Cynics stumble on a Qantas witch-hunt

The doubts over the true state of Qantas International's finances being pursued by Nick Xenophon and the airline's unions are irrelevant to the ACCC's decision making process – and probably immaterial anyway.

Nick Xenophon’s attempt to intervene in the Australian Competition and Consumer Commission’s authorisation process for the proposed Qantas alliance with Emirates is misguided and misconceived.

In an article published in The Australian Financial Review today Xenophon called for a "forensic analysis" of Qantas’ claims about the financial condition of its international business as part of its authorisation process. Last month the ACCC issued a draft decision which, if reaffirmed in its final determination, would authorise the alliance for a five-year period.

Xenophon is sceptical about Qantas’ claim that its international business is in "terminal decline". If that claim didn’t stack up, he said, "the whole basis for the alliance is a house of cards".

As he said, Qantas unions have been claiming for years that Qantas has been cost-shifting between its Qantas and Jetstar brands to make Jetstar look better and, more particularly, to make Qantas International’s numbers look worse in order to justify the radical restructuring occurring within that business.

The problem for Xenophon and the unions opposed to the alliance is that the ACCC, while it did have access to Qantas’ financial accounts and looked at them, didn’t need to test their veracity in order to come to a draft conclusion on the airlines’ application.

As ACCC chair Rod Sims said – and it was the basis for the draft decision – the commission looked at the international business and concluded that if the alliance wasn’t approved Qantas would drop its Frankfurt route and probably reduce its services to Heathrow whereas the alliance would improve the product and service offering to both airlines’ customers by increasing access to the combined frequencies, destinations and frequent flyer programs.

"The ACCC also considers that the alliance has the potential to result in public benefits in the form of cost savings and other efficiencies, a competitive response from rivals (mainly on routes between Australia and UK/Europe), stimulation of tourism and trade and enhanced crisis management response," the commission said in its draft decision.

‘’Taking all these together, the ACCC concludes that the alliance is likely to result in material, although not substantial, public benefits."

In other words, without having to fully address the issue of the financial condition of Qantas’ international business, the commission saw net benefit to consumers in the alliance, with the gains for consumers outweighing the minimal disadvantages in a sector where there is deep and intense competition to discipline their behaviour.

Had it subjected the business to "forensic" examination it may not have agreed with Qantas’ position that it has lost nearly $700 million in the past two years but it is hard to believe it could have concluded anything other than that Qantas International is in real trouble. The logic of what has been occurring within the industry supports Qantas’ view that without radical change the business isn’t viable.

Qantas has been steadily losing share on its international routes for years as Asian and Middle Eastern carriers have entered the market and continually added capacity on what were once routes dominated by Qantas. Qantas has lost nearly five percentage points of share on the Kangaroo route alone in the past five years.

Not only is there more capacity on its routes but its competitors’ planes are newer and more efficient and their product better. The hub carriers are also able to offer services to a far, far wider range of destinations than Qantas with far more convenient schedules for business travellers.

The status quo is killing Qantas’ international business. Virgin Australia, run by former senior Qantas executive John Borghetti, has struck alliances with most of Qantas’ key competitors to create the kind of virtual international network that is the only obvious response for end-of-the-line carriers.

Qantas’ unions are threatening to challenge a final decision in favour of the alliance if the ACCC doesn’t delve more deeply into Qantas’ financials but Sims is making it clear that the debate about the precise financial performance of the international business is irrelevant to the draft decision the commission made.

Unless someone can make a compelling case ahead of the final decision that the impact on consumers from reduced competition will outweigh the gains to consumers from the alliance, that’s not an issue on which the commission has to come to any concluded view.

If it did, the material supporting the draft decision with its market share statistics over time and analysis of the cost structures of Qantas and the airlines with which it competes – and the reality that Qantas’ international network, and investment in it, has shrunk as competition on its routes has increased – would favour Qantas’ view of the condition of its international business over those of Xenophon and its union critics.

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