Careful what you wish for, Mr Joyce

Alan Joyce says Qantas is subject to a "unique set of limitations" as it battles a competitor that has three rival airlines on board as shareholders and potential discount-war underwriters.
By · 20 Nov 2013
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20 Nov 2013
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Alan Joyce says Qantas is subject to a "unique set of limitations" as it battles a competitor that has three rival airlines on board as shareholders and potential discount-war underwriters.

He's talking about two pieces of legislation that limit foreign ownership of Qantas, but you really do have to wonder if he and the Qantas board have thought through where their campaign might go. The restrictions on Qantas' ownership arguably underpin its brand value. It doesn't have a kangaroo on the tails of the aircraft for nothing.

The Air Navigation Act caps foreign ownership of Australian-based international carriers to 49 per cent. The Qantas Sale Act that accompanied Qantas' privatisation in 1993 separately imposes the same limit, and states that foreign airlines can own a maximum of 25 per cent of Qantas individually (British Airways was a 25 per cent shareholder between 1993 and 2004) and 35 per cent combined.

Virgin Australia is Qantas' main domestic competitor, and it was subject to the 49 per cent limitation imposed by the Air Navigation Act until February last year when chief executive John Borghetti separated its international and domestic businesses.

Up to 100 per cent foreign ownership was suddenly possible, and today Virgin is majority foreign owned, with Singapore Airlines and Etihad Airways on board with just under 20 per cent apiece, Air New Zealand owning 23 per cent and founder shareholder Richard Branson's Virgin group owning 10 per cent.

All will take up their entitlements to Virgin Australia's new $350 million share offer, and Air New Zealand, Etihad and Singapore Airlines will also underwrite it, and buy up any shortfall, boosting their stakes. They will each also get a seat at Virgin Australia's board table.

Joyce believes Virgin is on the way to being privatised by a troika that will fund a price war, a conspiracy theory most starkly put in an internal memo to staff: Virgin had opened up a conduit to "unlimited sovereign funds" and could set prices in a bid to "terminally weaken Qantas and Jetstar", he said.

The Qantas CEO is right about one thing. After splitting its international and domestic businesses Virgin Australia has ownership options and an ownership structure that Qantas cannot replicate. Qantas can't rejig in the same way because it is caught by the Qantas Sale Act.

His claim that the foreign airlines are hell-bent on destroying Qantas isn't backed up by recent capacity numbers. In the year to June 30, Virgin expanded east-coast Perth routes and boosted available seat kilometres by 5.9 per cent. Qantas and Jetstar combined boosted available seat kilometres by 5.6 per cent, but added twice as much capacity because they have twice the market share, and focused their expansion on the Melbourne-Sydney-Brisbane corridor.

Virgin also predicted in August that it would boost capacity by between 3 and 4 per cent in the December half, in line with demand growth: it is believed to be tracking at the bottom end of that range.

Joyce can still argue that Virgin with its big foreign shareholders has latent price-cutting power that is unacceptable. He says he is not advocating any particular government action, but is arguing in Canberra that Virgin is no longer an Australian company for the purposes of the Air Navigation Act and air services agreements that give Australian airlines access to overseas destinations. Unions that have so often been at loggerheads with Qantas are backing him.

The problem, however, is that possible government responses create problems of their own.

An attempt to close the ownership loophole that Virgin and its big shareholders have flown through would be retrospective. Unscrambling the omelette would be a lawyers' picnic, and if it was achieved, Virgin's ability to survive would be in question - a national concern.

Levelling the playing field by removing or weakening foreign ownership restrictions on Qantas would avoid the retrospectivity problem, but Joyce knows that there is no appetite for it on either side of politics.

The airline's brand is also tightly tied to its Australian ownership.

It is Australia's flagship carrier, and the kangaroo tail is its main corporate logo. It uses its "I still call Australia home" anthem less than it used to, but still trots it out regularly and gets positive feedback every time it does.

Its brand was valued at $1.3 billion this year by Brand Finance, more than half its current market value of $2.5 billion. It's an intangible but nevertheless real part of the overall Qantas value package for investors, and it might be undermined by changes to the law that allowed the group to adopt a similar ownership structure to Virgin and deepen its funding.

Would an open register be a net plus or a net minus for Qantas overall? I am not sure. I am sure, however, that Qantas should be careful about what it wishes for.
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