Alan Joyce’s ‘boring’ flight path keeps Qantas in rare air

For Qantas chief Alan Joyce, the take-off in the airline’s shares vindicates a striking corporate turnaround story.

Qantas CEO Alan Joyce has overseen a striking turnaround. Picture: Renee Nowytarger

For Qantas chief executive Alan Joyce, the take-off in the airline’s shares is a vindication of a striking corporate turnaround story, but it also stirs the ghosts of the failed takeover bid by private equity a decade ago.

The company’s shares have been inching towards the $5 mark as it reaps the benefit of this week’s ratings upgrade from Moody’s and an earnings update earlier this month where it declared itself on track for its second-biggest yearly profit on record.

In December 2006, the Macquarie and Allco Finance Group-backed consortium Airline Partners Australia — headed by former Telstra chairman Bob Mansfield — tabled a $5.45-a-share bid. Including a 15c-a-share special dividend, this would equate to $5.60 a share. Others in the consortium include current Fairfax Media bidder the private equity firm TPG Capital and Canadian private equity play Onex.

Yesterday Qantas shares closed at $4.86, and on Tuesday shares in the airline touched $4.95 — the highest level in nearly a decade.

“The circumstances were obviously very different back then. It was before the global financial ­crisis,” Joyce tells The Weekend Australian. “I think the share price was trading pretty low and private ­equity saw that there was an opportunity of coming in. I think we’re very different now because the company has shown that it has got momentum behind it, that the share price is improving, that the earnings are being delivered.”

Hindsight, the Irish-born businessman says, “is a great thing”. Despite having supported the bid at the time, when he was chief executive of Jetstar, these days he says he is thankful it never took place.

“The company would have had a lot more debt than it should have and given the global financial crisis, it would have been hard to service that,” he says.

“And secondly, I think you would have had things done to the business like selling off Frequent Flyer that I don’t think are in the interests of the business.”

Joyce says that a private equity owner selling off the Australian carrier’s Frequent Flyer business would have been a “huge missed opportunity”. The business — which has twice been eyed off for the sales block since then — “is doing very well as a consequence of keeping” it, he says.

The loyalty division’s earnings have enjoyed double-digit growth and are expected to grow at between 7 per cent and 10 per cent yearly for the next five years.

In 2008, after the failed private equity bid, Qantas looked at listing the Frequent Flyer business, but ditched the idea as the global financial crisis struck. It looked again in 2014.

“We looked at it a couple of times but came to the conclusion this was not going to work and it was not going to create value and that’s why we’ve said we would never do it,” Joyce says.

Lending credence to Joyce’s view, this month Air Canada announced it would not renew the contract with the company that runs its loyalty program Aeroplan. Instead, it will kick off its own loyalty program in 2020. Aeroplan was originally Air Canada’s in-house program but was spun off into a separate business in 2005.

Asked what he thinks he can do to sustain the market’s enthusiasm for Qantas, Joyce says the answer is “a little bit boring”.

“It’s consistency.”

To this end, Joyce has focused on a so-called transformation plan that has focused on cutting costs, using the fleet more productively and looking to high-growth markets in Asia.

Balanced Equity’s Andrew Sisson, a long-time Qantas investor who stared down the private equity bid and eventually caused it to be scuttled, says Joyce has done a good job on that.

Sisson says that even two decades after the privatisation of Qantas, “there were still inefficiencies and it took a crisis to address those inefficiencies”.

It’s a far cry from the days when the price fell below $1 in late 2013 and Joyce unsuccessfully pleaded for a government debt guarantee, or when it closed at $1.65 before the 2011 grounding of the fleet because of industrial ­turmoil.

Industry veteran Peter Harbison, the executive chairman of CAPA-Centre for Aviation, says Qantas is a “very different” airline to a decade ago.

“It has muscled Virgin into submission domestically and solved many of its European international problems through the Emirates partnership,” Harbison says. “Its cost base is much lower, its financial fundamentals are much stronger and it has a coherent structure and strategy.”

Last year Qantas delivered a record profit of $1.53 billion.

This year, underlying pre-tax profit is forecast to be down by between 8.5 per cent and 11.7 per cent, though this will still be the second-best in the company’s 96-year history.

The financial performance is in contrast to chief rival Virgin Australia, which on Thursday posted a net loss for the third quarter of this financial year.

Harbison says Qantas has “most of the characteristics of a solid investment”. “This is unusual for an airline,” he says.

For the domestic market, the flag carrier has a domestic market share of about two thirds and is getting about 80 per cent of the profits, Harbison says.

“Not least importantly, it has been able to present its strengths coherently to the market”.

On the question of whether the market enthusiasm can be sustained, Harbison believes the strength of Qantas is founded on its hold on the domestic market, “so as long as the economy remains reasonably sound, it should continue to be solidly profitable”.

“For the time being Virgin Australia is regrouping, so offers a fairly soft target,” he says.

“That will change. Its fundamentals are solid and, once its shareholding stabilises, it will become clear what a powerful asset it has in that regard.”