Nov 3, 2012

Why this reporter will have to buy Qantas shares

After enduring the Qantas AGM on the small streaming video screen it is clearly necessary for this reporter to make a new investment in the airline's stock. It is the only

Ben Sandilands — Editor of Plane Talking

Ben Sandilands

Editor of Plane Talking

After enduring the Qantas AGM on the small streaming video screen it is clearly necessary for this reporter to make a new investment in the airline’s stock.

It is the only way to ask questions at the meeting. Questions that were not asked at the meeting, yet questions that the institutional and longer suffering retail shareholders ought to have been pressing on the management and the chair with some urgency given the trashing of the brand, the stock price, the dividend sensitive investors, the company’s greatest asset, which is its people, and such unfashionable intangibles as the ‘national interest’.

In fact, the dividend drought was raised, but not explored.

If in truth the company is going to place the emphasis on debt reduction in place of capital expenditure, the real world consequences needed to be queried, and the hidden inspirational brilliance of management genius allowed to shine forth into the darkness of the uninformed hall in Canberra’s Hotel Realm.

There is a perverse, toxic relationship between slowing a company’s growth down in order to ‘catch up’ and being totally run over by competitors that know a company of fools when they see them, and will continue to eat them alive.

Would it not have been a good idea for someone to ask management what happens if Qantas stands still, or imitates standing still, for the three years CEO Alan Joyce says it will take to restore Qantas international to profitability, while the rest of the market keeps growing at a notional 6% per annum, making it almost 20% larger by then than it is now?

Would it not also have been a good idea to ask if on the resumption of significant capital investment at that point what real prospect Qantas would have of reclaiming all of those customers it would have lost to its competitors, whether Australian or foreign, or hybrid, like Virgin Australia Holdings?

There are some encouraging signs that Qantas understands that to survive in the Asia Century it needs to engage with Asia and invest in Asia and fly in Asia. These are the same encouraging signs you can observe in a year 10 classroom, when some beaming luminary from either side of politics poses for a photo opportunity, and gushes nonsense about how well informed the children are. Well done Qantas.

But the test of what Qantas does in Asia isn’t its mastery of buzz words or an ability to look at an atlas. It is about what it actually does in Asia, or more to the point, hasn’t done, or has totally stuffed up, like Jetstar Pacific, which at this stage of the proceedings, is a disaster, or the Red Q nonsense that our asleep-at-the-wheel institutional investors signed up for.

Although some of them also unsigned from it, completely, and reportedly quit the stock.

Qantas should have been asked on what basis it thinks that connecting to the Jetstar franchise at Singapore Airport, after as much as 4-6 hours between flights, to complete a journey to points in China, India, Malaysia, Thailand or wherever, after flying full service Qantas from Australia, is actually going to cut it with business travellers?

What makes Qantas think it is acceptable to change from Qantas to Jetstar anywhere on a trip involving a connection? What is Qantas going to do about it? When Qantas puffed up the Red Q nonsense it specifically said it would be different to and better than any other regional premium experience in Asia.

Well poor struggling, second rate lesser premium Singapore Airlines owned single aisle carrier SilkAir is reporting margins of around 20%. What was Alan Joyce smoking when he said the things he was telling the Australian market about Red Q little more than a year ago, why hasn’t he been held to account for this, and why, in a few words, isn’t it much more competitive for an Australian business traveller going to much of Asia, or an Asian business traveller going to much of Australia, to do so flying the full service all-the-way offerings of Singapore Airlines, SilkAir and their Australian partner, Virgin Australia?

Why didn’t anyone ask the bleeding obvious?

No-one asked the really embarrassing question as to what happened to the wicked, evil, union death threats claim that Qantas trotted out just over a year ago, which caused the NSW government to deploy state police resources into a special investigation which without explanation, ended its inquiries? Where is the evidence? Why didn’t it support criminal charges? Did Qantas in fact just make it all up, goodness me, surely not, but if it did, has it been called to account for a PR stunt that involved false or misleading statements? Causing police engagement with allegations of death threats it a serious matter. Where is the accountability for the outcome?

When it came to the spontaneous decision to ground Qantas, costing shareholders $194 million and ruining the travel plans of willfully deceived booked passengers world wide, no-one asked the really burning questions.

Which is why instead of dramatically going for both the customers and the unions in one grandstanding hit, why didn’t Alan Joyce announce that unless the intolerable provocation of protected industrial action was ended forthwith by Fair Work Australia, he would indeed, have no option but to lock out both the customers and workers early the following week in order bring matters to a head, as Qantas was entitled to do, in law, but without causing so much misery to everyone.

Joyce would have achieved precisely what he achieved with the grounding, without costing the company anything like the same amount of money, without ruining the travel arrangements of 70,000 passengers, and without inflicting the longer term damage to the reputation and brand of Qantas which he says was miraculously totally 100% reversed and even further improved by the end of last November.

No-one raised any questions about how the partnership with Emirates, subject to approval, will win back to Qantas a single passenger from Emirates, nor why it means Qantas is telling its customers to fly Emirates as its preferred partner to Europe from most of the geographical spread of Australia from next April.

The claim that the partnership was one of equals wasn’t explored. What precisely is equal about eight arrivals or departures per day of Qantas A380s through Dubai providing daily returns to London from Sydney and Melbourne compared to dozens of Emirates A380s and 777s a day serving more cities in Australia, not counting its additional flights between Australia and New Zealand or up to Asia?

There were some really serious questions like this that needed to be pursued from the floor yesterday.

They weren’t pursued, notwithstanding some well articulated anger from some of those present, and some fawning, please hurt me even more type of questions.

True, the decision to buy Qantas shares in order to ask questions at AGMs, or possibly, some special shareholders meetings in the future, may seem perverse.

But if you believe in this country, and you believe that ultimately, remorselessly bad or sub-standard management will give way to something better, Qantas makes sense at such depressed price levels. It can and will (or must) rise above this.

There is no rational reason why both major Australian airline groups cannot grow, prosper, compete ferociously, and reward their owners. There is no reason why in the Asian century, they will not do that in a way that participates in growth that will mostly come to and from abroad, rather than originate in this country.

But it demands in the case of Qantas, something considerably better than it has in its management today, and as far as Virgin Australia is concerned, it will soon, very soon, be judged against similar tests of its leadership, and the challenges that arise from the participation in its structure of a range of not necessarily compatible foreign airline interests.

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20 thoughts on “Why this reporter will have to buy Qantas shares

  1. David Lloyd

    We seem to have a problem that the board and the management are in a separate universe. It is shameful that shareholders do not get a real voice and I also wonder why the institutional investors don’t ask these questions.

  2. moa999

    I thought Joyce committed to $1.9bn of capex over the next few years – this is hardly insignificant and much more than the very lean post-IPO years, and indeed much more than profit in 2012.

    Also mentioned as I recall was 120+ new aircraft over the last five years with 65% by value going to Mainline.

    Insto investors ask their questions in private – I doubt there were many reps at the AGM at all.

  3. patrick kilby

    I’m not so gloom and doomy. The fleet is being renewed single aisle first then twin aisle; the Asia strategy did not work out due to SQs monopoly at Singapore airport so now QF has party 3lft maybe that can be re-thought. Earlier Ben you were knocking single aisle flights but now Silk Air is growing and profitable they are back in fashion (and even with lie flat beds in the US for 4-5 hr flights); so maybe not so dumb just need a regulator to allow competition to SQ.. I thing a competitor to Silk Air is not a bad idea if Singapore airport and govt allows it.

    The American strategy is quite good, the Dallas hub seems to have worked despite Ben’s worries. I expect they may move it to an A380 sooner rather than later, which will improve the economics even more. I expect with 9 million frequent fliers they can consolidate for a couple of years and then up their international growth rate, and regain market share with the right equipment and costs. Note apart from SQ and CX most Asian airlines are not attractive to Australian travellers (being rather dodgy).

    Emirates seems a good European strategy (and may lend them a few A330s to tide them over pending 787s, and through better fleet utilisation free up a QF A380) so the US in good shape Europe in potential good shape, domestic is good now we are back to a 2 airline policy, then Asia is next (but the trickiest due to protectionist markets, and I suspect JQ is not seen as permanent). Note there are a lot of closed shop in Asia and Europe than QF has to navigate (note in the Europe closed shops Emirates and QF can help each other out).

  4. ltfisher

    I am not so sure Patrick re the American ‘strategy’.For example can the A380 do the Dallas run, both ways non-stop? And how dependable is the American Airlines link? Aren’t they still in some form of bankruptcy/financial protection.

  5. timjack Elton

    patrick, you make some good points, trust me, I wish I could share the same positive feelings as you do. The fact is, in Asia, Jetstar is seen as competition to Tiger out of SIN, still a small part of the SE Asian aviation business, nothing more, Air Asia is running rings around all of them. I speak from a position of spending a lot of time working in the region.
    The Qantas brand still holds its own in Asia, other words, up with the likes of SQ CX etc…. Jetstar is seen as the cheap end of the market, a brand name which is still relatively unknown by the the general population despite what Joyce says back here in Australia.. Sure it is growing, manipulated by the direction of the Qantas management.. as I see it, it would be easier and cheaper to market “Qantas lite” (for example) rather than continue to market the now fused two brand strategy.. the punter is fused & confused… no doubt about it!

    I say this from hearing the word on the street, many times now… stuff like, “who are Jetstar, they are another cheap Singapore company aren’t they?”

    I am convinced a Qantas coloured logo derivative or extension name painted on the new single isle jets would be far easier to market..

    Believe it or not, Asians are far more “brand conscious” than we give them credit for…. remember, although the LLC market is growing, it is still overwhelmed by the premium market… the Jetstar name still a pup, and still carries a very fragmented customer appeal in some countries… doesn’t have a good name, or little known.

    After that performance in Canberra at the Qantas AGM yesterday by Mr Clifford, (smug) but still apologising for the grounding…. says to me, Qantas will not recognise that it is possible they have made some basic strategic mistakes… and it is time to make up with its staff.. I say this because for me, it is hard to be a proud Australian when I see what poor people skills Mr Clifford and his board demonstrated yesterday.. they are just business mercenaries more interested in their own self perceived importance glossing over the fact that they have instilled a lot of bad vibes in communicating with both the media and public. I fear this will become a lot more evident in the coming months. I think this is also what Ben has been alluding to over the past year or so..

    In SE Asia there is a belief Qantas are pulling out of Asia with the recently announced tie up with EK and moving everything to Dubai… It doesn’t matter any more what Mr Joyce and his PR department say to the contrary, this is the strong perception they instilled in the Asian market, probably because of the poor direction from the marketing/communications department, the positive message got lost to the negative.. In a nutshell this will become a big issue in the next year or so, placing a lot of pressure on the Qantas management to correct. I doubt they have the capacity to fix it by then… I guess they will simply retire and leave it for someone else to sort out.. time will tell…

  6. John Thomas

    Ben I have 1 Qantas share left, you can have it if you like.
    There’s much more pain to come for Qantas.

  7. patrick kilby

    ItFisher an A380 might not make it to Dallas to Sydney direct with a full load in winter, but it would do Sydney to Dallas and back to Brisbane with a fuller load and lower costs than the 747-ERs, which seem to be working very well.

    TimJack Elton my point is that QF needs a better regulatory environment in Singpore or Hong Kong for Asia to work (as Jetstar is an interim measure for QF mainline connections; and for Singapore only) so I agree with you.

  8. Ben Sandilands

    The 569 tonne MTOW version of the A380 would perform better on the route than the 744ER, but the now in production 575 tonne version which Qantas would have received as frames 13 and 14 would have performed very well, and quite likely managed non-stops both ways. Another tragic miscalculation by Qantas management in postponing indefinitely.

    The issue for AA’s 777-300ERs is that payload would also be slightly restricted, more so for example than we see on some Cathay Pacific operations non-stop to NYC. In practice, those restrictions could be quite severe, because there is a big ETOPS 180 exclusion zone roughly NE of Tahiti, and while on some days the forecast high altitude conditions would suggest a different route that bypassed it, on days when a four engined jet could be rostered to fly through it, that space would be unavailable for a long range big twin jet.

    The only two jets in service that could reliably do the route non-stop both ways would be the Airbus A345, and the Boeing 777-200LR. However the -200LR would still have to lengthen its trip time when the exclusion zone would have otherwise provided the most direct routing taking into account conditions aloft as well as what the normalised range payload calculations say for a perfect day with minimal winds etc.

    As it currently stands a passenger seeking to fly DFW to SYD via BNE would be better off going to LAX and then taking a reliable non-stop to Sydney.

    If the passenger was connecting from a range of cities over DFW the LAX advantage can in some cases be quite significant.

    For those reasons I think the hype about DFW is true only in one direction.

    If you are flying economy, such as Macquarie Bank executives are now expected to do, at least according to anguished insider tales of woe and disentitlement, you are also at risk of being told a day before flying back that you have been rebooked over LAX in order to manage down the booked load because of unfavourable forecast headwinds on the route.

  9. ltfisher

    Thanks for the info Ben.
    All this speculation presumes of course that passengers are not going to get sick of these ever extending extra long non stop flights. Having done quite a few trans Pacific flights in the last few years, and found none of them really comfortable, I am always on the lookout for alternatives. Theoretically Hawaii should be the best. However, getting a good onward connection to the US mainland out of there ie one that avoids LAX, is often problematic. However, some airlines are getting more innovative eg Alaska which offers a direct HNL to Bellingham WA service [Bellingham in Washington State is just an hours drive from Vancouver].

  10. moa999

    Is the diversion rate on DFW-BNE much higher than LAX-MEL, I have heard of a number of diversions on the latter and assume they get impacted by the same winds (I realise the former is 400miles longer)

  11. Ben Sandilands

    Haven’t picked up on any headwind related diversions for the A380s only those caused by medical emergencies. But there probably have been some, although usually load restrictions avoid this for any type.

    One of the reasons for Qantas buying the 744ERs, apart from being a great deal, was to more reliably fly Los Angeles-Melbourne non-stop but that did quite often come with payload penalties. It is a bugga of a route in the wrong seasonal conditions. The 777-300ERs have no reported issues out of LAX and of course the -200LRs flown by Delta have the added advantage of full freight even though the unit costs per passenger are higher because of the small capacity cabins.

    I believe there is still a small number of headwind related diversions for 747s ops but generally Qantas avoids that in advance by keeping a close watch on the expected conditions a day out. The diversions arise when mother nature pulls a surprise mid flight or closer to home.

    In the early days of the 747SP, which made non-stop trans Pacific flights commercially possible, there were many diversions flying to Australia, and the earlier years of the 747-400s also had more problems than now in terms of headwinds. I can’t answer the question as to whether the rate fell away because of better weather forecasting allowing more timely load management, or if it was something else that came into play.

    However I do recall a United DC-10 having to divert at the last minute to Williamtown (Newcastle) in the 90s when the last few minutes to Sydney was judged an unacceptable risk, which makes one wonder what the reserve fuel calculations were like when that decision was made, and both Pan Am and later United were tight lipped and non-committal over several incidents in which flights were said to have run the tanks dry during taxi to the terminal at Sydney. It was a long time ago.

  12. ltfisher

    How do you think the 747-8 would go trans Pacific Ben? I know CX have the freight version in regular service trans Pacific and they seem to love its uplift capacity.

  13. Ben Sandilands

    The passenger version mainly ordered by Lufthansa was optimised for a range/payload combination that didn’t require the equivalent of Australia-US non-stop full load flights, so it’s not in the hunt.

    According to Boeing at a briefing some time back, the type will not deliver its brochure performance until a fix for flutter related issues is tested and certified, with 2014 mentioned. At the moment the tail fuel tanks cannot be used, until those issues are fixed, so it is a jet that is flying short of its intended performance goals, which is pretty sad. The GEnx engines, which are a bleed air version of the bleedless engines for the 787 are also getting a performance upgrade to meet fuel burn specs, but I’m not sure where that program is.

    There has been a lot of ‘silence’ about these issues. Albaugh had a bit to say about them just before he was replaced at Boeing whether that was coincidental or not.

    The best thing that can be said is that if anyone is happy with it now they should be ecstatic when everything is fixed. I doubt that it can ever be a commercial airliner contender for 14-15 hour passenger sectors.

  14. Nick Brodie

    Ben – your anti-Qantas bias is staggering and breath-taking. Many of your comments relate to past business decisions made by a Government-owned legacy carrier when the cost base and operating environment was worlds away from what it is now. Even fleet decisions were legislated – TAA was prevented from certain fleet decisions because it would disadvantage Ansett. The world is littered with the bones of old-world carriers and multiple-born-agains through bankruptcy protections. Time and time again Qantas has tried to engage in commerical partnerships or equity tie-ups only to be torpedoed by the ACCC, the Australian Government or a foreign Government – in various forms this has involved SIA, BA and AirNZ. What if Qantas had been allowed to merge with AirNZ? What if Qantas and BA had merged? You make no mention of the restrictive and draconian Qantas Sale Act in any of your slash-and-burn anti-Qantas rhetoric nor do you point to any of the pro’s and con’s of Virgin’s 66% (and growing) foreign ownership. Remember, Virgin inherited it’s market position from the collapse of another bloated, inefficienct dinosaur of the regulated airline duopoly – Ansett. If Ansett had restructured on a lower cost-base Virgin would (potentially) now be in the position that Tiger is. Virgin only has 5 planes in it’s long-haul fleet (ironically the only part which is 100% au-owned) all the rest is smoke an mirrors selling off bits and pieces here and there to fund further expansion – it’s shiney, it’s new but they pay less and send most work offshore along with 66% of profits for SIA, Virgin Group, Etihad and AirNZ. Fast forward 5-10 years and what will Virgin look like? There’s nothing wrong with foreign investment, it just needs to be fair. SIA has wanted fly-through rights to the US from AU for years (but always blocked by au-Govt)and now they own 10% of Virgin – is there an issue here? If Qantas was freed of it’s legislative restrictions and genuinely allowed to compete on a level playing field then perhaps we’d see a quicker turn around. Do you really think if Joyce ‘threatened’ to ground the fleet the unions would’ve backed down? No one in the right mind would have believed him – I say good on him! I mean how Australian is the threat by the unions to ‘slow bake’ Qantas? Why would an Australian union even think about making that sort of comments publically? You don’t hear these threats at Virgin because they already have the efficiencies that Qantas needs to acheive. They pay cabin-crew less and either contract out, casualise or offshore the rest plus they have strong equity partners. Everyone wants to have a strong and visible national carrier that flies to many places all around the world but the commerical reality is many people will opt for another carrier even to save $200.
    I’m as frustrated with Qantas as the next person but I can see the strategy and see it – overall – as a good one. It needs time to bed-down, it needs time to get the Asian re-timings sorted and time for new codeshares to be negoiated. Qantas is a massive far more complex airline than Virgin.
    Perhaps a more balanced piece from you on turning the tide for an iconic legacy carrier, problems with the legislative environment and pathways to the future might be appropriate…..


    Why would any sane investor hold qan shares wether individual or fund manager

  16. Ben Sandilands


    Your historical references are wrong, Why do you trot out nonsense about the ACCC torpedoing deals with carriers like Singapore Airlines when if you paid even the slightest attention to detail you would know that it died in 2001 because, surprise, Singapore Airlines said No.

    Go back, and read the historical record. The Australian government didn’t stop Qantas doing anything in relation to foreign carriers, but commercial common sense did after Qantas studied the books (Air NZ) or withdrew (BA) or was shown the door (Singapore Airlines).

    If Joyce had asked FWA to suspend protected industrial action in lieu of leave it with no alternative to close down the airline it would have achieved the same result as it did without spending most of the $194 million it admits that the industrial dispute cost. It didn’t need to ask for any union approvals, it only had to exercise its right under the act but without the look-at-me antics of the Saturday afternoon press conference in which Joyce threw into unnecessary chaos the travel plans, and trust, of at least 70,000 customers.

    It isn’t necessary to agree with anything the unions said or did to know that the tactic used of shutting down the whole operation was disgraceful and damaging. Had Qantas instead obtained the necessary orders from FWA, which most industrial law authorities believe was a certainty under the act, the same resolution of the disputes would have been achieved, market share would not have been lost, and the full year results would also have been somewhat higher, no doubt reflected in the share price.

    I’ve always strongly supported the repeal of the Qantas Sale Act. An additional benefit of this necessary reform would be to deprive a mediocre management of yet another excuse for its failures.

  17. B.C.

    I wonder how many of the issues at Qantas can be put down to Joyce and his management team and how many might be caused by the Chairman and board? I know that can be hard to determine from outside. However, the industrial action last year shouldn’t have surprised anyone who was familiar with Leigh Clifford’s background. I do wonder if the move to reduce debt at the expense of capital investment is a management decision or a direction from the board.

    On the bright side, at least we still have a Qantas. If the private equity take over had happened a few years ago I doubt Qantas would still be here.

  18. Nick Brodie

    Ben, 10 April 2003 – In a simultaneous announcement, Australia’s ACCC and New Zealand’s Commerce Commission have found that the deal, under which Qantas would buy 22.5 per cent of its competitor, would lead to higher prices and lower service – deal dead – not exactly what i’d call nonsense, but anyway…..
    SIA and BA and Qantas have flirted for decades. Qantas and BA assisted SIA technically and ushered SIA into IATA in the 40’s and 50’s and SIA even flew a jointly painted Concorde in BA/SIA colours on a promotional flights in 1977. Merger speculation between QF and SIA was rife in 2005, 2008 in recent history at least….
    All the rest is open to some speculation on both our parts and all (interesting) history but it’s good to see your support in repealing the Qantas Sale Act.
    Generally enjoy your posts. Thanks, N.

  19. ltfisher

    Some info please Ben: I thought BA and SQ actually operated LHR-SIN-LHR as a regular service for a while?

  20. Ben Sandilands

    I believe they did but way back, well before the QF/BA JSA and prior to the former being foundation members of Oneworld and before SQ joining Star.

    It may have gone as far back as a shared Concorde service which went to London via Bahrain and flew south of the tip of Sri Lanka to avoid sonic boom issues, but resulting in a trip time of more than four hours, or some 2.5 hours shorter than the subsonic flight time for those days, which incidentally, was when jets were usually flown slightly faster than today and had less ATC congestion issues.

    The jet was liveried as BA on one side and SQ on the other.

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