Interview — John Ward

JW: It’s a little early to know, but irrespective of whatever party had won, the situation is that our financial performance for the current year is unlikely to be such that it would be inviting to go to the market to raise capital. The pilots’ dispute and other things that are well documented have knocked our profit performance to a six and with poor profitability it’s not the ideal time to be going to the market in search of capital.

JT: If you were to be privatised, the bottom line really is that most of the money raised by the share sale must go directly to Qantas to relieve debt rather than to consolidated revenue.

JW: As we’ve said on numerous occasions, in privatisation or any other policies we would want to have an equity injection of some$500m.

JT: If Qantas is not privatised, then what alternatives might be viable to alleviate your currently high debt-to-equity ratio?

JW: We need equity in some form. The current shareholder could always change their attitude and put some in. Another is to go to something less than privatisation and raise equity in the form of quasi-equity which could be an option attractive to the current Government.

They really need to form a position on that.

Last year they were our thoughts on the subject in a special proposal to them. Given our current financial performance though, whether you go for a real equity raising in the market or a quasi equity raising, the sort of support that we might have enjoyed a year ago probably wouldn’t be expected at the moment.

JT: What is quasi equity in your view?

JW: The way we look at it, it would be raising money in the market without selling Qantas shares, but in a form that was different to debt. Basically it means that the potential fiscal compensation or dividend on that money would relate to the future performance of the company and to the future capital growth of the company, but not to a fixed percentage of the amount raised, irrespective of the success of the company. Essentially, it would be very close to equity in servicing characteristics but it would not go as far as actually selling shares in the company.

JT: Are there any precedents for that?

JW: I’m not aware of anything really substantial in Australia. However, if you look at Switzerland there is an often used practice with companies, that prior to floating they issue what they call ‘going public’ bonds which is an initial step towards going to the market. If that goes well they would then have a degree of convertibility at a later date. Now I’m not suggesting anything with guaranteed convertibility, but something down that line using techniques that have been used successfully in other countries could merit further investigation. It’s not breaking new ground internationally, although it might be new ground in Australia.

JT: How much money is Qantas looking at over the next five years to support its investment in new aircraft, plant and equipment?

JW: Well, on the equity side we are looking at a minimum of $500m in equity. On the amount required relative to the value of plant and equipment over the next five years it would be closer to$6 billion.

JT: On domestic deregulation, do you see a possible role in the years to come for Qantas serving the domestic market?

JW: There isn’t currently a role and that’s due to Government policy considerations. Frankly, given the size of the domestic market and its immediate growth prospects and our focus on growth with inbound tourism, we don’t see it as being an attractive market worth pursuing at this time. We see higher rewards sticking to our current network though the domestic market is something that we would clearly keep under review, though to a great extent we are not the ones that are going to be setting Government policy. We are, however, a company that’s going to need to maximise its own benefits once policy has been set. But entering the domestic market isn’t high on our agenda at the moment.

JT: If the proposed new entrants fail to prove viable over two or three years then there is a chance the Government, under the terms of the Closer Economic Relationship (CER), might invite Air New Zealand to provide competition for Australian, East-West and Ansett. Given your 19% shareholding in ANZ, would Qantas possibly look to setting up a 50:50 joint QF/TE domestic operation? JW: Being a director of Air New Zealand, I find it a little difficult to speculate on what that airline might wish to do given the opportunities of participation in the Australian domestic market. But given the circumstances of doing something in unison with Air New Zealand, if Air New Zealand thought it was viable and attractive to become an entrant in the Australian domestic market then maybe we would join them.

JT: Will domestic deregulation affect your present on carriage and joint marketing agreement with Ansett?

JW: Shouldn’t think so, there’s no reason why it should. We’ve got a good relationship with Ansett in exploiting our international interline opportunities to the extent that we can and seeing as we have no plans for setting up a domestic operation, we are going to need a strong domestic partner to work with and the Ansett group has so far proved their worth and against that background we don’t see any need to change.

JT: Does Ansett NZ get any of your on carriage in New Zealand or does it now all go to Air New Zealand?

JW: Ansett New Zealand gets a substantial share of our carriage. In fact prior to us getting the necessary approvals from the NZ government to take a shareholding in Air New Zealand, we were required to guarantee to continue an existing agreement we had with Ansett New Zealand whereby they would get preferential feed from our international operations into New Zealand.

That was the result of certain agreements reached between Sir Peter Abeles and David Lange – when he was PM – that were given considerable public airing at the time in New Zealand. At the moment we are required to honour those conditions that were imposed on us at the time as a prerequisite to our gaining a shareholding in Air New Zealand.

JT: How has the pilots’ dispute affected Qantas in the long term?

JW: The jury is still out in the long term but in the short term it’s had a devastating affect which you’re fully aware of. In the medium term we’ve lost 12 to 18 months’ growth of our business . In the longer term, if you go out four or five years from now the scars would have healed I think, but the greatest longterm effect is the immense damage it has done to the credibility of Australia as a destination, though I do believe that is recoverable in the longer term.

JT: I remember back in 1988 that it was quoted by senior QF executives that the restoration of the airline’s interline rights would be worth around $50m annually. · Has this held true and if so it must have been one area that actually did improve its revenue pool during the latter half of 1989.

JW: I’m not sure where the $50m figure came from but its definitely created benefits that have flown to our bottom line in the latter half of 89. We managed to fill the vast majority of our seats over domestic sectors with our own international traffic or international interline traffic, which is one of the reasons why we didn’t get into the business of other international carriers who were carrying purely domestic traffic. We could easily fill up with international traffic and that was where our priority lay to keep other tourists coming here to the extent they could and carry them around on our own services. That was a small plus during the time of the domestic pilots’ dispute but unfortunately it was swamped by the huge negatives of all the people who didn’t come here, plus the loss of forward bookings from the big tour wholesalers and convention organisers.

JT: Is Qantas presently evaluating new routes, such as to South America, a return in time to possibly South Africa, plus additional destinations in Europe?

JW: We have a joint venture with Aerolineas to South America and we are watching that, but the performance to date isn’t encouraging us to make concrete plans of starting up our own services in the next couple of years. On South Africa we are well satisfied with our own performance to Harari and that’s now up to two services a week and operating profitably. We can see growth opportunities there and we don’t see any real possibility of recommencing services to South Africa until such time as certain political events take place to the satisfaction of the Commonwealth and our owners.

You asked about Europe, we don’t see any new ports in the immediate future. We are now going through a period of consolidation in Europe. Growth opportunities are a little further down the track and will be largely dependent on the successful marketing of Australia as a tourist destination, while we feel that the best potential is in the north of Europe.

JT: Is your use of the Frankfurt hub in conjunction with Lufthansa working well?

JW: Not as well as I would !ike and that’s somewhat more to do with the state of the market than the validity of the concept. We are not growing as fast into the Frankfurt hub as we had planned. Mind you, we didn’t plan on the domestic pilots’ dispute and a few other things.

JT: What is the situation with Australia Asia Airlines?

JW: It’s all dressed up with nowhere to go. Purely it was establish!ld as a contingency exercise, but if that is the way we could operate services to Taiwan then we didn’t want to be slow out of the blocks when the referee blew the whistle and it’s ready to go, but at the moment the government agreements and clearances that are necessary have not been forthcoming. But if they are, Australia Asia is the vehicle and it’s now in a position where it could start at a moment’s notice.

JT: Is the sensitive area up in Taiwan or down here?

JW: The sensitivity is in Taiwan, Canberra and Beijing.

JT: Taiwan seems these days to be developing a closer relationship with Beijing than perhaps they used to.

JW: And I think they now will for the ties with Taipei and Beijing are becoming closer on many things. I think some of the sensitivities between them will recede in time and that some of the difficulties that people have to face in Canberra may become smaller.

JT: A few years ago there seemed a desired aim of flying an Australia/New York route with the SPs via Tahiti. This now seems to have faded away. Would Qantas look to again serving NY in its own right or will it now largely build upon its present joint on-carriage/marketing agreement with American Airlines?

JW: I think in the next few years it is going to be a matter of building on our established West Coast gateways with American Airlines. Should the New York market to Australia reach the size that it can viably support direct services then we would want to be in that, but the time frame for that is going to be measured as several years on current outlook terms.

JT: The two SPs and several older 7 47-200s are currently on the market as you build upon a late model 747/767 fleet. How seriously is Qantas evaluating alternative aircraft such as the MD-11/12, proposed 767-X and Airbus A330/340?

JW: Very seriously. We are currently in the early stages of that evaluation. By the end of this year I would believe that internally we will have completed all the necessary work and sometime in the first half of next year the results of that work and the deliberations of the board would probably be a matter of public record.

JT: Finally, in view of the damage done by the pilots’ dispute, the dramatic increase in fuel costs plus an accelerating re-equipment program, will Qantas show a net profit this year?

JW: As to the profit on the narrow base of running the airline before we take into account sale of aircraft and other things, it doesn’t look as if we will be profitable this year.

The sort of immense negative impact the pilots’ dispute has had plus some of the other things that have occurred have put us back many years. It is really too early to speculate on the ultimate bottom line. A breakeven or small profit is not currently beyond the realms of possibility but it will depend on a number of other activities that would augment the core business. Selling aircraft will help but without that sort of activity we are unlikely to have a positive result.

JT: The used 747-200 market has never been better at the moment. Are you looking at selling several in the next eighteen months?

JW: Probably four within the next year and maybe some more in the six months after that.

JT: And the SPs as well?

JW: T here’s not a great market for SPs. They are still a young aircraft and we believe, having tested the market, it might be preferable to keep the SPs as we could use them strategically and dispose of older 200s while there’s a strong market for them.