Caught In The Act

The compromise may have been disappointing but it was hardly a surprise. Prime Minister Tony Abbott wanted to remove foreign ownership limits of 49 per cent that existed under the Act but he knew that was a lost cause. It couldn’t getthrough the Senate. Instead there was no choice but to agree to Labor Party amendments and the result, according to CAPA, is a “largely pointless compromise”.

As it stood the QSA, introduced in 1992 as Qantas was heading out of government ownership and into privatisation, imposed strict limits on foreign holdings. Any single foreign investor was limited to a 25 per cent stake. Foreign airlines could hold no more than a combined 35 per cent. Total foreign ownership was capped at 49 per cent. Under the amended Act total foreign ownership remains at 49 percent but the limits on the stakes that can be held by foreign airlines are removed. Theoretically, a single foreign carrier can now own 49 per cent of Qantas.

Right now, however, that prospect is problematic because the airline is already 38 per cent-owned by foreign investors, none of which are airlines. Thus no foreign carrier can buy more than 11 per cent unless it convinces existing offshore shareholders to sell, or Qantas issues additional shares.

Labor transport spokesman Anthony Albanese argues the amendments are designed to make sure “that Qantas still calls Australia home”, and to ensure there substantial offshoring of maintenance and catering. “You don’t protect an iconic Australian company by sending it offshore and that’s what the government’s proposals were designed to do,” he said.

The question now is: do these amendments really level the playing field? The answer is a resounding “No”. Qantas’s primary argument for radical change to the QSA is that its major rival, Virgin Australia, is for all intents and purposes majority foreign-owned, with stakes held by powerful government-owned foreign carriers – Air New Zealand, Etihad Airways and Singapore Airlines as well as Richard Branson’s Virgin Group – giving it the sort of access

The result is a “largely pointless compromise”.

to foreign funding and other backing Qantas can’t get.

Virgin’s position is unique, the result of a clever corporate structure. To facilitate the requirement that international airlines be 51 per cent Australian-owned, in March 2012 then current Virgin Australia Holdings (VAH) shareholders were issued shares in the newly-created Virgin Australia International Holdings (VAIH) at the ratio of one VAIH share for each VAH share held (with a nominal value of $0. 000001 per share), which is held in a trust company. At the time Virgin’s major foreign shareholders were the Virgin Group (26 per cent) and Air New Zealand (19. 9 per cent). That then cleared the way for up to 100 per cent foreign ownership of the core domestic VAH business, 80 per cent of which is now held between Singapore, Air New Zealand, Etihad and the Virgin Group.

This opposition is founded mostly on a range of intangibles and misconceptions.

“By ring-fencing the airline’s international operations using a separate (majority Australian-owned) vehicle, Virgin is able to comply with international bilateral agreements and the Air Navigation Act that requires majority local ownership of an international airline. This structure comprises the domestic (and listed) Virgin Australia Holdings and the international division as Virgin Australia International Holdings,” CAPA explains.

VAIH has its own independent board of directors but operates under a long-term service and loan agreement with VAH to provide aircraft, crew, maintenance and administration services. VAIH is subsequently billed for these services; however, the airline notes its loan and future capital requirements are all funded from VAH. The split has had nooperational impact.

What remains unclear, even after the amendments to the QSA, is whether Qantas can do the same. There have been reports Qantas may try to do the same as Virgin, splitting its domestic and international arms, but its ability to do this under the new version of the QSA is uncertain because some references in the Act are to “Qantas” as a complete entity rather than ‘”Qantas International” or “Qantas Domestic” in isolation, even though most of the restrictions are of the same type that apply only to Virgin’s international arm under the Air Navigation Act.

On its part, Qantas is making no statement about whether it is considering such a split, although it was due to provide an update on its current structural review alongside its full-year results in August. That review was also looking at options such as a part sale of its frequent flyer business or even some of its Jetstar offshoots. While analysts believe a total split of its domestic and international arms (they already report their financial results separately) to allow greater foreign investment in the domestic business would be a positive, most question whether it is achievable under the Act. And in reality it is the international arm which is in most trouble, continuing to leak cash at an alarming rate. CAPA executive director Peter Harbison believes Qantas should follow Virgin’s lead and split its operations, but he did not know if it would and the consultancy’s report issued after the Act was amended suggested Qantas would not be able to mimic the Virgin structure without significant opposition.

“Qantas would be unable to mimic the same structure without significant legal, political and union opposition and the new amendment does nothing to help that situation. Were Qantas to make any such move, legalchallenges would create uncertainty and risk significant degradation of goodwill from employees, the public and politicians. This opposition is founded mostly on a range of intangibles and misconceptions, liberally sprinkled with vague nationalistic sentiment, but it is effective nonetheless,” said CAPA.

Indeed, the questionable patriotism surrounding the Flying Kangaroo and its position as a national icon is part of the problem. Politicians and much of the public still act as if it is a government-owned airline when it is a private company. CAPA says most of those responsible for maintaining the heat and opposing change clearly see little relevance in the immense changes the global airline industry is undergoing.

“They are in no position to prevent those changes occurring, but seemingly would prefer to focus on maintaining a pretence of supporting the status quo. Qantas does seem now at least to have convinced Canberra that its international operations are a victim of these external changes, rather than the fault lying at the feet of management; but it took a massive shock to the system – shutting down the airline in 2011 – to bring that point home. But meanwhile the ownership debate has remained mostly coloured with catchy rhetoric and often sheer erroneous assumptions. ” The Labor opposition has said its watered-down amendment will make “sure that Qantas still calls Australia home” and maintains the QSA is required to protect skilled jobs – especially in the area of aircraft maintenance. Virgin Australia actually performs no heavy maintenance in Australia but Qantas’s de facto status as the “national carrier” seems to require it be held to a different standard, CAPA points out.

There is something else to be considered, even if Qantas did somehow manage to nut out a structure similar to its local rival – what overseas operator would want to invest in an airline currently losing as much as $1 billion a year with an uncertain future, particularly in financial terms? Several potential suitors have already been mentioned, most of all Qantas’s alliance partner Emirates Airline. Its president Tim Clark has consistently ruled that out. “Equity is not on the table” he says. During a Senate inquiry, Joyce refused to comment on whether an investment provision was included in the pair’s partnership agreement.

Over the years Qantas has certainly been no stranger to potential equity deals with foreign airline partners. At various times it talked to British Airways (which did take a stake at privatisation), Singapore Airlines and Malaysia Airlines, but none of these progressed beyond the preliminary stage.

Two big Chinese carriers, Shanghai-based China Eastern and Guangzhou-based China Southern have also been mentioned in investment dispatches but again have both denied any interest at this time.

For his part, Joyce has been more than bullish in terms of the level of interest from foreign high flyers. “Given the amount of partners that we have around the globe, the interest that there is in the Australian market and the attractiveness of this brand name, there is not going to be a shortage of people interested in the company,” he said earlier this year.

CAPA agrees, saying that despite its losses Qantas is relatively well cashed-up, retains a powerful brand, owns the best airline frequent flyer program in the world and still has two-thirds of what remains one of the world’s most lucrative domestic markets. “These are features that attracted Emirates as a partner and there are numerous other airlines that would see value in anchoring a stake in the airline. ”It also believes that despite current denials and given the close and deepening tie with Emirates, it is becoming highly unlikely that the Gulf carrier would not join Qantas’s share register should there be a substantial shift in the government’s position.

CAPA also adds that the fast-growing Chinese airlines will undoubtedly become major forces in international aviation by the end of this decade and will be investing in foreign airlines as part of their global spread. “China Southern for example took tentative steps toward a 10 to 15 per cent stake in Qantas during 2013, even engaging lawyers to advise on the purchase; however, the process ultimately went into abeyance. The third of the big three, Air China, is not a prime candidate at this stage, but it is still Beijing’s preferred instrument and, despite its position in the Star Alliance, has a joint cross shareholding with oneworld airlineCathay Pacific Airways. Even the least expected allegiances become possible as new market opportunities arise… the level of turbulence and disruption in the global airline industry – and particularly in Asia – is such that this year’s unthinkable can quickly become next year’s given, so ruling out any prospective purchaser would be imprudent. ” Everyone agrees that any impact the amendments to the QSA are going to have will take some time to emerge, possibly several years. In the meantime there is universal agreement that Qantas isn’t about to collapse any time soon. The airline may want more access to foreign capital but the truth is it doesn’t seem to be having too much trouble raising funds as it is. It is in a strong liquidity position of $3 billion, consisting of $2. 4 billion of cash and $630 million in undrawn debt facilities. Availability of domestic capital sources has presented no problems.

As CAPA puts it: “Qantas is no longer government-owned, it’s not the national carrier and any sense of nationalistic ownership is misguided when discussing a commercial enterprise. If there is a real sentiment to re-nationalise Qantas, that is the course that should be taken. But there is no credible suggestion that that is in any way likely, let alone good policy. In a competitive dual-carrier market like Australia’s, restricting one publicly listed competitor under an ideological guise has to be inappropriate – and as such presumably contrary to the national interest. ” The fact is that Qantas will have to live with the current playing field for the foreseeable future. Further changes to the QSA are not going to happen unless the current government wins the next election with a strong majority and more friends in the Senate. And that appears highly unlikely.