Qantas seems to be in a state of perpetual crisis under chief Alan Joyce.
In 2011 he deemed it necessary to take the unprecedented step of suddenly grounding the airline, claiming management were losing control of the business to the unions. In retrospect, the claim looks shrill and the grounding overly dramatic.
Now, Joyce is after some form of bailout — a government loan or loan guarantee, even a partial re-nationalisation — as Qantas faces real domestic competition for the first time since the collapse of Ansett in 2001. What’s more, the competition is personal and professional, with Joyce facing off against former colleague John Borghetti, whom he beat for the top job at Qantas but who is steadily making inroads at Virgin Australia.
At any moment the Australian Takeovers Panel will deliver a verdict on an application by the Australian Shareholders Association, which is opposing Virgin’s $350 million capital raising on the grounds it is prejudicial to small shareholders and represents a foreign takeover by stealth, increasing the combined stake of Etihad, Singapore Airlines and Air New Zealand from 63% to 68%.
The challenge is to cut through Joyce’s over-the-top rhetoric — like yesterday’s line about Virgin being a “newly-minted sovereign-owned airline”. So what? Virgin started life here as a (much-needed) foreign entrant and … well, you either believe in the benefits of competition or you don’t. Former treasurer Peter Costello was dead right over the weekend when he called on the government to reject any bailout. Back when Ansett collapsed, Costello said: “The first people in my office opposing any bailout for Ansett were Qantas … they were right then. They’re wrong now.”
Qantas may have drawn a “line in the sand” at a 65% share of the domestic market, but it is hardly a national emergency if they fall below it, any more than it is a national emergency if their credit rating is downgraded to junk bond status. Many in the market don’t consider airlines to be investment grade anyway. Moody’s rates Qantas as one of the few investment-grade airlines in the world: Southwest Airlines, Lufthansa and majority government-owned Air New Zealand. Both Moody’s and S&P have Qantas’ current credit rating as stable.
We read over the weekend that Qantas could be forced to consider an equity raising, sell assets or defer new aircraft deliveries to preserve its credit rating if the federal government doesn’t provide assistance. Well, exactly the same pressures face every top chief executive, all the time. It is Joyce’s job to run Qantas’ balance sheet. If he is failing, he can’t blame the government.
Qantas is losing money, and downgraded its earnings outlook at the October AGM. At the time Deutsche Bank’s analysts cut Qantas’ pre-tax profit estimate for 2013-14 from $229 million to a loss of $52 million and wrote that “when airlines engage in a capacity war there are no winners … it is likely that all major players are loss making”.
A note out today from broker CIMB confirms his will be the first year in which Qantas makes a pre-tax loss, and lowered its discounted cash-flow valuation of the airline from $1.78 to $1.05 a share. Qantas shares have fallen from $1.90 in April to $1.21 today — that’s a 64% drop in seven months.
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Qantas is a national champion and its future matters to all Australians. Joyce’s strategy of cost-cutting and offshoring does not seem to have ensured its future. However politically unlikely, the fact that Joyce wants foreign ownership restrictions on Qantas lifted is genuinely worrying — does he want to hand control of the airline to an overseas competitor?
Perhaps the truth is that Joyce is running Qantas into the ground, and running out of options.