Geoff Dixon: Unlocking value at Qantas

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Chief executive Geoff Dixon is moving fast to restructure Qantas Airways following this year's failed takeover bid. Can he do the things private equity wanted to do?

Few chief executives have had the kind of year that Qantas Airways boss Geoff Dixon has experienced. It started 12 months ago when the first hints of a private equity buy-in emerged, subsequently becoming the world's largest private-equity takeover attempt of an airline. The bid would ultimately fail, but the way it was embraced by the carrier's board and management upset some shareholders, costing chairman Margaret Jackson her job.

If that weren't enough, in the same 12-month period Singapore-based low-cost carrier Tiger Airways announced plans to launch a new Australian airline aggressive Middle East carriers won important new operating rights to serve the country and home rival Virgin Blue ordered regional jets to compete on Qantas-dominated thinner routes, while also announcing plans to launch long-haul international services.

But Dixon took it all in his stride, telling Airline Business during a passing visit through Singapore, following the release in August of record year-to-June earnings, that the past year's events had been fairly typical of the challenges faced since he took up the top job in March 2001.

"It really is just more of the same. I had only been in the job six months and 9/11 happened, and then Ansett collapsed," he says. "We have just had a series of things one after the other." Whichever way Dixon looks back on it, however, the past year has without question been one of particularly sharp ups and downs for Qantas. Rumours started hitting the market around October 2006 that private equity was taking a serious look at making a play. It was confirmed in December when the Airline Partners Australia (APA) consortium went public with a proposed bid that soon won the support of the Qantas board.

Takeover
The A$11.1 billion ($9.1 billion) takeover was formally launched in February and the price, including a special dividend payment, looked like a phenomenal deal for shareholders. The airline's share price has historically traded in a narrow band and the offer represented a premium of 60% over the average share price in the three years before takeover speculation arose.

But the market had huge distrust for APA, which included Australia's Allco and Macquarie, and North America's Texas Pacific Group and Onex Partners. Several key shareholders felt Qantas was worth far more and some even alleged that senior managers, who would have been given 1% of the airline, were deliberately talking down future earnings prospects. The deal failed in May when not enough shareholder support was secured, following several earnings forecast upgrades.

Chairman Jackson was an enthusiastic supporter and made spectacular public relations blunders that ultimately led to her resignation following the bid's collapse. Jackson, who departs in November, warned in one media interview that the share price would fall if the deal did not go ahead. It has, in fact, generally remained around APA's offer price ever since.

Dixon and his senior management team kept their jobs, despite being criticised in some quarters for allegedly being too close to APA. In truth they stood to make tens of millions of dollars in bonuses and incentive payments if the deal went through, although for his part Dixon pledged to donate most of his to charity. And nearly four months after the deal's collapse, Dixon says he has no real regrets. He still supports the board's recommendation to endorse it, calling it the right decision at the time given the many competitive pressures Qantas faces and the low level the shares had been trading at for so long.

Monday morning quarterback
"It's very hard to play Monday morning quarterback, but I don't think you could say there are regrets," he says. "We had an offer, we put it [to shareholders], the offer didn't get up, we got on with our lives. I would question what would have happened if we hadn't have put it up, had ignored it."

He adds: "Are there any good things coming out of it? We certainly feel our share price has been sustained, and people now have a different view of the value in Qantas. I don't think it was a distraction for the management group, and obviously our people out in the field handled it well because we could not have brought in the results that we just did if we had a period of sustained distraction. This was really under way from about October of last year, so for most of the financial year we were under a takeover, either rumour or in reality. We got out of it well and I think the people handled it very well. As soon as it was over we moved on quickly and the company is very much on track."

Moved on quickly is an understatement. Dixon wasted no time taking to the market ideas for bringing out additional value in Qantas, which now has a cash position of A$3.4 billion, some of them squarely borrowed from the pages of private equity handbooks. It is probably fair to say that without the bid he would not have the flexibility now to press ahead with such bullish new ideas, although Dixon says they had in fact been under consideration long before APA came along.

Dixon admits that it was "very frustrating" to see the carrier's share price remain so low for so many years despite consistently solid earnings, and he is pleased now that it has stayed up around bid-price levels.

Value in Qantas
"Wake-up call is a bit harsh, but I think it was confirmation that there was value in Qantas and people now realise it," he says. "It probably took a third party, meaning private equity, to indicate or to confirm what we had always felt, that there is real value in Qantas."

Qantas in its year-to-June results sharply increased its dividend and announced a buyback of up to 10% of its shares. A major reorganisation will also see main operations split into standalone businesses, in which minority stakes may be sold through private placements, joint ventures or initial public offerings. Dixon says that to "unlock value" Qantas plans a "complete segmentation of portfolio businesses over the next 18-24 months", mainly covering frequent flyer, freight, fleet and holiday divisions.

"More leeway? I wouldn't say more leeway, as we have always been pretty innovative. But certainly you could say it's a catalyst for us to move quickly," says Dixon on whether the failed takeover has given him more freedom to act on reorganisation initiatives. "We had already been working on this. We had most of the segments close to being able to report on their own anyway. We just decided there was momentum there, let's go for it, and the board has fully endorsed it. After the bid [failed] the share price was up around the bid price, so we had to sustain that. But we still think it's the best way to run the business."

The reorganisation looks similar to what Air Canada did with its ACE Aviation Holdings parent, when it spun off key units. But Dixon, who has discussed ACE's experiences with the Canadian company's head Robert Milton, says the difference is that cash-rich Qantas is doing it while strong, whereas Air Canada's changes came out of its restructuring under creditor protection.

The aim is to create more value and show transparency in the main business units, says Dixon, who adds that by the next half-year financial report in February frequent flyer and freight divisions will have separate reporting with full profit and loss breakdowns. Meanwhile, fleet ownership changes may come out of sale and leasebacks, aircraft refinancing, a joint-venture tie-up with a lessor or an "IPO/­de-merger of a Qantas vehicle".

"The intention is to continue to segment so we can get much better transparency on our costs and efficiencies. That's number one. Number two is to see whether there is more value in parts of Qantas by running them in a different way, whether just more transparently or with partners, or with other options," says Dixon. "We are not about cutting the company up, per se, we are just saying, 'Is there more value in it?'"

Synergy
He adds: "We have a strong view that the sum of the parts of Qantas is probably worth more than the market indicates. We may not sell anything, we may not de-merge anything, we may not IPO anything. What we will start from is people will know what the value is. They will know what the frequent flyer contributes, what our freight contributes, what holidays contributes, and what our fleet is really worth, and it is very difficult in airlines to work that out unless you do that."

One business that is already segmented is low-cost subsidiary Jetstar, which was launched in 2004 and which has been a star performer. Some had predicted it would be a failure, as the experiences of most other major airlines that launched low-cost subsidiaries had been negative. But Dixon pushed ahead and Jetstar launched with 14 aircraft on day one and strong financials ever since. It started with domestic services and later added New Zealand flights. Late last year it introduced widebody aircraft for longer-haul international services to destinations Qantas is unable to make money from due to its higher cost base.

"I don't think the group would be anywhere near as profitable or as successful without Jetstar. We would have found it hard with our legacy cost base, despite all the work we have done on costs, to maintain our market position. It would have meant other airlines could have stepped in and as they get bigger they make it more difficult for you," says Dixon.

Domestic challenges
Qantas and Jetstar are now facing new domestic challenges, with main competitor Virgin Blue continuing to grow and Singapore's Tiger entering the market in November. But Dixon says the longstanding group directive to retain a dominant domestic market share remains unchanged. In the last financial year it stood at around 67% in terms of RPKs. "Our strategy is to keep 65% of the market and we will," he says firmly, adding that more narrowbody aircraft orders are likely to be placed soon for both Jetstar and Qantas.

The carrier has also been aggressive with its so-called "Asian strategy", which has included buying into other airlines. It now owns 18% of Vietnam's Pacific Airlines and is the biggest single shareholder in Singapore-based Jetstar Asia, which has been a disappointment until now, but which Dixon says is finally close to being profitable. Qantas remains on the lookout for other investments, both in terms of passenger airline buy-ins and acquisitions on the freight side, which Dixon sees as having particularly good growth prospects.

Dixon is a man of contrast in many ways. He has a no-nonsense, tough-as-nails reputation, but paradoxically appears shy at times. Guarded with his private life, he prefers one-on-one meetings to group gatherings and avoids being the centre of attention. He admits to being a workaholic and someone who thrives on challenges, and in his time as chief executive he has faced more than a few. There have been major setbacks, such as being knocked back by competition regulators twice in attempts to link up with Air New Zealand. But he has for the most part had impressive successes, including making it firmly through the post-September 2001 downturn, SARS and the Iraq war. But he believes the real test may be when things eventually stabilise for a protracted period.

"With what we have been going through I have had a very stable management team that have all stuck. The question is: 'Can we manage in good times?' Because we certainly have proven we can manage in difficult times. In a more stable environment it will be interesting to see how good we are. Some people who can be good in crisis find it more difficult in stable environments."

Dixon says he does not intend to stay on beyond mid-2009 when his contract expires. Within Qantas the leading candidates to succeed him are chief financial officer Peter Gregg, executive general manager John Borghetti and Jetstar head Alan Joyce. Whoever comes through over the next 12 months, Dixon insists he will not be a "lame duck" chief executive between now and his departure.

"We have got a new chairman coming in and it is important that we have a proper transition. But it doesn't mean I am going to be winding down. I am going to absolutely be here between now and then. We have a very big growth profile, we have got a lot of aircraft on order, the company is now twice as big as it was six years ago and it will continue to grow. There is a lot still to achieve."

Working up - biography
Geoff Dixon, 67, has been the chief executive of Qantas Airways since March 2001.

He joined the carrier in 1994 and has had responsibility for all commercial activities, including worldwide sales and marketing, network development, revenue management, fleet planning, cabin crew, customer service, product development and airline alliances.

Before joining Qantas, Dixon worked at Ansett Australia as director of marketing and industry sales, and at state-owned domestic carrier Australian Airlines - which Qantas later acquired - as general manager of marketing and corporate affairs.

Before that Dixon worked for an arm of the Australian Government Overseas Service in Australia, as well as on posting for nine years to the Australian Missions in The Hague, New York and San Francisco. He has also worked in the mining and media industries.

Dixon is married and has two children.

Executive question
Is the industry ready for the next downturn?

"The industry will always be, like any industry, subject to economic downturns and market problems, and obviously aviation occasionally has a few others. But I don't think the industry is as vulnerable as it was, say, 10 years ago.

Four or five things have happened. One is the late 1990s were very difficult and there was a lack of discipline. A lot of government-owned carriers were not necessarily forced to run as businesses.

But since we had all those shocks early in the new century, almost every airline has taken a lot of costs out, and that is different. I rarely know of any airline that hasn't improved productivity and efficiency. Also I don't know of any government that is not very serious about saying to their airlines: 'You have got to run on a profitable basis. Yes you are important to our country but we are not going to have you as a drain.'

On top of those two things I think the industry has been one of the real beneficiaries of globalisation. A lot of aircraft have been bought by newer and low-cost carriers, and then you've got the Indians, the Russians, the Chinese, who are coming in in a big way. The industry hasn't just sat there and suddenly got healthier because good times came through and everybody was flying. Yes, that has happened, but it has happened because of globalisation, so everybody is getting it.

Another thing is the industry has proved to itself that it had some pricing power. So you've got a lot more competitors out there, but not everybody is competing with everybody else. It is just a stronger industry."

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