Doubts about Jumbos add to Qantas woes

ALAN JOYCE will have a lot more than oil prices and a dented safety record to worry about when he becomes Qantas's chief executive in November.

Two years after Qantas hosed down a Macquarie Research report that estimated the worth of the airline's fleet on its books was $3billion more than the planes' market value, Merrill Lynch has questioned whether a big write-down is on the way. This comes amid speculation that the Flying Kangaroo will be forced to announce its first capital raising in six years.

In a note to clients, a very bearish Merrill analyst, Kevin O'Connor, warned the recent slump in market values for aircraft around the world could place intense pressure on Qantas. "Asset values for all aircraft types continue to fall and the number of parked aircraft continues to rise globally."

The fall in aircraft prices has come as the capacity constraints of the past two years have eased, with many airlines cutting routes.

Aside from this, the worry for Qantas is that when times were good it could justify the higher value on its jets through their "in-use valuation", but now there is a risk that its operations could be hit by a domestic and international slowdown these valuations could be at risk.

The bonus for Qantas is that its ageing fleet of 747-300s, which should have been retired when the A380 was first due to enter into service in 2006, are already largely depreciated.

The recent slide in oil prices has provided only small comfort to Qantas, given on the other side of the ledger it has been hit hard by a recently resurgent US dollar. As well as dramatically increasing Qantas's capital costs, the falling Australian dollar could also hit the recent growth in outbound international travel, which had been propelled by the strong currency.

Adding to Qantas's list of worries is a warning from Merrill Lynch that it could struggle to hold on to its investment-grade credit rating.

Electrical shocker

Five years ago the electrical retailer Retravision was top dog, with a market share of about 23per cent, followed by Harvey Norman and then the buying group NARTA - which acts for JB Hi-FI, Clive Anthony's, Clive Peeters, David Jones, Winning Appliances and Bing Lee.

Industry consolidation hasturned the tables, with Harvey Norman No.1 and Retravision now No.3.

Yesterday's defection of thelargest member of the Retravision group - with $100million in buying power - tothe $3 billion NARTA is another blow.

The sale of the Queensland retailer RT Edwards to the South Australia-based Radio Rentals will sting because it will boost NARTA's ability to get lower prices from suppliers.

In the last two years NARTA has snared five key customers - two from Retravision and three from Betta.

Poker face

Sure, there are rumours that itsUS rival Bally wants to take it over, but the Merrill Lynch gambling analyst Daniel Renshaw warns the recent share rally by Aristocrat means it is overvalued.

He says to justify the poker machine maker's share price of$7 at yesterday's close, investors should be guaranteed a turnaround in the recent poor sales of machines in Australia and its biggest market, the US.

Renshaw says there is no evidence that sales will return to normal next calendar year.

He says the share price has been getting well ahead of itself (up 50 per cent from lows in August), given that there has been no news on whether customers in NSW and the US were willing to open their wallets for software and games for its new machine, the Viridian.

Renshaw says it could take until late next year or early 2010before customers were placing substantial orders.

A positive in Renshaw's note is that Aristocrat is benefiting from a fall in the Aussie dollar, because nearly half its earnings come from the US. Given its earnings guidance of $190million to $200million was set when the Aussie dollar bought US95c, that will be a cinch.

Lousy odds

Another danger on the horizon for Aristocrat, as well as Tatts Group and Tabcorp, is the Senate inquiry into poker machines and problem gambling, which begins in Melbourne today.

The inquiry could lead to a limit in withdrawals from automatic tellers in gambling venues of $100 a day per person.

Evidence will be taken from the Australian Hotels Association and the American Gaming Association, as well as gambling companies.

Some states, such as Victoria, have messages known as player information displays, or PIDs, that pop up on screens, warning gamblers about low odds and urging them to take breaks.

These could be introduced more widely or the inquiry could recommend strict limits on poker machine locations.