Issue 57: June 1990

Back in our May 1988 edition Recce, we argued the case for privatisation on the basis that when the economy inevitably turned down, both Qantas and Australian would likely suffer the worst economic crisis of their long histories. The past year has seen events that nobody, even in their worst nightmare, could have envisaged. An expected, though still painful, downturn through the first half of 1989 as we came back to earth after the halcyon days of Expo and the Bicentennial, followed by the devastation caused by the pilots’ dispute, has, amongst others, left both Government airlines in tatters.

In an exclusive interview with AA in this edition, Qantas CEO, John Ward, glumly points out that it would presently be impossible to take Qantas to the marketplace when it is unlikely to report an operating profit this financial year. Qantas uplift is around 20% down on the 1988/89 year to date and an increase (in real terms) is not expected before year’s end as overseas tour whole- salers only now begin to realise that the domestic airlines are once again back in action.

Qantas urgently needs a cash injection of around $500m to reduce its very high debt to equity ratio (believed to be now around 80:20, about the same as Australian), while it faces something in the order of $6bn in investment over the coming five years in new plant and equipment. If this is to be financed from day to day cashflow, then its debt will only increase.

Sounds esoteric? Well consider that as this theory barely works in a strong market, then in a falling market the effects are ravaging. When a downturn comes, that fragile two or three percent margin that airlines worldwide operate on can easily slip into the red. Without a viable month to month cashflow exceed- ing debits, then the airline will slip into a further mire of debt and actually have to begin to mortgage its remaining assets in order to finance its day to day operations. (Put simply-if, for instance, you had a take home pay of $400 a week and your expenses were say, $440 a week, then you wouldn’t need a calculator to see that you had a major problem. ) Without some meaningful government action to address the airlines’ critical debt problem, then this is exactly where both our Government carriers are headed.

What the anti-privatisation brigade fail to appreciate is that the privatisation issue is not about merely hiving off the national estate. It is simply about providing additional cash resources to the companies involved. No company, irrespective of what it does, can function profitably if it is saddled with a high level of debt. What Qantas and Australian urgently require is to be able to reduce their burgeoning debt to equity ratios in order to successfully meet the challenges of the nineties.

For Qantas, that will be a liberalised international air transport policy with most of its competition not only immensely profitable in relative terms, but also cashed up to ensure that their equipment decisions and levels of service provided aren’t dictated at the end of the day by short term monetary considerations. As Qantas rightly competes with these airlines on equal terms, then it must also have the ability to do likewise; otherwise, competitors such as SIA, BA and Cathay will eventually out-compete it in the marketplace. It is interesting to note that of the world’s leading 35 airlines (in RPK terms), only six are Government owned, and most of them are dismal performers at best. That Qantas is forced into this unenviable ‘club’ by its owner is nothing short of absurd.

It is also interesting to note that for the first quarter century of its life, Qantas was actually in private ownership. It was only with the ending of WW2 and the emergence of a new world order that the Government decided to buy up the Qantas Empire Airways shareholding and also begin its own domestic airline under the name of Trans Australia Airlines. The relevance of that decision in 1990 (at a time when even Russia’s Aeroflot is being mooted for possible preparation for eventual sale, and Qantas itself is a 19% shareholder in a recently privatised Air New Zealand), is somewhat clouded to say the least.

Australian Airlines fares even worse in real terms, as unlike Qantas it cannot fund its imported assets from overseas derived revenue. Australian also, naturally enough, suffered greater damage from the pilots’ dispute than Qantas, though in the long term it is well configured operationally to cope with deregulation via its sensible fleet mix and the ability to augment its short-term cash flow through the sale of its older 727s as the new 737-400s are received. To compete with the new entrants, and indeed the Ansett group, it is however going to have to reduce its debt burden substantially if it is to be a serious contender in a deregulated environment.

As an example of what can be achieved via a cash injection, it is worth quoting the example of 1983 when the Government (ironically with Kim Beazley as Aviation Minister) injected an extra $115m into the then TAA. This was used entirely to retire debt with the result that an additional $17. 5m was added to the air- line’s bottom line the following year. An injection of several hundred million dollars now would increase its operating profit (and ultimately taxable income irrespective of ownership) by tens of millions of dollars annually. This in turn would also serve to increase its market valuation.

The bottom line though, is that if the airlines are privatised, then the necessary funds raised MUST be returned to the air- lines to reduce their debt to commercially acceptable levels. For the Government to simply take the money and run would be the ultimate act of hyprocracy.

Kim Beazley has indeed returned to his old battleground of Aviation at a fortuitous time. After all, it was his forward thinking that led to the eventual dismantling of the much hated and horribly inefficient Department of Aviation and culminated in the establishment of the FAC and CAA with the plethora of long over-due reforms that are only now being floated. His efforts now will be to ensure Qantas and Australian a fair go in order to enable them to survive as the airlines that they so rightly deserve to be in an ever more competitive world.

Though who knows, maybe Vladimir Ivanovich of Kiev will be able to buy shares in ‘his’ national carrier long before Mary Simp- son of Cronulla- let’s hope not!