In a shell game of corporate interests versus political point scoring in Canberra this morning, QANTAS chief executive Alan Joyce spilled the beans on its corporate model, stating he may sell low-cost carrier Jetstar. Why not go the whole hog and sell the fleet and keep the most profitable part? The Frequent Flyer program.
First, let’s hear the wailing from The Cupboard:
Mr Joyce told a Senate committee in Canberra that the amendments to the Qantas Sale Act proposed by independent Senator Nick Xenophon would apply intrusions and restrictions on Qantas Group airlines that did not apply to competitors.
Describing Senator Xenophon’s legislation as “misguided”, Mr Joyce said :”We have grave fears for the future of Qantas if these legislative proposals come into effect. To take just one example, he wishes to require that a Qantas Group airline such as Jetstar conduct the majority of its heavy maintenance in Australia.
“Jetstar would then be confronting competitors who enjoy a lower cost base by doing virtually none of their heavy maintenance in Australia. Those of us running Qantas would have to face a choice: allow Jetstar to fail within the confines of the Qantas Sale Act, or sell it to allow it to succeed outside it.
“That is a simple statement of the dilemma this legislation would construct.”
There are three dilemmas here for Mr Joyce. First, like his counterpart at Telstra (TLS) David Thodey, he must manage what is effectively a quasi private/public institution and all the stickiness and perverseness that entails. Second, without drastic public purse support, the QANTAS business model fails to provide an adequate return to shareholders. Thirdly, Joyce must battle the populist and correct view that the Australian economy should at least have a few skilled workers earning enough to at least buy houses off their workmates at ever increasing prices.
Qantas has faced some severe grilling these past few months, the efficacy of which was questioned here at MacroBusiness with a broader look at the commentary here.
The question for Australian voters is should QANTAS be saved at all? Why is so much time and government attention devoted to this particular company? This is, like so many Australian non-mining industrials and taxpayer supported banks, a very low return on equity (ROE) business:
And one that has destroyed shareholder capital, with the share price at a 15 year low:
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To put a possible Jetstar sale into perspective, for the 2011FY, QANTAS reported:
- $228 million in earnings for QANTAS Airlines
- $169 million in earnings for Jetstar
- $62 million in earnings for Freight services
- $342 million in earnings for Frequent Flyer
QANTAS will be releasing its interim result to the market next Thursday. Consensus forecast earnings are around 14 cents per share for the full year, with a slump in second half earnings at approx. 5 cents a share. Most analysts and brokers have a buy or strong buy on the stock, which is intriguing given the awesome risk revolving around the business, with JPMorgan in particular expecting a “challenging” earnings environment.
Maybe it is time for QANTAS to play to its strengths: sell the fleet to another (government-supported?) airline group and keep the Frequent Flyer program here. At least the latter can be run for a pittance.