MELBOURNE AUSTRALIA 18 December 2006 – Any Qantas Airways Ltd. (ASX: QAN) shareholder that doesn’t accept the Macquarie Bank Ltd. (ASX: MBL) consortiums offer of $5.60 per share must be completely mad. The offer is at least 60% above the five year average of $3.50, and is higher than the $5.20 that the share price achieved in 2002. In fact, there shouldn’t be one single shareholder who won’t get at least some sort of capital gain when the takeover goes through.
In addition to the capital gain, shareholders have also received a reasonably tasty, full franked dividend as well. Although many Qantas shareholders probably wouldn’t have normally sold out their position, afterall an airline provides that extra level of diversity to most Australian share portfolios, we can’t imagine that there would be too many that will lament for too long the loss of this company from their investments. Really, it wasn’t going to go anywhere, and hasn’t done for the last five years.
Over that five-year period, while the Qantas share price has been largely flat, the All Ordinaries has added 60%. During this period Qantas has seen off all comers from a competitive standpoint, just allowing the token presence of Ansett/Virgin, etc. It has also cut costs left, right and centre in an effort to maintain a decent level of earnings. It is therefore difficult to understand quite how the private equity partners will be able to extract further revenues, pay off the huge interest bill, make a profit and then still make it an attractive enough investment to sell back to the public in five years.
If anything, the environment is only going to get worse for the airline industry. How? Competition for a start. In the Australian Financial Review, the Chanticleer column claims that US airlines have not shown any interest in expanding further into the Australian market. That may or may not be the case, but one reason perhaps for their lack of interest is the favours that the Australian government has given to the ‘national carrier’ by restricting the incursion of foreign airlines. Will they be so inclined to do so now? Not if Qantas starts shipping more jobs offshore, and overseas carriers come and offer to establish new jobs here.
Once Qantas is out of direct Australian shareholder ownership the government will have next to no reason to ‘protect’ it. Their biggest concern will then be to ensure that there is sufficient competition in the Australian market to keep airfares low and to even push them even lower. This can only be done with increased competition. For the company that is in the dominant position – Qantas, it will likely cause an errosion to their passenger numbers, revenues and profits. But with more carriers in the market it will make it harder for them to raise prices without pushing customers away.
What else? How about that old favourite, oil? Is it a sign that on the day Qantas announce its acceptance of the takeover that OPEC announces that it will cut production early next year. As reported by the Associated Press, “OPEC said it expects non-OPEC supplies to grow by 1.8 million barrels a day in 2007… and about 500,000 barrels per day more than anticipated global demand growth of 1.3 million barrels.”
In other words, as we have pointed out before, OPEC are very happy to see crude oil at the high USD$50’s and are in no hurry to let it slip. And why would they? For the time being at least the global economy has been able to absorb and live with the higher oil price. There’s no point in letting things cool off if the natives are still happy enough to spend away.
Finally, although we are sure there are other reasons, interest rates. We wouldn’t say that borrowing costs are at a particularly low or high level at the moment, but there still seems to be a more than reasonable chance that interest rates could rise further if inflation continues to take hold. The inflation rate here is at a level that doesn’t make the government or the Reserve Bank particularly comfortable. The bulls in the United States seem convinced that rates will fall, even though there is still enough evidence to suggest they could move higher. And reports out of the UK also show inflation running hot with the potential for the Bank of England to push rates higher there. The private equity and Macquarie infrastructure model can only work to complete satisfaction in a low interest rate environment.
All in all, we are happy for Qantas shareholders that they have been rewarded for their staying power, but we still have the impression that paying $11 billion for an airline which is bound to lose many of its concessions is bound to end in tears.