Disaster averted?

The bid collapsed on May 8 with APA conceding defeat in what had become a public relations nightmare.

It is impossible to know exactly what may have transpired had the deal gone through, but one aspect of the sub-prime disaster in the US has been its global ramifications.

Australians have had a daily dose of new revelations of how the intricate web of financing has struck down some the world’s most respected financial institutions and their CEOs.

One aspect of the Qantas deal that made the public and government concerned were the almost weekly revelations of how the deal was to work.

At the time Australian Aviation wrote: “The incredible paradox here is that Qantas has survived nothing but headwinds – in the form of wars, fuel prices, terrorism, SARS and tsunamis – because of its low debt levels, courtesy of tight fiscal management through the 1990s after its IPO in 1994. And only a reckless optimist would suggest that there is going to be a 180 degree change in the winds. Sure the headwinds will be different but they will be there, simply because they always have been. ” And the headwinds were indeed different – soaring fuel prices, LCC Tiger Airways and a severe credit crunch, resulting in, among many other things, the virtual collapse of equity buyouts.

In February 2007, then Treasurer Peter Costello warned on ABC Radio that the “70 per cent debt level proposed for Qantas by APA should be concerning for the Qantas board. ” He also told The Australian that “people ought to remind themselves they are living in a golden period with low commercial interest rates, small spreads and high profits and they ought to tuck away enough to weather a bit of a shock, and the shock could come from around the world. ” And even the Reserve Bank weighed in, suggesting that the debt-fuelled private equity boom was a possible risk to “macro-economic stability. ” In August last year equity buyouts died virtually overnight and it is quite possible that the Qantas deal would not have been completed by that date.

If international experience is any guide the deal would have been renegotiated or would have collapsed.

If it had gone through the new owners may have found themselves scrambling to refinance the deal, with possible fire sale implications for some assets.

Orders for A380s, 787s, A320s and 737s – which all require progress payments – may have been in serious doubt or scaled back dramatically – if they hadn’t been cancelled already! A sobering reminder of the effect of the sub-prime fiasco and what might have happened to Qantas has been the rollercoaster ride for Allco’s shares during January as the stock market took a drubbing.

According to a Reuters report, while Allco Finance Group Ltd was not aware of any reason for the sharp fall in its share price, analysts had other ideas.

Reuters quoted Shaw Stock Broking’s manager of institutional sales Jamie Spiteri saying, “It’s [Allco’s share decline] largely to do with all the concern and uncertainty of what is perceived to be a complicated financial organisation which has got layers of debt which are not overly transparent. The market is getting nervous about such organisations. ” While Allco Finance Group bounced back the following day recovering some ground, the shares were well off – by 83 per cent – the highs of 12 months earlier, suggested Bloomberg.

Regardless, the last thing Australia wants is its primary and national airline hostage to fickle global equity markets.

Next time the Australian government needs to be far more robust in the national interest test with major infrastructure assets.