Abbott leaves Qantas with a wing and a prayer

Less than three weeks ago, Qantas ticked Joe Hockey’s four boxes to qualify for federal government assistance. Something changed between then and now.

The Abbott government’s Cabinet decision last night to rule out extending a guaranteed line of credit to Qantas but to press ahead with the repeal of the core of the Qantas Sale Act gives the appearance of coming to Qantas’ aid in its hour of need, but the practical reality is that the government has decided to distance itself from the group.

That could be a matter of principle for a government that has vowed not to use taxpayer money to prop up private enterprises; it could be a very political decision to shift some pressure/blame on the Labor opposition for the pain Qantas is about inflict on its workforce as it sheds 5000 jobs to cut $2 billion from its cost base; or it could be a response to the intense lobbying from Qantas’ competitors. Maybe it’s a mixture of the three.

The government knows that Labor, the Greens and Clive Palmer are vehemently opposed to amending the Qantas Sale Act, which would not only lift the foreign ownership restrictions on Qantas but enable it to offshore far more of its operations, particularly its maintenance.

Given the composition of the Senate -- both old and new -- there is virtually no prospect of the government’s proposed legislation being passed within the life of this parliament. That makes the decision to repeal Part 3 of the Act an empty gesture that does nothing to improve Qantas’ plight.

In the longer term, lifting the unique restrictions on Qantas would give it more operational flexibility, lower costs and better access to capital. It would also, of course, raise the prospect that the national carrier would eventually be foreign controlled or owned (but with its international operations technically majority Australian-owned to protect its access to offshore markets by copying Virgin’s structure).

In the near term, those Qantas-specific restrictions represent a competitive handicap for a group already carrying the burden of its legacy costs as it tries to compete with newer and lower-cost airlines, many with both natural geographic advantages and various levels of government support.

There is no level playing field in the aviation industry. That doesn’t mean that the government should provide direct support for Qantas but, if it is going to rule it out, it should at least demonstrate some understanding of the complexities and peculiarities of Qantas position.

Both Abbott and Hockey referred last night to levelling the playing field by amending the Act, implying they understand it isn’t level today.

By putting forward a remedy that can’t be implemented and ruling out any other options, however, they are acknowledging, and ensuring, that the playing field will remain tilted.

Hockey’s original checklist for assistance was that the business had to face restrictions imposed by Parliament that weren’t imposed on its competitors; it had be providing an essential service that, if disrupted, would adversely impact the economy; it had to face competitors actively supported by other governments to their massive disadvantage and it had to be doing everything within its own control to reform itself.

Despite the ticks next to Qantas’ name in those boxes, Abbott and Hockey appear to have been persuaded by Virgin Australia’s John Borghetti and Rex Airlines’ John Sharp that direct support for Qantas would tilt the playing field against them.

Even though they wouldn’t tick all of Hockey’s boxes (they don’t face the government-imposed restrictions that Qantas does and both have majority foreign ownership) they demanded that any guarantee for Qantas should be extended to them -- which would have preserved the uneven playing field Hockey’s boxes were supposed to identify.

Abbott referred to the history of Qantas over the past decade and said it had been “hugely” profitable for most of that time and said that demonstrated to him that a well-managed Qantas was more than capable of competing and flourishing.

That could be taken as a dig at the much-maligned Qantas management and board but it also reflects the shallowness of the general understanding of the predicament Qantas is in. It’s easier to blame Alan Joyce and Leigh Clifford than to try to grapple with the implications of the structural changes that have been accelerating through the industry.

Qantas used to be hugely profitable. In 2007-08 -- the final year of Geoff Dixon’s tenure as chief executive -- it had pre-tax profits of $1.4 billion and a net profit of $970 million. Virgin, under its then CEO Brett Godfrey, reported a $140 million profit.

Last week Alan Joyce revealed Qantas had lost $252 million in only six months and Virgin announced a $188 million pre-tax loss for the same period.

Between 2008 and now of course, was a global financial crisis that saw an enormous amount of international capacity redirected into the region and onto Australia’s international routes. Qantas’ international business went from being highly profitable to losing $450 million by 2012.

It also saw the emergence of a series of new airlines, both full service and low-cost carriers, from within the Middle East and Asia, whose governments see the potential of hub carriers for their wider economic development and national prestige.

Given Australia’s open skies policies, many of them service routes that Qantas once dominated. Its international market share has been decimated and its strategy of using Jetstar to create a regional business to reduce its vulnerability as an “end-of-the-line” carrier has been undermined by the impact of the capacity flowing through the region.

Its domestic profitability -- and Virgin’s -- has been savaged by Borghetti’s strategy of attacking its higher-yielding volumes, adding capacity on key routes to support the strategy. Qantas has responded to the threat to its position and, indeed, its existence posed by its lower-cost rival by matching the capacity increases rather than cede share and yield premium and allowing Virgin’s cost advantage to erode its yield advantage.

The collision of strategies and ambitions has destabilised both groups, with Virgin’s strategic shareholders having to pump in most of the $350 million of equity it raised last year to enable it to sustain its competition with Qantas.

Maybe different managements and boards might have coped with the changes that have been flowing through the domestic and international markets differently -- there is an argument Qantas should have tackled its uncompetitive costs and taken on its unions and its legacy industrial relations agreements much earlier and Joyce’s Asian strategies could be questioned with hindsight -- but the prospect of Qantas returning to its “hugely profitable” past is remote.

The structural changes in the global and domestic markets have been profound and are continuing. Qantas, as the high-cost incumbent in one of the most attractive markets in the most attractive region post-crisis, is at the pointy end of them, is carrying a lot of legacy baggage -- including the restrictions on its flexibility within the Qantas Sale Act -- and is engaged in a longer-term battle for survival, not massive profitability.