Qantas can bleed now or later, but capacity war must end

Qantas is investing in a loss-making strategy, and there’s no easy way out. Dave Hunt/AAP

Tony Abbott has thrown a curve ball at Qantas in refusing to offer up the debt guarantee it wanted, but seeking to abolish Part 3 of the Qantas Sale Act in its entirety. This opens the door to foreign ownership above the current 49% cap and more concentrated ownership by one overseas airline, among other things.

Should the proposed legislation pass, will Qantas inevitably split its international and domestic operations, along the lines of Virgin?

The Air Navigation Act requires that for an international airline to be designated “Australian” it must have majority Australian ownership — limiting foreign ownership to 49%. This provision does not apply to domestic carriers, thus allowing majority foreign ownership of a potential “Qantas domestic”. As an example, Virgin’s domestic operations are 66.9% foreign owned (by Air New Zealand, Etihad Airways and Singapore Airlines).

Fine, so it would be possible. But would it happen? Well, as the great American baseball player Yogi Berra said, “It’s difficult to make predictions, especially about the future”. But here goes.

A dogged strategy

Qantas CEO Alan Joyce has repeatedly claimed Virgin is being supported by cash infusions from its foreign investors. Those investors: Air New Zealand, Ethiad and Singapore Airlines, clearly see some advantage in holding a majority stake in Virgin, presumably as providing solid linkages with their own networks. And as is often the case in complex industries, such linkages can be more easily and fully achieved by ownership rather than a mere alliance. So does it not stand to reason that British Airways, Emirates or other international airlines want to do similarly with Qantas?

Perhaps, but it’s far from clear. In response to Tony Abbott’s announcement last night, Qantas characterised that foreign support as being designed “to fund a loss-making strategy against Qantas”. That loss-making strategy is designed to provide a strong foothold in Australia, which makes the linkages to the foreign owners more valuable. But Qantas already has more than a foothold: it has two thirds of the domestic market.

Why invest in a loss-making strategy to either retain that share or even try and increase it, especially when there is already a triumvirate that seem committed to preventing that from happening?

No easy money

In short, it’s not obvious that there will be a queue of international airlines eager to throw money at a price war in domestic Australian air travel. If there is not then it makes little sense to split Qantas’s foreign and domestic operations, particularly as there are some ongoing costs to doing so.

If the proposed legislation fails to pass the Senate, which seems likely given the stated opposition of Labor and the Greens (and despite possible support from incoming crossbench senators David Leyonhjelm and Bob Day), what options remain?

For Qantas there seems little to do than push forward with the aggressive restructuring program it recently announced and to revisit its stated goal of maintaining 65% domestic market share, regardless of the short term profit consequences.

It may be that ceding market share to Virgin could lead to an equilibrium with less aggressive capacity expansion by both players, and consequently higher ticket prices. Market share does not equal profit, as Qantas’s recent results are testament to.

Political suicide

Prime Minister Abbott doesn’t want to “let Qantas bleed”. Anthony Gherghetta/Flickr, CC BY

Perhaps an equally interesting question is what options remain for the Coalition if the legislation fails to pass.

If, when the new Senate sits in July, the legislation still fails to pass then the Coalition will be in a tricky position. Abbott has already made it very clear that the current playing field is not level. The government would then either have to do what Abbott yesterday implored Labor not to and let “Qantas bleed”, or reverse its position on the debt guarantee, or a related option.

Option A: Holden/SPC Ardmona tough love; option B: the Gonski flip-flop redux. Neither of those prospects seem politically enticing.

What’s next for Qantas? A great deal of uncertainty about its ownership, operational structure and the possibility of support from this or future governments. The only thing that seems certain is that 5,000 loyal Qantas staff will lose their jobs.

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