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Posts: 585
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Qantas & Virgin Blue Media Article

Thu Apr 11, 2002 11:22 am

Publication: AFR
Section: Chanticleer
Author: Jane Boyle


Qantas Airways chief executive Geoff Dixon has wasted no time flexing his muscles since Ansett's final grounding a month ago.

That's bad news for Virgin Blue and Patrick Corporation, highlighting the battle they face to achieve their lofty market share goals.

Ansett's demise has certainly left Virgin Blue with a strong growth profile. UBS Warburg has lifted EBIT forecasts for the carrier to $39 million for the year to March 31.

The broker expects EBIT to be $90 million in fiscal 2003, with 20 per cent market share, and believes the airline can stretch that to 30 per cent by March 2004.

But while Virgin has ambitions to achieve a 50 per cent market share, Qantas has already made it perfectly clear it will not relinquish its newfound dominance easily.

The launch of six new Boeing 717s on seven new regional routes and the release of 1.5 million discount domestic tickets highlight the fact that in addition to its stranglehold on the most profitable corporate market, Qantas will also fight hard for the leisure market Virgin Blue's domain.

Qantas has identified its subsidiary businesses, which include the QantasLink regional operations, Qantas Flight Catering Ltd and Qantas Holidays, as major growth areas.

The airline has embarked on an aggressive strategy to grow profits from its subsidiary businesses to 30 per cent of the total group earnings over the next few years. The figure has been less than 20 per cent historically.

As part of that strategy, it is trawling for acquisition opportunities to grow Qantas Holidays.

In the December half, subsidiary businesses earned $105.9 million, delivering 39 per cent of group profits.

But that period was an aberration because international operations, which account for 75 per cent of capacity and costs, plunged into loss due to the slump in international travel following September 11.

Virgin Blue faces some tough decisions about its future strategy.

While it can carve a profitable niche as a no-frills, point-to-point operator, most industry watchers argue it is unlikely to capture any significant corporate share.

They argue it will also struggle to secure substantial international feeder traffic or grow its market share past 25-30 per cent unless it makes major changes to its business model.

The airline and its new half-owner Patrick Corp are haggling with Ansett's administrators over the airline's terminals and other assets. A decision is imminent.

They will not buy them unless it is for a bargain price well below what the administrators want.

Virgin won't need all of the space in Ansett's terminals.

So the airport operators, which want to buy back the facilities, are trying to convince the airline that it will be cheaper to rent space on a fee-per-passenger or similar basis than take over the leases.

Sydney Airport Corporation Ltd will also vigorously resist any attempt by Virgin and Patrick to resurrect Tesna's plan to bring international carriers, such as the Star Alliance airlines, into the Ansett terminal to maximise the value of the facility. It is estimated this would equal a transfer of over $1 billion in value from Sydney's international terminal, controlled by SACL, to Virgin and Patrick.

It's hardly an option that would be attractive to a federal government keen to proceed with the $4.5 billion privatisation of the airport.

It has been estimated that the cost of the leases and other costs of operating the major Ansett terminals would total close to $50 million a year.

Qantas has identified savings from selling its terminals to airport operators or a third party and has begun discussions with SACL.

If Virgin doesn't buy the Ansett assets, Patrick's $260 million for a half share in the carrier will likely go to Branson's Virgin Group.

But Virgin is also looking to fund the terminals via a structured finance deal that would allow Patrick's cash to go to the Virgin Group.

Qantas faces its own challenges to fund an accelerated fleet expansion program and any new growth opportunities that emerge.

The airline is considering options for a new capital raising to give it greater balance sheet flexibility.

Last October the airline picked up 15 Boeing 737-800s at depressed prices in the wake of September 11, which it funded through a $450 million institutional placement.

The airline faces average capital expenditure of $2.5 billion over the next three years, peaking next financial year.

While the airline says it can fund this through operating cash flow (which analysts expect to increase by $540 million next year), debt and its dividend reinvestment plan, credit ratings agencies are monitoring its position closely.

Standard & Poor's has a BBB+/Negative/A-2 rating on the airline, ranking it the equal second best among global airlines.

The US airline SouthWest has an A rating, while Lufthansa also has BBB+. Qantas' 21.4 per cent shareholder British Airways is two notches below on BBB-.

Qantas is under pressure to protect its rating. S&P's negative outlook means the airline is vulnerable to the still-weak international market, and to further increases in fuel prices which account for up to 15 per cent of an airline's cost base.

Last month Qantas sounded out credit ratings agencies on a hybrid capital raising, but canned the idea because the outlook for higher interest rates made it less attractive.

The airline will continue to monitor market conditions and Qantas chief financial officer Peter Gregg has not ruled out a ``jumbo'' hybrid issue, in the order of $1 billion to $1.5 billion.

This would give the airline firepower for future opportunities, such as a renewed bid for a stake in Air New Zealand.

While there has also been speculation that Qantas could buy back part of British Airways' stake, with the rest placed to institutions, both carriers continue to insist that BA intends to hold on to its investment.

Qantas is still lobbying strenuously to have its 49 per cent foreign ownership cap under the Qantas Sale Act removed to give it capital raising flexibility and a lower cost of capital. The act also limits any one airline to 25 per cent and total airline ownership to 35 per cent.

The campaign appears to be gaining momentum in Canberra.

There have been positive signals from both sides of parliament but the word is that a decision will not be made until after the federal Budget.

Source: AFR, p56, 10/04/2002


Why would Qantas need to increase their foreign investment to 49% when it appears they are doing quite well financially at the moment?

They recorded a profit, despite the trend & are growing at an alarming rate.

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RE: Qantas & Virgin Blue Media Article

Thu Apr 11, 2002 11:32 am


Why are they looking into this option if things are working out at the moment?

Does anyone know of a website showing all of the airlines credit ratings?
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Joined: Mon Jan 15, 2001 8:30 pm

RE: Qantas & Virgin Blue Media Article

Thu Apr 11, 2002 4:44 pm

I don't know of any sites, but you would think QF would be on a shopping spree to strengthen it's presence in Asia.

I do for some reason seem to suspect that maybe, just maybe QF may sell some equity to AA if it had the opportunity. This would then stop SQ or maybe deter SQ from trying to pick up some QF stock.

It sure will be interesting to see a QF & SQ tie up.
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RE: Qantas & Virgin Blue Media Article

Thu Apr 11, 2002 5:24 pm

Soon Virgin Atlantic will start flying into Sydney, Perth and Melbourne. Richard Branson is going for the Pacific and with Virgin Blue he has a great partner for the domestic market. The service is better than Qantas and Qantas was not serving any good food or catering so they can stop that service as well. The only thing Qantas is better in is their High Prices of the tickets. They may keep that.

Just check the article about the service of Virgin Blue.

Qantas is going the same way as BA, they think that they can do everything but they are forgotten that there are also airlines like Virgin Atlantic and people like Richard Branson. BA/AA is history and Bransons new Logo will be Qantas here we are.

RE: Qantas & Virgin Blue Media Article

Thu Apr 11, 2002 6:32 pm


I hardly think Virgin is going to operate in conjuction with SQ. Unless of course it's run and managed by SQ.

As for QF, do not underestimate the white rat. It's moving into NZ to kill the koru off and will be targetting everyone and anything that gets in it's way here.


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