Qantas Emblem Changing to Lone Star of Texas?

MELBOURNE AUSTRALIA, November 23, 2006 – What is Macquarie up to now?  All of a sudden it wants to buy some airplanes.  Perhaps Allan Moss has always dreamed of being a pilot.  Maybe he is jealous because Donald Trump and Greg Norman have their own private jets.  This will show them.

Anyway, according to reports yesterday from the Australian Financial Review, Macquarie Bank Ltd. (ASX: MBL) will team up with private equity firm Texas Pacific to buy effective control of Qantas Airways (ASX: QAN), with each party holding 25% each of the company’s shares.

What on earth could this mean for the Aussie icon?  For most countries, the main national airline, whether it is publicly or privately owned is viewed as a status symbol for the nation.  It is, for some reason, raised on a pedestal above nearly everything else to be sacred and untouchable.

It could probably be argued that Qantas incites more passion than that other dominator, Telstra.  However, there is undoubtedly not the same love/hate relationship between the populace and Qantas as there is between them and Telstra.

And so, as soon as the reports of Macquarie taking a stake in Qantas were announced we were treated to the typical statement that follows any involvement from them, that they are looking for businesses with stable revenues.  The old stable, predictable, sustainable revenues eh?  In the airline industry!

We know that Qantas has been a profitable business for years, but that has largely been due to the favourable treatment it has received from the government which helps it to control the number of domestic and international carriers coming into Australia.

But what will happen if the government repeals some of those favours?  History has shown us that Australian travelers are more than willing to give other entrants a ‘fair go.’  Ansett did pretty well for years until they eventually went pear-shaped.

When Virgin Blue (ASX: VBA) came into the market, it managed to pick up the slack from the Ansett collapse, and regardless of whether you appreciate the quality of their service or not, they have cornered a sizeable market share, enhancing their domestic routes by adding international connections.

A less ‘Australian’ Qantas would only make it more likely that other carriers will become attracted to the Australian market as the government and regulators perhaps feel less inclined to protect it.

The reality is that a less cosseted Qantas should lead to greater competition in the aviation industry and therefore more competitive airfares than is currently the case.

With Qantas being so dominant there is naturally the fear from potential competitors that they would cut their pricing too low on specific routes as new competition enters the market.  However, if competing carriers feel that they are going to get a fair crack at the entire market, their willingness to supplement their offering to less profitable routes would increase.

However, we shall first wait to see whether this is a serious takeover from Macquarie or whether it is a London Stock Exchange MkII.  Secondly, there have already been rumblings from our friend Senator Barnaby Joyce who thinks that the emblem of Qantas will change to the “Lone Star of Texas.”

It’s good to see Mr. Joyce remains as reasonable as ever.

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Markets and Money e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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You miss one important point entirely. The degree of indebtedness of private equity entities remains unknown. No doubt additional debt will be carried in order to make this purchase. This debt will be immediately distributed on to Qantas balance sheets, in an industry were margins are already notoriously thin. Qantas will be LESS competitive and/or will reduce service levels in order remain ‘solvent’.

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