Qantas share price could outstrip APA offer.

A report in the Sydney Morning Herald says that while Qantas has attempted to deflate expectations it is on track for a massive profit surge, one broker predicted the airline’s share price could outstrip the Airline Partners Australia $5.45 takeover offer by as much as $1.05 a share.

Underscoring the question of whether the Qantas board and its advisers could have haggled a higher price from the Macquarie Bank and Texas Pacific-led consortium, JP Morgan slapped a $5.68 target price on the carrier, remarking it had “enormous upside risk” to its earnings.

“APA’s offer of $5.45 per share now represents a negligible premium to our valuation,” JP Morgan analyst Matt Crowe said in a note to clients. “If, as we expect, operating conditions remain buoyant for the next six months we believe Qantas will trade above the APA offer.

“While we do not dispute that these risks are real and potentially large, at the moment we think upside risks are a bigger issue for Qantas earnings than downside risks.”

Mr Crowe said he believed Qantas’s guidance of a doubling of pre-tax profit to $1.23 billion in the two years to June 30, 2007 looked “conservative in terms of numbers and tone”.

Highlighting the airline in January had filled its highest percentage of seats since its 1995 public listing, Mr Crowe calculated every extra 1% lift in Qantas’s load factors represented an extra $150 million in pre-tax profit. In January it filled 82.7% of its seats, up on its 76 per cent long-term average.

“The last two months of Qantas operating statistics were extremely strong,” Mr Crowe said. “Unfortunately February operating data will not be released before APA’s offer for Qantas closes on 3 April.”

If load factors stayed around 80%, which Mr Crowe conceded was unlikely, he said the airline could be worth as much as $6.50 a share.

Goldman Sachs JBWere analyst Paul Ryan agreed Qantas was “somewhat conservative”. But he said this was understandable given the volatility of the airline industry.

In a bid to hose down expectations, Qantas has warned its profit forecasts could be tempered by the entry of the Singapore low-cost airline Tiger and expansion of Virgin Blue in the domestic market. Along with the uncertainty over oil prices, the airline also warned of potential litigation costs stemming from a European Union and US investigation into air cargo price fixing among airlines.

Qantas CEO Geoff Dixon broke his silence on Friday by warning the airline needed to step up its cost-cutting efforts – even if the private equity deal failed. This follows the airline’s admission on Thursday that its cost-cutting program was behind budget.

Seizing on news Qatar Airways had been granted rights to fly daily into Melbourne, and a second Australian city from next year, Mr Dixon said the looming entry of the fourth Middle Eastern carrier into Australia meant Qantas had “no option but to achieve further cost savings if it is to remain competitive”.

“The reality is that whatever its ownership structure, Qantas must change, and will continue to change, to ensure it remains successful,” Mr Dixon said in a statement.

Despite Mr Dixon’s warnings, Qatar is not increasing capacity into Melbourne. It is filling the void that was left by the recent retreat from the city of Austrian Airlines and British Airways.

Qantas shares rose 2c to $5.14.

Report by The Mole with material from the Sydney Morning Herald