Surely, Qantas Is Better Alive And Shared Than Extinct?

TIME HAS PROVEN the Qantas Sale Act to be a red herring; rather than a protection for an Australian airline in Australian ownership, headquartered and managed in Australia, this well-intentioned but misguided legislative time bomb now threatens to detonate, wiping out the airline and tens of thousands of jobs with it. The cavalier attitude of those able to help is astonishing. Surely a partly foreign-owned Qantas is preferable to an extinct one?

Once again, Qantas is in the news; not for the right reasons, and not (directly) of its own making.

Before we get started I want to make it clear that the renationalisation of Qantas, government guarantees of its debt, and other silliness publicly indulged in by those who should know better are the last things I would ever advocate: maybe, maybe, if it ever came down to Qantas folding or not, there could be a case for the government taking it over, restructuring the living daylights out of it, then privatising it again. But that time is not now, and there remains a number of other options to try before anything so drastic is even contemplated.

I read an article in The Australian yesterday that had me shaking my head, ruling out as it does the prospect of either relaxing or abolishing altogether the provisions of the Qantas Sale Act that prohibit majority foreign ownership of the airline, and place restrictions on the size of the shareholding individual foreign investors are able to take in it.

At the time the Keating government privatised Qantas in 1995, the Qantas Sale Act was in some respects justifiable, if not a textbook case of hypocrisy. That sale followed the privatisation of the Commonwealth Bank, an institution not subjected to the same market-distorting restrictions that Qantas was encumbered with.

But Qantas held (and I contend, still holds) a unique place in the modern Australian psyche, and even those who openly refuse to ever fly on it still confess to feeling some kind of affection when they see Qantas planes on airport tarmacs thousands of miles from home. This is what Keating sought to safeguard: the legend of the flying kangaroo, the spirit of Australia, with its fearsome reputation for safety, reliability, and service. And so dreaded foreigners were prohibited by law from owning more than 49% of it, foreign airlines investing in Qantas no more than 35% in total, and no single foreign investor or entity more than 25%.

Admirable, but utterly misguided.

An early warning of the pointlessness of the Qantas Sale Act came in late 2006, when a quaintly named consortium known as Airline Partners Australia — cleverly structured to comply with the Qantas Sale Act despite a significant shareholding by US private equity funds — narrowly failed to win the required 50% acceptance rate needed for its takeover attempt to succeed, despite carrying the endorsement of the Qantas board of the day. It was widely speculated ¬†at the time that the primary objective of the takeover, had it been successful, was to siphon out about $3 billion in cash Qantas continues to hold on its books even now before disposing of the airline in a fire sale.

(The bulk of the money held as cash by Qantas is to fund accrued workers’ entitlements, just in case anyone thinks it’s crying poor whilst sitting on a war chest).

It showed that compliance with the Qantas Sale Act did not equate to the longevity or prosperity of the airline itself. It would almost certainly have been fatal to Qantas’ business had it proceeded, just 18 months out from a savage global downturn that hit aviation businesses disproportionately hard, and robbing Qantas as it would have of the very liquidity that had made it an attractive target to begin with.

It is instructive to revisit the episode given the supposedly competitive environment Qantas now finds itself operating in. But first, I want — very openly — to kick the anti-union can around a bit, for reasons that will become obvious a little later.

Longstanding readers will recall that back in 2011 when Qantas CEO Alan Joyce grounded the airline in response to militant union bastardry and rampant industrial action over a series of ambit pay demands, I came down in this column very firmly on the side of the airline and its management and against the unions. Most will find such a judgement to be of no surprise. The management, however, happened to be right.

More recently, I shared this little gem, which provides a salutary insight into just how mad, bad and dangerous the unions in this country really are to business and to jobs (and jobs at Qantas especially), despite their grandiose but empty rhetoric about the rights and conditions of the worker: the end destination of this madness is to drive the companies to the wall, and the people they employ onto the scrap heap. So much for constructive workplace relations, union-style.

There are two reasons I bring this up.

Firstly, Qantas — like the car manufacturing companies and a number of other Australian “legacy” brands — has reached a tipping point with its labour costs; simply stated, that point lies where the continuing perpetuation of enterprise bargaining agreements that secure rolling wage rises year in, year out and usually well above the rate of inflation has become unsustainable. It is no secret that in spite of the billions of dollars in taxpayer monies thrown at car makers for years, labour costs lie at the heart of the decisions of Nissan, and Mitsubishi, and Ford, and now Holden to stop making vehicles in this country. And for that, the unions must take their share of the blame.

Qantas, along with Victorian food processing firm SPC Ardmona, seem to be the next cabs off the rank when it comes to this insidious cancer of union-inflicted insolvency and the mortal threat it poses to the viability of those businesses.

But the case of Qantas is different when it comes to the consideration of factors arising from its unionised labour costs; this is the second reason for belting the unions, culpable as they are on this point as well.

The same unions that tried to cripple Qantas in 2011 with ridiculous claims on pay and conditions (but have already done more than enough damage, thanks to the legacy of historical EBAs) strike deals for the same work to be done by an equivalent workforce at Virgin at rates of pay 16% less than they received at Qantas prior to that year’s round of wage claims. As readers will see, this is even more pertinent when it comes to cabin crew, one of whom on a “legacy” agreement at Qantas can earn roughly double what the union-struck deal at Virgin would allow them to.

It not only smells of hypocrisy — nay, stinks of it — but it also points to an agenda within the unions affected of preferment, of trying to set one company up to fail and another as an industry “winner,” which has not only contributed to the unsustainable and unrealistic levels of wages Qantas is forced to shell out, but is an object lesson in why, even with coverage of just 16% of the Australian workforce, the union movement still has far too much influence and clout in this country.

My point is that even before we get to the other factors that have put Qantas in the situation it finds itself struggling to survive in, the odds were already stacked against it by those sections of its workforce represented by trade unions. As I said, this will become important later on.

Now, it seems the pleas from Qantas for the Abbott government to do something to help it will go unheeded, with the article from yesterday’s issue of The Australian showing that deputy Prime Minister Warren Truss has effectively conceded there is nothing it can do on account of the numbers in the Senate — even after the new Senate, friendlier to the government than its present incarnation, is constituted in July.

I don’t think nationalising Qantas is in anyone’s interests: airlines are businesses governments have no place in running, and before anyone starts talking about the likes of Emirates, Qatar, or even Singapore Airlines, it should be noted that these and others like them are mostly countries ruled by one-party states and/or dictatorships, and far from primarily serving a commercial purpose, their airlines also fulfil political functions that can also become military functions under certain circumstances as well.

Either way — and certainly when it comes to the likes of the Middle Eastern carriers, and perhaps some of the Chinese airlines now expanding rapidly — their airlines seek to eke out market share to the destruction of other airlines, not to co-exist with them.

I think the Rudd government made the gravest mistake back in 2009, when it made what was basically a politically motivated decision to block a proposed merger of Qantas with British Airways. The resulting entity would have been majority-owned by Australian interests, controlled by Qantas, based in Sydney, and run by a management populated with a majority of Australian personnel. Qantas and British Airways would have continued to operate as separate brands within a common ownership structure.

But it would also have been a truly global business: and in the modern world of aviation, scalable businesses are the ultimate objective for an industry beset by rising costs and in an environment where travellers want service and standards of safety, certainly — but on a cost-effective basis, which also means lower fares overall.

This is the reason the larger state-run carriers are almost predatory in their expansion plans. It is also why, for example, airlines in the US that are already huge in their own right, such as United and Continental, are merging to form mega-airlines. It is all about scale.

In the aftermath of the Rudd government decision, BA merged instead with Iberia, and later divested itself of its stake in Qantas. And now, the chickens come home to roost.

Qantas competitor Virgin has got around the requirements for 51% of its international operations to be Australian-owned very easily: excluding its piecemeal business to New Zealand and the Pacific Islands, Virgin operates just five (5) truly long-haul aircraft, the 777-300ERs I still contend Qantas should have bought, and flies them to Fiji and the USA. For everything else it has built a so-called “virtual airline” based on codeshares with other airlines (Singapore Airlines, Air New Zealand and Etihad chief among them) to provide its customers with access to a route network of international destinations.

Virgin’s domestic airline business — operated by a separate legal entity to its 777s — faces no restrictions on foreign ownership; it just happens to be 77% owned by — you guessed it — Singapore Airlines, Air New Zealand, and Etihad.

Like Qantas, Virgin also lost several hundred million dollars last year, but unlike Qantas, it was able to undertake a capital raising exercise, reaping some $350 million in cash, from its foreign owners.

In other words (and given the bottomless pockets at SIA and Etihad), Virgin has one huge competitive advantage over Qantas in terms of labour costs. It has a second in terms of ready and limitless access to cash, courtesy of its ownership structure.

And it goes without saying, to put it bluntly, that Virgin is a foreign airline operating in Australia on domestic and international routes.

Unable to compete on the same basis and with one wing effectively hooked behind its famous tail, it doesn’t take an economics professor to see that Qantas is boxed in. Unless someone kicks one of the walls out, the building will collapse, crushing the airline as it does.

I don’t know if repealing the Qantas Sale Act will enable the airline to fight its way back onto a competitive footing or not; I really don’t. But it seems logical that as that Act places Qantas at a severe competitive disadvantage to Virgin that is slowly suffocating it, that disadvantage should be removed.

The alternative — perhaps not now, perhaps not in the next two or three years, but certainly in the foreseeable future — is for Qantas to collapse.

It is locked in a battle for domestic market share with Virgin that it can neither win without access to investor capital, yet cannot cease to fight: Qantas’ domestic business is highly profitable, for now, and built on decades of loyalty from high-yield customers. But Virgin will continue to be unrelenting in adding capacity (extra plane seats in layman’s terms) into the domestic market to push Qantas to breaking point, funded by foreign interests, and when Qantas’ domestic business breaks, that’s it: the international arm of Qantas is already haemorrhaging red ink and has done for years. There is nothing left to prop the edifice up if its strongest turret is destroyed. The whole thing will come crashing down.

Game over.

Those disinclined to repeal the Qantas Sale Act (or to support its abolition) should carefully consider what the collapse of Qantas would mean.

The foreigners who own Virgin will be disinclined to keep air travel for Australians affordable in a monopoly market, and even if such a scenario generated a terrific surge of public anger, it would take months — if not years — for a viable competitor to be planned, established, and then grown to the point it represented any meaningful replacement for Qantas or any realistic sort of threat to Virgin’s market position.

In turn, the economic damage would be incalculable.

Qantas and its subsidiaries operate roughly four times the number of aircraft Virgin does; it services the travel requirements of an exponentially wider number of locations across the country than Virgin, and its importance to Australia’s economy cannot be understated. Travel, tourism, freight, communications and other logistics are heavily reliant on Qantas continuing to operate, irrespective of whatever Virgin does, and once the breach exists it will take many years for any competitor to fill.

I’m loyal to Qantas but I’m no sycophant; it’s done many great things over many years, but it has made its mistakes too. Nobody would deny that.

But the gross errors that were Airline Partners Australia and the Rudd government’s torpedoing of the Qantas-BA merger were, for different reasons, mistakes that could have been terminal for Qantas: the first for breaking it up and selling it for the higher value of its parts, if that had been the end result. The latter might have wrecked the opportunity for Qantas to secure its long-term survival. That could well still be the final result of that incompetent, stupid, ideologically driven Labor Party decision.

Very simply, what is worse: a Qantas owned by offshore investors, subject to some stringently legislated conditions such as being headquartered in Australia, managed by Australians, and mandated by law in areas such as the standard of maintenance its planes receive — wherever that occurs?

To say nothing of the bulk of its workforce remaining employed, and a cherished Australian icon enjoying a stable, secure, long-term future.

Or a Qantas forced to close, when the pressures of an uncompetitive commercial environment and a labour movement hellbent on driving it out of existence finally succeed in doing so?

If you’re still not convinced that abolishing the Qantas Sale Act is the right thing to do, then consider this.

Whether you like or hate Qantas CEO Alan Joyce, and irrespective of what you might think of the merits or otherwise of the management regime he is pursuing at Qantas, his grounding of the Qantas fleet in 2011 was a masterstroke: had he not done so, shutting off the right of the Qantas unions to engage in industrial activity over wages for three years, the higher wage outcomes the unions would probably have extracted from Qantas management at that time — in light of what we now know of the airline’s predicament — could well have already put Qantas out of business by now.

Just remember, the three-year prohibition on the unions taking aim at Qantas, in yet another round of thuggery and bastardry designed to extract yet more extortionate pay rises, expires in October.

If all hell breaks loose at that time, the consequences for Qantas, quite literally, could be anything.

In fact, it could get very ugly indeed.