Wed "Sydney Morning Herald":
Time to cut out the luxuries
Qantas is a great asset, but one British Airways can't afford, writes Elizabeth Knight.
That pesky rumour about British Airways selling its 22.5 per cent holding in Qantas just won't go away.
This time The Times in London reignited the story with quite a strong piece yesterday stating that British Airways was considering a £1 billion ($2.79 billion) rights issue to be unveiled in February.
It said that part of the BA restructuring would include selling its stake in Qantas.
The Qantas share price was slapped the second this story appeared on the wires. It closed down 12c at $3.88.
BA chief Rob Eddington earlier this week denied speculative reports in the weekend British press that there would be large job cuts associated with the airline's restructuring.
Qantas just hovers around repeating to analysts BA's official line that it would like to hold on to its Qantas stake.
And this is clearly true. It is one of the most valuable assets on the BA books. It earns money, which is more than can be said for most of the BA's other assets.
In a perfect world - or even in a normal world - this kind of investment is the perfect accessory to the partner relationship between the two airlines.
But Qantas is a luxury BA can ill afford. It's like holding onto the Cartier watch when the children are starving.
So it's no surprise BA is considering both a rights issue and selling its stake in Qantas.
The £400 million sale of the Qantas holding won't go near to getting BA out of its pickle but would help pay interest costs for a while.
Let's not forget, BA is £6.5 billion in debt and just lost $US75 million ($145.8 million) in the quarter.
While it might suit Qantas and BA to dismiss the latest reports as mere speculation, this scenario is entirely plausible.
Qantas doesn't like all this chat because it places an overhang on the stock which will clearly stay around until February when Eddington finishes his review and tells the investment community just how he is going to get BA out of its current mess.
In the meantime, Qantas continues to revel in the misfortunes of the rest of the Australian and overseas aviation industry.
Its information machine doesn't want to appear too cocky about how much money it is making from Ansett's demise but Qantas is probably the only airline in the world whose core profits will rise in the current year.
And moving into the future, Qantas has finally agreed on the launch of its budget airline, Australian Airlines, to start operating around September/October next year.
Ian Myles from Macquarie says Qantas is looking for a cost base 25 per cent below that of its existing airline.
Indeed, it's easier to start a Virgin than compete with one with the existing Qantas cost structure.
The first bit of saving will be increasing the number of seats on the plane. The next trick is to cut 20 per cent from staff costs.
Fuel costs should have fallen to a more comfortable level by late next year. Just the time to start a new airline. Of course the idea comes from the European low-cost airlines that have been so successful.
Myles says the Europeans achieve earnings before interest and tax of 25 per cent.
He contends that if one assumes a load factor of 80 to 90 per cent and yields 15 per cent below the normal level of Qantas, the Australian Airlines model could be looking at revenue of $80 million to $90 million. This would add $15 million to $25 million to the Qantas EBIT line.
Of course there would be some cannibalisation of the existing Qantas network, which has a higher yield. But the new airline should theoretically be more profitable because of its higher margin.
This is the time to experiment. Qantas has 90 per cent of the domestic aviation market and because the rest of the industry is in crisis can take advantage of cheaper aircraft and a potentially more flexible workforce.
The move by Chris Corrigan at Lang to take a position in Ansett is a play on reducing the airline's cost base by changing work practices. This was his modus operandi at the waterfront and it has been very profitable. Gaining Ansett assets through Virgin/Lang would be a threat to Qantas but would be less daunting if Qantas could counter the Virgin offer with its own low-cost airline.
Lang remains a long shot but is not yet out of the equation.