Alan Joyce makes the right call (again) painful though it may be, while China Southern Builds a city. Also – Why Kingfisher cannot be let to fail:

Victoria
By Victoria August 23, 2012 14:37

Alan Joyce makes the right call (again) painful though it may be, while China Southern Builds a city. Also – Why Kingfisher cannot be let to fail:

In the Australian press it is going to be get-Alan day again no doubt starting tomorrow. Few airline executives in recent memory have had to put up with the stick that Alan Joyce has suffered and yet he and his team are guiding Qantas through a very tough period with great skill.

Qantas Airways reported a A$245m loss today for the year to June 30, 2012 from a A$250m profit for the year before, blaming rising fuel prices, and the series of strikes that temporarily grounded its fleet during the period. This is the first full year loss for Qantas since going private in 1995. Qantas said underlying profit before tax – the airline’s preferred measure of financial performance – was A$95m from A$552m the year before. Qantas blamed the annual loss on its A$4.3bn fuel bill – up 18% from last year and its international business, which lost A$450m.

In fact these figures are far better than we here had expected. For a start the Aussie Dollar has been hitting Qantas very hard for a number of years now and in its home APAC region this negative FX impact has of late got worse not better. It is also pleasing that the impact of the strikes has not been brushed under the carpet, the effect of the strikes on the bottom line was a $195m hit – that is 80% of the total loss at the airline – Qantas during the past year has done very well against headwinds and was in effect shot in the foot by striking employees.

After posting the result, Alan Joyce said Qantas would be cancelling its order of 35 787-9s but confirmed its commitment to the 15 787-8s on order. This is, we could argue is an overdue statement, but at least Alan and the team at Qantas have had the guts to push the plunger on the 787-9 order and sort finances out before anything else.

International competition is going to get far worse and the 787-9 will not change that fact or help the airline in this fight for survival. Sorting out finances and merging the international business would be the best bet but of course the Australian government already destroyed the perfectly-timed and best match-up back in 2005 when SIA came to the table. It is a one way street to the door of Emirates right now. But China Southern Airlines is an option.

Indeed it is odd to hear that China Southern Airlines is going down the well-trodden route of Krupp and Fiat in building a city for employees. The airline says it has grown so quickly that it has decided to build a $10bn city on the outskirts of its current home in Guangzhou.

Rice paddies, farms and forests on the banks of the Liuxi River will be replaced by concrete in an unusual butterfly-shaped layout that is bisected by the airport. In addition to being the airline’s administrative headquarters, it will also accommodate a university – specialising in relevant aviation curriculums, an IT and technology park, maintenance facilities, residential areas and possibly even an amusement park.

“This will be our home – not just in an administrative sense,” project director Liu Zhiqiang said. “It will be where we live and play. And not just for our employees. It will be a city for everyone.” Responsibility for designing the 400ha city was awarded to Woods Bagot after it beat off competition from consultancies from France and the United Kingdom.

Work on the city is due to start next year but the question is whether it just adds to the 90 or so cities in China that currently lie empty. Expect there to be some unhappy farmers and small protests before work starts. This story does underline the huge shift going on in the global economy.

Why Kingfisher cannot fail:
If Kingfisher were to collapse it is becoming clear that it may well damage the prospects of USL and ultimately the UB Group. United Spirits Ltd (USL), the alcohol company of the UB Group is starting to look overexposed to Kingfisher Airlines. As reported countless times; although USL has not directly lent to Kingfisher, it has a current outstanding debt of close to Rs400 crore towards United Breweries (UB Holdings) Ltd, the group’s holding company, which owns 28% of USL and which has supported Kingfisher Airlines by putting up just under 98% of this holding as collateral. UB Holdings has around R13,000 crore (US$2.4bn) exposure in Kingfisher which breaks down as Rs 4,000 crore through debt and equity and Rs9,000 crore through corporate guarantees to banks and lessors. To date Rs835 crore of guarantees have been revoked. The problem lay in the finances of USL itself as it lumbers under a debt of Rs8,600 crore and is trying to deleverage the same as costs mount.

Vijay is currently trying to bring in Diageo Plc to purchase a significant stake in USL that will reduce the debt. But Vijay Mallya must infuse at least Rs1,200 crore of equity into Kingfisher Airlines in the short term to prevent the crisis having a cascading effect on his other group companies such as UB Group.

The fact is that the UB Group is one of the largest employers in India, thus the political fallout from a total Kingfisher Airlines collapse will be significant. Vijay is playing the card that the airline and the other group companies are too intertwined to be considered separate – to date this has worked well for him. Much rests on the decisions of Diageo at this time.

US$1m = 5.5235 crore

Victoria
By Victoria August 23, 2012 14:37
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