Losing altitude - the downing of Howard & Costello

Consolidation (in the US) of the industry follows a severe downturn that began in 2001. Higher fuel costs have taught airlines to quickly pass on such costs to passengers as well as to reduce the volume and quality of meals served on board. As a result, carriers - alas not passengers - are expected to do better financially in 2007. Consolidation will help airlines cut overheads by eliminating overlapping routes and aggregating (perhaps even off-shoring) maintenance facilities.

For consumers, that would likely mean higher fares, smaller seats, smaller (if any) meals and more-crowded aircraft as low yielding flights are rolled back into their hangers. Across the globe, airlines are either keeping a close eye on rivals or are already breaking bread with them. No airline wants to be left without a dancing partner when the square dancing music stops. United Airlines, while talking to Continental Airlines is keeping its options open by reaching out to Delta management saying that it may be a better fit for Delta Airlines than the predatory US Airways.

The options for the Monopolistic Marsupial’s new owners are as beneficial to them as they are detrimental to the interests of the flying public. Not to mention Qantas staff. And the real options - that is, the options that can move Macquarie Bank from being the millionaire’s factory towards becoming the billionaire’s factory - go further than merely the pantomime of possibly re-listing Qantas on the ASX somewhere between 2010 and the coronation of King William V of England.

After Qantas’s balance sheet is recast and as many of the costs as possible (principally what the airline considers as OPWs, over priced workers) are sucked out, then the owners should be able to on-sell the airline to a mega carrier like United Airlines-Continental Airlines (or United Airlines-Delta Airlines) for a price that will make the alleged “generous” $5.45 a share look a lot like Kerry Packer’s (super cheap) buy back of the Nine Network from one Alan Bond. Let’s not forget that TPG, the sharpest participant in the private equity consortium, has a history with Continental Airlines. A very profitable history that is.

A quick look at the route maps of the three airlines (United, Continental and Qantas) suggests they make a good fit. A very good fit in fact. There is little overlap between them.

The Monopolistic Marsupial (when aggregated with its joeys: Jetstar, JetstarAsia and Air Pacific) is strong in Australia, New Zealand, Asia and the Pacific with long paws that reach points in Africa (Johannesburg), Europe (mainly Heathrow and Frankfurt) and North America (LAX, San Francisco and JFK). It also has a well respected management team.

United, from its hub in Chicago, dominates the US Midwest and West, and is strong in Asia.

Continental (like Qantas) is popular with business travellers, able to command higher fares, has strong hubs in Houston and Newark (New Jersey) and extensive routes to Europe and Latin America. It (like Qantas) has a well respected management team.

If United and Continental link up, it will take a few years for the leaner reorganised group to take shape. Probably the same amount of time that it will take for the cashed up ATM (Allco, TPG and Macquarie) consortium to make Thai, Khmer and Vietnamese the low priced linguae francae at Qantas. Soon thereafter, a bid by say United-Continental for Qantas will make eminent sense. And the fat cats at the ATM consortium with infinite patience will await a tsunami of a takeover premium for their shares.

But by then of course it will be too late.

Already by mid 2007, thousands of Australian jobs would have been stripped (or well on the road to be stripped) from Qantas. Unattractive routes would have been hived off to other alliance partners and fares would have risen. Customer service at near monopolist, Qantas, already close to zero, will fall further. And this is just the beginning.

Even if in time the air lanes were opened up to competition, such as Sydney - LAX to Singapore Airlines, Sydney - San Francisco to Virgin Pacific (or similarly named sibling of Virginblue) and Sydney - Johannesburg to Emirates, it would prove to be too little too late.