D-day looms for Qantas cut-price airline
By Mark Todd
Qantas Airways' board will this week consider a detailed plan to launch a low-cost international airline as the company tries to identify ways of expanding in a fiercely competitive aviation market.
The new airline would target markets, mostly in Asia, that are not profitable for Qantas to serve under its current cost structure. It is believed the proposal calls for the creation of a new entity operating under a separate management team and using a fresh logo, leaving the Flying Kangaroo to the main brand.
Analysts believe Qantas could launch the airline for relatively little outlay. Aircraft leases will comprise the bulk of the costs, as the company already has all the requisite terminal and administrative infrastructure in place.
It is estimated Qantas could start a service of six Boeing 767s using only $400 million in capital. Qantas would inject as much as $100 million in equity into a new subsidiary and raise $300 million in debt funding.
Qantas would put employees of the new carrier on separate, presumably inferior, awards and conditions. The airline's planes would have only one class of seating.
Macquarie Equities suggested in a recent research note that Qantas needed to expand its international business away from the traditional routes of the US, Europe, and Japan to increase revenue at better than the 5 per cent to 7 per cent at which the market is growing.
A low-cost carrier could open "at least" another 10 routes for Qantas. Potential routes include Malaysia, Greece, Vanuatu, Vietnam, Korea, China, United Arab Emirates, Sri Lanka, and secondary ports in Thailand and Japan.
Macquarie estimated a low-cost carrier could break even with a load factor of only 54 per cent, or a little more than half a plane load. Qantas's current threshold on its international business is 66 per cent, meaning it is restricted to flying the busier routes.
Earlier this year, Qantas was forced to suspend uneconomical services to Canada and China.
Qantas's board will meet this Wednesday to discuss the proposal. Some analysts are expecting a decision on a cut-price airline to accompany the full-year financial results scheduled for issue on Thursday.
A year of tough domestic and international competition, spiralling fuel prices and a weak dollar have extracted a heavy toll on the company. On average, analysts forecast Qantas earned a net profit of $320 million in the 12 months to June 30, 2001, down more than 25 per cent from a year ago.
The board is also expected to consider the outlook and whether to further investigate a partial float of the company's wholesale travel division, Qantas Holidays, and its $500 million worth of terminal assets.
On another front, Qantas remains busy trying to garner support for its proposal to take a substantial stake in Air New Zealand as a precursor to closer relations between the two carriers. Late last week, Qantas chief executive Mr Geoff Dixon held talks with Mr Rob Cameron, representing the joint committee established by the Australian and New Zealand governments to consider the issue.
Air NZ has favoured a plan for major shareholder Singapore Airlines to increase its stake to help provide funds for a much needed $4 billion fleet upgrade. The deal requires NZ government approval. A decision is expected by the end of the month.