Rod Sims' misplaced competitive spirit

The ACCC chairman wants to extend anti-signalling laws from the banking sector to other industries to prevent collusive behaviour. Given the way the Virgin-Qantas capacity war has played out, he needn't worry.

Rod Sims has signalled that the Australian Competition and Consumer Commission is going to push for an economy-wide extension of the anti-signalling laws that currently apply only to the banks as part of the Abbott Government’s ‘’root and branch’’ review of competition laws. Apparently it’s not healthy for business leaders to say obvious things about their businesses.

In a speech in Sydney today the ACCC chairman nominated the price-signalling laws as one of the areas that impede competition and would need to be debated within the review.

‘’They currently apply only to the banking sector but recent statements regarding airline capacity show why these laws need to be extended to all sectors of the economy,’’ he said.

‘’With only two players in the market it is not healthy to have the sort of public signalling that we have seen recently. A cost duopoly can lead to reduced competition and higher prices for consumers,’’ he said.

The anti-signalling laws -- specific to the banks -- were introduced in mid-2012 and were part of Wayne Swan’s package of ‘’reforms’’ to the banking sector which included bans on exit fees on home loans and various changes to the credit card regime.

Those ‘’reforms’’ -- supposedly to make the sector more competitive and to create opportunities for smaller lenders -- have had minimal if any, impact on the competitive settings within the banking sector.

It’s also not clear that there is any particular public benefit from preventing bank executives from talking about key aspects of their businesses when there is no anti-competitive intent. By forcing them to self-censor their commentaries, their shareholders and the wider public are denied useful insights into the framework within which the banks are operating.

If there were real anti-competitive intent or collusion, of course, there would be other legislative headings the ACCC could use. It is worth noting that the ‘’reform’’ was confined to banks even though there was some discussion at the time about the peculiarity of singling out only one industry.

Sims references to airlines presumably relate to comments made by Qantas’ Lyell Strambi last year when he said the group would add two planes for each one added by Virgin to maintain its market share and defend its 65 per cent ‘’line in the sand’’ as well as more recent comments from Etihad’s James Hogan saying he would like to see the domestic market ‘’correct’’ and that it was a market in which both Qantas and Virgin should be profitable. Etihad is a substantial shareholder in Virgin.

It is self-evident that with both Qantas and Virgin losing money in the first half and, on analysts’ estimates, heading for combined full-year losses approaching $900 million, there is no collusion going on in the domestic aviation market.

The two duopolists are killing each other by adding capacity at a greater rate than demand growth. If there’s any attempted signalling going on, it’s falling on profoundly deaf ears.

Inevitably, at some point, the capacity war will stop and capacity will be withdrawn by one or both players until the market is more balanced -- and the airlines are profitable.

Neither Qantas nor Virgin need to signal anything. They understand each other, and each other’s operations and strategies, intimately.

All Strambi was doing last year was saying what Virgin’s John Borghetti, a long-time Qantas executive, already knew. Qantas would defend its market share at almost any cost.

Alan Joyce has consistently and publicly defended Qantas’ market share strategy and its logic -- and needs to be able to do so to explain to his shareholders the consequences of surrendering share to a competitor with significantly lower costs.

If he were muzzled from talking about it, he wouldn’t have a hope of surviving the external pressures without abandoning the strategy and losing the yield premium that is a key to Qantas’ ability to compete despite Virgin’s lower costs.

What Hogan said was equally obvious. It is irrational for duopolists in a healthy market, with a potential profit pool of $700 million to $800 million a year, if not more, to be losing the kind of money that Qantas and Virgin are losing.

Had it not been for the $350 million equity injection Virgin received largely from its three strategic shareholders and Qantas competitors last year it could well have flown the airline into a wall. Qantas’ credit rating has been junked and it has been forced, albeit not entirely as a result of the domestic competition, into a traumatic assault on costs.

Common sense says that at some point the irrational behaviour has to stop before they do even more damage to each other but, if the comments by Qantas and Etihad were intended to be anti-competitive and to signal a ceasefire, they are obviously hopeless at communicating and colluding.

Qantas has said it will add more capacity this year and, while Virgin isn’t talking about its plans, the market is very aware that it is adding significant capacity to the Tiger brand.

There needs to be evidence of damaging behaviour and consumer harm before more legislation and red tape is added to a business sector already groaning under the existing loads.

It seems reasonable to ask why, in what’s supposed to be a highly transparent, investor-protective, disclosure-based environment, public commentary of importance to investors -- commentary, of course, that doesn’t have any deliberately anti-competitive intent or effect to it -- should be censored.

Rather than debating the extension of the anti-signalling laws from the banking sector to the rest of the economy, it might be better to debate whether the existing laws should be repealed.