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selecta · Member Joined: 24 Dec 2006 Posts: 813 Location: ORD

The Sydney Morning Herald
January 15, 2007
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You may not have heard of David Bonderman, but you will hear more about him if the $11 billion bid to take over Qantas and turn it into a private company is successful. His deals have been described in The Wall Street Journal as "audacious".

Bonderman made his name after taking control of one of the worst major airlines in the world, Continental, in 1993, after it had entered bankruptcy protection for a second time.

Once, on a Continental flight, Bonderman was so appalled by the food that he kept his meal, took it off the plane, and sent it by express delivery to a senior Continental executive with a message: this is unacceptable. If Continental had failed a third time Bonderman's private equity firm would have gone down with the ship.

Instead, Continental became his calling card. Since 1995 the airline has become viable, profitable and doubled in size. Then Bonderman and the Texas Pacific Group did even better with their next airline, another bankrupt carrier, America West, which has since quadrupled in size and revenue.

But their best airline growth story was yet to come. Twelve years ago TPG became an investor in Ryanair, which has since grown exponentially by providing low-cost but reliable air service in a market previously dominated by bloated national carriers.

Since TPG invested in Ryanair, the airline has grown from eight jets to 108, has the largest route network in Europe, staff has expanded from 500 to 3500, and the airline has a market value higher than that of British Airways. Bonderman is chairman of Ryanair.

These deals have left Bonderman walking in the footsteps of the best and most influential airline executive of all time, Herb Kelleher, the founder of Southwest Airlines, the model for the low-cost, low fare, high-reliability airlines around the world. More importantly, Kelleher and Southwest enforced a morality on the business - and I don't use the term lightly - with simple, cheap and transparent fares, a strategy that has not changed in 35 years. (I once made a pilgrimage to Dallas for a 45-minute one-on-one meeting with Kelleher, the airline equivalent of an audience with the Pope, a pontiff who drinks and smokes too much.)

Bonderman and TPG have seen something in Qantas, although this is the first time they have invested in a major carrier that does not need rescuing. The crux of this deal is that the partners in this takeover offer see Qantas and Jetstar as the best and possibly only chance to attempt in Asia what Southwest has achieved in the US and Ryanair has achieved in Europe, though using a different model, one that offers the option of full service on long-haul flights, not just one-class, low-costs, low fares.

This is why they are willing to pay $11 billion for a company that the stock market valued at about $6 billion before the bid. The consortium, Airline Partners Australia, is offering a fat 50 per cent premium over the previous prevailing market value because it believes it knows more than the stock market about creating value and growth in the airline business.

Between them, TPG, Macquarie and Allco control more than $100 billion in equity. All three have had exponential growth over the past decade.

They also have far more experience and success in the airline industry than the existing ownership and board. The consortium's board would include four aviation heavyweights - Geoff Dixon, David Turnbull (former chief executive of Cathay Pacific), David Coe (chief executive of Allco, a long-time business partner of Qantas) and Rick Shifter of TPG (who has served on the boards of Continental, America West and Ryanair) - plus advice from Rod Eddington (former CEO of British Airways), who is on the board of Allco, and, of course, Bonderman, whose TPG would have a 14.9 per cent stake.

A formidable line-up. But the big red kangaroo on the Qantas tails carries a lot of baggage - emotional, symbolic, historical - including some excess baggage. A Roy Morgan opinion survey conducted since the takeover offer was announced found a majority of Australians still think of Qantas as their airline, either Australian-owned or government-owned, almost 12 years since Paul Keating's Labor government sold off Qantas in 1995.

The emotional baggage may explain why so much mythology has sprung up about this deal: that it is a foreign takeover; a Macquarie Bank fee feast; jobs will be cut; debt will be too high; regional services will be slashed; maintenance jobs will go to Asia; the company will be broken into parts for resale; low-cost Jetstar will engulf Qantas; government's protection will diminish.

None of this is true. The Qantas Sale Act caps foreign ownership at 49 per cent and is still the law. The consortium is 51 per cent Australian-owned. The Allco group would have a 35 per cent equity share. Macquarie, because it already controls Sydney Airport, has only 14.9 per cent. Senior Qantas management has 1 per cent.

Allco, a global finance company born and bred in Sydney, has been given the leadership role by the partnership, with a 45 per cent voting share. This means that Australian companies would control 62 per cent of the private ownership. As for Dixon becoming a plutocrat off the deal, he will give any proceeds to charity. "I'll probably be making a little bit less [salary] than I'm making now," he told me, "but I may have a lot more to give away."

The consortium likes Qantas management and the Qantas business model. It supports the plan to spend $10 billion to expand capacity by 40 per cent over the next five years. And it loves the deal Qantas extracted from Boeing in 2005 when it ordered or optioned 115 Boeing 787s. It was a great deal for Qantas. It forms the bedrock of the airline's growth and survival strategy in the brutal competition but enormous potential of Asia.
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