Touchy Joyce risks unnecessary escalation

Alan Joyce risked appearing to massively overreact to an annoying ginger group today when he dropped something akin to a neutron bomb on Tourism Australia as part of a broader assault on what he described as "APA Mark 2".

Responding to the stirring of a group of shareholders with around 2 per cent of Qantas' capital who don't appear to be gaining traction for their alternative strategies for extracting shareholder value from the national carrier by abandoning a four-decades-long relationship with Tourism Australia might appear an act of petulance and overkill.

For Tourism Australia, the loss of a $44 million three-year contribution and the potential loss of a further $18 million if Qantas' prospective alliance partner, Emirates, follows suit is a potentially disastrous development. Qantas will complete some programs scheduled before the expiry of the current agreement with Tourism Australia next June and will re-direct its marketing support to state tourism authorities.

So why did Qantas decide to take such dramatic action and why did Joyce choose to give that group of activist shareholders the air-play he gave them today and risk inadvertently giving them increased credibility?
The only conclusion to draw is that he and Qantas believe that investment banker Mark Carnegie, former Qantas chief executive, Geoff Dixon, adman John Singleton, former Qantas chief financial officer (and current Leighton CFO) Peter Gregg and retailer Gerry Harvey pose a threat to his position and Qantas' strategy.

He wants to burst their bubble before it has a chance to swell and create some pressure on them to put up or shut up rather than have to live with them sniping from the sidelines over a protracted period during which, given the nature of the airlines industry, something could happen to make Qantas more vulnerable to the activists than it is today, where it has broad shareholder support for its strategies.

By withdrawing Qantas' support for Tourism Australia Joyce does two things. He draws attention, in a dramatic way, to Dixon's potential conflict of interest as chair of Tourism Australia and a claimed member of the ginger group (albeit one keeping a very low public profile) while dragging the Federal Government and the responsible minister, Martin Ferguson, into the fray.

Ferguson will now be under pressure to either convince Dixon to publicly disavow any involvement with the activists or criticism of Joyce's strategies or to distance himself from a body that would have little relevance or purpose without the involvement and financial support of the national carrier.

Qantas has already tried (unsuccessfully, it appears) to put pressure on the Leighton board to get Gregg to "cease and desist" and focus on his day job but, except for Carnegie, the other members of the group have characterised themselves as passive Qantas shareholders who just happen to have some views on Qantas' condition and strategies that they are willing to share through presentations to Qantas' institutional shareholders and its unions.

Those shareholders and unions have been told that the group wants three Qantas board seats and the CEO role and would spin-out the group's frequent flyer program and float off Jetstar's Asian business.
Joyce responded to that agenda indirectly today when he described Qantas, not as a portfolio of businesses, but as a set of ‘'operationally separate businesses that integrate at a strategic level".

He said that was the level at which ‘'customer aspirations for international travel support the frequent flyer proposition, or the two-brand strategy maximises profit for both Jetstar and Qantas and so on". In other words that the whole of Qantas is more valuable than the sum of its parts.

He referred to a ‘'club'' of investors that had taken a stake in Qantas, saying the club included some key players from the ‘'rejected APA private equity bid in 2007". He also said there had been some interesting speculation about the aims and ambitions of the investors "but so far there is no evidence they know their aims and ambitions themselves". Ouch.

Some of Joyce's sensitivity to the emergence of the activist group with their criticisms of his strategy and the alternatives they are promoting might be that he would be acutely aware that Qantas is at an, as he has described it, an ‘'inflection point'' in its history.

The alliance with Emirates would, if the Australian Competition and Consumer Commission permits, change the nature of Qantas' loss-making international business, with Qantas opening up a range of gateways into Europe in particular through Emirates' Dubai hub but handing over most of its international passengers on those routes to Emirates.

There would be cost and revenue benefits from the alliance and Emirates traffic that could be flowed into Qantas' domestic network but perhaps the biggest strategic benefit (apart from stemming the losses while maintaining a largely virtual international network) would be that Qantas would be able to shift the focus of its international business to Asia and operate schedules that suit travellers to and from Asia rather than maintain Asia-unfriendly schedules geared to the Kangaroo Route.

The ACCC will produce a draft response to the proposed alliance before Christmas and Joyce and Qantas have a lot riding on it being endorsed. Having former executives proclaiming that there is an alternate and more attractive route to salvation, by investing in the international business, isn't helpful for Qantas at this juncture.

The activist group is opposed to the Emirates deal, which they appear to believe is loaded in Emirates longer term favour.

It would appear that most Qantas shareholders are broadly supportive of the Qantas strategy and understand that the world has changed dramatically since APA made that $5.45 a share bid just before the financial crisis – the crisis itself and its impact on the availability of leveraged credit and the value of assets, the continuing development of the Middle Eastern and Asian hub carriers and the small matter of a $1 billion a year increase in Qantas' fuel bills.

From today's dramatic response/over-reaction to the would-be activists, it would seem Joyce is determined to ensure that remains the case and to pressure and discredit the critics and their alternatives. If they choose to escalate their efforts to destabilise Joyce and his board to try to generate some momentum and support for their agenda, the confrontation could escalate further.