Merrill Leaps From Qantas Mid-flight As Airline Weathers Fine From Us Court
The Age
Wednesday January 16, 2008
QANTAS shares fell to their lowest in a year after investment giant Merrill Lynch issued a "sell" recommendation and a US court gave the airline 15 days to pay a $US61 million ($A68 million) fine for its involvement in price fixing.
Investors took heed of Merrill Lynch's advice and dumped Qantas shares, sending the price down 23?, or almost 4.5%, to $4.90. The Qantas share price reflected the broader Australian sharemarket, which recorded its seventh consecutive day of falls, the benchmark S&P/ASX 200 Index slipping 20 points from 5980 to 5960. In a note to clients, Merrill Lynch said Qantas' earnings and return on equity were expected to peak during the year due to increased competition domestically and internationally, a likely increase in ticket prices, and union pay demands. "With Qantas' price/book (ratio) still well above its historical average, the earnings slowdown is not yet reflected in the share price," the note said. "Qantas faces rising competition with new airlines entering its domestic and international markets and existing competitors such as Emirates planning to significantly increase capacity into Australia. Some of these competitors have significant operating and capital cost advantages versus Qantas. "Our (fiscal) '08 forecast is unchanged and we still expect Qantas to beat its current FY08 (2007-08) guidance of 40% earnings growth. However, we expect earnings growth to turn negative late in calendar 2009 and have lowered our FY09 (2008-09) forecast by 20%, reflecting cost and competition concerns." Merrill Lynch is the only analyst listed by Bloomberg as advising clients to bail out of Qantas. Citigroup and Goldman Sachs JBWere retain a "buy" rating on the stock. Before Christmas, Qantas said it expected earnings for 2007-08 to be more than $1.4 billion before tax. The airline will report its interim profit early next month. Qantas has had an unimpressive start to 2008. Passengers had a lucky escape when a Qantas 747 to Bangkok last week lost crucial electrical power needed to land and was forced to rely on standby battery power. Engineers have threatened to take industrial action, potentially grounding aircraft, unless a wage agreement is reached this month. And the high oil price has resulted in Qantas lifting its fuel surcharge on international flights. Yesterday, the US District Court for the District of Columbia added to Qantas' woes, giving it until the end of the month to pay $US61 million for colluding on prices for air cargo between 2000 and 2006. Qantas chief executive Geoff Dixon angered the Australian Competition and Consumer Commission by saying "we do not believe this or any further financial penalties will materially affect future operating results". ACCC chairman Graeme Samuel said Mr Dixon's comments highlighted the soft approach taken to cartels and called on the Rudd Government to overhaul competition laws to make price fixing a criminal offence. Shaw Stockbroking analyst Brent Mitchell said the high times for Qantas were likely to end over the long term. Merrill's view was that Qantas was entering more difficult times, "largely because of the increased competition", he said. "If you leave it too late, you join the throng of people selling and often it is better to beat that." Argo Investment's Rob Patterson said it was disappointing the benchmark index did not follow the positive lead from the US. "The market is fearful of how the reporting season will go in the US, where several investment banks, including Citi and Merrill Lynch, report this week," Mr Patterson said. -- With NABILA AHMEDMERRILL LYNCH PREDICTIONS? Qantas earnings and return on equity to peak at record levels in 2007-08, and then decline in 2008-09.? Ticket prices to come under pressure by December 2009.? Competitors increase flights and other airlines enter market. ? Tight labour market means Qantas is likely to give its main unions most of what they want, including wage rises of up to 10%.
© 2008 The Age
