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Analysts expect little interest in Qantas International

written by australianaviation.com.au | September 2, 2014
A Qantas A380 at Dubai. (Rob Finlayson)
A Qantas A380 at Dubai. (Rob Finlayson)

If not Emirates, then who? That’s has been one of the questions surrounding Qantas Airways after the airline floated a proposed new corporate structure for its international operations in a bid to open itself up to further investment.

The answer, it seems, is no one. Not yet anyway.

The move to split its domestic and international operations came after federal parliament moved to relax parts of the Qantas Sale Act – no longer is a single foreign carrier restricted to a maximum 25 per cent stake, while the 35 per cent limit on total foreign airline ownership was also lifted. But the 49 per cent total foreign ownership cap remains.

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While Qantas has offered few specifics about the new international company – questions such as would it have its own Air Operator’s Certificate, would it be publicly listed and how much would the airline group want to hold of both its domestic and international arms would for now remain unanswered – chief executive Alan Joyce said he expected interest from offshore.

“Those options could be mixed and varied and we’re not going to speculate on how they could occur, but this is aimed at allowing us to seek further investment – future investment around the international business,” Joyce said after announcing a full year loss for 2013/14 on Thursday.

In the days after the proposed split was announced, attention turned to Emirates, given the Dubai-carrier’s deep alliance with the Flying Kangaroo that was forged in 2013.

However, Emirates has long maintained that it is not interested in an equity stake and that stance was reaffirmed overnight when Emirates chief commercial officer Thierry Antinori told the Reuters news agency: “We buy planes and invest in products; we do not buy shares.”

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So who else could be in the frame?

Neil Hansford, the chairman of aviation consultancy Strategic Aviation Solutions, doubted there would be an airline willing to invest in Qantas International given its current predicament.

“I can’t see any other airline having any interest of buying into Qantas,” Hansford said on Tuesday.

“The international operations have nowhere to go. They have been forced off the Kangaroo route and they used to make a third of their profit on the Pacific route and that has gone away now as well.”

However, the domestic business still had plenty of positives despite the struggles in recent times due to a flood of extra seats in the local market, the mining boom coming off the boil and weak consumer confidence.

Mint Asset investment analyst Greg Fraser said a new equity investor in Qantas International, whether a foreign carrier or overseas fund manager, did not solve all the airline’s issues.

“It’s not a straightforward thing to say that simply raising more equity having split the airline into two is the answer to all their problems,” Fraser said on Tuesday.

“I think there is a multitude of factors that they continue to have to address, such as the cost of operations, the cost of the fuel that they buy and all the standard things of operating an airline.

“I don’t think it is the panacea that some people in the market think it might be.”

One aviation analyst, who declined to be named, suggested any foreign airline who chose to invest as an equity partner in Qantas may find the Flying Kangaroo’s deep (non-equity) alliance with Emirates a hinderance to working as closely as they would like.

“The relationship with Emirates is pretty much the poison pill for anybody else to buy into Qantas International I would have thought,” the analyst said.

CAPA – Centre for Aviation said in a research note after the changes to the Qantas Sale Act were announced there “would certainly be interested airline investors” if the 49 per cent cap on foreign ownership was lifted, with Emirates on the top of the list.

“Given the close and deepening tie with Emirates, it is becoming highly unlikely that the Gulf carrier would not join Qantas’s share register should there be a substantial shift in the government’s position,” CAPA said on July 22.

CAPA also noted the rise of Chinese airlines such as China Southern – which had considered taking a 10 to 15 per cent stake in Qantas in 2013 but went no further than merely looking – and the impact they would have on the industry in the years to come.

“There are the fast growing Chinese airlines; they will undoubtedly become major forces in international aviation by the end of this decade and will be investing in foreign airlines as part of their global spread,” CAPA said.

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8 Comments

  • Andrew

    says:

    Good write up Jordan!

  • peter

    says:

    Of course, it had to come to this. When you outsource your aircraft servicing, staffing, customer help line and just about every other variable, then you cut staff numbers, routes and new aircraft that would actually make the company more profitable and the experience better, then after all the damage is done and you’ve outsourced the blame to fuel prices, GFC, competition etc, then maybe the reality is that it’s time to outsource the board and especially the chairman…….maybe to Air New Zealand. Woops, maybe they’d actually make a go of it, but my guess is they’re too intelligent to touch it, even at a bargain basement price. Sure, sell some shares to China, that will really keep any remaining clients loyal ( ??? ).

  • Neil Hansford

    says:

    Jordan, Its one thing to try and find a partner in the “fire sale” but how much of a present and future problem is the pro-rating agreement with Emirates.
    The more pax that are originated on a QF domestic sector then onto EK or fed into a domestic sector from EK the more potential there is for the Qantas international performance cancer to spread into the QF Mainline and Qantaslink businesses that at least have a reasonable future.
    If there isn’t a minimum pro-rate to Qantas then the more traffic that EK generate the more QF domestic will face declining yield where they are carrying passengers for far less than they are prepared to discount to their loyal domestic customer base.
    When will there be acceptance that the Qantas international business model, built around the A380, is broken and needs ma complete rework by new management and board.

  • John

    says:

    Neil,
    Why is the international business model broken because of the 380?

    I can assure you that with out the 380, Qantas would be going backward across the Pacific!
    Qantas have only 12 380s, so i dont believe the international business model is totally built around the 380.
    Lets remember by now, if not for Boeings delays,it would have had a significant number of 787s flying internationally!

    Re Emirates, given that this Airline is,or will become the dominant force in Global Aviation,for the reason that never in the history of Aviation, has one airline ordered, nearly half the total order book for the worlds largest Aircraft!
    And then throw in 150 777Xs!

    So after Virgin did their deal with Etihad, i believe Qantas didnt have much choice!

    However i take your point, the issue for Qantas is the detail of the Emirates agreement, and as you say,amongst other things, what sort of pro rates are Qantas getting on the domestic sectors?

  • Lofty

    says:

    I just load these airplanes swiftly and safely. I just wish people earning 10x+ my salary could get things right. 9x out of 10 I have to take a further pay cut or be made redundant to pay for it. moan moan. (!)

  • John

    says:

    Peter,

    It’s the incredibly high wages & arrogance of QF staff & union leaders that has killed Qantas.

    Qantas has never been an icon, just because they keep saying they are.

    Some travel agents won’t even sell them anymore.

    They get 3 times the commission selling cruises & guess what cruising is booming.

    Most decent travel agents aren’t order takers but sales people & there are not selling QF as no future in it & when QF INT closes down that will be a nightmare for agents who have sold them.

  • Chuck

    says:

    John,

    I think you’re ignoring the elephant in the room for aviation in general.

    The percentage of total costs that wages represent has not varied much in the past 30 years, but fuel prices have gone through the roof – and this despite the fact that aircraft have been getting more efficient with each generation. The collective aviation industry of the world needs to find a way to have more clout when it comes to avtur prices.

    Whilst our Australian wages are high on world terms, the cost of living in Australia demands far higher wages than those of emerging economies. Whilst old QF contract wages are very generous, LCC wages are embarassingly low for the demands, technical knowledge, and responsibility of the airline professions. There has to be a middle ground somewhere in there. If you slash and burn wages, then you’d better find a way to depreciate the rest of the economy at the same time – everything from the cost of electricity, to road tolls, mobile phones, cans of coke etc.

  • Michael

    says:

    Emirates has the right idea. “We buy planes and invest in products, we don’t buy shares”. Reminds me of what Air NZ says – “If I look after my people they’ll look after the customers, and the customers will look after the share price.”

    It’s all about the customer, Mr Joyce. If you look after your customers you can have a viable Qantas International despite the high cost of wages and all that guff. Cutting costs is the panadol you take when you have a headache – it contains the problem in the short term. Getting more customers, and making sure they’ll want to fly with you again next time, and tell all their friends to fly with you, is the real solution.

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