Qantas chief says a partnership with Air NZ would be equal

By Graeme Kennedy

Friday 5th July 2002

'In the travel and tourism food chain, everybody gets to eat before the airlines'
- Qantas chief executive, Geoff Dixon

Qantas chief executive Geoff Dixon has confirmed the carrier is continuing negotiations for a close partnership with Air New Zealand as one of several options to strengthen his airline's base for increased international growth.

Mr Dixon said the talks included the possibility of Qantas taking a minority stake but having informed the Australian Stock Exchange of the moves it would be inappropriate for him to reveal anything further "at this point."

He told the Australian National Aviation Press Club a partnership with Air New Zealand would be one of equals - "and I stress equals" - as part of creating a stronger basis for global growth.

"We are around the tenth-largest airline in the world based on revenue passenger kilometres but we still form less than 3% of the world market," Mr Dixon said. "We have no option but to continue to forge international relationships.

"We find ourselves operating in what people are now calling the post-September 11 world and according to the International Air Transport Association (Iata) 2001 was only the second year in the history of modern civil aviation in which international traffic declined."

He pointed out that Iata member airlines reported a collective loss of $US12 billion - about as much as they had made in profits in the previous four years - and that the best the industry could hope for in 2002 was to halve those losses which, as well as the effects of September 11, reflected long-term forces putting huge pressures on the profitability of all carriers.

Mr Dixon said airlines could now be categorised into three groups - those which had responded to the "new" world and were genuinely competitive, others which were performing poorly and those, like Air New Zealand, which were either back in government hands or receiving substantial government support.

He said Qantas, which gained most of its revenues from the international travel market and deployed 75% of its capacity on international routes, was aware that it was as vulnerable as other world carriers in the existing difficult conditions.

"In this environment, the logic of further consolidation of the industry to achieve economies of size is compelling," Mr Dixon said.

"Just recently, American Airlines chairman and chief executive Don Carty flagged the previously heretical notion that the US aviation market should lift its restrictions on foreign investment.

"If a leader of the US airline industry is thinking like this, it is clear no major carrier can afford to ignore the needs for serious alliance relationships strengthened by equity."

Mr Dixon said the Australian government's Qantas Sale Act, which limited foreign investment in the carrier, remained a real barrier to the airline's ambitions to be globally competitive.

A single foreign airline can take 25% while total investment by offshore carriers cannot exceed 35%. Foreign investment from all sources including non-airline is capped at 49%.

"The act restricts our capacity to access global equity capital, imposes an artificial ceiling on our share price and consequently increases our cost of capital," he said.

"It is essential that in trying to maintain our position as a financially successful airline Qantas is not constrained by legislation which is restricting our growth in a vastly changed aviation and overall economic environment.

"The removal of artificial and company-specific legislation such as the Qantas Act is an absolute necessity to enable us to realise our full potential in an industry which is like no other."

Mr Dixon said repeal of the act to allow foreign investment would not mean Qantas would lose its Australian identity. The carrier would remain an Australian company with an Australian board and headquarters and subject to Foreign Investment Review Board scrutiny like all other Australian companies.

"All that would change is that we would be in a stronger position to take the Spirit of Australia brand to the global market," he said.

Mr Dixon said Qantas' recent forecast that it would exceed its before-tax profit forecast of $A550 million by 10% for the 2002 financial year would be a good result in the current environment.

"But the market will expect us to do much better next year because of the billions of dollars of assets we utilise," he said.

On the domestic scene, Mr Dixon said that while it was no secret that Qantas held a large share of the market since the collapse of former Air New Zealand subsidiary Ansett Australia it now faced a "very agile" competitor in Virgin Blue, while there were no barriers to further competitors entering the market.

He said Qantas added the equivalent of seven years' capacity growth "virtually over-night" to meet demand after Ansett's demise with its domestic operations growing about 50% in six to eight months as it spent $A60 million to quickly lease more capacity.

"By August last year the siren call for more and cheaper air fares in Australia had created a crisis situation in the domestic industry," he said.

"Impulse had failed and been absorbed by Qantas, Ansett was on track by our estimates to lose close to $A400 million, Virgin was struggling and had lost considerably in April, May and June and Qantas - despite good international and subsidiary results - had only broken even on domestic operations between January and June.

"With four airlines being urged on to greater price competition by a gaggle of self-interested parties including some state governments, tourism authorities and hotel and resort operators, the industry in domestic Australia was bleeding more than $A500 million in a little more than nine months.

"And I am not sure that anybody except the management of the airlines and some of their staff cared - in the travel and tourism food chain, everybody gets to eat before the airlines."

Mr Dixon said size was no guarantee of survival although Qantas had begun one of the biggest capital investment programmes in its history with an average spend of $A2.5 billion a year over the next four years.

"The future of Qantas is not inevitable," he said. "We have no inherent right to continue and like everyone else we have to adapt to survive in the emerging world aviation order - we are not immune."

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