Back to the future

Airlines need cash for the bumps in the road (or air pockets) that come along all too often. And yes you can sell off Jetstar and the frequent flyer program – again good for equity investors and shareholders, but again no good for the long-term viability of the country.

Perhaps it’s time to evaluate if Qantas shouldn’t return to government hands to bring long-term stability, vital in what is a long-term business with national agendas. There are very, very few successful airlines that are not in government hands or have a majority of government ownership.

The global wave for privatisation of airlines was started at British Airways in the Thatcher days and indeed it was ripe for a restructure and float. It was, at the time, industry worst-practice and considered a laughing stock with the moniker of Bloody Awful. After its float is was the pin-up boy of what could be achieved and many governments followed the UK’s lead. But even at British Airways the magic of the late 1980s and 1990s had faded and a considerable amount of the airline’s success related to its dominant position at Heathrow, which is highly slot-constrained.

“It costs you $1 billion to buy $3 billion – is that a good deal or not?”
John Singleton

Most of Qantas’s competitors are government-owned or governments are the major shareholders. While competition law in some countries restricts or prevents bailouts, the stability of not having to answer to the fickle stock market enables management to focus on long-term decisions which are best for the airline and country.

Contrails recently had an informal chat with incoming Air New Zealand chief executive Christopher Luxon and it was abundantly clear the airline’s focus is about projecting New Zealand excellence abroad and supporting exports while attracting tourists to the country. Contrast that with Qantas where chief executive Alan Joyce has engaged a defence team in the Macquarie Group to handle predators and also Citigroup to keep an eye on Qantas’s share register. The Qantas board and executive team have spent the last eight months fending off speculation about an unfriendly takeover.

There is no such thing as a level playing field anywhere in the aviation world – there never will be – and privatised airlines are at (and will remain at) a significant disadvantage while they are answerable to the stock market. Unless Qantas can marry itself to a strong government airline such as Emirates its future will always be challenged and challenging.

To put this in perspective there is quite possibly only one private airline – Cathay Pacific Airways – that regularly makes an acceptable return on capital.

But its home is one of the world’s greatest business centres. However, even Cathay counts as one of its shareholders – with 29.99 per cent – the Chinese government-controlled Air China Limited.

In the land of the free – and free enterprise – every major US legacy airline has gone through or is going through Chapter 11.

It makes for a very sorry tale.

In 2005 John Kay, writing for the Financial Times on the woes of airlines, commented thus about various types of businesses: “Some businesses attract too many entrants because people like being part of them and some businesses have too much capacity because governments favour them.”

He then added the dynamic of the mighty dollar. “The dollar bill auction is an unpleasant party game played by economists. The rule is that a dollar bill goes to the highest bidder, but both highest and second-highest bidder must pay. The game can continue until the resources of the players are exhausted. Even if you are already hopelessly in the red – you have spent more than a dollar to gain a dollar – you may go on raising the stakes. Another cent might win you a dollar: not to put up another cent involves certain loss.”

Finally he adds on types of businesses that “if the market will ultimately be profitable for those businesses that remain, companies go on spending in order to be among them.”

In a sobering summary has says: “The misfortune of the airline business is that it combines all these characteristics. Being an airline executive seems to offer the company of glamorous hostesses and the allure of exotic locations, even if the reality is meetings with insolvency practitioners and visits to the commercial courts.”

Airline food for thought?