Credit crisis grounds QF FF float

According to Geoff Easdown in The Herald Sun, Qantas directors are expected to suspend plans to raise $800 million in the proposed float of the airlines’ Frequent Flyer business.

The board will decide late this month whether to proceed with the initial public offering aimed at selling 40 per cent of the popular loyalty scheme that analysts have valued at $2 billion.

Frequent Flyer, now a separate business entity within the airline, was the national carrier’s second biggest earner in the year to June 30, finishing ahead of Jetstar with net profit of $163.6 million on sales of $849.3 million.

But board concerns about the state of the market and the ability for retail investors to raise cash at this time has already caused the project to be deferred.

At last month’s meeting it was agreed to wait until this month to make a decision when conditions might have improved.

Instead they have worsened, which virtually guarantees any share sale will not proceed at present.

Incoming chief executive Alan Joyce indicated as much at the weekend, making it clear that there was now a real question mark over the proposal.

“The move had always been subject to market conditions, and market conditions are very weak,” Mr Joyce said after a ceremony in the French city of Toulouse that he and and outgoing Qantas CEO Geoff Dixon attended to take delivery of the airline’s first A380 super jumbo.

Saying that the outcome could only be determined by the Qantas board, Mr Joyce added: “We will make recommendations to the board and we will be talking about it in the board meeting this month.”

“But we have always said we had to maximise value, and if market conditions were weak we wouldn’t do it, so that’s probably as far as I will go at the moment,” he said.

Any delay will scuttle months of work by the airline which has seen the program restructured to make it appeal to would-be investors and more attractive to members who can now redeem any seat on Qantas flights, but for a higher points expense.

The original scheme remains but has been criticised for its inability to provide seats when needed.

After last month’s board meeting Mr Dixon declared that the IPO was not delayed but would be decided between August and September.

Both Mr Joyce and Mr Dixon, who leaves the job after eight years on November 28, interrupted an investor roadshow in Britain, Europe and the United States to take part in the formal handover.

Both said that given present market conditions, they were surprised at the warm receptions they were receiving from investment houses during their two week mission.

“We are not having any difficulty in getting people to finance our aircraft,” Mr Dixon said in response to questions about the carrier’s $US35 billion plan to replace aged aircraft with new models.

As well as awaiting the 19 A380s it has ordered from Airbus, the airline has also ordered 65 787 Dreamliners from US aircraftmaker Boeing.

Mr Joyce said: “We have a number of (financing ) opportunities available to us and we are seen as an attractive investment grade product. We do not have any problems in the current environment and we are being offered finance on competitive terms.”

The message they have given global banks and investment houses during the roadshow is that Qantas has a strong balance sheet and remains largely protected from the problems other airlines elsewhere face.

Unlike other carriers, Qantas was not reliant on the financial services industry for corporate traffic, Mr Dixon said during his visit to Toulouse.

“Much of our business is derived from those working in the commodities area which continues to be strong,” he said.

With Airbus officials, Mr Dixon and Mr Joyce hosted late Friday a formal dinner for 200 that included global leaders in aviation, including chairman of Rolls-Royce Simon Robertson.

Rolls-Royce supplied jet engines to Qantas and designed the Trent 900 engine that powers the airline’s first A380.

Prior to the dinner, guests watched an impressive laser generated sound and light show where Australian Aboriginal themes, the Qantas story and scenes of the jetliner under construction were screened on the new Qantas aircraft’s all-white fuselage.

Earlier, both Mr Dixon and Mr Joyce reiterated their call to grow Qantas by merging the business with another mainline carrier.

“There’s not much value in running around buying bits and pieces of airlines in the current environment,” Mr Dixon said.

“What you have got to do is real mergers.”

Both Mr Dixon and Mr Joyce argued that airlines had to consolidate and grow to survive in a new era where high fuel costs and the cost of buying new aircraft were prohibitive, making it hard for smaller operators to compete.

British Airways and Spain’s Iberia agreed recently to consolidate their businesses and TWA and American Airlines also followed suit to dominate their US-based rivals.

While Qantas looks to follow, would-be partners are in short supply in the Asia-Pacific region.

Neither Air New Zealand nor Singapore Airlines fit the national carrier’s design plan.

A previous attempt to create a trans-Tasman merger with Air New Zealand was blocked by competition regulators and as Mr Dixon noted at the weekend: “I think we have both moved on from that deal”.

“They (Air NZ) are now owned 80 per cent by their government.”

He said a cross-Tasman arrangement would offer only one route and Middle East carrier Emirates was about to introduce a A380 super jumbo service.

And of former Prime Minister John Howard’s once preferred option for Qantas to consolidate with Singapore Airlines, Mr Dixon replied: “I don’t think they (SIA) are interested.”

He said that if a merger went ahead, Qantas was big enough and would have the financial strength — “and the best order book in the world” — to have a say about who controlled the business.

Asked if the Qantas Sale Act could prevent a merger from going ahead because of constraints the legislation imposed on foreign investment in the airline, Mr Dixon said there were “clever ways to put airlines together and get the synergies we want”.

A Report by The Mole