Fly, be free

Qantas’ move to develop more of a regional strategy is something worth watching. Although we are in the Asian region, and heavily export to Asia, very few big Australian companies have developed strategies into the region. One that did, AMP (Axa Asia Pacific), just sold off the juicy Asian operations and concentrated on developing its local cartel. That will eventually cost Australia dearly, unless it is changed. It is clear that America and Europe are either in decline or going to struggle and there is a seminal shift towards Asia. This has been realised by multinational American and European companies, but not in Australia. Broker support for Qantas is mixed and the analysis unimpressive.

UBS has a buy and a target price of $2.70, but concentrates on the cost cutting rather than the strategy:

The changes effectively mitigate additional investment in Qantas International by delaying AS380s, cut unprofitable routes (some London-Asia sectors), better leverage alliances (British Airways, LAN, MAS), establish its own premium short-haul hub in Asia (likely Singapore), and accelerate Jetstar’s growth through a JV in Japan.

We believe Qantas is targeting a doubling in the 5% it currently earns on A$8bn of capital invested in Qantas domestic and international. This only requires a 4% extra yield over costs and our forecasts contemplate something close to this over a five year period.

Deutsche Bank has a buy and a target price of $2.40. It views the move very much through the lens of domestic consumers, a cartel abroad:

Given it will compete with the Virgin/Singapore Airlines alliance for Australian travel to Asia and it will not carry the imbedded loyalty of the Qantas brand we suspect the company is planning to rely on business travelers’ loyalty to the Qantas Frequent Flyer Program.

Royal Bank of Scotland, which has a buy and a target price of $2.68, is more interested in the regional strategy, although it sits on the fence:

The most interesting change to QAN’s international strategy is the planned creation of an Asia-based premium carrier, although few details have yet been provided. QAN naturally has a customer base of corporate travellers but faces tough competition from two established brands in Singapore Airlines and Cathay Pacific. In our view, the most logical base for QAN is Singapore, although management is still looking at other possibilities.

JP Morgan, which has an overweight recommendation and a target price of $2.47, pretty much states the obvious:

To achieve a group ROIC of ~12% by FY14E, we estimate Qantas would need to increase PBT by ~$1bn above our current $863m forecast. This timeline is ahead of management’s proposed target (~FY17), but is indicative of the task ahead. We do not believe this target can be met from cost savings alone e.g., we estimate staff redundancies under Phase 1 could save ~$120m pa from FY13 (already included in our forecasts).

Several components of Phase 1 focus on revenue upside and aim to generate additional value from existing assets. For example, establishing a premium Asian airline based in Singapore or KL will: i) increase Qantas’ exposure to the growing Asian market; and ii) allow Qantas to compete more effectively with SIA for outbound traffic from Australia to south Asia.

What is noticeably missing in all this is an analysis of what is obviously a regional strategy. And that is the problem. Analysts look at what is easy: the impact of cost cutting or cost containment, the financials like debt or some obvious revenue projections, maybe mutter about potential industrial action. But they do not look at strategy. And because they do not, it makes it much harder for Australian corporates to get support for any globalising or regionalising plays.

The Qantas strategy is an ambitious flight into regional competition. It is the analysts that are pedestrian.

dbdaily (3)

UBS – Wed (3)

RBS 17.08.11

JP Morgan 17.08.11

Comments

  1. Has anyone even asked why Qantas is going to own more than 1/3rd of an airline that will primarily fly domestic routes in Japan? Isn’t that very big news?

    • The CEO of Jetstar at the announcement in Japan stated that it will operate international routes within 5 hours of its home ports. It is similar to the current Jetstar Group strategy.

  2. I find it incredible that while QAN is showing that they have to look towards the growth areas, the Unions and populist politicians are trying to keep the status quo. The movement into Asia is to take advantage of the ASEAN free skies agreement. As a purely Australian airline they would miss that opportunity which would greatly benefit the Australian operations. QAN appears to not have any intention to close the QAN brand. However given that the current international operations are losing money, they are heading towards being a small regional niche player like AIR NZ. If the Unions continue with their current rhetoric this will be the case.

    In defence of the unions QAN does not have a good track record in communicating with its employees and their Unions. QAN has to give credit to its employees for the generally high level of service that they offer. Years of being white anted by Mr Dixon didn’t help. However the Unions have not given an inch. There are ways where international ops can benefit from this new Asian operation. QAN mgt have to do better in communicating that.

    All in all this strategy makes sense and I was thinking about the MB post talking about how Australian Companies don’t have an Asian strategy when it was released. Given the voices against it, I have a feeling that the QAN board will be more intent in seeing it happen.

    • Dumb_Non_Economist

      Stu, I agree with the idea that QF has to look towards Asia, however the unions view this with great apprehension, for good reason. They see a large shift of employment from Australia to Asia, especially with maintenance, FAs and pilots as a way to reduce their costs. Having had some experience of maintenance in the Philippines, the standard of safety in FA training and pilots in general (excepting CX/SQ)I think they are justified.

      Airline management worldwide have shown little regard to their employees and QF is about the worst followed closely by CX and SQ. The little leprechaun’s attitude to IR is very colonial as is CX/SQ. JB has shown a far better managerial style than Joyce by a long shot.

      Jetstar is attempting to do what has happened with shipping, they want to be able to have their offshore based crew fly Oz registered aircraft to and within Austrlia, the day they achieve that is the day I’ll go by boat/train.

      The standard of LCCs in Asia isn’t something to aim for.

      • If I was a shareholder, I’d be telling Qantas to shut down QF International. I wonder how the unions will like that.

        Have a read through a few Qantas annual reports, it’s a fairly sobering experience.

  3. When you have Atom Ant, the Mad Kat in the Hat, and the mutant X-man Senator Stunt lined up against you, I know who’s side I would rather be on. Why people use our popular media to trash our regional neighbors to score a short term political point is beyond me. For Qantas to succeed it must become an international company. Legislation needs to be changed to allow it to become so.

    • Steve 1 – its the age of big business bashing…

      Politicians are way too full of themselves and are being supported by a naieve public that blame the GFC on private sector alone.

      The Road to Serfdom has begun!

  4. Strategy may be right – but Qantas has a big peception problem among it’s customers and employees and the political class – largely because of an arrogant and inflexible management.

    Can they deliver? Who knows – only time will tell.

  5. Never invest in an Airline is what I was advised a long time ago. I still believe that today. Also a shift to Asia does not mean profit as Asia comes with it’s own problems. The wages might be lower, but it’s generally for a good reason. Having said that the union grip on Qantas make it hard to be profitable. Run away is my opinion.

  6. Does Qantas have the management skill to run an Asian airline? The answer would be no.

    Try as I might, I couldn’t see how an Australian airline can compete with ‘non-profit’ Asian airlines on price. There may be a case if they went with the A380/787 as a ‘premium service’. The A320 on the other hand are cramped and EXTREMELY uncomfortable. I will not fly on it even if Qantas/Jetstar pays me, so how can they compete against Asian rival with comfortable twin aisle planes?

    When it comes to air travel, route is more important than price. Flying to Dallas instead of San Francisco on a 747-400? They need to leave the luggage behind if the plane is full!!

    http://www.ausbt.com.au/qantas-leaves-baggage-behind-in-dallas-deliberately

    This post on PPrune sums up Qantas future.

    http://www.pprune.org/dg-p-reporting-points/456991-exploiting-asian-markets-irish-suicide.html

    Now, the current Qantas model is definitely unsustainable. Unfortunately, their new strategy will cause their domestic customer to abandon them, and the Qantas will be run into the ground.

  7. Europe and the US are stagnating so Qantas launches a domestic airline in Japan. Yep, they sure know where the growth is.

    The other point is, why on Earth does Qantas feel that it is going to be able to do any better than the existing premium carriers in Asia? If they are trying to catch the Chinese business market then I sure hope they aren’t planning on using KL as a base. Who in their right mind would fly from China to KL to travel to North America or Europe?

    There’s a reason Qantas trades below its 1995 float price. Unfortunately for Qantas, the more things change the more they stay the same.

    Cheers

    Ben

  8. Yeah, Asia may be experiencing solid growth, but it will not be an easy market to break into. Singapore, Japan, Malay, Cathay Pacific, Garuda, the competition is fierce and nothing less than first-rate will cut ’em a slice of the pie. I doubt they even have what it takes to compete with the aformentioned big boys amongst others.

  9. Nice spin stu. Alan Joyce was at Ansett management driving into the ground until it died. Da lil turd started Jestar Vietnam, an abject failure. The routes that QF want to dump are full. Checked out the Cathay pay and profits lately? Cathay drivers and CC are paid more yet their company is in profit, bizarre. Then their are Emirate incomes…

    You have NFI!

  10. El Zorro Dorado

    Your comment on the standard of analysis ( and analysts) on QF is right on the mark. In this case –and in hundreds of others literally –the scope and depth of thought is extremely shallow. To be effective in providing a commentary on a company which knows its business very well, analysts have to get into the skin of management and have detailed knowledge of the markets and environment the company faces. Most have not a single clue about aviation nor about travel or the business markets and social changes underway in Asia and elsewhere QF flies. The move by QF is a gutz effort but reflects a company capacity to respond aggressively to the rapid changes underway.It’s not so much a regional strategy but a world strategy –one which reflects the shift in business predominance away from the west. I just hope that QF has the management depth and corporate/commercial skills to make it all work in a multitude of cut-throat markets. QF’s operational skills are good but their strategy calls for much greater commercial development skills and resources than have been apparent or needed to date. I wish them well in this. Incidentally, the target values of each of the analysts may be important to equally anal fund managers –but they simply have not a clue.