More spin on the spin off of the Qantas off frequent flyer programme

A report in The Australian says that the spin off of the $3 billion-plus frequent flyer operation, follows in the path of Air Canada which transformed its equivalent arm into a company worth more than the airline itself, with Qantas seeking to list the new vehicle on the Australian Securities Exchange within nine months.

Qantas will keep a controlling stake and bring in as a partner Aeroplan, the highly successful Air Canada offshoot.

Details of the proposed spin-off are expected to be unveiled on Thursday when the company releases a record annual pre-tax profit of an estimated $1 billion.

The company is also expected to announce a capital return of up to $2 billion in the form of a special dividend and share buyback.

Aeroplan was spun out of Air Canada in 2002 and listed on the Toronto Stock Exchange in 2005 at a market capitalisation of $C2 billion. The market capitalisation has more than doubled and is now bigger than Air Canada.

UBS estimates that Qantas generates about $175 million in pre-tax profit from the frequent flyer business and if it is put on a multiple of 20 times earnings it could be worth as much as $3.5 billion.

Aeroplan has a similar number of frequent flyer customers as Qantas and has a market capitalisation of about $C4.1 billion ($4.6 billion).

Given Qantas’s 5 million-plus customers are frequent flyer members, Qantas would remain in control of the entity.  It will include a Jetstar loyalty program and a more powerful offering to frequent flyer members such as the ability to be able to buy frequent flyer seats on any flight on any day.

But the first cab off the rank in its restructuring program is understood to be the creation of a separate fleet business, with this entity designed to extract better capital management options and financial taxation options and is based on an adaptation of a model devised by the private equity consortium that bid for the airline.

Depending on how it is structured, it could equate to a $US1.5 billion to $US2 billion ($1.78-2.37 billion) capital windfall.

The proposal is still being thrashed out, but the new entity is likely to transfer some or all of Qantas’s existing owned fleet as well as the new double-decker A380s into a special purpose fleet company and lease the aircraft back.

This is likely to be set up in joint venture with an existing lessor, and the lessor would manage the vehicle and derive a fee.

The vehicle would be structured in such a way that it would generate a loss and therefore pay no tax, with the benefits passing to the joint venture partners through lower leasing rates for Qantas and a guaranteed fee stream for the lessor.

The new entity would include some sort of partnership with either Allco Finance Group or Macquarie Bank.

Qantas controls $15 billion of aircraft assets, or 217 aircraft in service, 154 of which are on its balance sheet. It has one of the largest re-equipment programs under way to bring down its fleet age, as well as to grow. This is expected to cost $US11.5 billion.

There is a lot it can do with this in terms of depreciation, leasing, taking aircraft off the balance sheet as well as refinancing the old aircraft.

In the meantime, Qantas chief Geoff Dixon will preside over a record profit for 2007 and a capital management program.  Given that Qantas’s strong load and traffic figures have led analysts to lift their forecasts in the three months since the previous upgrade, the median of analysts are a record $1.06 billion pre-tax profit.

Report by The Mole