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Market, competition and the sheriff – Qantas under siege

Qantas’s nightmare start to 2008 shows no sign of ending, with its shares tumbling to their lowest level since Airline Partners Australia launched its ill-fated $5.45 takeover bid for the airline in December 2006.

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Qantas’s nightmare start to 2008 shows no sign of ending, with its shares tumbling to their lowest level since Airline Partners Australia launched its ill-fated $5.45 takeover bid for the airline in December 2006.

Hours after Qantas was given two weeks by a court in Washington DC to pay a $US61 million ($68 million) criminal fine for fixing freight rates, Merrill Lynch yesterday slapped a “sell” recommendation on the airline after slashing its 2008-09 profit forecasts by 20 per cent.

“Rising competition, rising wage pressures, higher capital costs and a weakening economic backdrop mean that Qantas is close to the end of its earnings upcycle,” the broker said in a note to clients.

Qantas shares slumped 23c to $4.90, after the downgrade added to worries over the impact increased competition from Tiger Airways and Middle Eastern carriers such as Emirates could have on Qantas’s bottom line.

“Some of these competitors have significant operating and capital cost advantages over Qantas,” the broker said, slashing its price target on the airline from $5.82 to $4.60.

Merrill warned ticket prices would “be under pressure” by the end of calendar 2009.

Fears in recent weeks of a global economic slowdown and global over-capacity of jets have weighed on the entire airline sector.

Qantas shares have now fallen 19 per cent since late October.

The airline’s mid-December profit upgrade has not eased worries the airline’s dream run could be drawing to a close. Merrill, however, said it still expected Qantas to meet its forecasts of a 40 per cent lift in earnings in 2007-08.

Recent signs of an economic slowdown in the United States and Britain has fuelled fears Qantas could be hit on its two key long-haul routes, to Los Angeles and London.

It is on these two routes which Qantas has a stranglehold on the high-yielding corporate market. Any slowdown could lead to a sharp drop-off in business traffic.

A possible lifting of interest rates by the Reserve Bank next month also could dampen the recent record demand for international travel by Australians.

The Merrill downgrade adds to the recent gloom surrounding Qantas, with the carrier suffering arguably the biggest dent to its once enviable safety reputation in decades after one of its Boeing 747s lost electrical power on approach to Bangkok last week.

Qantas also declined to comment further yesterday on its involvement in a price-fixing ring in the US, after having its plea agreement with the US Department of Justice approved in a US court.

Under the deal,Qantas has admitted to illegally fixing prices in the US with other airlines and has agreed to pay a $US61 million fine.

The carrier, however, has not owned up to any illegal activity in Australia or Europe, where it is under investigation by competition regulators.

Countering Merrill’s bearish outlook, JP Morgan issued a note which said Qantas’s buyback of its shares – which is now 39.5 per cent complete – could boost the carrier’s earnings per share in 2008-09 by 5 per cent. JP Morgan, which cut its recommendation on Qantas to “neutral” last month, kept its price target on the carrier at $6.43.

Qantas’s recent share price slide has been echoed across the sector, with Virgin Blue shares rising 8c to $1.78 after touching a 16-month low on Monday.

Air New Zealand was also on the receiving end of a downgrade by Goldman Sachs JBWere.

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