Issue 301: Head to Head

However, according to Fairfax Media’s Adele Ferguson, former Qantas executive Peter Gregg is denying that he’s supporting the plan to buy a stake in Qantas, secure a board seat and change its strategic direction. However he has not denied giving his opinion to Qantas investors when asked for it.

The situation has been clouded by some erroneous reporting such as meetings between the pilots’ union and Geoff Dixon and random inflammatory comments from some of the so-called investors. At press time none of these former executives or investors had made their views public and any discussions between the author and other aviation journalists and some of the investors were off the record.

It would appear the main gripe they have with Qantas CEO Alan Joyce is that he cancelled 35 Boeing 787s in August and inked a deal with Emirates in October.

Both deals are game changing for Qantas, but are they changing the game the right way?

It is well known that Dixon’s way of dealing with Qantas’s high cost base was to grow the airline with mega aircraft orders to get economies of scale. Just after Ansett collapsed in 2002 there was a massive order for 60 737s followed by the commitment for 115 787s in 2005 and another mega order for 737s and A320s in 2008.

The current management appears to be reversing that strategy in the international space.

It is believed Dixon is not happy about the 787 cancellation as he sees the aircraft as a game changer, the likes of which the industry hasn’t seen in decades. The marketing and commercial animal in Dixon probably sees what the 787 would bring to Qantas.

This writer certainly has issues with the cancellation of the 787, particularly after the feedback from All Nippon Airways that confirms the aircraft is a passenger magnet.

It is one of those, which comes first – the passengers or the product – questions.

However, at the same time Joyce has to fix Qantas International, which has not made money for over seven years, it is reported.

There is also disquiet about the Emirates deal – although it is understood that some of the agitating investors concede much of the detail is still to be spelt out by Qantas. That disquiet is hard to fathom and possibly can only be explained by a deep mistrust of Emirates.

Alliances are always fraught with danger in the airline industry with airlines swapping partners at will. However, Emirates is not normally a willing partner and has shunned, till now, all attempts to lure it into a global alliance. The fact that it has embraced the Qantas deal is significant and it is hard to see how it is not a win-win for all concerned. Certainly Qantas gains access to Emirates’ much lower cost structure, a massive fleet of 777s and a huge network not only in Europe but North Africa and the Middle East.

There may be concerns that Qantas is allowing Emirates access to its corporate database, but many of those flyers are already flying Emirates anyway. It would be fascinating to find out how many Qantas frequent flyers are also members of Emirates’ Skywards frequent flyer scheme. The level of public interest in the Qantas / Emirates tie-up is unprecedented in the author’s experience with numerous Qantas frequent flyers calling to find out how soon they can use their points on Emirates.

Leaving aside the differences in strategies clouding the investors yet-to-be-announced pitch, is the fiasco that was Aviation Partners Australia’s bid in 2007. That $11 billion bid, funded mostly with debt, carried a $100 million success bonus to Qantas executives and a $5.45 share offer. The only problem was that if it had succeeded Qantas would have crashed and burned in the 2008 GFC.

While Joyce again opted for the nuclear option to try and flush out the plotters it hasn’t had the same impact as grounding the airline in 2011 to nix the unions.

Commentator Michael West says this time “it looks petulant. It takes Geoff and his mates Singo, Mark Carnegie and Peter Gregg too seriously. The lads are pretty good at getting yarns in the press mooting what they might do if they had a lazy $3 billion. That’s a far cry from a credible offer for the national carrier. Singo and Carnegie are linked to every second deal in town.”

And it is entirely possible that an over-exuberant media may be making more out of this than is reality. However, Dixon had apparently excluded himself from Tourism Australia meetings that involved Qantas, which adds credibility to the “plotting” theories.

The Weekend Australian carried a story on December 1 saying Carnegie had intensified efforts to lure more investors into pressuring the Qantas board for a change in strategy, following the move by Joyce to pull funds out of Tourism Australia. Carnegie, the newspaper said, “is understood to be hoping Joyce’s surprise move to pull a $44 million three-year marketing agreement from Tourism Australia could help arguments about the need for a change in strategy for the airline.

“Critics have seen the move as an overreaction by Joyce given the Tourism Australia board and Tourism Minister Martin Ferguson are publicly backing Dixon, who has been accused by Qantas of potential conflicts of interest given his close association with Carnegie,” the paper said. Some estimates put the level of influence of the APA MK 2 group in Qantas as high as 16 per cent – but most suggest it is in single figures.

According to The Weekend Australian the push by the Dixon/Carnegie group is being privately criticised by some. One investment banker described the group as “Dad’s Army”.

“Dixon ran the airline for a long time,” the investment banker told The Weekend Australian. “He should go back to running his pubs. It’s very poor behavior.”

Former British Airways chief executive Rod Eddington told The Australian’s and National Aviation Press Club’s President Steve Creedy that he had not been approached by the consortium or anybody outside the consortium acting on its behalf.

“And if they did, I’d simply tell them I’ve retired from the airline business. I’m happy to leave it for the next generation,” he told Creedy.

Of course the entire play may just be that – an exercise to drive up the share price and see what happens. It is known several of the players bought in at around $1.00 so they’ve already made a 30-something per cent gain.

Several credible industry figures told Australian Aviation they do not believe Dixon and his group will make a play for Qantas. The Weekend Australian also raised the interesting angle that Dixon may be motivated by “bad blood” between himself and Qantas chairman Leigh Clifford.

Clifford took a pot shot at the previous management at this year’s annual meeting, saying the Airline Partners Australia private equity bid had distracted the company. “Important reforms that were not undertaken in the pre-GFC period are now being made, with a new management structure, new technology, more responsive customer service and more efficient operations,” he said.

The debate on the future of Qantas also raises once again the issue of whether the national carrier would be better off in government hands free of the whims of the stock market.

The extraordinary success of Emirates, Etihad and Singapore Airlines on one hand and Air New Zealand on the other show what can be done for airlines both large and small despite being owned by governments.

The airline industry is a long-term high capital industry in a short-term instant gratification world – the two are incompatible. Those wanting instant gratification can see the airline is trading at roughly half its real value, has $3 billion in cash and that the sale of the Qantas frequent flyer program and Jetstar might net $3 billion. But after all that Australia is left with nothing.

“The airline industry is a long-term high capital industry in a short-term instant gratification world.”

Sure Joyce has had some missteps like the Malaysian adventure with the Red Q full-service airline, but no-one ever gets it right all the time. He is also facing some of the toughest trading conditions ever with a major restructure of the international division and unprecedented competition both in the international area and on the domestic front.

Let’s see if he can get the game-changing Emirates deal over the line.