Hockey right and wrong on Qantas

Qantas has its hand out for a $2 billion dollar debt guarantee from Australian taxpayers on the basis of “levelling the playing field”. The government has quite rightly told them that such a taxpayer subsidy (which is what it is) will not be forthcoming. But Treasurer Joe Hockey still argues that he is going to “level the playing field” because it will axe the carbon tax as well as remove restrictions on foreign investment in the airline.

The phrase ‘level the playing field’ should set off alarm bells in any citizen, but unfortunately it usually invokes feelings of sympathy and national pride – hence why pollies and rent-seekers use the phrase.

The thing is that Hockey is talking complete rubbish about creating a level playing field because, in axing the carbon tax and removing restrictions on foreign investment, he isn’t doing any such thing. And you know what, it doesn’t matter.

Qantas is suffering financial troubles at present because Qantas chief executive Alan Joyce has cut prices to the bone as he attempts to maintain what he has entitled a “line in the sand” of maintaining 65 per cent market share in the domestic Australian business versus Virgin Airlines.

In essence his company and Virgin are engaged in a price war where they are both losing money, but with the eventual hope that the other one will cede ground in terms of market share important to economies of scale and profitability. This was reported widely in the media back in September last year.

Qantas doesn’t want to be the one who gives up ground and is pleading unfair to the Australian Government because Virgin, via its owners, can access cheap debt because Singaporean and New Zealand taxpayers via their government-owned airlines bear most of the risk. 

Qantas isn’t suffering at the hands of Virgin because of the carbon tax, because both airlines face exactly the same carbon tax. The carbon tax is levied based on the carbon content of kerosene, not whether there’s a kangaroo on the tail wing. By any definition you can think of, both Virgin and Qantas are on a level playing field when it comes to the carbon price.

Now, both Virgin and Qantas have at various points complained about the carbon tax, saying they haven’t recovered its cost. But did customers suddenly decide that they aren’t interested in flying if they had to pay $4 extra per fare (the cost of a 1900km flight, according to Qantas) due to the carbon tax while they have proven willing to pay far, far more extra if it’s due to the price of a barrel of West Texas crude going up?

Last year Qantas management made it very clear it would ruthlessly drop prices to defend its line in the sand against Virgin. The head of Qantas's domestic business, Lyell Strambi, said last year, "We've made it very clear we'll be sensible in terms of capacity. But if a competitor puts one [plane] in, we'll put two in as a group. We're very clear, we're not making any apologies for it."

In essence it wouldn’t matter what costs they faced, carbon tax or no carbon tax, Qantas made a choice they were willing to lose money and Virgin have proven they’re willing to lose money too in a fight over volume.

At convenient times they might like to say that the cost not being recovered is that attributable to the carbon tax. But you could equally say it’s the cost associated with fuel, or labour or the million-dollar salaries of the airline’s executives.

So if you want to justify policy surrounding Qantas on the basis of ‘levelling the playing field’ then the carbon tax is the last place to look.

However, at the same time why would Australian taxpayers care about Virgin gaining market share over Qantas because Singaporean and New Zealand taxpayers are dumb enough to take on the financial risks associated with the Australian domestic aviation market?

Seems like a great deal to me. We get extra flights, lower prices, Virgin expands its Australian staff, and we get to collect carbon tax revenue that offsets the need for higher taxes on income or GST – all at the largesse of Singaporean and New Zealand governments.