Qantas has its reasons for hiding light under bushel

A report in Sydney Morning Herald’s ABACUS says that as Qantas boss Geoff Dixon continued his French mini-break following his attendance at James Packer’s wedding last week, he left his loyal lieutenant and finance head Peter Gregg to craft a statement in the most obscure and understated way to let only the most astute reader know that the company’s profit was going to be bigger than previous company indications.

Yes, an upward profit revision. But getting Qantas to tell the market that its results are more positive than previously expected is like pulling teeth.

As readers will be aware, just about every other listed company in Australia delights in the prospect of being able to deliver positive news. However, for Qantas, it is never that simple.

Indeed, one of the great criticisms that investors have had of Qantas is that it has always been working several agendas when it comes to letting the market understand its prospects.

Those institutional shareholders that refused to accept the private equity bid for the airline argued that one of the reasons the Qantas share price lagged its real value was that the management massaged profit expectations down or, at the very least, underplayed the upside.

Traditionally, this has been because Dixon was busy walking a very fine line. For years he has been managing the industrial relations and public relations situation.

In order that he could take costs out of the business he has needed to renegotiate with the various and largely unionised workers. In doing so he played the “profits under threat” card on a regular basis when it came to renegotiating salaries and conditions – and this continues.

Qantas’s other agenda has long been its attempts to lift foreign ownership restrictions imposed by the Government. While this continues to be something of a lost cause, Dixon is always aware that removal of these ownership barriers will enhance the company’s share price and reduce its cost of capital.

More recently, Dixon has had even more reason for downplaying the earnings prospects. The private equity consortium’s bid for Qantas was supported by the board and management but ultimately rejected by shareholders. In order to put weight behind the bid, Qantas management continued to caution about the risks to earnings, the most immediate of which was the threat of Singapore’s Tiger Airways entering the Australian domestic market.

(It’s worth mentioning that there are mixed messages about this from within Qantas. At a Press Club function earlier this month, Jetstar boss Alan Joyce laughed off the threat imposed by Tiger, suggesting the Asian newcomer was already bleeding millions of dollars.)

During the period that the private equity bid was active, Qantas had to reluctantly upgrade its earnings twice, putting pressure on the bid’s prospects for success and exposing the board and management as attempting to sell the company too cheaply.

Having yet another profit upgrade so soon after the bid was unsuccessful is yet further evidence that Qantas had been seriously undervalued.

Thus it would have given management no joy yesterday to have to admit that its 2007 earnings prospects were even better than they had reluctantly indicated only a few months ago.

It seems, however, that analysts were not about to fall for this management assessment again. Following the lapse of the bid, many stockbroking analysts revised their numbers up for 2007. This left Qantas in the position of having to confirm these broker revisions or look like they had left the rest of the market insufficiently informed.

Qantas took the appropriate move and got on board to let everyone know that the broker upgrades were on target. Of course, Qantas didn’t make it obvious: the news was tagged on to the last paragraph of an unrelated statement about selling its small shareholding in Air New Zealand.

Nor has the company been too forthcoming about who might be joining its board following the vacancies created following the departure of chairman Margaret Jackson and fellow director James Packer.

The board meets on July 18 and this could result in some clarity. Following the decision by QIC chairman Trevor Rowe to decline his invitation, the betting has moved back to James Strong as the new chairman.

Report by The Mole and ABACUS