A Qantas debt deal might not fly with Abbott

It is apparent that the Abbott government would like to respond positively to Qantas’ urgent request for assistance. However, it is quite unsure and uncomfortable about the form that help might take.

Last week it was Joe Hockey who acknowledged Qantas was competing at a disadvantage to Virgin Australia and its troika of strategic shareholders. It is a contest that, for Qantas, might not be commercially sustainable.

In an interview today with a Brisbane radio station, Tony Abbott said he was open to changes to the Qantas Sale Act, which restricts foreign ownership of Qantas. But he was less than enthusiastic about suggestions that the government could acquire a shareholding in the national carrier or provide guarantees of its debt.

Abbott said: ‘’I’m not sure they really want to see a new government shareholding and the trouble with providing a government loan guarantee is, where does that stop? Once you start giving it to one business, why shouldn’t you give it to other businesses?’’

Virgin Australia has already put its hand up to say that it wants whatever Qantas might get.

Qantas would probably respond to the Prime Minister’s rhetorical question by saying that there is only one national flag carrier and only one company bound by the Qantas Sale Act, which contains not just restrictions on foreign ownership but board composition and where the majority of its operations are located. Qantas also has a special role in emergencies involving Australians abroad.

The Act underscores the national interest in the airline and could be used as justification for assistance.

While changes to the Act to lift the restrictions on foreign investment (limited to 49 per cent of the group with sub-caps of 35 per cent for investments by other airlines and 25 per cent for an individual airline) would appear the most politically palatable options, Abbott was right in saying there would have to be a community debate before that could be contemplated.

One suspects it would be quite a heated and politicised debate. In any event, removing the restrictions probably wouldn’t be of much practical assistance to Qantas. It certainly wouldn’t give it the kind of near-term help it is seeking as it tries to protect its investment-grade credit rating while in the midst of a damaging capacity war with Virgin.

Qantas’ Alan Joyce appears to believe that Virgin will use the $350 million of new capital that is being largely contributed by Air New Zealand, Singapore Airlines and Etihad Airways to prolong or even deepen its assault. This forced both groups into losses in the second half of last year and has some analysts predicting that Qantas could lose as much as $500 million this financial year.

The most recent operating statistics for both groups show that Virgin is continuing to grow its domestic capacity, passenger volumes, load factors and yields. Qantas and Jetstar are holding their capacity steady, but experiencing lower load factors and yields.

If Qantas continues to defend its 65 per cent market share ‘line in the sand’ and Virgin Australia’s strategic shareholders (all Qantas International competitors)  are prepared to see the capital they have provided consumed by a capacity and price war, it could get quite bloody for both groups.  There are no near-term winners in an airline capacity war.

Virgin lost $100 million last year. But, as Alan Joyce has noted, the three airline shareholders and Richard Branson were still willing to stump up their 73 per cent share of the raising, with the airline shareholders underwriting the raising.

Qantas’ fear is that its competitors could use Virgin to destabilise it by attacking its core profitability and therefore undermine its international operations.  Qantas’ airing of its concerns about that potential agenda drew a furious response, with threats of legal action from Virgin.

Qantas is not especially enthusiastic about the idea that the government could take up a modest shareholding as a demonstration of Qantas’ importance to the national interest – something that the ratings agencies have indicated would protect its credit rating.

Of greater appeal and impact would be some form of guarantee of its debt, with Qantas paying a fee for the guarantee in similar fashion to the scheme the Rudd government put in place for the banks during the financial crisis.

While Abbott makes a pertinent point – that it would be difficult to confine a guarantee scheme to just one company – the practical reality is that the Australian government would inevitably re-nationalise and recapitalise the core of Qantas if the group failed and there was no option other than its disappearance from the skies. Apart from the banks, there aren’t many companies about which that could be said.

A guarantee of its debt – or at least some of it – would secure Qantas’ credit rating. But it could be quite complicated and messy, given that Qantas has been expanding offshore via its Jetstar brand, both directly and via a range of interests in offshore joint ventures. The government would be reluctant to expose taxpayers to risk-tasking outside the boundaries of the national flag-carrier role.

Qantas could have avoided (or at least deferred) having to plead for government help if it conducted its own equity raising. But a group that has never returned its cost of capital would find it hard to justify asking shareholders for more.

Virgin was fortunate that its key shareholders – all with some level of government ownership themselves – have strategic reasons for being on its register and for underwriting its capital raising at a point where, because of the cost of the capacity war it ignited,  it was extremely vulnerable itself.

Qantas doesn’t have that kind of shareholder, which is why it is desperately looking for help elsewhere. This year could be a definitive moment – and not necessarily a positive one – in its long and proud history.