Singapore Airlines CEO makes the most astute observation about Qantas sale

Perry Flint in Air Transport World, reports that we could leave it to Singapore Airlines CEO Chew Choon Seng to make perhaps what is the most astute observation about the pending takeover of Qantas by a private investment group led by Allco Equity Partners and Texas Pacific Group.

Speaking to ATWOnline News Editor Brian Straus recently, Chew pointed out that if, as appears likely, the sale is completed, “the beneficiaries of protectionism are not going to be the traveling public nor the greater Australian interests but financial investors.”Of course he hardly is a disinterested observer. He and his predecessors have been lobbying the Australian government for permission to carry passengers between Australia and the US for many years, a request that Canberra steadfastly has rejected, largely at the behest of Qantas.

Nonetheless, he is correct and it raises an interesting question. As long as Qantas belonged to the Australian people, either as an asset of the state or as a publicly traded company (in which thousands of mom-and-pop investors proudly lined up to buy shares), politicians could turn a blind eye to the fact that a significant portion of its profit came from an advantage maintained by government policy that likely translated into higher fares for consumers.

And now? Foreign interests will control around 40% of the carrier under the current buyout plan, making it more difficult to wave the Australian flag or should we say kangaroo the next time a Singapore Airlines or Emirates comes knocking on the door for traffic rights.

Of course with nearly $US9 billion sunk into the deal, we expect the new owners to lobby just as hard to retain the status quo. Indeed, they will have a new argument in their arsenal.

If past buyouts are anything to go by, Qantas will take on a substantial amount of financial leverage to support this deal, and just as US airlines used their tattered balance sheets following 9/11 as a reason to lobby for pension reform and tax relief, we expect Qantas’s new owners soon will be in Canberra demonstrating why the existing bilateral structure needs to be maintained at the risk of imperiling the airline.

Still, we would not bet too heavily on the government’s continued acquiescence. Up to this point, it has behaved with commendable consistency in this matter. No doubt it was tempted to intervene on behalf of what is a national icon, and such a step would have been welcomed by large segments of the population, but it has remained true to its free-market principles. Perhaps now it will be more aggressive in applying them to the realm of airline competition as well. Thus the takeover could lead to an increase in competition on the transpacific, probably not the thing the new owners have in mind at all.

Beyond that, longtime readers of this magazine know that we are not big fans of buyouts of healthy carriers. As Samuel Johnson observed about second marriages, airline mergers and acquisitions represent the triumph of hope over experience, and we are old enough to remember when Northwest Airlines had one of the strongest balance sheets in the industry. However, we also realize that Texas Pacific Group is a bird of a different feather. It was associated closely with the financial rescues of two US carriers, Continental and America West, and its founding partner David Bonderman is the chairman of Ryanair. This is an investment firm that understands and is drawn to the airline industry.

Mergers and acquisitions are a fact of life and they are occurring now because some of the sharpest minds in finance see a bright future for the airline industry for at least a few more years. That is an opinion that is shared elsewhere, witness US Airways’ run at Delta and rampant speculation about a United-Continental tie-up. We agree that things are looking up, but note that it doesn’t take much for things to turn down. None other than Warren Buffett met his comeuppance in this industry. One can make a distinction between a corporate takeover by an outsider and an airline-to-airline merger, but both are being driven by the same factors. Like it or not, the game’s afoot.

Report by Perry Flint in Air Transport World