Is Qantas A Good Investment

The Region

Perhaps the brightest area in the world economy at present is our own region – that of Asia and the Pacific rim. Many of the countries closest to us – Hong Kong, Singapore, and Taiwan are enjoying the highest rates of economic growth anywhere in the world. South Korea is steadily increasing in importance, and the threat posed by North Korea appears, hopefully, to be fading. Other countries in the region such as Malaysia, Indonesia and Thailand are also continuing their rapid economic development. China is perhaps the most outstanding prospect of all, and is forecast to grow at over 10% during the next few years. The one disappointing country in the region at present is Japan, which is still struggling to return to positive growth. Whilst the recent earthquake in Kobe might reduce this even further.

Australia

Australia has done very well during the past year, achieving a growth rate of over 6% – higher than the USA, Western Europe or Japan, although this is not expected to be sustainable in the longer term. Most forecasts predict growth rates for Australia of around 4% over the next few years. It is also due to some good decisions made by the Australian Government during the last decade. It floated the dollar, deregulated the financial markets, lowered tariff barriers and encouraged Australian industry towards a mindset of international competitiveness. Overall, Australia is far more outward looking and export oriented than ever before. Hence the world as a whole is expected to do alright over the next few years, the region we live in is expected to do better than almost anywhere else, and Australia is ideally positioned to take advantage of this situation.

The Airline Industry

All of the above is not merely filling in the background – it is of direct relevance to the airline industry. Julius Maldutis, writing in Salomon Brothers’ Quarterly Global Aviation Review for the first quarter of 1994 says that “airline equities [shares] have become an excellent surrogate of national economic performance and the increased globalisation of business activity.” That means that if you think a particular country is going to do well and you want a piece of the action, then buy some of its airline shares. The Bureau of Transport and Communications Economics (BTCE) recently completed a major study of trends and issues in international aviation which found that “annual growth in aviation traffic is strongly influenced by annual growth in GDP (Gross Domestic Product- a measure of the size of the economy). When GDP growth rates increase (or decrease) traffic growth tends to increase (or decrease).” The report forecasts that “the highest growth rates in international aviation passenger [and cargo] traffic are forecast for routes within, and linked to, the Asia Pacific region … Airlines in the Asia Pacific region are set to become the largest carriers of international passenger traffic by the year 2001.” Note, however, that the above statement refers to traffic. What we are interested in is profits. And as has been demonstrated repeatedly around the world, not least in Australia, any mug can fill an aircraft with passengers. Making a profit out of them is quite a different proposition. Indeed, the BTCE report found that “despite the pattern of annual traffic growth and technological advances, the airline industry has recorded relatively low operating profit levels over the last two decades … in any one year between 25 and 33% of the airlines usually report an operating loss.” So this is a bit of a worry. On one hand, Qantas is located in a part of the world which is expected to grow more rapidly than any other. This growth is expected to result in more traffic for airlines in the region, and Qantas is therefore well positioned to take advantage of it. On the other hand, the industry to which Qantas belongs is one in which up to a third of the players in any year lose money. We will therefore need to look very closely at Qantas itself to decide what we think its prospects are in the increasingly competitive environment of the Asia-Pacific region.

Qantas Recent History

Often, a good indicator of the financial health of a company is its track record. The BTCE, in its “International Aviation” Report (No. 86, December 1993) found that Qantas’ operating expenses per TKA (tonne kilometre available) were less than world average operating expenses per TKA for the entire period 1979-1992. It suggested that this was due to Qantas’ average stage lengths being among the longest in the world. Over the long term the BTCE observed that Qantas’ efficiency has improved, as has the world average. This would have been good, if it were not that Qantas’ revenues per TKA also remained consistently below the world average over the period. Over most of this period, there was at best a small gap between operating revenues and operating expenses per TKA. Usually this is what led to relatively small operating profits during the period, although it also resulted in the largest loss of the eleven airlines examined in the BTCE’s study. Although Qantas’ performance in the past can only be at best described as mediocre, a glance at its annual reports over the last few years does at least indicate some encouraging trends. Earnings have been improving over recent years. When analysing and comparing airlines, to get a good impression of underlying operational performance it is important to remove tax effects (which vary from country to country, and year to year) and one off items such as profits from selling off aircraft. One should also add back interest charges, expenses due to operating leases for aircraft, depreciation and amortisation charges. This removes any variations in profits which may be caused by the arrangements for financing of aircraft, which may differ from one airline to the next. The resulting figure is called EBDRIT, which stands for “Earnings Before Debt, Rentals, Interest and Tax.” Qantas’ EBDRIT was in decline until 1990/91, but since then has been steadily improving. Another important indicator is the level of debt being carried by the company. Qantas’ debt had been rising steadily, but now appears to be finally reducing. The “circuit breaker” was the equity injection of $1.35 billion by the Government during 1992/93 (and looking at the way the debt was heading, just in the nick of time). Since this equity injection, it appears that Qantas has finally begun to bring its debt under control. As well as reducing the total overall debt level, this has brought Qantas’ debt/equity ratio back towards a more satisfactory level. Although this analysis of recent history produces encouraging results, the problem is that the company in its present form is in many ways almost unrecognisable from what it was just a couple of years earlier.

Recent Changes

Within the space of less than two years, we have seen: The acquisition of Australian Airlines and its subsidiary airlines; The injection of $1.35 billion additional capital by the Commonwealth Government; The purchase of one quarter of the airline’s equity by British Airways; Out of the 16 member Board, seven resignations and nine appointments; The appointment of a new Chairman – Gary Pemberton, the widely respected former Chairman of Brambles – a large international transport company; The appointment of James Strong, former Chief Executive of Australian Airlines, as Chief Executive; The departure and replacement of almost all of Qantas’ top team of executives in less than a year; The securing of a “BBB+” credit rating for its unsecured senior debt from the New York based Standard & Poors ratings group. All these changes make it very important that we concentrate on the company in its present form and look at where it is going, not dwelling too long on what it was and where it has been. We need to take the view of the pilot, not the tail gunner.

Recent Changes In More Detail: What Do They Mean?

The acquisition of Australian Airlines was probably the most significant change for Qantas in many years. And perhaps the most challenging. Sources within the Dept of Finance had described Australian as a “basket case”, requiring so much government support that it really had more in common with the State Rail Authority than its commercial airline competitors. However, it smartened up its act quite a bit during deregulation, and now the acquisition appears to have paid off, with the former domestic airline now more than pulling its weight in contributing to Qantas’ profits.

Is Qantas Its Own Worst Enemy? An Aa Commentary

Imagine you are a business executive with interests that take you to one or more major European cities several times a year. You don’t want to go to London and naturally time is precious so you want to track direct with the least stops and the greatest frequency of service. Would you fly Qantas – no way! Not very patriotic is it, but sadly true because according to DoT data half the Australia to Europe traffic each year does not even want to go near Mother England. Though try getting a QF executive to admit that there is a potential market in non UK Europe and well, forget it! So a significant proportion of our business community is literally forced to fly with Singapore, Malaysian, Thai or Cathay and perhaps several lesser carriers to their destinations in Europe, one of our biggest trading partners. And these aren’t backpackers, we are talking about high yield full fare front of the cabin frequent flyers. The four primary carriers mentioned collectively run daily nonstops from their respective Asian hubs direct to Amsterdam, Paris, Madrid, Zurich, Vienna, Stockholm, Frankfurt and Rome. Of these only the latter two are served by Qantas, and only on a five times and twice weekly basis. This is a tragedy for Australia’s aviation interests as the one and a half million passengers who will travel to non British Europe this year are literally forced onto other carriers to avoid the long haul to a distant land often far to the west of where they really need and want to be. But of course there is no market there, is there? There was no market in a nonstop Sydney/Los Angeles 747SP service in the early eighties either. Until, that is, when PanAm launched its SPs onto the route and Qantas was obliged, kicking and screaming, to reciprocate. Surprise, surprise, the pax loved it. Loved it so much that today it is the way to cross the Pacific while traffic grows in leaps and bounds to satisfy enthusiastic consumer demand. Build it and they will come. Another trait within the QF corporate mentality that seems to survive despite however many upper level management purges that take place over the years is the willingness to live with a market sector that they claim ‘traditionally loses money’. We had that for decades on the Pacific. Nowadays that route at Australian Aviation July 1995 least seems to be suddenly profitable though it still did not stop QF from killing off their services to San Francisco early last year. The day this gem was announced they say you could hear the celebrations at United’s Sydney HQ a block away! One man’s loss is usually another’s gain and United quickly moved to prove the point by launching its own Sydney/San Francisco 747-400 nonstops with results that we believe are far in excess of even the most optimistic projections from what is the world’s largest airline. UAL did not understand why QF threw away this under serviced market and still doesn’t – nor for that matter do we. It is, for instance, interesting to note that United has now gone to daily frequencies on this sector, doubling the capacity that QF execs obviously deemed not viable! It gets better though when QF actually states as recently as last October that it is losing money on the lifeblood of its operations – the Kangaroo Route – and needs to link with British Airways to regain profitability on what has always been its premier route. This writer would be more ready to believe in the Man in The Moon and the Tooth Fairy before believing that Qantas perennially loses on a route where it holds ascendancy by a very wide margin and now has a domestic traffic feed second to none. Fortunately Professor Fels of the Trade Practices Commission wasn’t born yesterday and quite rightly stymied this blatant attempt to seriously reduce competition on the route, though both QF and BA fought hard to have the decision overturned and eventually won out with TPC approval in May, albeit with fairly stringent competitive clauses attached. What Qantas has to appreciate is that its implications of deliberately choosing to not service a market also costs it money in other ways. For instance, the executive we mentioned earlier, like the vast majority of business travellers, is a member of a frequent flyer club. Is he in the Qantas one, no way, he or she is in Ansett. You don’t need to be a genius to realise that this person also probably travels a lot domestically so his or her trade is important. That person flies Ansett domestically because he or she can then avail themselves to the fastest way to Europe via Cathay, Malaysian or Singapore while at the same time gaining valuable frequent flyer points all the way. Out of Asia, that person can also fly with Lauda, Swissair or ANA and still get their Ansett points. With Qantas it is either QF or BA, pretty useless if your destination is another half day’s travel away if you choose to fly either carrier instead of one of the one stop Australia/Europe Asian expresses. So that person flies Ansett within Australia instead of Qantas and all because the airline’s senior management seemingly continues to believe that the outside world really revolves around just three cities – LA, Tokyo and London. Imagine just for a moment a different scenario. Imagine that QF ran its 747-400s to London one stop as it does now but also fed its Bangkok hub with daily A340-300s out of Europe. An A340 in QF livery. With lateral thinking the long term potential for capturing significant high yield passenger and freight markets with this type of long range point to point aircraft are high indeed (300 three class pax, same as Singapore gets next year). Qantas would then still rule the roost on the important Australia/UK route in addition to offering a highly viable alternative to forcing Australians to fly with its competitors by at last having both frequency and short duration flights from Australia into the major capitals of Europe. The benefit of an ultra long haul aircraft like the A340 is that when you don’t use its maximum range potential you can effectively use all of the revenue payload available for passengers and high value freight rather than filling the fuel tanks first then downloading revenue producing payload to meet the range requirements. Only the A340 and the 747-400 have this ability (the MD-11 comes close and Boeing claims the B Market 777 will from 1997/98) and for many routes the 747 is simply too big to be profitable while offering the all important frequency of service demanded by the business market. Enhanced frequency between two ports not only increases the market size, through stimulating new traffic, but also reduces the airline’s overall expense of serving that port while also increasing the market share that the high frequency airline enjoys as it becomes the dominant carrier on that route. “Haha!” They will say, “look at Paris, nobody wants to go there, we lost money on that one.” Naturally they didn’t get the traffic. From Melbourne or Sydney you had to endure between four and five stops and upwards of a 30 hour flight. Business frequent flyers aren’t stupid! Feeding Bangkok (or Singapore) though is a different matter though can you imagine Qantas management getting a handle on this – no way – the three city scenario is just too deeply etched in their corporate persona. It would be about as easy as getting them to seriously consider buying jets from somewhere other than Seattle. The past is full of lessons. In 1983 Qantas flew just three services a week to Japan, it is now approaching three dozen. Just four years ago it didn’t even fly to Taiwan and today that market is booming. Though politics didn’t help here it could have been speeded along significantly if QF management had taken the bit between its teeth. No such problems with Korea but again no service and almost no traffic. Today we have a booming new market. China is beyond understanding. Abandoned in 1987 as not worth the effort (probably half right at the time) but totally disregarded up till last year when it finally filtered through that this immense market, which will probably be the economic dynamo of the world within half a decade, was being totally lost to Qantas. Begrudgingly Qantas has returned (courtesy of Australian Airlines’ demise) with a single 767 frequency a week. A daily might be a more appropriate way to start and if the bilateral doesn’t allow it then move to fix the problem, not ignore the market. After all, if the China market wasn’t a potential goldmine, then why has Hong Kong traffic soared so much over the past few years? Not all those HK travellers are going there to eat on a floating restaurant and buy watches! And so it goes on. If Qantas does have a perennial blind spot it is simply that it persists in deliberately ignoring a number of potentially viable markets worldwide, largely because it cannot break its 747/767 mindset via aircraft that just might be able to offer some interesting and profitable solutions to its problems. Perhaps of greater concern to Qantas is the gaggle of smaller regional airlines which Qantas has inherited in the process. Although there are now a lot more aircraft with red tails flying around, there has been little or no integration of these airlines into Qantas’ operations, maintenance systems or management. Their pilots, for instance, all remain in completely separate organisations. These new airlines offer Qantas management a significant challenge to its corporate image. Red tails and kangaroos are one thing, but weaving all these smaller operators into a seamless web of identifiable Qantas product is perhaps not so straightforward. The other major challenge must be to Qantas’ priceless safety reputation. There is nothing to say that any of these airlines are in any way unsafe, or less safe, than their parent. However, the different nature of their operations, and their disparate individual company cultures, will inevitably invite some close examination. In the midst of the CAA’s recent travails, Qantas has already been caught in the glare of the spotlight, firstly concerning some trouble with alleged unauthorised repairs carried out on an Airlink BAe-146 in the west, and another incident concerning a pilot’s decision to press on despite technical problems which some consider should have grounded the aircraft. Whatever the outcome of these investigations, it is undeniable that Qantas is now a far more diverse organisation than it was. The airline now finds itself flying a wide range of aircraft types, flown by pilots in different organisations, on operations which make it far more challenging to maintain uniform standards in checking and training.

They now operate into outback and island strips, some quite short, many uncontrolled, and with limited maintenance and support facilities. Some of these operations are a long way from that of flying a 747, wings level, on a ten mile, final approach on the ILS at an international airport. This wide range of different operations now being conducted under their banner must be causing a few sleepless nights for Qantas management. Qantas affectionately refers to its two 747SPs as Heckle and Jeckyll. The aircraft were originally purchased in the late seventies specifically for the short haul, short field Wellington/Sydney service and it was only via prodding from a forward thinking PanAm that the stubby Jumbos were finally deployed on the trans Pacific nonstops that they were originally designed for. Today, after years of trying in vain to find a buyer, the two SPs are flown on the Australia/Taiwan route in the colours of Qantas subsidiary Australia Asia. (Rob Finlayson) Australian Aviation July 1995. This wide range of different operations now being conducted under their banner must be causing a few sleepless nights for Qantas management.

The “BBB+” (investment grade) credit rating was a significant achievement for the company. Qantas’ then managing director, John Ward, commented at the time that only three of the world’s airlines have higher credit ratings than Qantas: British Airways (now a 25% shareholder in Qantas), Japan Airlines (which wouldn’t achieve this rating presently) and Southwest Airlines, the only profitable substantial US carrier. However, in its statement in support of its determination, Standard & Poors identified, among other things, perhaps the one real asset which assigns significant value to Qantas: the “regulatory support afforded the company by Australia’s international air services agreements.” Indeed, even after Qantas is floated, it will continue to enjoy the ongoing protection of the Australian Government through its role of negotiating, on Qantas’ behalf, the bilateral agreements which govern almost all of the world’s international air transport industry. These arrangements may not look exactly like the old style tariff barriers which allowed much of Australian industry to slide into complacency, decay and international non competitiveness, but protection it is nevertheless. Although this Government protection may help secure the Qantas’ debt, it is definitely a worry for investors. Protection may assure profits in the short term, but in the longer term it inevitably leads to under performance. It may well be true that airlines throughout the world are protected in one way or another from those nasty foreign competitors, but it needs to be remembered that investors don’t need to invest in airlines at all. They can buy media stocks, or shares in banks, or mining companies, or whatever has the potential to pay the best return. It is not enough for Qantas to be a successful and profitable airline. It needs to be a company which earns sufficiently high returns on equity – and pay dividends – that investors will be attracted in the first place, and stay with it for the long term. Protection is not the way of doing it. It looks good but it’s not. It’s very bad. More recently, we saw the most blatant and crude attempt to prop up Qantas’ future profits when the Government reneged on its agreement to allow Air New Zealand access to Australian skies. This is once again a manifestation of the relationship between Qantas and the Government which has persisted for Qantas’ Australian Airlines inherited domestic fleet is largely based upon the Boeing 737. Backing up the 34 strong 737-300/400 fleet are four A300s ex long haul 767-200s and -300s, plus the odd peak period 747 service with more 737s and 767-300ERs on order. (Qantas) many years, and apparently remains alive and well – where the Government will cheerfully sacrifice the national economy in order to protect the profits of Qantas. The decision to exclude Air New Zealand will not benefit the Australian economy. It won’t help the millions of Australian air travellers who might otherwise enjoy cheaper fares, or the businesses who must buy tickets from the “heavenly twins”, or the tourism industry which depends so heavily on air transport. Strong’s appointment as Chief Executive certainly generated some media comment at the time, mostly revolving around the polarised opinions of his capabilities as a manager. One view was that he had proved himself by single handedly dragging the old TAA out of the doldrums and recasting it as a world competitive domestic airline. Another was that he did no more than unimaginatively apply the formula devised by Scandinavian Airline Systems’ Carl Jansson to TAA, producing the same result – a change in image and market perception, without actually tackling the underlying structural issues which faced the airline. It must be said, however, that during his time in the left hand seat so far, he hasn’t put a foot wrong, he has got results, and his critics seem to have gone rather quiet. Nevertheless, a sizeable amount of analysts’ attention will be directed towards the issue of just how good the management team is. And at the moment, there are so many new faces that this is very difficult to assess how they will perform. The numerous changes going on are an indicator of perhaps the most significant challenge facing Qantas – the need for a total cultural change in the management and staff of the airline. It needs to make the painful transition from a cosy, cosseted, protected, Government owned organisation, looking at times more like a Government department than a commercial enterprise – to a fully commercial, internationally competitive, profitable company which earns sufficient returns on its equity that investors will want to buy shares in it.

 

 

This is no easy task. There are still plenty of people in Qantas who believe that the maximising of profits is somehow immoral – that companies should behave more like Government social policy departments and put consideration of social impact, public benefit, industry policy and so on ahead of profit. Many believe they are simply entitled to their job. There are divisions of Qantas which still base pay and promotion on seniority, rather than merit. In some areas of Qantas, these people are currently being weeded out although it will be a slow process. In other areas the process hasn’t even started. The purchase of one quarter of the airline’s equity by British Airways has yet to have any discernible impact. One major outcome of this was to have been a price fixing arrangement on the Kangaroo Route to London. Unfortunately, Qantas rather messed up its submission to the Trade Practices Commission by promising lower ticket prices for consumers, but then giving the game away by admitting that the deal would assist the public float (ie. maximise profits, and therefore the sale price of the airline, by allowing ticket sales to be increased). The TPC ruled in October 1994 that the arrangement was not on though has since softened its stance albeit with stringent anti monopoly requirements. Strategically, however, the original decision to sell one quarter of the airline to BA was interesting. At the time, the Government had the choice of turning Qantas into the international arm of a similarly sized regional carrier (Singapore Airlines), but instead it has become essentially the regional arm of a much larger international carrier. Given the generally lower operating costs of Asian airlines against which it will have to compete in the future, investors may have to contemplate whether Qantas can take on its rivals in their home markets and still increase its profits to more satisfactory levels.

More Recently . . .

On September 21, 1994 Qantas reported a record pretax profit from operations of $301.8 million – a $269 million improvement over the previous year’s figure of $32.9 million. Operating profit before depreciation and interest increased by over 35% in comparison with the previous year. Qantas Chairman Gary Pemberton said that the result “demonstrates we are on line towards the targets we have set ourselves. Our aim has been to show the financial markets we are trending in the right direction and I believe this result achieves that.” He attributed the improvement to a combination of factors including improved trading conditions in Australia and overseas resulting in increased passenger loads, better aircraft utilisation and high load factors. Pemberton went on to say that “future prospects will depend to a considerable extent on trends in the aviation market particularly a continued strengthening in market demand and the maintenance of reasonable yields.” He noted that costs had increased during the year, although by less than the increase in capacity: “With strengthening of yield in prospect, further reductions in overall unit cost levels will continue to be a major priority.” This succinctly sums up Qantas’ key problem. Existing capacity levels in the region will prevent yields from improving in the short to medium term. Intense competition is likely to hold fares down. The opportunity for price fixing on the Kangaroo Route has been blocked by the TPC in its May ’95 approval. The only way to go is to reduce costs. That primarily means labour costs, which, like any major airline, form the largest proportion of Qantas’ total expenditure. And that is the challenge. Of more recent importance of course was the release of the half year results to December 31 1994. A pretax return of $202.9m on revenue of $3672m for a net result of $128.5m was certainly an improvement though not generally as good as was hoped for by many. The first half is traditionally also the strongest though with inbound and domestic growth being what it presently is this might well be the time when this long held theory takes a dive. Certainly Qantas would wish it so. On this half year performance it would thus be expected that a full 1994/95 year return of a pretax result in the region of $350-380m might be on the cards, somewhat short of the $400-450m that Gary Pemberton alluded to back in 1993 as what was required for Qantas to go to the market with all burners lit. Based however on a full year return of $350m to $400m analysts feel that the float could raise something between $2.25bn and $3.0bn. However, this is really academic as these results won’t be released till months after the float is finalised in July or August. In the long term however, Qantas will need to produce a pretax operating profit in the order of $500m in 1996 and $600m the year after if it is to be rightfully considered as one of the world’s truly viable airlines befitting its present status as the 11th largest carrier (in RPK terms) in the world. This is a big ask though highly possible given the steadily strengthening Australian domestic economy with its resultant increase in premium class and full fare economy traffic, the massive surge in domestic tourism and an inflow of overseas visitors that is the envy of the world. By 2001 Qantas will probably log twice the RPKs that it did last year, as for that matter will Ansett. Growth of this magnitude in the most dynamic region of the world really makes it very difficult to be a long term loser. Confusing the issue though is the imminent purchase of half of Ansett Australia by Air New Zealand. The opportunities this allows Qantas’ rival will indeed be many in the coming years through this liaison. What will happen to Qantas’ 19.9% shareholding in ANZ will also be of interest though this would certainly have to be disposed of before the competitive aspects of the deal could be taken seriously. Also complicating things is the fact that the Government, in its desperate quest for cash rather than cutting its expenditure, is taking nearly $6bn of Government owned instrumentalities to the marketplace this year. On top of that the private sector is looking at a further $13bn to $15bn in equity raisings. Indeed, some traders are understandably wondering just where all this money is coming from. On the positive side though is the TPC’s recent approval of the joint BA/QF linking on the Kangaroo Route, a move that must surely add some extra value to the airline’s ultimate value. The government will, of course, raise additional revenue on the sale by having recently increased the foreign ownership stake from 35% to 49%.

Conclusion

So is Qantas a good investment? It’s really rather hard to say. On the positive side, costs have been reducing and profits have been improving. The Government has been beavering away at trying to protect Qantas’ turf to defend it against competitors, and this is likely to continue. The number of people flying to and from (and within) Australia has increased dramatically over the last few years. Furthermore, Qantas’ share of the Australian international travel market has increased, standing at 40.6% for 1993/94. This has happened at a time when other carriers have lost market share, or withdrawn altogether. More growth is forecast, with the Federal Government’s Tourism Forecasting Council predicting that the number of tourists visiting Australia will double in the next half decade. On the negative side, although profits have been improving, they still have quite a long way to go before becoming really attractive to investors. And the Government’s attempts at protection may have the detrimental effect in the longer term of eroding Qantas’ competitiveness, reducing potential returns for investors. Unfortunately, there’s more to the negative side. The airline industry generally is one where even when traffic increases, there is no guarantee of accompanying rises in profits. And Qantas has never distinguished itself in the past as an airline which is particularly noteworthy in its ability to cut costs or make strong profits even in good times. Even if we accept that Qantas has the potential to be a very good airline, it really needs to become a good company. Most investors don’t care if the company they are investing in flies aircraft or cleans out grease traps – what counts is the return on investment. And this is where Qantas is going to find it most difficult. Qantas must earn as good a return as BHP, or ANZ, or CRA, or News Corporation, not to mention overseas companies that are listed on the world’s stock markets. It can’t just compare itself to other airlines. To earn the return on shareholders’ funds that the global market will demand, it will have to just about double its profits from the present level. This is not an impossible task. Indeed, one would have to say that Qantas is heading in the right direction. But what it comes down to is that investors will be betting on the abilities of the management team, starting with Chairman Gary Pemberton, and Chief Executive James Strong, to deliver the goods. Can they do it? Are they equal to the challenge? Each investor will have to decide for themselves.