Call to free up Qantas routes

The Australian AVIATION, February 6, 2007


Glenda Korporaal, Blair Speedy

ONE of Australia's most respected fund managers, Kerr Neilson, has urged the federal Government to allow Singapore Airlines to fly on the Pacific route if Airline Partners Australia is allowed to buy Qantas.

The managing director of Platinum Asset Management, which manages $22 billion in funds, Mr Neilson said that if Qantas was owned by a private equity group focused on making a substantial profit, and was no longer a national icon, it should not receive special government protection when it came to key routes, such as the Pacific.

"If Qantas is no longer a national icon because it has basically become an EBIT (earnings before interest and tax) play, how much protection is the Government going to afford Qantas?" he noted to The Australian yesterday.

"Why should they if it is just another commercial undertaking?"

Mr Neilson said it was time that the Australian Government opened up the Pacific route to the US to new carriers, including Singapore Airlines.

"You can never get a seat," he said. "It is not consumer friendly. It's not in keeping with a deregulated economy."

His comments came as a director of the APA bidding consortium, Bob Mansfield, said that while the consortium was willing to consider some conditions - including a commitment to regional services - jobs could not be guaranteed. "On staffing, what we're putting on that is we can't guarantee jobs, because I don't think any employer can," Mr Mansfield told Southern Cross Radio.

A fund manager with a large institutional stake in Qantas said Mr Mansfield's comments highlighted the consortium's enthusiasm to complete the acquisition and was therefore good news for the airline's shareholders.

"The only real issue for current shareholders is that the bid gets torpedoed, because the share price would obviously pull back," the fund manager said.

The willingness of the bid team to address government concerns by guaranteeing to keep engineering maintenance within Australia and maintain regional services also suggested that they would not impose unexpected costs on the airline's new owners.

"Mansfield has already said the jobs will stay onshore, and if they are going to crystallise that from being a promise into being a condition, then it suggests they were going to adhere to those promises anyway, that it's in the business plan."

Mr Neilson said he could not see how the $11 billion bid by the Macquarie Bank-led private equity consortium would be in the best long-term operational interests of Qantas.

There was a danger with highly leveraged private equity bids that they damaged the business they took over as they cut costs to improve profits and pay for the debt, leaving it vulnerable to problems such as industrial action, higher fuel prices and other external shocks.

"I don't see how Qantas will become a stronger, better business when using more leverage."

However, as a major shareholder with $180 million in Singapore Airlines, Mr Neilson said he was "delighted" with the proposed takeover, as he felt it would benefit SIA.

"We own (shares in) Singapore Airlines and we are delighted at this takeover," he said. "We think it puts more and more opportunity in the way of Singapore."

Mr Neilson said the impact of the cost-cutting program of recent years was already evident to frequent flyers on Qantas, in service levels and the operation of the inflight entertainment system. "If you fly with them you will find there is not quite the same attitude from the staff as there was a few years ago," he said. "There is a sort of feeling that they have been squeezed too much."