May 24, 2007

Qantas Airways May Spin Off Units, Return Cash

Qantas Airways Ltd. Chief Executive Officer Geoff Dixon said the airline may spin off some units or return cash to investors after the failure of a A$11.1 billion ($9.1 billion) buyout he supported.

Australia's largest airline is benefiting from "favorable" conditions such as rising ticket sales and strong global economic growth, Dixon told analysts today in his first public comments since the Macquarie Bank Ltd.-led buyout collapsed May 8.

"We think we can handle most of what's coming at us," said the 67-year-old, who last week pledged to stay at the airline for at least two more years.

He is meeting with employees, investors and analysts this week to ease strains after shareholders ignored a board endorsement and rejected the A$5.45-a-share cash buyout as too low.

"The overall tone was positive for Qantas," said Matt Crowe, a transport analyst at JPMorgan Chase & Co. in Sydney. "They highlighted freight and the loyalty program as areas where they think they can do something to enhance value."

Qantas shares rose 4 cents to A$5.46 at the close of trade in Sydney. They earlier reached a record A$5.54 in Sydney, climbing above the offer price for the first time. More than 112 million shares traded, making it the most active stock on the Australian exchange today.

Chairman Margaret Jackson had urged investors to accept the offer, saying shareholders who thought the stock wouldn't fall if the buyout failed had a "mental problem." Jackson last week said she will quit the board.

Frequent Flyers

Qantas will consider returning capital to shareholders via a special dividend, a share buy-back or splitting up the company, Dixon said without elaborating.

The airline will review the ownership of its loyalty program, which has 4.9 million members, Dixon said. The unit makes money by selling air miles to banks, credit card companies and retailers to use to reward customers.

Qantas plans to create an Asia-Pacific freight company, and is finalizing a small acquisition in Asia, according to a slide presentation lodged with the stock exchange. The airline is also interested in further acquisitions throughout Asia, particularly as it seeks to expand its low-cost carrier Jetstar in markets such as Indonesia, Thailand and the Philippines, Dixon said.

Analysts at UBS AG and Goldman Sachs JBWere Pty this week upgraded their ratings on Qantas shares to "buy" from "hold," citing factors such as increased demand for international travel.

Profit Forecasts

Global airline passenger traffic, measured as the number of passengers multiplied by the distance flown, will rise 5 percent this year, and cargo traffic will increase about 4.9 percent, the Geneva- and Montreal-based International Air Transport Association said April 4.

The "favorable" conditions will probably last for at least 12 to 18 months, Dixon said.

Australia's economy is in its 16th straight year of growth and the jobless rate has fallen to a 31-year low, giving more people more to spend on holidays and travel.

Qantas increased its earnings forecast twice after the board endorsed the buyout, saying pretax profit may almost double to A$1.23 billion in fiscal 2008, from A$671 million in the 12 months ended June 30, 2006.

The carrier didn't see the need to upgrade its forecast for the current fiscal year, Dixon said today.

The buyout group, which also included Texas-based TPG Inc. and Sydney-based Allco Finance Group, planned to increase Qantas's debt to return A$4 billion to shareholders within a year of taking control.

Credit Rating

The airline may return A$2.2 billion to shareholders through a special dividend or share buyback, analysts at Merrill Lynch & Co. said in a report last week.

Standard & Poor's affirmed Qantas's BBB+ credit rating after the buyout failed, though said a return of capital to investors may lead to a downgrade.

Qantas had A$3.18 billion cash at Dec. 31 and total debt of almost A$7.5 billion, according to S&P.

The entry of discount carrier Tiger Airways Pte to Australia, higher oil prices and an increase in the number of aircraft globally, posed a risk to Qantas's earnings outlook, Dixon said. Tiger is 49 percent owned by Singapore Airlines Ltd.

Qantas has 67 percent of the Australian air travel market, it said today. Jetstar, which was started to compete with Virgin Blue Holdings Ltd., has a 15 percent market share.

James Packer, Australia's richest man and executive chairman of Publishing & Broadcasting Ltd., said last week he would also step down from the Qantas board. He didn't provide a reason for the decision.

The airline will conduct an "orderly" search for new directors, with replacements likely to be named before the annual shareholder meeting later in the year, Dixon said.

To contact the reporter on this story: Joyce Moullakis in Sydney at

Source: Bloomberg

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