Qantas ticks all the boxes for aid

Support for Qantas – such as a guaranteed line of credit – would send a powerful message to Virgin’s state-backed shareholders that the government will defend our national carrier.

Joe Hockey has laid out the criteria companies need to meet to become exceptions to the Abbott Government’s stance on using taxpayer funds to support private sector organisations. Qantas, probably uniquely but not coincidentally, meets them all.

It’s obvious that Hockey is laying out the intellectual and policy framework for giving Qantas a helping hand without providing ammunition to the critics of its refusal to give $25 million to Coca-Cola Amatil to keep SPC Ardmona afloat or throw more taxpayer funds at General Motors and Toyota. He also doesn’t want to create precedents that could be cited by other distressed companies.

He asked some rhetorical questions which provide the checklist against which assistance would be assessed.

Do Parliament and the Government impose restrictions on the business that are not imposed on other businesses in the same industry? Thanks to the Qantas Sales Act, which restricts foreign ownership and imposes some directions on its governance, that’s a tick for Qantas.

Is the business fundamental to the economy, providing an essential service which, if significantly disrupted, would have a detrimental impact on the economy? Another tick.

Do other governments actively support other players in the industry that are engaged in direct competition to the ‘’massive’’ disadvantage of the Australian business? Apart from Virgin Australia’s share register being dominated by state-owned or controlled foreign airlines, many of Qantas’ other competitors in international markets are state-owned or controlled, so there’s another tick.

Is the enterprise doing everything within its own control to reform itself? Having taken 20 per cent out of its unit costs in the past four years, having flagged another $2 billion of cost cuts over the next three years and about to announce the outcomes of a strategic review that could see it sell off parts of its best assets to raise capital, the answer would almost certainly be yes. The final tick.

What Qantas has been asking the government for is not amendments to the Qantas Sales Act to lift the restrictions on foreign ownership. Not only are the politics of changing the Act difficult but in the current environment of losses and a battered share price it would provide no solution to Qantas’ problems.

What it really wants is for the government to provide a guarantee for a new line of credit, which Qantas would pay a fee for. That would not only give it extra financial flexibility and lower the cost of new borrowings but it would send a signal to the ratings agencies, the wider market, and its competitors that the airline has federal government support.

Qantas’ case would have been helped by last week’s Virgin Australia response to an ASX query over a slump in its share price. Virgin confirmed a flurry of analysts’ forecasts that -- rather than the small profit or modest loss previously expected -- it would lose about $49 million in the first half, before including losses from its Tiger Australia subsidiary or one-off restructuring costs.

Competition from Virgin, whose major shareholders are Air New Zealand, Singapore Airlines and Etihad Airways, has forced Qantas heavily into the red. It has forecast its own first-half losses of between $250 million and $300 million, a forecast that caused its credit rating to be downgraded to junk status and triggered the strategic review.

Virgin’s admission that it, too, is losing money heavily says that the behaviour of the domestic duopoly is commercially irrational. No rational duopolist embarks on a strategy of competition under which both competitors generate large losses. It also allows Qantas to claim that foreign governments are funding an attempt to destabilise it, if not to destroy it.

The three government-backed shareholders in Virgin stumped up the overwhelming majority of the $350 million in new equity Virgin raised last year after losing $100 million in 2012-13.

It is that capital which has enabled Virgin to survive and sustain its assault on the premium end of Qantas’ customer base and the attempt to breach Qantas’ 65 per cent domestic market share ‘’line-in-the-sand.’’

Explicit Government support for Qantas in the form of a government guarantee of a line of credit would achieve two outcomes that Qantas clearly believes would help it in its battle with Virgin and for its own survival.

The obvious impact would be to provide it with greater financial flexibility and credibility but perhaps even more powerful would be the message it would send to Virgin’s airline shareholders that the government is actively interested and involved in defending Qantas.

To end the capacity war and the haemorrhaging Qantas needs to convince Virgin and its financiers that they can’t budge it from its defence of its line-in-the-sand – that it has the financial capacity to withstand, indefinitely, whatever is thrown at it.

Government support of some kind would do that and would, no doubt, also be interpreted by the state owners of Virgin’s capital providers as a gentle signal that the Australian Government isn’t amused that their capital is being used to destabilise the national carrier.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles