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Speaker 1: Welcome to the Fearing Greed Business Interview. I'm sure, Ailma.

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Speaker 1: There's a lot going on in the aviation industry. So

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Speaker 1: far this year, two local airlines have collapsed, first Bonza

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Speaker 1: then Rex. Domestic economy airfares have now risen twelve percent

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Speaker 1: in the past couple of months since Regional Express REX

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Speaker 1: went into administration. A new white paper for aviation has

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Speaker 1: outlined a blueprint for the sector to grow becoming decades. Meanwhile,

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Speaker 1: there's ongoing talk of an IPO for Virgin Australia and

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Speaker 1: they've been going on forever. It seems Air India has

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Speaker 1: flag plans for a major expansion of its flights to

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Speaker 1: and from Australia, in a move that should bring greater

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Speaker 1: competition to the sector. And Quantas continues along its path

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Speaker 1: of mending the company's reputation with customers after announcing a

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Speaker 1: two point one billion dollar annual underlying profit which was

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Speaker 1: down about sixteen percent from last year. So what does

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Speaker 1: it all mean for the industry broadly, for Australia's national

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Speaker 1: carrier and for investors in the sector. Remember this is

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Speaker 1: general information only and you should seek professional advice before

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Speaker 1: making investment. To disc visions Jacob Kakanas is a director

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Speaker 1: of equy Research at Jarden Australia. Jacob, welcome back to

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Speaker 1: IF Fearing Greed.

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Speaker 2: Thanks for having Michel.

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Speaker 1: So plenty has occurred since we last spoke. Let's start

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Speaker 1: with Quantus. It's the biggest on the financial side. How

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Speaker 1: are they going?

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Speaker 2: Sure? I think Vanessa and the team delivered a great

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Speaker 2: FY twenty four years old. I think, like you noted,

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Speaker 2: it was down from the highs of the prior year.

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Speaker 2: But I don't think Sean will reclaim those levels of

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Speaker 2: the unline post COVID nineteen when we had plenty of

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Speaker 2: savings to plow through and you know, we had the

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Speaker 2: revenge travel theme and people keen to get out and

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Speaker 2: see the world after being closed up for the best

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Speaker 2: part of three years.

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Speaker 1: Okay, what about reputation wise? And I'm talking with customers now.

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Speaker 2: Yeah, I think it's still a path to go. I

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Speaker 2: think Quantus's investment in the customer. We've seen changes to

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Speaker 2: quantus frequent flyer program with Classic awards, plus how I

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Speaker 2: would talk to it and how I think investors in

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Speaker 2: the listed equity market would think about it is maybe

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Speaker 2: a score in the b's if you like we're not

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Speaker 2: quite at A plus, we're not quite yet at global

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Speaker 2: premium standards, but definitely much better than where we were.

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Speaker 2: Where we're hearing about a lot of the frustrations from

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Speaker 2: customers and a lot of the noise as we came

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Speaker 2: out of that COVID period and.

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Speaker 1: What about the view of the boardroom. So last week

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Speaker 1: I think it was the Future Fund came out with

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Speaker 1: the release of their proxy voting across all companies and

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Speaker 1: I think, if I'm right in my recollections right, they

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Speaker 1: were one of many who voted against the reelection of

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Speaker 1: some of the directors. Do you think the board has

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Speaker 1: managed relations with some of the big investors?

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Speaker 2: Suan, We're in an interesting juncture at the moment of

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Speaker 2: Quantus's board John Mullins coming in. John has a fantastic

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Speaker 2: reputation in corporate Australia. I'm sure you've spoken about companies

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Speaker 2: that he's on. I mean, just as an example, Telstra Treasury,

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Speaker 2: Wine Estates, Brambles is another great example, and how I

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Speaker 2: would talk to him. John's reputation is an astute capital

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Speaker 2: manager but also very good at keeping management honest and accountable.

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Speaker 2: And I think if we were to contrast that maybe

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Speaker 2: to where we've been for the last few years. I

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Speaker 2: think it's very difficult with a strong CEO personality like

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Speaker 2: Alan Joyce and his command seemingly over the board in hindsight,

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Speaker 2: made it very challenging for them to ask the right questions,

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Speaker 2: which I think, as you know the future funder highlighting

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Speaker 2: in their acceptance of remuneration reports and the re election

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Speaker 2: of directors, there is an account that still needs to

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Speaker 2: be held for some of those mistakes in times gone by.

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Speaker 1: Okay, so put all that together, what's your rating of

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Speaker 1: Quantus in an investor sense? And I must hasten to

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Speaker 1: add to all our listeners this is not investment podcast.

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Speaker 1: Always seek your own professional advice. But Jacob, what do

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Speaker 1: you how do you see quantas?

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Speaker 2: Sure, we're approaching all time highs for Quantus in terms

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Speaker 2: of absolute share price levels, so we're actually up right

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Speaker 2: near those levels that they've got to just before COVID struck,

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Speaker 2: which is around that seven to forty mark. So it

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Speaker 2: gets harder now for the management team to deliver into expectations.

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Speaker 2: I think one thing which we discussed last time in

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Speaker 2: Quantus's advantages its valuations. So the metrics that we look

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Speaker 2: at either eve Eveda versus other international airlines or its

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Speaker 2: pe are still depressed relative to where it would trade historically.

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Speaker 2: But I think in terms of sentiment and belief in

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Speaker 2: what the company's delivering, we're back almost to all time high.

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Speaker 2: So it's delivery on three key things as I see it. Firstly,

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Speaker 2: making sure that there's no air pockets in demand at

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Speaker 2: the moment. Obviously we're going through an economic cycle here,

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Speaker 2: we've got restrictive monetary settings probably versus the relative rest

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Speaker 2: of the world for the time being. The second one

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Speaker 2: is how do they run through that big Kapex plan

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Speaker 2: that they've got to replace their fleet. And then finally,

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Speaker 2: I guess a key part that you need to believe

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Speaker 2: in from here is where the Project Winter and actually

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Speaker 2: gets off the ground and gets delivered as we get

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Speaker 2: out to twenty twenty seven twenty twenty eight.

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Speaker 1: So I just explained that Project Sure.

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Speaker 2: So Project Sunrise is the point to point travel for Quantus,

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Speaker 2: which seemingly is going to open up the rest of

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Speaker 2: the world for Quantas there's no stopover Anymores. It sounds

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Speaker 2: like it's predominantly going to be to North America and

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Speaker 2: continental Europe. Courts have told us that they're going to

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Speaker 2: order twelve aircraft. Some research that I've done suggests that

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Speaker 2: four is the right size of the number of aircraft

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Speaker 2: to service those routes. So it'll be interesting to see

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Speaker 2: if there's any difference between what the company can tell

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Speaker 2: us they can do and what our research suggests.

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Speaker 1: Stay with me, Jacob will be back in a minute.

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Speaker 1: I'm speaking to Jacob Kakana's director of equity research at

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Speaker 1: jardin Australia. Okay, so let's go into competition and I'll

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Speaker 1: come to virgin at the end of it. But we

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Speaker 1: have had other I mean, we know the Katar story.

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Speaker 1: We've seen there India recently talking about it that they

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Speaker 1: don't seem to have slots or anything as yet. We

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Speaker 1: also domestically we see Rex and Bondza having failed or

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Speaker 1: gone into administration at least. What's the competitive environment like

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Speaker 1: on the international flights and then on the domestic flights

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Speaker 1: at the moment, and what's it made for customers like

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Speaker 1: me and you.

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Speaker 2: Internationals probably where we're seeing the most value at the moment. Sure,

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Speaker 2: I think in terms of a retlacement back to more

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Speaker 2: acceptable levels for a business class airfare. Gone are the

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Speaker 2: days of paying twenty plus thousand to fly at the

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Speaker 2: front of the cabin, which is exorbitant. And equally, I

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Speaker 2: mean it's good to see flights again under that two

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Speaker 2: thousand dollar mark, so there is value in the international cabin.

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Speaker 2: What's driving that. There's a lot of competition coming from

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Speaker 2: the North American airlines, particularly United as they partner with Virgin.

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Speaker 2: I think equally we're seeing Katar come back into the

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Speaker 2: Australian market. You would have seen that Singapore Airlines is

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Speaker 2: trying to look to solidify its slots out at Western

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Speaker 2: Sydney Airport. So internationally has always been a challenge for

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Speaker 2: corn how do they compete. They've got it largely US

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Speaker 2: dollar cost base there given that fuel the predominant input

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Speaker 2: cost is in US dollars for quantas. But equally, if

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Speaker 2: you were to speak to Cam Wallace, he says we're

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Speaker 2: no longer pursuing some of those vanity routes. And I

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Speaker 2: think where Corners has got into challenges historically as it's

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Speaker 2: trying to be everything to everyone and participate as a

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Speaker 2: big boy on the global stage. But I think now

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Speaker 2: they've really shrunk to their core and where do Australians

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Speaker 2: want to travel and focusing on that better.

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Speaker 1: Okay, what about Virgin. We've been talking about the IPA

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Speaker 1: probably ever since it was taken over by PA, certainly

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Speaker 1: in the last couple of years. Plenty of reasons why

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Speaker 1: it hasn't gone ahead, Like so no value judgment one

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Speaker 1: way or the other. But do you think it's competitive

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Speaker 1: enough at the moment and you think there will be

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Speaker 1: a float eventually?

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Speaker 2: Competitive? Definitely, there were still a few issues. The pilot's

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Speaker 2: EBA is a great example just in terms of solidifying

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Speaker 2: what are they bringing to market in terms of not

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Speaker 2: only a story for growth, but also making sure that

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Speaker 2: the core of the business is functional and operating where

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Speaker 2: they can generate sustainable returns for all of their stakeholders.

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Speaker 2: And I know that sounds like a really political answer,

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Speaker 2: but you've got to consider staff are really central to

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Speaker 2: a successful IPO, obviously the government and then Virgin shareholders,

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Speaker 2: so solidifying that's obviously really critical. There's been questions around

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Speaker 2: the market about whether or not Katar actually comes in

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Speaker 2: for a stake in that IPO. I only follow along

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Speaker 2: in the press like you guys do, but it's been

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Speaker 2: one thing that's been in and out. I guess in

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Speaker 2: terms of like a hokey pokey of how we get

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Speaker 2: to the market for the IPO's story. But equally then

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Speaker 2: I guess it's also been hamstrung by Quantus' lack of

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Speaker 2: share price appreciation. So, like I said, on those valuation

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Speaker 2: metrics that investors typically look at, when Quantus is trading

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Speaker 2: at a depressed valuation multiple, it's very hard for Virgin

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Speaker 2: to go and give a story to the market of

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Speaker 2: a justifiable level for a float that would be attractive

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Speaker 2: to the company and also to anyone participating in that flow.

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Speaker 1: Jacob, that's very diplomatic answer, So don't hold your breath,

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Speaker 1: but don't actually say it's never going to happen. I

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Speaker 1: think that's what you just said, Is that right?

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Speaker 2: Look, I think I noted to you in this program

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Speaker 2: before Seawan. I'd see it very, if not highly unlikely

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Speaker 2: that American private equity firms are long term owner of Virgin.

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Speaker 2: And yeah, I think we have to agree that the

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Speaker 2: core of that hasn't changed. We are in seemingly probably

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Speaker 2: the most unstable demand environment moving forward. Virgins so far

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Speaker 2: are very rational in how they've been acting, and I

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Speaker 2: guess from a consumer perspective, at least we're seeing improvements

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Speaker 2: in on time performance. I know that you noted at

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Speaker 2: the top off the top that there's been some air

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Speaker 2: price inflation. I think that that is right. It's around

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Speaker 2: commensurate with what we're seeing on fuel costs. I guess

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Speaker 2: as we get into deeper into calendar twenty four, that's

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Speaker 2: going to change. So it'll be interesting to see the

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Speaker 2: market dynamics as it plays out. So far, it's rational

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Speaker 2: and that should provide a good enough market setting for

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Speaker 2: Virgin to list.

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Speaker 1: One final question, what about external fact is like left

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Speaker 1: field things. A pandemic is a great example, but let's

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Speaker 1: pretend we're not going to have a pandemic in anytime

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Speaker 1: in the near future. I suppose I'm thinking more about

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Speaker 1: ESG and sort of pressure on airlines to become to

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Speaker 1: release those carbon into the atmosphere, those sorts of things.

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Speaker 1: Are there any of those things that you think we

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Speaker 1: should be keeping an eye on in the next two

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Speaker 1: or three or four years. Kind of the left field

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Speaker 1: staff it's not just about how much someone plays for

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Speaker 1: a seat and how much oil is. It's kind of

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Speaker 1: beyond that a bit.

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Speaker 2: Yeah, just not in in agreement. As you sum that up,

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Speaker 2: I think one of the biggest issues facing all of

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Speaker 2: the global airlines at the moment is the issues for

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Speaker 2: Boweing an airbus, and also the parts manufacturers. It's this

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Speaker 2: rare moment where you've got a genuine constraint of physical

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Speaker 2: aircraft supply. They can't get them off the production line

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Speaker 2: quick enough for where the airline demands are. So the

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Speaker 2: impacts of that at twofold one is that's holding back

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Speaker 2: more efficient aircraft. So the new generation of aircraft are

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Speaker 2: highly fuel efficient, they also have a cabin configuration that

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Speaker 2: work for the airline's unit economics, and we're just not

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Speaker 2: seeing that come through yet. So that's probably holding us

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Speaker 2: back as an industry generally. But then also genuine safety concerns.

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Speaker 2: I mean Boeing and the Max fleet of aircraft. We've

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Speaker 2: seen a number of issues with them even in developed markets.

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Speaker 2: Obviously developing markets have issues with their maintenance and some

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Speaker 2: of their engineering prowess that they have, but seeing issues

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Speaker 2: in the US market, particularly around safety, is a massive

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Speaker 2: constraint for the industry and in terms of confidence to

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Speaker 2: fly and confidence for consumers to spend that money that

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Speaker 2: they're being asked to pay. At the moment, you'd have

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Speaker 2: to say safety is probably at the forefront Shawn of

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Speaker 2: an issue holding back the industry.

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Speaker 1: Fantastic, Jacob, thank you for talking to Fear and Greed.

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Speaker 2: Thank Sean.

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Speaker 1: That is Jacob Kakana's director of equity research at Jarden Australia.

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Speaker 1: This is the Fair and Greed Business Interview. Remember this

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Speaker 1: is general information only and you should seek perferre sational

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Speaker 1: advice before making investment decisions. Join us every morning for

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Speaker 1: the full episode of Fear and Greek daily business does

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Speaker 1: for people who make their own decisions. I'm Sean Elmer.

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Speaker 1: Enjoy your day.