July 9, 2007

Humbled but not off the Flight Path

Eric Ellis, Sydney

A failed $9 billion takeover bid in May by a private-equity group for Australian flag carrier Qantas— which would have been the biggest deal in aviation history—seems to have humbled the airline’s pugnacious CEO, Geoff Dixon. But Qantas itself is flying higher than ever.

Dixon had enthusiastically backed the buyout, which would have given him a $60 million payout. “If I had my time over again, “he told FORTUNE in June in Sydney, “I don’t think I’d do anything differently, except I would not want myself, or any of the senior management, to do a long-term contract deal with the bidders.”

The former journalist, who has run Qantas since 2001, was hammered by the market and the media for being too cosy with Airline Partners Australia, the private-equity consortium led by Macquarie Bank and David Bonderman’s Texas Pacific Group. Two Qantas directors resigned over the failed bid. But Dixon holds on as boss, at least for now.

 “Dixon blotted his copybook,” says aviation analyst Brent Mitchell of Shaw Stockbroking in Sydney, “but the actual airline is doing pretty well.” Mitchell echoes widespread market sentiment that Qantas is a lot better off without private-equity owners. He points to Dixon’s own forecasts, touted in the heat of battle, that Qantas’s profits would come in at about $1 billion for the fiscal year ending next June, up from $565 million on revenue of $11 billion in fiscal 2006.

Those numbers prompted a rethink among key shareholders, which helped sink the offer. Qantas shares have since traded 10% higher. Dixon says a silver lining of the failed bid was that analysts “took a closer look at us, and they liked what they saw.”

The Qantas CEO says he is “as focused as ever” on protecting the airline’s 65% domestic market share, which has been buoyed by the booming Australian economy but is coveted by foreign-owned predators, including Richard Branson’s Virgin Blue and the fast-rising Singapore-backed Tiger Airways.

Tiger recently got approval to operate out of Melbourne, a move that has prompted a price war. Tiger CEO Tony Davis says that he is “determined to make Tiger Airways a national carrier, and we’ll be entering a lot of markets around Australia.” Abroad, Singapore Airlines has been lobbying Canberra to dismantle the lucrative duopoly Qantas has with United Airlines on the always-full flights across the Pacific to the U.S.

“We are a very profitable legacy airline in a difficult industry,” says Dixon, “and that has made us a victim of our own success.”