Qantas Takeover by Private Equity Consortium APA Approved

MELBOURNE AUSTRALIA (Daily Reckoning): What a relief that we live in a free market economy where the government is small, the regulations are even smaller, and where business and more importantly consumers are able to make their own decisions about what and how they spend and do.

Well, not quite. In fact, if this is what a free market economy is then we pity the poor souls in totalitarian regimes who are subject to big and many layers of government, even bigger regulations, and where businesses and consumers are restrained by petty bureaucrats who set the framework for decisions on spending.

Looking at the palaver surrounding the proposed takeover of Qantas (ASX: QAN) by private equity consortium Airline Partners Australia (APA), one would think that Australia fell into the latter of the above scenarios.

We read in yesterday's Australian Financial Review that "The Foreign Investment Review Board is finalising its recommendations on the $11.1 billion takeover... before it hands down the confidential report tomorrow to Treasurer Peter Costello."

It will then be "Mr. Costello who ultimately decides whether transforming Qantas into an enterprise comprising 77 per cent debt compared with the current 29 per cent is in the national interest." What? Why on earth should anyone be concerned about Qantas having an inordinate amount of debt? If that's the way they want to run the business then let them at it.

Seeing as competition barriers seem likely to be withdrawn following the acquisition of Qantas by APA, it should ensure that airline fares are pushed even lower, or at least are maintained at the current levels.

Let's look at the worst case scenario. Oil prices sky-rocket to USD$200 per barrel, Qantas hasn't hedged its oil, interest rates soar to 20%, no one can afford to fly, APA cannot keep up interest payments, and... surprise, surprise the airline goes bust.

History tells us that the Australian aviation market can easily support two carriers. It wouldn't be too much of a stretch to assume that some eager businessman or men, perhaps Ron Walker, Hugh Morgan and Robert Champion de Crespigny - could buy themselves a bunch of second aircraft during a Qantas 'firesale.'

Why should a government become involved in deciding on the best debt to equity ratio of an airline? Does the Treasurer or any other government minister have prior experience of running an airline? We doubt it.

But it doesn't stop there. Even though the Treasurer has yesterday agreed not to intervene in the deal, APA still has a number of backflips and somersaults that it must complete - even before those poor wretched owners of the company, namely the shareholders get to have their say.

The decision can still be scuppered by the Deputy Prime Minister and Transport Minister Mark Vaille over, according to the AFR, a "technical breach of cross-ownership laws concerning airports and airlines."

Finally, the Australian & International Pilots Association have an appeal before the Takeovers Panel arguing that jobs and safety standards would be compromised under the proposed takeover.

Once all these shenanigans have been completed it will then be up to the Qantas shareholders, which of course includes a number of industry superannuation funds, to decide whether to accept the offer or not. Then and only then, and subject to at least 90% of the shareholders voting in favour, will APA finally catch their quarry.

We are sure that APA factored all of these issues into the equation when they made the initial offer for the company. However, given the history globally of airlines, and the strong probability of less favourable operating conditions for the New Qantas, we still find it hard to believe that it will have been worth all the trouble.

Kris Sayce
for The Daily Reckoning Australia

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