy said the other day.
“there are oceans of liquidity out there”.
Nice to see the RBA shows a little concern with the environment of their own making. When all this comes a cropper we will at least know where to look. Meanwhile enjoy the ride but with the finger firmly on the trigger
The plan must be to take down the aircraft maintenance workers’ union.
If they move the maintenance offshore, they’ll annoy the government too much and they could well lose the monopoly on the Pacific route where they make most of their money. But cracking unions isn’t just OK with the current government, it makes them salivate with anticipation.
Competition is fine, but I don’t see why we should shoot the flying kangaroo in the foot (sorry about the mixed metaphors) to let in the likes of Singapore and Emirates with their government backing.
Virgin has been granted a licence to fly the Pacific route, which it will do in 2008, under the brand Pacific Blue. It also has a joint venture with Samoa, flying as Polynesian Blue.
It is listed on the Australian ASX so you can buy its shares directly. Furthermore it is 62% owned by Toll, who ate Patrick (who took on the warfies and both lost and won) to become a transport/logistics group worth over $11b.
So Virgin is more Australian than Qantas by a fair measure.
JC you are right about $11b looking for a home and this having an impact on the market. I’ve got a draft of a post on this in response to Mark earlier and on this thread.
I understand that hedge funds are also involved in this private equity lurk but I don’t understand how. Maybe you and/or your mates can enlighten us.
Robert, I believe that Qantas’ enterprise agreement is up for renewal next year. I recall reading in a broker’s briefing something like “Qantas have not yet had the opportunity to take advantage of recent changes in work place legislation.”
They can’t afford a knockdown stoush with the unions either, so it will be interesting to see what happens.
Try this Brian
The Singapore Government is apparently considering the sale of the Singapore Offshore Supply Base (Loyang) to TOLL, as part of the deal, the government is representing it’s own airline Singapore Airlines, to gain greater access to the pacific routes. And as someone correctly stated, qantas’s most lucrative. SA wants to legally challenge Qantas in some international court about this (I’ve forgot which one)
Thus far the government has resisted, however, now that this is percieved as another ozzie company going abroad (LOL) and may loose its Australianess, Howard’s government is freed from any moral or ethical link, Qantas may loose part of its premier cash cow route.
If anyone can afford an extended knock-down-drag-out stoush, it’s this lot. They could make Chris Corrigan look like Robert Owen if they thought there were returns in it. All those old labour-movement legends about strikes that went on for years and ended with the workers sticking together and the bosses giving up are less likely today because capital has the ability to wear more substantial losses for longer if there’s a payoff at the end.
Modern aircraft require fewer people to service them. There has been a steady decline in maintenance staff, an absolute plunge in numbers of qualified tradesmen, and an almost complete absence of investment in apprentices in recent years. We’re not talking about a huge jump in unemployment here.
The only thing that would kill an offshoring of maintenance is a serious crash (whether through terrorism or faulty maintenance). Ending Qantas’ reputation as a fatality-free airline would lead to a free fall in passenger numbers, which would be followed by panicky spare-no-expense investments in security and maintenance – including making a big show of keeping on all those old hands who have worked for Qantas for decades and can strip, clean and reassemble a jet engine while blindfolded and drunk.
I read in the financial pages of the Daily Tele that the Texas Pacific Group has CIA connections.
Silkworm
Texas P most probably does have CIA connections. Any good analyst worth his/her salt would at some stage leave US intel and go work in the private sector to make the big bucks. No big deal there and there’s no conspiracies.
I worked with several ex-national security people in the US investment Bank I worked for.One guy was the smrtest dude I have ever met who went through undergrad and grad school with alomst perfect scores. he originally worked for the NSA.
They’re well sort after in the private sector because they’re pretty smart seeing they went through a whole battery of tests to work for US intel. Some make great financial analysts. No, no black choppers here. Are you worried Opus Dei has a hand in the takeover? Just kidding round.
Brian
“I understand that hedge funds are also involved in this private equity lurk but I don’t understand how. Maybe you and/or your mates can enlighten us.”
Yes. I would dare say that Teax Pac would have a hedge fund offshot of sorts in it’s stable.
Hedge Funds are also active operating as private equity players these days. In fact it is a very fine distinction between a hedge fund and a private equity firm.
A traditional hedge fund needs or is required to mark to market each day in order to get a verifiable and accurate equity position. Private equity Firms can’t really do that because it is hard to value say an asset like Qantas when it goes private. The only time they can do that is when when the return an asset to Ipo.
The very large hedge these days are almost institutions in themselves and so would be easily able to tap investor money for a private equity deal.
One firm i know of, a hedge fund, raised US $ 8 billion in a few hours and had to close its books to prevent a deluge.
The difference between a hedge fund and a private equity firm is that a hedge fund is called upon to mark to market at frequent intevals. A private equity firm cannot do that and therefore the lead times are much longer in terms of realizing assets and seeing the loot/cash.
Then there a venture capital firms which could also belong in the same stable They look for deals like supporting start up firms with new techology etc. with then hope to bring these firms to the stock market one day. The VC firms buy lots of investments on probability scenarios … eg. that 15 will be failures and they lose all their money, 4 will be so so and 1 will go like a rocket.
I once had a young trader work for me for a few years, who left to start up his own firm and he is now a forbes 400 player. Really smart dude. I was almost in tears (kidding) when I left as he made the section I was responsible for a lot of money that was hard to replace.
Couple of Typos
Texas Pacific
Then last para.
When HE left.
hi
Lost a post to moderation
sorry
Have no fear about this takeover as it could be the best thing since Xmas (05) for the consumer. Most people you talk to hate Qantas. It has to be the least friendly group of trogs this side of the equator. Everything you ask of them they will not do unless they can screw more cash out you. And they charge mountains of loot just to put up with their shitty service.
They have a monopoly on all those routes DD mentioned. Here’s hoping they get ripped away by a government that should never have allowed this rort to occur.
If they go private and the governmet gets a backbone and takes away their monoply we’ll all better off. Sing airlines are a decent pleasant group of people to deal with. It would be a pleasure flying with them both domestically and overseas.
Don’t even shed a trear for that lot.
I’ll pop a bottle of bubbly if they go private. We’ll all be better off.
My bet is that the consortium will get into trouble anyway because they will have too much debt. Watch it all come back in the stock market with a more humble managment and a group of customer service people more ready to oblige.
Let it go. It has done nothing for us.
How about “to benefit Australian consumers”?
If the government of Singapore wants to subsidise SIA and give Australians cheaper flights in the process, why shouldn’t we let them?
It’s much better than the current situation where the govt. protection of Qantas means that Australia has the most expensive airline fares in the world. Which is kind of inconvenient when you live on AN ISLAND.
It costs $200 to fly from New York to London but $900 to fly from Perth to Hong Kong. Both flights are 6 hours.
One thing that bothers me is the mothballing of the once powerful watchdog the Foreign Investment Review Board. It is another area of failed economic management since Howard has been in office. A few years ago it was apparent that no foreign takeovers had been stopped since Costello has had the reins of Treasury. It is the body that can stop this takeover and it should do so.
Steve
While we run an inflationary monetary policy which is not of the government’s making- see the reserve bank to attach fault- the currenct account which is running at around 7% of GDP is a symptom of this malaise.
So we need to export our assets in oder to pay for our very high levels of consumption.
In other words if we didn’t have a ralaxed view of overseas investment our currency would probably be dripping down through 35 cents at the moment. So we can count our lucky statrs that there are foreign buyers who think our assets are good value.
We’re in money export business. We’re selling our currency to overseas buyers.
And just who appoints the Governors of the Reserve Bank of Australia? The howard Government. And why would the consuption be so high? Because the Howard Government has shown little interest in delivering services and would rather see people loaded up with private debt to buy their own services.
I thought the idea of a floating currency was that if the Australian dollar is only worth 35c then it can fall to 35c. but the dollar has always been kept inflated by Tory Governments and this was particularly evident before the currency was floated and especially when one John Howard was Treasurer.
Anyway I have always understood that the lower the dollar the more we get for our exports and the less inclined people would be to import.
“And just who appoints the Governors of the Reserve Bank of Australia? The howard Government. ”
True. But neither side realizes the damage they are doing by bloating up the money supply, not even the RBA management. A labor government would also indvertly follow the same policies.
“Because the Howard Government has shown little interest in delivering services and would rather see people loaded up with private debt to buy their own services.”‘
This is not a valid point. More redistribution and leaving monetary manangemnt the way it is would do nothing to alter the external balance. In fact it may actually worsen it seeing all government expenditure is consumption.
“I thought the idea of a floating currency was that if the Australian dollar is only worth 35c then it can fall to 35c. ”
True. But you want a policy mix that optimizes the exchange rate. Don’t forget that as we fall in value to the rest of the world our living standards also fall. Our imports become much more epensive. You want a “maximumly” strong exchange rate or at least one that isn’t adversely affected by bad government policy. And detering foreign investment would clearly fall into thet category. Th exchange rate would fall to compensate for a very bad government policy and therefore we would not be maximizing our full potential.
“but the dollar has always been kept inflated by Tory Governments and this was particularly evident before the currency was floated and especially when one John Howard was Treasurer.”
Not totally true.
Don’t forget we also had a super cheap currency when the Aussie was down at 50 cents for the longest time. Howard should have floated the currency in the early 80′s and didn’t. It was a mistake only corrected by the Hawke and Keating government.
It doesn’t matter if foreginers own our asets anyway. It is not as though they can wlak off with a mine etc. We don’t have the savings finance these capital expenditures so therefore we need to bring it in. It is a of maximizing our economic well being.
The whole point to me is that Australians alredy own most of the airline through Super funds etc and by flogging it off cheap to a few asset strippers we not only lose an iconic airline but we also damage the longterm savings potential of millions of Australians.
Short term gain may be a haulmark of your tory mates but it is far from being in the longterm interests of residents of Australia.
Hi Steve:
“The whole point to me is that Australians already own most of the airline through Super funds etc ”
Yes, but so what? Ownership is not the b all and end all. As consumers we don’t care who owns it as long as their service is reliable, pleasant and safe. Right now I have a real issue with it’s “pleasantness” which to a large degree is brought on by the fact that they are a monopoly in lots of segments of the market. Pray to god that changes if they’re privatized.
You’re fogetting also that but too long ago the stock was trading at around $3.80 and the offer is now $5.6. This is a fantastic bonanza to the current shareholders and it’s the main reason the board has chosen to advise selling.
Ultimately the syndicate can only buy Qantas if 90% of the shareholders tender their stock, irrespective of what the board says, it is the vast majority of the shareholders who will decide. Don’t cry for them, they’re doing cart wheels to the bank.
“….and by flogging it off cheap to a few asset strippers we not only lose an iconic airline but we also damage the longterm savings potential of millions of Australians.”
Well actually I don’t think they’re flogging it off cheap at all. They are paying a really big price for it. The bet is that they think they can achieve a good result if they’re privatized. The board by advising to sell and using investment baking advisors reached the conclusion that it is a great offer. Listen to them.
The shareholders will now scout around and look for other investments with their newly found wealth. In fact their savings propensity has increased enormously with high price as they seemed to have made a killing.
“Short term gain may be a haulmark of your tory mates but it is far from being in the longterm interests of residents of Australia.”
Wrong. i don’t have Tory mates. I don’t like Tories… Malcontent Fraser types. They would be against the deal anyway.
I can’t tell you which investment horizen is the best approach. you seem to prefer long term whereas other people like short term gains. These decisions are really personal preference issues.
I can assure you though the the most important investmemt issue is profit maximization.
We’re not losing an iconic airline, Steve. They will want you to fly on it as much as before.
It’s only the ownerhip structure that’s changing. No big deal. But hopefully it becomes a better deal for the customers if the government opens up the airways to competitors.
The ownership structure changing is what I object to. Where is the point of it if as you say the new owners have paid too much for it on borrowed money. Seems like the Bond,Skase, Enron tactics all over again and in the end the community is left with inferior serrvices to what they initially enjoyed.
And while you’re pondering this,jc. Don’t fhink that your selective memory,euphoric recall and history revisionism takes into account the track record of Hedge Funds with their unaccountable and despicable influence in creating the Asian Financial crisis.
They will quite happily destroy the economy of whole countries for short term gain and reduce paper millionaires to living in cardboard boxes on the streets of Tokyo and other places if it suits their purposes to undermine society’s more important institutions.
I am sure that this derivative of the Hedge Fund has nothing to offer QANTAS or the Australiann population.
JC and Steve: could you please explain what you’re talking about?
If people want to take Qantas over – that’s fine by me – I have no say nor interest in who owns it.
…bring on the competition!
” The ownership structure changing is what I object to.”
Well actually you have no reason to, Steve. It’s only an emotional type motivation not really based on good financial reasoning.
” And while you’re pondering this,jc. Don’t fhink that your selective memory,euphoric recall and history revisionism takes into account the track record of Hedge Funds with their unaccountable and despicable influence in creating the Asian Financial crisis.”
Well, err actaully steve most headge that were playing the Asian market losts money during the crisis.
Sacha
I basically agree with you.
Should read
Most Hedge funds that were playing the Asian markets….
So long as the seats are comfortable. And that I get upgrades to business class using points on long flights (9 hours or more).
Oh dear, I’m a bit too tired to cope with where this thread has gone. The argument as to whether it is important for us to own any of our major trading corporations is for another day. I just need to re-emphasise that in this deal Qantas will actually have more Australian ownership than previously (about 61% as against 53%.) The important change is that Qantas will have private owners (with heaps of debt) and Australian mums and dads, as well as super funds, will not be able to invest directly in Qantas.
This means a reduction in transparency and accountability. It has been said that Dixon as CEO effectively spends two months each year doing things like briefings for the market and shareholder relations that he won’t have to do now. The cost of accountability is said to be 4% of turnover, which is now saved, but probably offset by fees paid to the new owners.
To take up the point about competition, the customer is not always served by competition. One of the problems with the airline industry is that it is not profitable. This means investors don’t want to put money into it and it could have adverse implications for the age and servicing of planes. As to salaries I’d rather fly in planes that are serviced and operated by workers who are happy in the service and go to work with a spring in their step.
To take up JC’s point about the shareholders being happy with their bonanza, which they then reinvest, the effect of these deals is to reduce the companies available for investment and to raise the price. Takeover in media stocks show where this stuff is perhaps heading. All remaining companies have a takeover premium built into the price. If private equity buyout activity increases as expected the whole market becomes too expensive (some think this is already happening). So you pay your capital gains tax and if our major financial institutions, retailers and mining companies go it will be a very different market. Much like New Zealand. Then we might have another conversation about whether ownership matters.
To be honest I still don’t know whether the private equity deal is good for Qantas as an organisation or not. The claim by Dixon was that the market didn’t value Qantas properly. The very odd phrase of “patient equity” is being used to describe private equity. In fact there is some basis for this. I learnt today that investment institutions like your super fund turn over 130 to 150% of their stock each year. This is churning at a furious rate and does make the 3-5 year time frame of private equity seem like an age.
The problem with airline is that capital is particularly skittish in relation to fuel prices or if a few people come down with strange contagious diseases or if some terrorists blow something up. For Dixon it will be a relief that he doesn’t have to worry about the sheep all running over to one side of the paddock then the other all the time. He can than focus on matters of substance rather than market perceptions where the dominant emotions are fear and greed.
Peter Harbison says that Qantas would not have lasted more than 10 years in its present form. It would have withered into a solely domestic player and would have been taken over. He says the whole industry is in play at present. So you need to get big or be gobbled up.
I suspect that Qantas as a brand will become a somewhat upmarket niche player even within the Qantas company. In a significant move, according to Harbison, Qantas:
An article in the AFR points out some of the savings in staff costs. Cabin crew in Jetstar get $35,000 pa as against $60,000 in Qantas. Virgin Blue pilots earn about $140,000 pa compared with the starting salary of $220,000 for domestic captains in Qantas.
Jetstar now flies to 40 destinations “from Bangalore to Byron Bay” and will expand further into Asia, the US and Europe.
Dixon is 67 and gets paid $5.2 million pa for showing up to work. He gets $60 million equity in the new organisation which he and his family have decided to put into a blind charitable trust. I might be a sucker, but my reading is that he is working for the challenge and sees the private equity road as giving him the flexibility to move in a time of market consolidation.
In time also Jetstar may become an airline Australians can be proud of.
Who cares if Australians are proud of it or not? It’s a company that provides service. There is no world cup for airlines. You choose the one that offers you the best price and service on the day, and that is rarely Qantas.
I find it hard to believe that the airline industry is “not profitable”. Unless I should believe Brian over these two articles. Most companies are not in business to make a loss.
What’s not profitable is the business plan of some long-established airlines which were born in the era before mass air travel, when air travel was a luxury.
Yep. Icons are wonderful things to have, if you believe in the power of prayer.
But in reality icons are fetishes that political parties shake at election times to scare up a nationalist vote or two.
Companies like Qantas also use their “icon status” to excuse poor and expensive product. We’re supposed to feel patriotic while paying though the nose for off-hand treatment.
Once upon at time a serious argument used to be mounted defending subsidisation of domestic industrial infrastructure on the basis of national security.
During WWII Australia created an aircraft industry out of virtually nothing and by 1944 was manufacturing the state-of-the-art Mosquito fighter-bomber. The memory of Australia’s peril, 1939-45, served to reinforce post-war statist industry policy. But this priority has been shelved.
I admit to having ambiguous feelings about whether this is a good thing.
One the one hand it seems unlikely that the world will ever need to deal with prolonged total war again. Any total war will be horribly swift.
On the other hand, national industrial infrastructure is something of an insurance policy against international chaos.
In the meantime we make do by being pretend Janissaries to the United States.
Any deal must ensure that Qantas responds to all national emergencies like the Bali bombing â to which Qantas sent extra jets to bring home both the injured, families etc. And for nix.
The knock-on effects are substantial if maintenance, freight & catering head north â thousands of jobs plus hundreds of businesses which supply Qantas (with thousands more jobs) are on the line. Qantas is a significant employer AND purchaser of goods and services.
I also donât like seeing high value-high knowledge industries like aeronautical engineering & maintenance going offshore for both commercial and security reasons. The Qantas training program is like another PHD for our engineers, who take these skills into other areas of the economy and start up new enterprises etc.
They must also keep their unaccompanied minor service (which Virgin doesnât provide) â tens of thousands of children visit non-custodial parents and grandparents and other friends/relations each year with this program â which is labour intensive. Nearly every flight has a couple of âUMâ?s on board.
Very large companies with multiple divisions like Qantas, should not be let go lightly for short term private financial gain without adequate safeguards â there are many more stakeholders than investors who need to be considered.
Investors are just a group of moneylenders holding chits at the close of business, on one particular day. The countryâs biggest domestic carrier and only major international carrier is a NOT a casino. Iinvestors should have understood this before they bought stock â you can’t have all the benefits of Qantasâs ex-govt monopoly position and dominant market position, without any on-going conditions on sale.
I am hoping the Govt. has a long list of requirements before any leveraged buy-out can take place.
Yobbo – you compared the London-NY route, probably the busiest and most competitive international route in the world with the Perth-Honkers route, which is neither.
Jo, the way situations such as national emergencies are handled is for the government to have an arrangement to charter the jets when required and to pay the full charter costs. There is no reason for the airline not to be fully reimbursed by the government for the cost.
There is no reason in principle that the chartering has to be off Qantas or Virgin Blue exclusively. If they have insufficient capacity available to meet the chartering needs Air New Zealand, Singapore Airlines, Thai etc could be approached for the purpose. Qantas is a commercial operator in a competitive market and should not be expected to hold extra capacity against infrequent and unplannable-for national emergencies when alternatives are obviously available.
Of course one would expect Qantas to be the government’s first call for the reason that Qantas would want to be that so that it was seen as a responsible corporate citizen in its home market and because as it has a large domestic as well as international fleet it is likely, in most circumstances, to be able to respond most effectively to an emergency.
The Queensland Liberals have an interesting twist on the QANTAS sale here
A key question here is who shouldn’t let them go? Who should have a say in who owns Qantas?
Sacha – It is apparent that Peter Costello and the Federal Government regulators especially the ACCC who are investigating the deal and the Foreign Investment Review Board which was mentioned in the initial post. See Costello’s latest words here.
This is the dodgiest deal which makes no sense whichever way it is viewed. It is anti-competitive and puts the whole Australian Airline industry at risk.
Interesting comment.
There were some new perspectives in the press today.
First the Qantas pilots are considering stumping up $50,000 each to buy Qantas shares with a view to gaining a blocking stake in the company.
Second, the AFR has an article which looks at the implications for defence maintenance contracts, which are considerable:
Dixon reckons you either do all maintenance and repair here, creating an operation that would also need to do some third party work to achieve appropriate scale. Alternatively you get it done by the manufacturers who offer “total maintenance solutions”.
Jo’s point about maintaining the requisite skills and capacities within our economy is relevant and someone should be thinking about it in the national interest.
More generally the AFR says that boards of listed companies are wetting themselves about private equity takeovers and are starting to mimic them by taking on more debt.
However, the main thrust of the article is that the more important aspect of private equity ownership is the active interest owners take in the businesses, by appointing active, focussed, hands-on boards. I don’t have the new Qantas (Airline Partners Australia) board to hand, but I was impressed with it. The new owners do all seem to have an interest and track record in airlines, with the exception of Macquarie, the deal makers.
Steve, I’m still not sure that the FIRB will look at it as the deal seemed to be designed to slip under their radar. The ACCC will certainly put it through the competition wringer. Some would argue not before time.
It is also likely to conform to the Qantas Sale Act, so the government may not have any formal leverage with which to act, even if it wanted to. Their main leverage is with the international agreements, and one of their concerns will be to keep Qantas flying to woop woop.
Yobbo on profitability I should have said “not profitable enough.” Qantas is said to be the most profitable airline in the world. As a direct share investor I think it has been below investment grade. The comment would be BETTER VALUE ELSEWHERE.
I notice that the Ryannair article you linked to said the were going to avoid the longer routes. I guess the point of a national domestic carrier is that it is mainly longer routes, including many small centres. One can envisage a future where the government has to subsidise services to country centres in return for opening the main and international routes to further competition.
Virgin Blue Australia doesn’t impress me as an investment. Investorweb has its 2008 profit as slightly below its 2004 profit and suggests that it will pay no dividend at all in the next few years. Aspect Huntley tell me that none of the nine brokers that cover it recommend it as a buy. Not one.
As for pride, you can suit yourself, but I do take pride in seeing any Australians do well at what they are doing, whether ballet dancers or our tiddly winks team, if we had one. We do rubber gloves and condoms well (Ansell), we do hearing implants very well (Cochlear), also blood serum (CSL), gear to diagnose and manage sleep breathing disorders (Resmed) and surf wear (Billabong). Gazal Corporation do some interesting brands including Mambo. We do lots of things well, like cinema photography as well as swimming and cricket. All of these things make me feel better about where I live. Just a bit, anyway.
The psychic value you get from feeling Qantas is “doing well” is more than outweighed by having to pay ridiculous prices to fly anywhere. Unless you are rich and money is no object.
Qantas would not be the most profitable airline in the world if it wasn’t so heavily regulated, that is the point. Their profits are artificially inflated by having the government lock out competition.
You can always find a different company in a different industry to invest in. Travellers have no substitute to air travel.
So your idea is to have all airlines operating at subinvestment grade of profitability, is it?
I wish Peter Costello would listen to himself â he knows that this deal could feasibly break Qantasâs back with debt and more debt â so why is he going to let it proceed and not stop it in the national interest? Or is Costelloâs warning for public consumption only, ie. when, not if, Qantas falls over â the Govt isnât going to helpâ¦.ok citizens?
And Peter has helpfully pointed out – there is no other national airline waiting in the wings to take over.
The cost to the economy of Qantas go down is huge â so why arenât we hearing about this? You can hear the South Australian Govt in Tokyo, when Mitsubishi wants to close one plant â but the national airline with routes criss-crossing the country and the globe, is potentially going to be broken up/swamped with debt/whateverâ¦..& we get a promise not to use taxpayer money for a bail out. Wow!
& what Brian said again about the engineering/defence relationship.
GregM – I believe Qantas flew back some of the Bali bombing victims for nix, and families and other stranded passengers. Since this was publicised at the time, I would hope that they didn’t then invoice Canberra, for the same, after the event. This is what I referred to. They also flew in extra planes to help with affected Tsunami holidaymakers etc.
If you look at the mess in Lebanon recently with DFAT having the ship they hired gazumped, why shouldnât there be an obligation on Qantas (if it isnât broken into little pieces) to fly the flag? You cannot advertise yourself 24/7/365 as THE national airline, “still call Australia home” with little kiddies warbling on our tellies, and at our national sporting events etc, and then look the other way, the moment help is needed. Truth in advertising at the very least. And hiring a low-cost foreign carrier to bring home your citizens from some horrible disaster, cause your national privatised airline is too busy with paying customers – just about says it all.
The stuff-ups around Jake Kovco’s body is a salient lesson in the short sightedness of out-sourcing to whoever’s, at very time, it REALLY does matter that things are done well and properly.
Costello obviously sees a rocky road ahead, and is already signalling âno bail-outâ?. But will he be able to keep this threat/promise, when thousands are stranded across the globe and across the country, and thousands of small creditors are crying for payment, and employees entitlement have gone missing?
yobbo – just looking at flights from all around the place – there are some bargains but alot are very comparable with Aus domestic prices.
I’ll compile a few examples after I’ve finished cooking dinner, but there is a nice Zurich-Paris on Swiss Air for $684 AUD one way, and its only 480 Klms….Melb-Syd is looking very cheap at $99. And Seoul Beijing – $612 one way for 954klms. etc…
For those who want to read the optomistic view which I don’t subscribe to, Tis here
Jo, do you want a govt owned Australian airline?
Dixon knows that the airlines of the world are going to be rationalised. Qantas is currently 10th biggest and although it is the most profitable its expense base is on the high side. So Dixon will want to get Qantas into the top 5 or 6 and carve out a lot of cost. I think part of this will be to expand Jetstar rather than Qantas as such. Costello is worried about this because he said he didn’t think it was acceptable if we didn’t have a full-service airline in Australia.
Jetsar is now starting to fly overseas and presumably will offer Yobbo a cheap ride to Honkers in the not too distant future.
Steve I didn’t think that link was all that optimistic. Weaven and Clegg were saying it’s hard to make money out of airlines, they are paying too much (20 times earnings) and are loading Qantas up with debt. They were basically gobsmacked, or at least scratching their heads.
But you have to remember that Dixon was already on track to carve a couple of billion out of costs, he was expanding in Asia, the fuel costs for 2007 are hedged, I believe, and some of his capex was deferred because Airbus have majorly stuffed up on their orders. (He’ll probably make them pay to hire replacement aircraft or exact a penalty for profits foregone.)
You also have to remember that interest payments are a business expense, so Qantas will be paying little tax and no dividends. Also Dixon will be left with $2 billion cash on the balance sheet which he can use in case of emergencies before he thinks about going back to the owners for additional equity.
The broker forecasts had the EBIT (earnings before interest and tax) increasing well beyond what I understand the interest commitments to be over the next few years.
The people who set these deals up are cleverer than those who set up the deals in the late 1980s. That doesn’t mean they can’t come a gutsa, but I’m reasonably sanguine about the whole deal. Partly this is because the people involved do seem to have a passion (vision?) for airlines. The Texas Pacific guy’s very first deal was an airline bailout, he’s done another one since and he is currently chairman of Ryannair. In the first deal he was apparently flying on the airline and didn’t like the tucker they gave him. He sent it in a packet to the CEO with a note “Fix it!” You can be sure the CEO did, or he would have been gone.
As for Macquarie, you can’t love them, and I’m afraid my Australian pride doesn’t extend to their handiwork. But you have to admit that they know how to turn a quid and they haven’t stuffed up so far.
sacha did you read the article that steve linked to? If so, you would have read from people with heaps more clout than me – saying exactly the same things – but who are still pro-the deal cause as Kenneth Davidson points out in his Age column on Qantas – people just do go along with insane business deals in these sort end of boom times – http://www.theage.com.au/news/business/qantas-deal-a-game-of-leverage/2006/12/17/1166290414092.html
From the interview Steve linked to, with Gary Weaven, Executive Chair of Industry Fund Services & Brett Clegg, Associate Editor of the Australian Financial Review interviewed by Geraldine in November:
“the propaganda coming from the Macquarie Texas Pacific camp is that it will be somewhat situation normal….we can’t be naïve about this, that will be what they would say and of course they would say that, because otherwise they would have obviously the politicians offside.â? (MASSIVE JOB CUTS ANYONE?)
Geraldine Doouge: âAlan Kohler apparently has been writing….they should be forced to reveal to the Exchange the things they say to the private equity firms that might suggest a much greater return on investment, because if they can produce it for the private equity firms, why can’t they produce it for their existing shareholders?â? (i.e. CURRENT SHAREHOLDERS HAVE BEEN SCREWED BY DIXON)
Brett Clegg: âI think there is a large element that the Macquarie Bank proposal involves financial engineering…..(WHAT”S NEW?)
Brett Clegg:ââ¦.if you look at those companies disappearing from the share market, what are you left with? A few banks, a couple of insurance companies and a bit lumbering telecommunications giant with not a wonderful outlook.â? (i.e. THE ASX IS HAVING IT”S EYED PICKED OUT BY CARRIONS.)
Brian – my last post….
Davidson made the point with Qantas geared to the max – NO INCOME TAX will paid – a loss of some $260-350 million dollars per annum into Australian coffers – and again, not a word from Ratty or Costello. Budget black hole anyone?
And apparently the whole debt will be picked up by US investors http://www.msnbc.msn.com/id/16256085/ with default triggers that wont be as onerous as usual – Oh goodie!! & our foreign debt just went up another $11 billion. What proportion of GDP is it now?
Sacha, I do have a problem with corporate boards elected by faceless fund managers keeping the share price low, so as to flog off the national airline to private US equity mobs, who then burden the company with masses of debt for private gain. That isnt capitalism, it’s rogue traders!
My gut feeling is that Dixon is on a mission to take Qantas offshore as much as humanly possible to finally break the Qantas unions he has fought since becoming CEO. I think he’ll risk Qantas crashing and burning, and is why Ratty is being so quiet – he’d sell his first born to watch a union die.
Sacha, do you want Australia Post privatised? Why is it that people say that ownership doesn’t matter, but public ownership is verboten? Just wonderin’.
Jo, thanks for your interest and the links you provided. When I posted I didn’t expect more than about 10 comments, but the comments have brought out additional information and themes.
The Davidson article is interesting. It’s hard to know whether he is being a bit extreme. I suspect he is being a bit negative about the motivations of the private equity mob. Sure they want to make money – in indecent amounts. But I don’t think they are asset strippers. Certainly the strategy is still the same, if we take the statements made at face value.
I think the unions lost the game when Jetstar was successfully launched, btw.
Davidson now has another article in which he blames the halving of capital gains by Howard’s mob as providing an incentive for taking profits as capital gains and thus avoiding tax. He could be right, but he avoids mentioning that shareholders who sell in the takeover will be subject to capital gains. Still I think Costello should be worrying about this aspect of the leveraged buyout trend.
I’m not sure that the debt going overseas is a problem. Again much of the $11 billion released to shareholders will be reinvested overseas by Australian shareholders especially if our sharemarket is trashed by these takeovers.
In fact there is an interesting article in today’s AFR by John Edwards (of HSBC Australia) saying that our direct overseas investment is now catching up to foreign direct investment in Australia. The total is now $278 billion as against $307 billion. Ironically we borrow some of that $278 billion overseas so that we can invest overseas, but in the long run it should be good for the balance of payments. The weight of money from super funds (now at about $1 trillion, or equivalent to the whole sharemarket capitalisation) will increasingly go overseas.
Davidson, of course, points out that although the finance of the Qantas thing is being arranged through overseas banks, much of the debt will end up with the workers’ super.
We should all hope that the flyng kangaroo keeps flying. You might say that it is in the interest of the public.
But it is also in the public interest that Qantas fly less. As Davidson points out the carbon emissions from air travel are increasing more rapidly than any other sector. According to Stern, though, it’s only 1.6% and far less than land use change at 18% (mostly knocking down forests).
Stll, we should worry about frivolous air travel. I hope Yobbo has serious business in Honkers!
“Travellers have no substitute to air travel.”
Unless they’re not in a hurry and want the time to work on a book while fighting off pirates.
http://www.freightertravel.com.au
Seriously though, I find it hard to quantify the value of having a national airline brand. The US doesn’t have one and they seem to being doing alright.
Qantas: cheap, safe, pleasant – please choose only one.
Just been watching the Mark Vaile 7:30 report.
Counted “obviously” ten times, that make the whole deal obvious or is Vaile a nincompoop, probably the later.
Yes “obviously” ten times, “if you like” three times and plenty of “watching closely”. The transcript is up now, I heard it on Newsradio and there was an article in the AFR today.
Not much new here, I think. There has been no FIRB application to date and it seems it may not get pulled into that net. After all the deal was designed so that it wouldn’t. So there may not be an opportunity for the Government to specify formal conditions and I fancy they would prefer it that way. They have plenty of leverage, however, through their international agreements and things like landing rights.
I think there has been some loss of public support for Qantas over this deal and I think they are smart enough to know it. Hence they are unlikely to frighten the horses, in the short term at least. In the past they have been diligent in smooging the politicians and I expect they will continue to do so. For example, they say that if a pollie’s family book an overseas flight in the back of the plane and then let Qantas know who they are then they are routinely upgraded.
There has been a meeting of watchdogs and regulators (the name of the body escapes me) wherein these leveraged equity buyouts were discussed. The main issue bothering them is that management has a conflict of interest when they are being offered a share of the company.
They can ponder all they like, but I can’t see that anything can be done. It would be routine for management members of the board to withdraw when these matters are being decided. The only protection is the independent board members, who, it should be noted, lose their positions in a buyout. So we rely on the integrity of the likes of General Peter Cosgrove, who is on the Qantas board. That’s what he’s there for.
But a stakeholder management who will work like their arses are on fire is part of the private equity deal and is probably one of the main reasons that such companies perform better than public companies, as apparently they do.