Dixon flies under the radar…………….

A report in The Australian says Qantas is believed to be close to striking a deal as the global credit crunch makes debt raisings and other financial offerings increasingly difficult and expensive, it is no surprise that Qantas boss Geoff Dixon has mothballed plans to launch an aircraft-leasing vehicle until next year.

In the meantime, he is eyeing some opportunities in the physical world, namely retail travel agencies, to complement its Qantas Holidays business.

Qantas is believed to be close to striking a deal with a listed retail travel business for either a full takeover bid or to buy a strategic stake.

Qantas is not interested in online travel agents, because it has its own online business, but wants a business with shopfronts.

The most likely candidates are Flight Centre or Jetset Travelworld.

And given the recent on-again, off-again sale of Flight Centre and the shenanigans that has caused in the market, the more likely option is Jetset, which operates the largest travel agency franchise in the country.

With more than 600 franchise agencies trading under the Jetset and Travelworld brand names, as well as a fully integrated national airline ticketing system, Qantas could do a lot worse.

Jetset listed on the ASX at 16c in September 2000, and is currently trading at $2.88, putting it on a market capitalisation of $267 million.

Moving into the retail space makes a lot of sense. If the airline wants to remain top dog, it needs to get directly involved in all the distribution channels.

The reason is simple, because the Australian (and global) travel landscape is changing fast and consolidation is occurring at breakneck speed.

Just this week, online accommodation booker Wotif.com Holdings trumped Webjet’s friendly takeover bid for Travel.com.au.

The activity follows MFS’s $700 million acquisition of S8 last year after an acquisition spree in which S8 bought Harvey World Travel, Transonic Travel and Travelscene.

The upshot is that customers are faced with a complex choice when turning to a travel partner for advice on what travel experience best suits them.

The travel agents are taking advantage of this and nurturing strong relationships with preferred suppliers.

They are also moving into the wholesale space themselves, which is further marginalising Qantas’s wholesale business.

Qantas is right to start thinking about how to access customers from a retail perspective, given the amount of competition hitting Australia’s shores in the form of Tiger Airways, Emirates and others, all of which are beefing up their own direct relationships with customers.

Qantas used to own shopfronts, years ago, but got out on the basis that they were in competition with their customers, the travel agents.

For this reason it has struggled with the merits of moving back in, concerned about the potential backlash from the travel agents.

But as the industry changes, and Qantas’s wholesale travel business Qantas Holidays faces being marginalised just as it is about to spin off into a separate entity, the company is looking at how to increase its business proposition for a potential IPO next year.

Qantas Holidays makes good money, with in 2007, it generated a profit before tax of $47 million, on revenue of $930 million, giving it a value of $700 million on an earnings multiple of 15.

Dixon and his gang of executives, including Peter Gregg, are working frantically behind the scenes to create a new-look Qantas that includes spinning off some of its businesses into separate entities.

But the creation of a new fleet company, which was expected to be launched later this year, has now been delayed until some time next year – or when the credit markets improve.

This follows the recent sub-prime credit crisis, which has spread globally, putting the price of credit up and making the markets volatile.

While Dixon would have no trouble getting funding, it is more a question of the cost of debt and the appetite of the market for such a vehicle.

Until the market settles down, the business will remain on the drawing board. This is a shame, because it has the potential to free up more than $2 billion in capital, as well as enable it to do a lot in terms of depreciation, leasing, writing off old aircraft and so on.

The idea was to create a separate vehicle and transfer some or all of the owned fleet into a special-purpose fleet company, from which Qantas would then lease the aircraft back. 

Given Qantas currently has $US15 billion ($16.8 billion) of aircraft assets and committed capital expenditure available for securitisation, it would be a significant business.

Indeed, the airline’s fleet as at June 2007 included 217 aircraft, 63 operating leased and the balance owned on balance sheet.

According to AirClaims, Qantas’s operating fleet has a market value of $US6.3billion, of which $US3.8billion is held on Qantas’s balance sheet.

But with the cost of credit going up, Dixon is paying more attention to Qantas’s other businesses, including freight, its frequent flier business and holidays.

To this end, Dixon is in discussions with various parties as to how to structure its freight business to create an integrated freight and logistics company, which includes developing a footprint in Asia, where it recently made a small strategic acquisition.

It is also evaluating intra-Asian Air freight opportunities with Pacific Airlines and Jetstar Asia.

Qantas’s freight business includes a 50 per cent stake in Australian Air Express and Startrack Express.

On to politics: the company is gearing up for a visit to Canberra next week to lobby the Howard Government and the Opposition on how to get an open-skies agreement in Britain, similar to the one Singapore Airlines has announced, which removes all restrictions on flights between Singapore and Britain.

It is also pushing for expanded rights to operate onward services from the west coast of the US to other American cities as it braces for the impact of greater competition on the lucrative trans-Pacific route.

It follows a trend toward so-called open-skies agreements globally, including a deal between the European Union and the US and the gradual relaxation of restrictions between members of the Association of South-East Asian Nations.

Once this happens, the next step is for the US to open the door for an equity-sharing deal between Qantas and a US carrier.

Report by The Mole from The Australian