The Distillery: Skyfall?

Treasurer Joe Hockey’s call for a national debate over Qantas Airways' foreign ownership restrictions has the commentariat divided. While no one is willing to argue against the move, few expect it will do Qantas any good in its fight to keep red ink from its balance sheet.

According to several scribes the airline’s boss, Alan Joyce, is less concerned about the Qantas Sale Act as he is about the company’s credit rating. One goes as far as to label his manoeuvrings a “smokescreen” for the real goal.

That may be the case, though at least one commentator is willing to bat for the company over the need to tear down the foreign ownership regulations.

It’s The Australian’s John Durie, however, who spotlights the “real agenda” for Alan Joyce.

“The campaign from Alan Joyce this week has been a smokescreen for what his real agenda is, which is to be afforded the same level of support that the big banks enjoy – government support in the event of any financial troubles. When the global financial crisis hit, the former government guaranteed the banks. This is what Joyce wants from the government today.”

The desire for a government backstop is a matter of urgency, according to The Australian Financial Review’s Jamie Freed. With ratings agencies paying close attention, the prospect of a downgrade is real – and that could hurt the group’s liquidity to the tune of $2 billion.

“With a forecast of being free cash flow negative for the first half and analysts raising the possibility it will be so for the whole year, there is not nearly as much balance sheet wiggle room as it appears. And therefore it may not have enough firepower to continue fighting Virgin Australia Holdings. That means within two to three years, its market share could be down to 50 per cent from its target of 65 per cent.”

One question worth asking is whether a 65 per cent market share has become too expensive to chase? And with such a commitment, is it shooting itself in the foot?

Business Spectator’s Stephen Bartholomeusz, meanwhile, outlines the “very real policy dilemma” at the heart of the debate about Qantas and Virgin.

“The domestic market needs Virgin to be a strong competitor to Qantas to protect the interests of consumers and the wider economy. Virgin also needed to be recapitalised. Qantas is, however, the national carrier. It is competing on its own as a fully privatised entity with purely commercial motivations against an ever-increasing range of mainly state-owned or state-supported airlines. It is carrying legacy baggage that its competitors generally don’t have.”

That legacy baggage, like the baggage backlog around the holidays, might not be easy to clear.

The problem for Qantas is neither of the two options put forward by the government would likely address its fears. The first, the removal of restrictions of foreign ownership, mightn’t actually bring anyone to the table; while the second, government intervention, is always dangerous.

The AFR’s Matthew Stevens continues along this track, contending “the first option would be as politically unsustainable as the second is commercially unwelcome”. There is a third option on the table, however – the guarantee as outlined by Durie and Freed.

“That option would allow Qantas to access debt markets more cheaply and rebase its profile with the rating agencies to something more like that of the state-owned airline operators that currently underwrite Virgin. Now, you can bet that the politics of a guarantee would be no less interesting and contested than the other options (foreign or government ownership), but it would be easier to pursue, given it would not require a change to the Qantas Sale Act.”

Stevens’ colleague Michael Smith further explains why removing the ownership restrictions may do little to assist Qantas, though he does at least see a need to level the playing field. As such, a debate is long overdue.

“There is room for a foreign carrier to buy as much as 10 per cent to 15 per cent of Qantas and get one or two board seats to boot. But no one is biting. This is partly because of Qantas’ alliance with Emirates. The alliance with Qantas also means Emirates does not need to buy equity in the airline as it already has all the benefits of an alliance ... But still the rules governing its ownership now make it tricky to compete on a level playing field.”

The Australian’s Adam Creighton is firmer with his views on the need to relax the Qantas Sale Act. He argues the ownership constraints are crippling Qantas and must be curbed or we risk the end of a great Australian company.

“The question for Australians is not whether they would like Qantas to remain in Australian hands but whether they want Qantas to exist at all … The prohibition on foreign airlines from merging with Qantas or even buying it is the problem. The act bizarrely restricts foreign airline ownership to 35 per cent, although foreign airlines would bring economies of scale and expertise that, incorporated locally, would benefit Qantas and ultimately its customers.”

Through the back and forth over the foreign ownership debate one thing is clear: Qantas is struggling. It appears that the lack of momentum from the second half of the last financial year has flowed through into the current financial year, leaving it dangerously close to a re-rating from credit ratings agencies and a heavy loss in the current financial year.

It’s understandable that Qantas is calling for urgent change in light of this, however its national carrier status does afford it some preferential treatment which it would not be keen to lose.

In other company news, the proposed takeover of GrainCorp could have received a boost in the form of Australia’s free trade agreement with the US, according to Fairfax’s Malcolm Maiden.

It appears the FTA requires Australia to open direct talks with the US government should it be mulling a block of a US-led takeover, as is the case with Archer Daniels Midland acquiring GrainCorp. With talks seemingly not having taken place, approval may be closer than we think, Maiden suggests.

Elsewhere, the collapse in the share price of Forge yesterday has AFR Chanticleer columnist Tony Boyd calling for the Australian Securities and Investments Commission and the ASX to assess the lessons from its resumption from a trading suspension, while Fairfax’s Adele Ferguson discusses the prospect, and possible need, for board renewal at National Australia Bank.

The AFR’s David Bassanese crunches the numbers on yesterday’s capex figures and finds them surprisingly robust. Still, one result does not make a trend and the Reserve Bank is likely to keep its rates bias to the downside. Fairfax’s Michael Pascoe is less sceptical on the results, however, and notes that with several strong sectors not included in the figures, the RBA has at least cause for pause.

For now it appears as if the central bank will sit on its hands for at least a few months to further gauge the local economy while waiting on taper action – or perhaps lack thereof – in the US.

Finally, The Australian’s Glenda Korporaal believes a showdown is in the works over union influence in the superannuation sector, while Fairfax’s Michael West explains that half of the investment returns of Australian savers have been redirected toward management fees. Time for change, perhaps?