Market Hesitates On Qantas/BA Link

Sydney, Dec 4, 2008 (ABN Newswire) - It was hardly a ringing endorsement of the Qantas led marriage plans with British Airways; in fact it ended up as something of a thumbs down from local investors who have heard it all before.

Our market punted the Qantas shares up 8.4% yesterday morning by just after 11 am to $2.44 after they had touched a high of $2.47.

That was a more sedate rise than the 11.7% jump in BA in London when it confirmed reports Tuesday that merger talks were underway.

And then in late trading, they sold the shares down to $2.35, for a 4% or 10c gain on the day.

So much for the brave new world of a tie up with British Airways, which used to own 25% of Qantas back when it floated in 1995. It sold its 18.5% stake in 2004 as it struggled to raise cash to fill gaps in its balance sheet. Sir Rod Eddington (now about to be chairman of the ANZ) ran BA then.

The Brits get all excited by big shiny deals involving airlines.

They see every deal in terms of the big new carriers in the Gulf (Emirates) or the low cost operators like Ryanair or major players like Singapore Airlines which has lost billions of dollars in poorly advised structured deals in the past decade.

In fact you'd be right in wondering if the attitude of UK analysts, writers and investors has an unhealthy hold on the management and boards of airlines like Qantas.

The credit crunch is starting to rip its way through the airline business, starting in places like the Gulf, Singapore and Europe. 

Next year will see some nasty results from groups supposedly industry leaders and a BIG threat to the likes of Qantas.

Qantas is now a bigger, stronger and more profitable airline than BA which is struggling with the badly recessed UK, US and European markets.

Qantas is financially stronger; BA is long on talk and short on actual performance. 

Would you want the mob who stuffed up the start up of Terminal 5 at Heathrow, and then sent passengers' baggage to Milan airport to sort it out, guiding the fortunes of Qantas?

But the marriage banks are a bit farcical. Qantas wants to merge, sort of, with British Airways, which wants to merge with Iberia, and American wants to join the dance club, but without paying a dowry.

Is this another version of last year's failed Airline Partners Australia bid for Qantas?

Instead of private equity groups and Macquarie Bank buying, it's said to be a 'link up of equals'. But Macquarie and UBS are there with their hands out for fees (they were key players in the APA bid). UBS was advising Qantas in that debacle. No one emerged from it with any glory.

It's yet another example of the mad, bad belief that big is good and consolidation is the only way to go in aviation.

After the experience of the APA bid last year, we should ignore any pro-bid/deal comment from brokers or fund managers. Apart from several fund managers and the odd analyst, most didn't cover themselves in glory.

The enthusiasm for such a link ignores why being a big hasn't protected US carriers (the most successful is the much smaller Southwestern).

Some have collapsed and then been rebuilt in bankruptcy: the loses from the US airline industry make good reading only when compared to those from US and UK banks or the red ink spilled by Detroit.

The lure of being 'big' in business has, by now, been exposed as a chimera, judging by the number of times big banks like UBS, Citigroup and others have been bailed out, rescued or failed.

Industrial giants like General Electric have found no protection from being big: it downgraded earnings again last night for a third time this year. General Motors and Ford failings speak for themselves.

When the going gets rough, size is no protection: in fact it's like putting an apple in your mouth and saying "call me Miss Piggy" as every hedge fund, lurk merchant and investment bank emerge from the shadows to grab a piece of you as the share price slides and earnings slump.

That's why it's amusing that Macquarie Bank is still advising Qantas, despite its promoted $11.1 billion Airline Partners Australia bid for the carrier failed last year.

Macquarie hasn't met a fee or income stream it didn't like.

And there's an added irony with talk UBS is to advise BA. UBS's local investment arm, when headed by the principled Paul Fiani, helped kill the Airline Partners bid for Qantas.

UBS's investment banking arm was a big supporter of the merger advising Qantas. There is a lot of fee income at stake in these troubled times, so anything goes.

This deal is structured differently to the APA bid, along the lines of BHP Billiton and Rio Tinto.

Both dual listed structures are not good examples. (But Brambles, when chaired by BHP head, Don Argus, abandoned its dual listed structure to save money.)

Who will run it?

Tuesday night at the close of trading in London Qantas had a market cap of $US2.8 billion before today's rise in Australia and BA jumped 12.5% to be valued at $US2.7 billion.

BA has 255 planes, Qantas 220. Qantas will earn a profit of around $A500 million pre-tax this year, BA already is losing money and at best is marginally profitable. The failure to start T5 at Heathrow has hung over the company like an albatross.

BA's markets are deeply recessed: the UK, Europe and North America.

Qantas at least is based in the still growing Asian airline industry.

Its international business travel has been hurt (especially to the US), but Qantas' domestic business is solid and it has Jetstar, which outperforms the budget operations of BA.

Ryanair, the dominant budget carrier in Europe has again been rejected by Aer Lingus in yet another takeover offer, but some in London reckon that's a sign Qantas and BA and others should link up.

BA has been talking to Iberia, but when the chats started mid year BA's share price was higher than Iberia's.

BA's share price is now much lower than Iberia, which thinks it will be the dominant partner in that linking (along the lines of Air France and KLM).

British patriots and others reckon that's a load of cobblers and the UK Government is under pressure to oppose the deal. The Poms have already seen how poor Spanish management can ruin a prize UK asset.

The Spanish construction group and investor Ferrovial is being forced to sell two UK airports it picked up when it took control of BAA, which also owns Heathrow.

Between them Ferrovial and BA have managed to undermine the attractions of Heathrow through the botched opening of the new Terminal 5 and the poorly argued case for a new runway, which has triggered a huge backlash in the London area.

There are questions of whether both airlines can remain British (and European in the case of BA) and Australian to meet local aviation laws and rules.

The competition regulator, the ACCC will force the Joint Services Agreement on the Kangaroo Route to London to be undone if the two link up.

But the JSA has been undermined by the way BA has abandoned it to just one flight a day into Sydney, and got rid of its local frequent fliers and lots of staff.

Then there's the question of who is running this deal for Qantas: Geoff Dixon, or Alan Joyce. Qantas is supposed to have approached BA in August.

Dixon had just confirmed his retirement at last week's AGM and Joyce had the job. Who had carriage of the negotiations?

And isn't it handy that the Qantas AGM passed by without it being raised. No chance for at least a year for shareholders to have a go at the board and management, and Mr Dixon won't be around.

It's actually a good example of regulation arbitrage by two companies who know they have next to no chance of working it out.

Qantas might call Australia home, but it has done its best in recent years to try and escape.

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