Despite two outstanding strategic issues clouding the long awaited privatisation of Qantas, initial investor interest appears solid. But a reduced issue price is threatening to cut dramatically the value of British Airways' 25 per cent investment and shrink the expected returns for the federal coffers.
As applications for stock started early last month, in preparation for the listing scheduled for 31 July, BA was faced with the prospect of the value of its stake plummeting by no less than 25 per cent, in the short term at least, if the issue is taken up at the top end of the A$1.80 to A$2.10 price range set by Canberra.
The UK carrier paid A$665 million (US$460 million), or A$2.66 a share, for its 250 million shares in early 1993. But the offer to private investors in early July valued the stock at A$2 and institutional tendering could bring that down to around A$1.90.
Interest in the stock appears strong, although brokers say the mums-and-dads investors are not yet fully convinced after media reports warning of the volatility of the airline industry. At presstime, some 600,000 Australians had requested the prospectus.
In contrast, the initial response from brokers who buy shares on behalf of the more experienced investors was so high - 250 million of the 750 million on offer - that the lead managers had to cap the allocation to ensure there would be sufficient shares left for the general public.
Strong interest has also come from Asia, including a surprisingly high level from economically battered Japan, for the 24 per cent still available to foreign investors.
Indeed, the Federal government could emerge as the unhappiest party in this prolonged privatisation process. At one stage, based on BA's outlay, Canberra believed it would rake in A$2 billion from the sale of the remaining 75 per cent. At the share price range set, that figure will drop to between A$1.35 billion and A$1.5 billion.
But as the flotation nears, two prickly strategic issues, which could affect Qantas' performance in its first 12 months as a private company, remain unresolved.
A potentially costly air rights row between Australia and Hong Kong over Qantas' fifth freedom rights through the UK territory is on hold. After reciprocal sanctions and threats of withdrawing all traffic rights from both sides, negotiators met in Hong Kong in late June.
The two sides restored all traffic rights that existed before the dispute, but also agreed to ditch the current air services agreement with the aim of renegotiating a new one by early next year. But without concessions from either side the disagreement could flare again in the first half of 1996.
Qantas also remains in the dark about the level of domestic competition it could face in the next year. Air New Zealand is still talking to Ansett about taking a 50 per cent stake, but is increasingly frustrated over Australian government refusal to give assurances about its policy on the future shape of the Australasian aviation market.
There are also two domestic startups in the pipeline: a proposed union-run carrier, ACTU Airlines, and Aussie Airlines, headed by former Compass chief Bryan Grey. In its flotation prospectus Qantas acknowledges: 'The potential impact of a further domestic trunk route operator on the profitability of Qantas and other domestic operators could be significant.'
Source: Airline Business
