Joyce has Qantas flying high again after some turbulence

After a decade of underperformance and a stunning turnaround, Qantas’s share price has hit the $5.45 price.

Qantas chief Alan Joyce. Artwork: Sturt Krygsman

After a decade of underperformance and a stunning turnaround over the last three years, Qantas’s share price has finally hit the $5.45 price that former chair Margaret Jackson said shareholders would be stupid to reject.

She was right at the time but Leigh Clifford and Alan Joyce have the airline positioned to reap the benefits of a massive restructuring with a profitable future.

Even better, in 2007 the airline was due to pay 15c a share in dividends, so the buyout price was more like $5.60 a share, which if reinvested after the GFC would have put Qantas shareholders a mile in front.

As for the airline, it would probably have been controlled for some time by Morgan Stanley, which underwrote the TPG debt.

The plan was for a quick sale of the international and frequent-flyer divisions, which would have both gone through.

Some argue if the deal had gone through on the eve of the GFC it would have wreaked havoc on the airline, causing a split and even bigger job losses.

But shareholders would have their $5.60 cash (including a special dividend) safely in their hand.

Since then the Qantas stock has increased by 1.5 per cent while the market has fallen 7.8 per cent, but on an accumulation basis including dividends Qantas is up 22.9 per cent and the market by 44.7 per cent.

Qantas didn’t pay dividends for several years.

Today Joyce points to frequent flyers as his financial bedrock, accounting for 21 per cent of group earnings at an impressive margin of 24.4 per cent. It’s the division that balances the airline volatility.

In the latest half-year profit of $852 million, domestic earnings were $371 at a margin of 12.7 per cent, international at $208m with a margin of 7.3 per cent, Jetstar earned $275m on a 14.8 per cent margin and loyalty was $181m at 24.4 per cent.

Consensus forecasts have the airline reporting earnings per share for the present year of 48.7c and 52.1c next year after hitting 49.4c last year.

This puts the company in shape to set a new record for earnings, which peaked (on an underlying basis) at $1.5 billion in the 2016 year.

Over the decade, domestic airfares have fallen by 25 per cent and the number of foreign carriers coming into the country has increased greatly, forcing Qantas to make some radical changes.

Some 5000 jobs have gone leaving the airline with 30,000 people.

More impressive has been the consistent financial performance from the company in an industry notorious for its volatility.

The stock traded as high as $5.49 yesterday before closing up 1.5 per cent at $5.45.

Ten down for the count

Yesterday was the preliminary manoeuvre ahead of the main game for the Ten Network battle, which will come when Commonwealth Bank appoints a receiver to handle its $200m in secured debt.

Yesterday’s public declaration by Lachlan Murdoch and Bruce Gordon that they are associates shows they will work together on two deals.

The first is to protect their individual liabilities, totalling some $67m, as guarantors of the Ten debt, with James Packer apparently walking away from any further involvement some time ago.

Packer doesn’t want to know about Ten any more, while Murdoch (on his own account) and Gordon have positioned themselves to, if necessary, buy the assets from the receiver to keep Ten alive and operating under their ownership. Just why Packer’s stated lack of interest wasn’t disclosed by Ten is one question, given he apparently made his plans clear a few weeks back.

As a key debt guarantor his change of plan was newsworthy, even though he is still liable for the money if either KordaMentha or the CBA-appointed receiver can’t find someone to recapitalise the company.

The game will clearly be to keep Ten on air, because once the lights go out the costs increase and the revenue disappears.

Gordon has already pledged his money by paying the actual cash to CBA while Murdoch has merely written his support. Both stand to collect around $40m in guarantor fees. The Ten fiasco has not been a happy adventure when you consider Murdoch invested $128m into a company worth $1.6bn back in November 2010 and together Packer and Gina Rinehart have invested over $600m in a corporate vehicle worth $58m yesterday.

KordaMentha was appointed as an administrator by the board — as expected since the firm has worked with Ten since March — which means when it fronts creditors it will have to detail its fees and work, given the apparent conflict.

CBA has to appoint a receiver within two weeks which means the firm will make the main running on the deal.

Ten had extraordinary deals with 21st Century Fox and CBS to take their full slate of television productions.

But the studios have agreed to cut their fees, which together with the promised cut in licence fees, will push the company from the red to being earnings before interest, tax and amortisation positive to the tune of about $70m this year.

That is step one but then the receiver will want his or her money, which will be achieved through the sale of the licence and other assets, which is expected to cover the $120m drawn on the CBA debt.

The company has appointed Moelis as an adviser, which will be helping to find buyers, but Murdoch and Gordon look to be in the box seat.

Foxtel is also an equity investor but by all reports, Telstra has made clear it is not keen on further investments.

Ten has had McKinsey in the house looking at cost cuts on a deal that would give the consultancy 25 per cent of the savings achieved.

Given the savings on the broadcast licence will be half taken by new spectrum fees, it seems Murdoch and Gordon were not taken by the McKinsey advice, which is why they declined to accept the offer to extend the guarantee out to $250m in debt.

That call triggered the board’s move to appoint its advisers KordaMentha as administrators, and now it is over to CBA to call in receivers, with Ferrier Hodgson one name doing the rounds.

Depending on whoever else emerges as a potential white knight there is every chance of Ten being controlled by Lachlan Murdoch and Bruce Gordon on a private basis.

They will then have the chance to show what better management can produce in an industry which, like all traditional media, has its challenges.

Board game begins

Throughout his nearly 12 months stalking BHP, Elliott Management’s Paul Singer has not raised the issue of board seats, instead focusing on selling off the gas and oil assets, collapsing the dual-listed company structure and more buybacks.

Yesterday as the BHP board prepared to potentially anoint Ken MacKenzie as its new chair, Singer revealed his hand, calling for board renewal.

Board seats are an old playbook from activist land and finally the choir is singing the words in the BHP game.