Time for Qantas to get its house in order

Removing some government restrictions immediately would be dangerous for Qantas, but could be highly useful down the track in a hostile industry environment.

The Abbott government’s likely acquiescence to Qantas’ pleas for help is, if it plays out as expected, quite politically astute as the airline slashes jobs in an effort to lighten the legacy costs that dragged it to a first-half loss today.

Alan Joyce announced plans to cut its workforce by a further 5,000 jobs today as the airline revealed a first-half result awash with red ink: its statutory loss for the half was $235 million, down from $109 million in the first half of 2013. 

The government has already announced that it will draft amendments to the Qantas Sale Act to remove the layers of restriction of foreign ownership of the group – restrictions peculiar to Qantas. The Act also insists that the majority of Qantas’ operations, including maintenance, have to be located in Australia and also impose some restrictions on its governance structures.

The government also appears close to extending the guaranteed line of credit that Qantas has been seeking, albeit with an interest rate that, if the facility were drawn down, would be punitive. (Qantas has been lobbying for the facility, not because it needs the funds, but to lower its funding costs and hopefully regain its investment grade credit rating as a result of the government’s demonstration of support.)

The two initiatives, however, would be linked. The facility would only be available until the amendments to the Qantas Sale Act were enacted, at which point it would be withdrawn.

The cleverness of the linkage flows from the knowledge that it is likely – in fact, almost certain – that the amendments will be opposed by Labor, the Greens and enough independents in the Senate to ensure that they won’t be passed within the life of the current parliament.

Lifting the limits on foreign ownership would do nothing positive for Qantas today, other than making it vulnerable to hedge funds and corporate raiders who would see it has cash holding equivalent to its market capitalisation; that it has a frequent flyer program worth more than its market capitalisation and, in Jetstar, a low-cost-carrier brand that could be worth at least that much. Qantas could be a profitable break-up if the Qantas Sale Act barriers were lowered.

In the longer term, if it can get its share price up, removing the restrictions – particularly those relating to the location of its operations – might be more useful.

By proposing the amendments and linking the life of the line of credit to their passage, the government can argue that it is providing the facility only because of the government-imposed restrictions on Qantas’ financial and operational flexibility. Once Qantas is in the same position as, say, Virgin Australia it won’t continue to receive that support.

That addresses the public campaign waged by Richard Branson and John Borghetti against any government help for Qantas unless Virgin, too, receives the same support.

Virgin is expected to reveal losses of just under $50 million, excluding further losses within Tiger Australia and restructuring costs, when it reports on Friday. Without the $300 million of equity it raised last year it would also have been destabilised by the domestic capacity war.

But the Virgin camp would also be well aware that explicit government support for Qantas, even if notionally temporary, is also intended as a warning signal from the government to Virgin and its three big airline shareholders and Qantas competitors that the Abbott Government is uncomfortable with the notion that foreign government-owned airlines have pumped capital into Virgin and are funding the assault on Qantas that has destabilised the national carrier.

The likely linkage between the line of credit and the Qantas Sale Act would highlight the uniqueness of Qantas’ position and make it possible for the government to argue that it sets no precedents for bailing out private sector companies and isn’t a case of corporate welfare but more of a quid pro quo.

There’s a less visible element to that quid pro quo.

The government has made it clear that it is waiting for the outcomes of the cost cutting and other measures announced today in the first phase of Qantas’ strategic review. The airline may also announce further asset sales, although the fate of the more sensitive assets like the frequent flyer program or Jetstar may not be determined for some time.

While the government has denied there is any secret deal with Qantas that trades the government help for job-shedding, Tony Abbott has made it clear that it is a pre-condition of any assistance that Qantas needs to do what it can to ‘’put its house in order.’’

It would seem a reasonable demand before any form of taxpayer support is extended to a private business (although generally private businesses should stand or fall as a consequence of their own efforts) that the business make its best efforts to put itself on a sustainable footing. The experience of the car industry highlights the futility of throwing vast amounts of taxpayer funds over extended periods at companies and industries that are inherently unviable.

Qantas’ ability to compete profitably, with Virgin in the domestic market and a raft of competitors internationally, is hampered – some would say hamstrung – by its legacy costs and, in particular, the myriad of agreements it has with unions that have created wages and conditions significantly out of kilter with those of its competitors.

While Qantas has been progressively shifting the newer proportions of its workforce onto new awards or, thanks to Jetstar, into a different employment environment, it still has a lot of employees on the old awards and with absolutely no incentive to give up income, conditions or leverage.

The only recourse Qantas had to reduce its cost disadvantages – and ultimately to survive against lower cost competitors – was to shed the high-cost jobs. Now it’s doing that. It might be unpleasant and it might generate a backlash from its unions but Qantas doesn’t have too many options for improving its competitiveness within very dynamic and hostile domestic and international industry environments.

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