The Distillery: Foreign skies

The bitter 12-month battle between Australia's two largest airlines for the corporate travel market has spilled over into a war of words over Virgin Australia's foreign shareholders. On one hand, Qantas boss Alan Joyce makes the case that foreign competitors are using Virgin to weaken its business. On the other, Virgin chief executive John Borghetti counters by saying our national carrier is just a little scared of competition.

The commentariat is split on who is right, though all agree that Joyce has little hope in coercing the government to act against the latest capital raising. The big question, according to one commentator, is whether Qantas really wants a level playing field.

Elsewhere, supermarket giants Woolworths and Coles have agreed to a new code of conduct with manufacturers. The move, according to scribes, won't stop the competition watchdog from continuing its pursuit of the big retailers, but it is a smart decision ahead of the government's review of competition law.

First to the fight for our skies – The Australian Financial Review’s Matthew Stevens looks at the view from the Qantas Airways side of the fence and can’t help but agree with the carrier’s grievances.

Stevens believes that Joyce has a case in calling for a review of the Foreign Investment Review Board process that led foreign players to hold such a large share of Virgin Australia Holdings. He also argues for improvements to the Air Navigation Act, which Virgin has cleverly avoided by separating its domestic business from international operations.

“The alternative he (Joyce) offers would likely be a much more bitter pill. Because the way Qantas sees the world, if Virgin is allowed unfettered access to foreign investment that has strategic rather than commercial outcomes as it motivation, then the time has come to review the Qantas Sale Act that constrains foreign investment in the national carrier. And frankly, he has a fair point. Either the whole industry works to the rules that constrain Qantas or those rules should be scrapped.”

The Herald Sun’s Terry McCrann agrees that Qantas has a case, with the whole episode bringing up some bigger policy issues.

“For in simple terms, Virgin and the three airlines – Singapore, Eithad and a reborn Air New Zealand – are getting away with what Joyce and Qantas are specifically prohibited from doing. This is, effectively running a foreign-owned and indirectly controlled Australian airline. That leads on to two bigger points. The failure of the FIRB, foreign investment review and approval process. And the apparent sub-contracting of a major government policy change to three foreign airlines.”

McCrann, however, believes the push to stop the latest Virgin capital raising should, and will, go nowhere.

While McCrann and Stevens show sympathy for Qantas’ position, the same can’t be said for The Australian’s John Durie, who sees its complaints as being a little rich. The national carrier might want to mull its preferential treatment locally before it launches an all-out assault on fairness in the aviation sector.

“His (Joyce’s) case against Virgin is non-existent but the argument for a level playing field is valid; there should be no restrictions on foreign ownership of Qantas. The question, then, is how level Joyce would like the playing field to be, because one suspects he quite likes the protection afforded to him as a national flag carrier.”

Fairfax’s Elizabeth Knight agrees, contending the move by Joyce was “an act of desperation” and a sign that all may not be well with its current operations.

“My guess is that Joyce is preparing the ground for an unsavoury result in the first half and probably the full year as well … The flying kangaroo is being financially king-hit by its smaller competitor, Virgin, that now has the backing of three large, ostensibly sovereign-owned airlines with unlimited financial muscle. It's the equivalent of the schoolyard weakling finding three big brothers and trouncing the bully.”

Unfortunately for shareholders, each player is hitting the other so fiercely that both are coming out as losers.

And Business Spectator’s Stephen Bartholomeusz explains that Qantas is going to have a hard time changing the minds of policymakers on its foreign ownership restrictions.

“Qantas’ entreaties, however, have been rejected and the group’s particular place within the Australian consciousness continues to make the prospect of allowing majority foreign ownership a difficult one for politicians. This is the case regardless of whether they subscribe to Joyce’s fears about the motivations of three of his biggest international competitors in recapitalising his only real domestic competitor so that it can continue its assault on his key market.”

Moving to retail, the AFR’s Chanticleer columnist Tony Boyd says the grocery code of conduct is a win for Woolworths and Coles as they look to keep their detractors at bay. It may come at the expense of some profits and won’t keep the Australian Competition and Consumer Commission from pushing on with its investigation into the competitive dynamic of the sector, but it is a step forward.

The Australian’s Richard Gluyas also labels the code a “step in the right direction” and a smart concession from the big retailers ahead of the Abbott government’s review of competition law next year.

It is this notion of distrust surrounding the supermarkets chains’ motives that has some labelling it as nothing more than spin, but Business Spectator’s Stephen Bartholomeusz, like Gluyas and Boyd, sees enough positive steps in the code to suggest this isn’t the case. Still, it is an evolution, not revolution in the relationship between Woolies, Coles and their suppliers.

It’s easy to understand where the critics are coming from, however, given that the two dominant players in the grocery sector have made the move at such a critical juncture. The review of competition law will definitely be worth watching next year, though like most government reviews, the public has every right to be sceptical that it will amount to anything.

In the financial sector, Fairfax’s Adele Ferguson puts the microscope on the Commonwealth Bank of Australia’s submission to a Senate inquiry into its financial planning scandal. The bank, Ferguson contends, air-brushes out several key facts and leaves many questions unanswered.

Meanwhile, Ferguson’s colleague Michael Pascoe sends criticism the way of ANZ Bank’s board. Pascoe asks why the bank is so out of step with its competitors on compensation for its chief executive and calls for shareholders to bring the board back to reality by knocking back the remuneration report. While Pascoe makes a great point, a strike on the remuneration report is probably unlikely given the bank has just reported another record profit.

Finally, the AFR’s Laura Tingle delves into the latest challenge for Prime Minister Tony Abbott in Indonesia, while The Australian’s Liz Moran confidently pushes investors to choose bonds over term deposits. The little rise in risk, she contends, is worth it given the extra returns available.