Qantas

OpEd: Australia should remove ownership restriction

Airlines are the root of the global economy as well as regional economies. Airlines “tie” the six regions of the world together (North America, LatAm/Caribbean, Asia-Pacific, Europe, Middle East, Africa). Inevitably, Qantas has been one of the most important airlines in the history of aviation and has been able to survive the trials and tribulations impacting aviation. However, Qantas’ fate is more important than ever before as the airline faces continuous competitive pressure in both the domestic and international markets.

In theory, Australian aviation operates in a deregulated environment and yet, many restrictions still apply, particularly in the area of foreign ownership. Qantas is a legacy carrier plagued by legacy characteristics. The business model was developed during a time of regulation and like airlines in other markets forced to adapt to liberalized or deregulated environments, Qantas has not had the opportunity to reinvent itself and take advantage of a new platform like many of its competitors. The Qantas Sale Act of 1992 put serious restrictions on the airline’s ability to optimize performance due to the associated foreign ownership restrictions.

The Australian domestic and international markets are faced with excess capacity issues meaning there is too much supply for demand. As noted in Qantas’ recent announcement of a $235M loss, both the domestic and international markets are suffering as airlines compete for business. Unfortunately, for Qantas, the competition is fierce as Virgin Australia, backed by three state-owned airlines, continues to fight for market share. Both Qantas and Virgin Australia posted financial losses in 2014 and the battle for supremacy will continue despite this. In the world of globalization and deregulation, the airline industry is an “eye for an eye, tooth for a tooth” business.

Due to the current foreign ownership restrictions put on Qantas, the airline must have 51% Australian ownership. Access to “cheap” capital is very difficult for Qantas due to this restriction set forth by The Qantas Sale Act. However, its main competitor, Virgin Australia, has a major advantage over Qantas as it has access to “cheap” capital, via the three state-owned airlines (Singapore, Etihad, Air New Zealand).

Australia has always had a sense of pride and is a nationalistic society. Qantas has traditionally been supported as the official flag carrier of the country and this continues to be evident with the current foreign ownership restrictions discussion. There seems to be a belief between government and the citizens of Australia, that reducing foreign ownership restrictions will result in loss of pride and loss of the nationalism associated with the name Qantas. In reality, if foreign ownership restrictions were lessened, and foreign monies were invested into the airline, it is very doubtful Qantas would lose its identify. The solution to the identity issue is a well-planned marketing and branding strategy.

Qantas’, Alan Joyce, has argued for the need for government support, essentially subsidized assistance for the airline, while Virgin Australia’s, Borghetti, as argued against. Interestingly, as of this week, the Australian Government has shot down Joyce’s argument and said no government support is heading in the direction of Qantas. In a deregulated environment, government assistance should not be permitted as it creates an unfair competitive advantage to airlines operating in the same deregulated environment.

As Qantas and Virgin Australia run head to head, it is only a matter of time before access to resources disappear. In this particular case, Virgin Australia has greater resources but even this powerful brand, backed by strong air carrier ownership, has limitations.

It is possible for both Qantas and Virgin Australia to survive and operate successfully long-term. And, it is important for the Australian Government to take this perspective as competition is best for the market as it keeps airline fares reasonable and expands market share in terms of route network. However, in order to accomplish the task of having an efficient airline industry, changes are necessary both externally and internally.

Externally, the Australian Government must revise the rules associated with The Qantas Sale Act removing the current 51% ownership restriction. Such a change will permit Qantas to seek access to cheaper capital most likely in the form of equity relationships with airlines in the Oneworld Alliance (i.e., Cathay Pacific, Qatar). Internally, Qantas has a lot of work to do in terms of restructuring. The domestic and international operations should be split into separate businesses resulting in a new business model for each entity including new leadership. The Qantas brand would continue to survive and both business models, though different, would complement each other. The physical size of Qantas should be reduced as the current fixed costs are high. Unfortunately, one of the negative impacts is a reduction of the employee base. The airline, is overstaffed. Additionally, Qantas must restructure its aircraft fleet by simplifying it.

The notion of building a smaller airline is a good thing as costs will be significantly reduced and by splitting the business into two air carriers (domestic and international), management can focus on opportunities including enhanced partnerships with the Oneworld Alliance that can essentially offer the world in terms of network. Air New Zealand, although primarily government owned (approximately 75%) is a good case study for Qantas to research. Air New Zealand restructured the company by developing and implementing a successful strategy. The end result was a decrease in capacity, a focus on long-haul travel, a simplified aircraft fleet, strong alliance relationships, and a recent profit announcement of $140M after taxes. Interestingly, the Government of New Zealand has been selling off shares of the airline as part of a partial-privatization plan.

One of the key strategies for airlines world-wide, is to “shrink” the physical business but “grow” the network through strong partnership opportunities. In other words, airlines, within alliances, should strive to complement one another rather than compete.

John QAbout the author, John Wensveen, Ph.D.

John is partner and executive VP, airline start-ups for Mango Aviation Partners. He is responsible for leading development of new air carrier projects as well as restructuring of existing airlines. He can be reached at john.wensveen@mangoaviation.com

 

5 comments

  1. Unfortunately the 51% restriction is a rule applied to ALL Australian airlines who represent Australia on international routes. It’s not part of the Qantas Sale Act and it impacts Virgin Australia also. That’s why Virgin have created a separate, wholly owned subsidiary that performs its International services and has its foreign ownership restricted to 49%.

    Virgin Australia’s domestic operation has the funds being pumped into it by foreign entities and it can go to 100% if each such investor gets the Foreign Investment Review Board’s blessing.

    Of course, Virgin Australia’s international entity is more of a paper structure but it meets the law and lets them obtain foreign backing for their domestic operation, etc

    Removing the Qantas Sale Act will still leave Qantas with a 49% foreign ownership cap as they service international routes via Qantas mainline and Jetstar. They also have flights to New Zealand covered by JetConnect which flies 737s painted in Qantas livery but based in NZ and paying NZ pilots (at lower rates, etc – but that’s a separate issue all together :) ).

    The solution is plain & simple:

    1) Remove the Qantas Sale Act and let foreign entities back Qantas to the maximum of 49% provided the FIRB approves it

    2) Split Qantas into Domestic & International as Virgin Australia has. This will let foreign entities own as much as they want of the domestic (profitable) operation. The Australian government can then invest in international if they want or set up a debt guarantee that’s just for them.

    To say that the Qantas Sale Act is preventing more than 49% foreign ownership is incorrect & misleading. It’s also missing the point that up until recently, Qantas were able to arrange massive amounts of investment & had an investment grade rating (one of the few airlines in the world to do so) – all despite the existence of the Qantas Sale Act.

    Yes, we need a level playing field for airlines in Australia BUT we also need to look beyond the rhetoric & brinkmanship to really assess the situation and determine a path forward. Debt guarantees are not the solution and removing the Qantas Sale Act is not the magic silver bullet that will fix everything. Qantas must adapt to the changing world of aviation, reassess its priorities and lift its myopic focus on the bottom line to the exclusion of all else, a focus that has pushed it faster into a headlong race to the bottom.

    Frankly, I do not believe that Australia’s current government (both opposition & those in power) are up to the task of honestly appraising the situation, nor are our mainstream media able to cut through the spin & propaganda to get to the core of the issue. I also believe that the current board of directors & senior management at Qantas are not up to the task of turning the airline around thanks to their woeful track record of the past 5 years (& beyond).

  2. Grant,

    As the author of this article, I am pleased the content has captured your interest. There is much debate about the current Australian aviation environment and I agree with your comments about government not being in a position to make major decisions about the future of the airline industry. I also agree that the media, generally speaking, is not in a position to dig through the “meat” and provide recommendations on how to create a more efficient environment. Qantas needs a major overhaul but this must be based on a restructuring plan that starts with a blank slate. I also agree that a new team is required. No longer can airlines be treated as airlines but as a business. Deregulation is growing throughout the world and one of the main aspects of this is to eliminate government control of the industry. However, in Australia, my professional opinion is that deregulation is not being exercised to the limits it should be.

    The article is a snap shot and an opinion piece. The article touches on one piece of the overall problems that exist in Australian aviation and as you rightly presented, there is much more information to be discussed. Unfortunately, due to word count restrictions, it is difficult to address all points and recommendations. This is a huge topic and a matter that will not be solved over night.

    The Qantas Sale Act of 1992 was created before Qantas commenced the privatization process, and before “new” air carriers existed. There is a lot of conflict with the content of The Qantas Sale Act when compared to the Air Aviation Act which seems to be missing from much of the government and media talk.

    Virgin Australia is not constrained by the same foreign ownership restrictions Qantas faces. As mentioned in the article, Virgin Australia has large-scale foreign investment by three foreign airlines equating to 65% (ANZ 24.5%; Etihad 19.9%; Singapore 19.8%). Additionally, the Virgin Group also owns 7.4% bringing total foreign investment to approximately 71%. The Qantas Sale Act clearly stipulates foreign investment, by a foreign airline, in Qantas specifically, is limited to 35%.

    When writing this article, I knew it would stimulate debate and I hope, readers respond with their own thoughts and opinions. Perhaps, a great solution will be uncovered during this process that will somehow impact the future of Australian aviation.

    Best regards,

    Dr. John Wensveen

    • Thanks for your reply, John and yes, there’s only so much space to write :)

      We definitely need to get rid of the Qantas Sale Act to help level the playing field, but even without that, Qantas is limited to 49% foreign ownership by the Air Aviation Act. This is the same issue that Virgin Australia faced which they avoided by splitting domestic with International.

      If the QSA was removed then Qantas could easily have a level playing field by separating International from Domestic, thus allowing as much foreign investment as the FIRB would permit. How they manage this step (given Jetstar as well as mainline services) will be “interesting” to say the least.

      Splitting the company and stopping this insane “line in the sand” market share mentality would go a long way towards helping them out of their current situation. Removal of the QSA and sacking the board & CEO would help too :)

  3. Pingback: Mango’s, Dr. John Wensveen, provides a perspective on the current state of the Australian airline industry

  4. Matthew E

    What gets me is to make it a level playing field all seem to assume that the QSA is what needs to go. That is one option however another option would be for the same rule that apply to Qantas could also apply to other airlines (ie: Virgin Australia).

    The whole having to be 51% Aussie owned for the International operations is a bit of a joke when taken into account that far more jobs and funds are recieved from the local operations, Simply should be in my opinion 51% Aussie owned across the board (For flight operations, Spun off engineering divisions, and other related enterprises another matter), This would then prevent foreign airlines from distorting the market so much as they would be unable to pour unlimited funds unto the market.

    As for sacking the board and the CEO, Well while I can agree they may not have done as well as other’s could have it grinds me that all seem to make them out to be the fault, Forget the fact that we are having unprecedented competition backed by foreign airlines, Or that fuel prices are 100-200% above historical norms. In fact when accounting for the fuel growth if fuel had remained at historical prices then Qantas would actually be posting $1 billion+ profits after tax.

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