Reece

As you read these words domestic airline deregulation is now a reality after years of anticipation. What will happen now? Even a modern day Nostradamus would be hard pressed to know. We must say though that it is a great pity that the timing of this long overdue event (ie a free domestic airline market) has to coincide with an era of rapidly rising fuel costs and a major recession. How these two factors will have affected the overall performance of deregulation two years from now will be interesting to see. Obviously their effects though will be in the negative and must be taken into account when the inevitable knockers of a free market begin to emerge from the woodwork.

There are bright spots on the horizon though. Unlike the USA, Australia is well placed in terms of airports and airways to at least be able to cope with the surge in growth that deregulation should bring over the coming years. In America, the airlines deregulated and grew at a meteoric rate but the level of federal funding for airports and the ATC infrastructure was ignored. In fact there is still some $A9bn of aviation trust money held in US government coffers that succeeding administrations refuse to release for airport/airways upgrades that are now long overdue. Australia’s FAC and C A A have set aside literally billions of dollars that will greatly enable our infrastructure to cope with more than a doubling of regional air traffic by the end of this decade. Indeed the amount that has already been spent to upgrade airports and related ATC facilities these past three years is quite tremendous. The 1988-97 funding for KSA alone is just short of $2bn!

So, from dawn on October 31 a new era in domestic aviation commenced in Australia. A freer Ansett and a soon to be privatised Australian competing head to head on schedules of their choosing. Newcomer Compass stirring the nest of the traditional and hopefully drawing tens of thousands of everyday folk out of their cars, trains and coaches and onto the long haul airways where they belong. It will also, at long last, bring forward a new era in viably discounted Australian holiday packages to at

last counter the fiscal charms of a week in Bali, Fiji or NZ. A new era? Most certainly, we wish deregulation well.

Privatisation -At Last!

It took years of head bashing but finally, the economic realists within the ALP have won the day and achieved victory in their battle to privatise Qantas and Australian Airlines.

The debate is not of course about who really owns these two very competent airlines but rather who will foot the bill in reducing their presently perilous debt to equity ratios by way of a long overdue cash injection. As owners, the Commonwealth has been particularly reticent at providing its business enterprises with adequate capitalisation, preferring a policy of letting them get further into debt to avoid immediate payouts from treasury with little short-term monetary gain. However, in the real world you cannot run successful companies in this way and now at least both airlines will be able to greatly reduce their significant debt burdens by way of shareholders’ funds.

Though sensible and rational the concept of privatisation is, a few key factors need to be clarified before the Government rushes into selling the farm for what could be little gain. The elements of putting together the share float for both carriers should certainly not be rushed.

The present fiscal year will obviously be a lot better for both airlines than was the disastrous 90/91year, though by how much, amidst the spectre of recession and runaway fuel prices, is difficult to ascertain. It will be better though and it will indeed have to be, for the performance of both airlines this year will to a large extent drive the level of enthusiasm that they will be able to engender from the population at large, including major institutions and perhaps offshore interests (airlines) looking at buying a piece of the action.

With Qantas, for instance, it is our firm belief that the Australian Government must always retain at least 51%. For defence and bilateral negotiation purposes alone the majority share of this major world airline (rated 16th overall in RPK terms) must always remain at home. At presstime it was still also unclear whether or not the general public would be able to purchase Qantas shares. If the public is excluded from participating in the float, then one of the great opportunities of all time to raise additional revenue and give the average Australian a share in what is a gilt edged investment will have been lost. Indeed, considering the rush for Compass shares earlier this year, it would be a national disgrace if you and I weren’t allowed the opportunity of placing a few spare dollars in the flying kangaroo. I know I will be.

On Australian, the government has wisely decided to sell it all as it lies within a totally different strategic scenario than does its big brother. What must occur here (and also applies for OF) is that any international airline that takes a share must be able to bring some worthwhile baggage to the wedding. In other words, if we are to sell a share abroad then that airline must be in a position to be able to actively boost the fortunes of either Qantas or Australian.

As both carriers presently have very well developed marketing and oncarriage agreements with many of their respected suitors, it is difficult to see just how a 20% share in Australian will really help, say BA or JAL or whoever. Qantas’ 19. 9% share in Air New Zealand has introduced some benefits for both carriers though their case, for largely geographic reasons, is different from an Australian/BA or a Qantas/Lufthansa teaming.

These issues are very complex and often the real gain in such endeavours is clouded by hyperbole and at the end of the day amounts to little more than a flashy press release. Any foreign sale of Qantas or Australian’s shareholding must be for real reasons, not for what merely sounds great at the time.

Objective number one though is to reduce their debt. Qantas presently has a debt/equity ratio of 78:22, Australian’s is even worse at 83:17. Qantas requires around $600m to $800m in additional capitalisation while Australian would happily settle for half this. This will then bring their ratios back to around 55:45, something that both can live with. Though the Government has said that it will supply these amounts from the proceeds of the share float, we will all feel a lot better when the money is in the airlines’ bank.

Governments of all colours have a bad track record for not honouring their pledges, taking the money and running. This must not be allowed to happen with airline privatisation.