Qantas, PAL and MAS

Dino D'Amore
By Dino D'Amore August 28, 2014 15:22

Qantas, PAL and MAS

PAL’s shareholding sale moves ahead while Qantas shows yet again that aircraft are totally overvalued on the books of many flag carriers. Air One needs a lessor to create more Indian competition; while it really is a case of buy Qantas and IAG stock.

Ramon Ang’s San Miguel has finally agreed to sell its 49% stake and with it management control of Philippine Airlines’ parent PAL Holdings to business tycoon and partner Lucio Tan. Lucio Tan will buy out San Miguel in a deal that should be worth about $1.568bn. Any price paid below this amount will represent a very good deal for Tan and that is before the potential value of the airline is considered beyond this fiscal year given that restrictions into the EU and US have been lifted during 2014. Tan currently holds 51% of stock through the holding company but San Miguel retains management control.

PAL Holdings posted a net profit of P1.46bn ($34m) in the April-June 2014 quarter from a P1.06bn net for the corresponding 2013 period and this trend is likely to continue. So, if Tan is going to buyout San Miguel, then it really has to be now or never.

Meanwhile as Qantas announces an underlying loss of A$646m from an A$186 million profit a year earlier, we really have to say that the airline is doing very well indeed. These figures are far better than expected and it looks like the business is continuing its turnaround as capacity growth is slowed.

The initial share price dip was a trigger for intense buying sending shares up 7.3% on the day, that increase is on the back of the underlying figures and there is most likely more value to be had as the airline is positioning itself to seek a new investor to take a minority stake in its broken-away international business.

“We have decided to create a new holding company structure and corporate entity for Qantas International,” said its chief executive, Alan Joyce. “This structure increases the potential for future investment…At this stage, those options could be mixed and varied, we’re not going to speculate on how they could occur, but this is aimed at allowing us to seek further investment and future investment around the international business.”

This structure would mean that Qantas needs to re-visit the splitting of the Air Operator’s Certificates so that the domestic and international businesses each have their own. A plan abandoned in February 2014. If Qantas re-starts this process then it would mean that a sale effort is on.

Many will ask: How is it that ANZ can post monster profit gains while Qantas is haemorrhaging money? The answer is two-fold: ANZ has something of a monopoly going on for its core routes, while Qantas is in a market share war with Virgin Australia, the Chinese majors and in all reality, seemingly the entire weight of OneWorld and Star Alliance, thus competition is key. However unionization and political interference are also playing their part in weighing Qantas down but the maintaining of international traffic rights is the real killer for the airline and given that Qantas cannot sell more than 49% of the business, and it is hiving off the far more attractive domestic business, we have to ask: who would want 49% of this?

Of course much of this talk at Qantas is a very clever deflection of the press in order to mitigate the publicity of the totally dreadful write-down of aircraft values.  Management at the airline have moved to create a smoke screen – which as I write has been most effective with mainstream press – but let us not get distracted from the core message from today in the Qantas figures: Qantas has had to write-down $2.6 billion on the value of the fleet because they have been sitting on the totally overvalued books for many years now. Qantas management, in another quality move, have decided that it would be best to get all bad news out of the way in one go. The reality is that the move to write-down the aircraft will cut depreciation costs by over $200m a year, which further positions the international business for a sale in the mid-to-long term. At least Qantas has got this out of the way unlike other airlines such as Thai.

Qantas has previously said it will not exercise options or purchase rights over 50 Boeing 787-9s until its international business returns to break-even – I do not think that will be a very long wait! Qantas shares look to be a good investment right now before any split.

Over in India, Air One Aviation is looking to lease and/or purchase 20 A320s and will now also look at 737s in order to start services as planned by mid-2015 before SIA/Tata’s Vistara gets too much of a foothold on competing routes with their 20 leased A320s from BOC Aviation – a deal that may well give Vistara the edge it needs. At this time Air One is unable to get the right positions with any lessors. Can you help?

Meanwhile, the Malaysian government has approved the restructuring of Malaysia Airlines (MAS) in the process sealing the fate of about 19,500 staff (a quarter of the total) and many long-haul routes to concentrate on the airline’s core Asian business while preserving some core long-haul routes into the EU to help feed traffic. Also going is the MRO business.

In all this IAG is a big winner as British Airways will most likely pick-up the passengers for OneWorld on the abandoned and reduced services. The other winner will be of course AirAsia and it must be said that any MAS contraction will see AirAsia very quickly rush into the void. Ironic one may think given that some three years ago AirAsia, through the TUNE collaboration, tried to buy MAS in a deal that would have given the airline a valuation about double its current listing. That deal was crushed by the unions, the same unions that now face 19,500 staff cuts. However given the causes of the MAS problems we can argue that AirAsia has been very lucky indeed on several counts.

But all in all it is IAG shares that are today now showing value prior to the full MAS announcement which will require a stiff drink before reading.

Dino D'Amore
By Dino D'Amore August 28, 2014 15:22