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Q&A: Qantas the Australian airline, or not?

Qantas wants a regulatory environment that would allow more foreign investment in the airline. Paul Miller/AAP

Federal Treasurer Joe Hockey has kicked off a debate about the foreign ownership of Qantas, flagging a review of the legislation that currently limits foreign holdings.

He says the airline is bound by “regulatory handcuffs” that will ultimately limit its long-term growth.

The Qantas Sale Act was brought in by former Prime Minister Paul Keating in 1992. The Act, together with the Air Navigation Act caps foreign ownership of Qantas at 49% and also means a single foreign entity can hold no more than 25% of the airline’s shares.

The Opposition says it will oppose any moves to change foreign ownership limits that apply to Qantas, arguing the national carrier is an important part of Australia’s national security. And even Qantas chief Alan Joyce has said changing the Qantas Sale Act to allow more foreign ownership is not “realistically achievable”.

Instead, according to the Australian Financial Review, Joyce is seeking some form of credit guarantee from the government, which could step in and buy up to 10% of the airline.

So what’s changed since 1992, and what can Australians expect if foreign ownership restrictions are lifted?

Tony Webber, Associate Professor, University of Sydney Business School

Why is there a foreign ownership limit placed on the airline under the Qantas Sale Act, and the Air Navigation Act?

The 49% foreign ownership limit under both acts relates to government discussions about air rights. The Australian Government negotiates with other governments on air rights, which determine the number of seats that Australian carriers in total can bring into the country. Air rights also determine the number of seats that the relevant foreign carriers in total can bring into Australia. Sometimes these rights are couched in terms of movements or departures as well, as is the case in negotiations with the United Arab Emirates and perhaps other countries. The Australian Government will represent Australian airlines in these discussions. But they are deemed Australian airlines only if they are majority-owned by Australians.

The more problematic issue with the Sale Act are the other two restrictions which are not relevant to Virgin Australia, notably the restrictions on foreign airline ownership.

What are the economic arguments for Australia to retain a “national airline”?

Few in my opinion. About the only reason I can think of, aside from the emotional reason, is that it can be called on to rescue Australians trapped in troublesome situations overseas. If you look at a number of major western economies they actually don’t have national carriers, think US, Japan, China, India, Brazil. Where they are really relevant is if they are government-owned and serve as an instrument of tourism policies.

What is the role of Virgin Australia in this debate, and why are John Borghetti and Alan Joyce going head to head over the issue?

Qantas is worried that Air NZ, Singapore Airlines and Etihad are propping up Virgin while it is making losses so that it can weaken Qantas. Qantas is cranky because the capacity expansion of Virgin is hurting Qantas (as well as Virgin). And if this is sustained for a year or two this will really hurt the usually most profitable segment of Qantas.

George Cairns, Professor of Management at RMIT

Why are we having this debate now?

The first decade of the 21st century saw the emergence of a new class of national carrier, from the wealthy nations of the Middle East. Drawing on their oil fund revenue tax wealth, the Gulf states launched state-owned airlines like Emirates, Etihad and Qatar Airways, based in new state-owned hub airports that are ideally placed to provide links to Europe, Asia and beyond. These airlines have received massive investment in new aircraft fleets and have built huge market share very rapidly.

For many, the argument for a national airline will be based on comparison with these new and successful carriers, rather than with Qantas’s earlier peers and competitors, most of which have been lost to private ownership. One argument in favour of a national airline that may prove difficult to counter is that of providing an essential but unprofitable service to remote communities that cannot be served other than by air. But a comparison of Qantas and Virgin route maps for Australia shows they both cover the same major and secondary locations, and both service remote communities, but with differences between their respective strengths and gaps.

Why is Treasurer Joe Hockey throwing his support behind a review of foreign ownership of Qantas?

I would imagine that this proposed review is driven by a number of factors. These may include political ideology and support for private-sector, market-driven competition. But, they may also include budget pressures, recognising both that airlines require huge capital investments in order to maintain modern fleets, which Qantas - if you discount Jetstar - has failed to do in recent times. The tax revenue of the State is under pressure as China’s economy slows and resource demands falter.

As Joe Hockey looks around the Australian economy, he may judge that there are limited options to increase investment on a purely domestic basis. Serious investors are likely to demand executive influence if not control and if these are to come from overseas, then the Qantas Sale Act will need to be amended to enable this.

Who are the potential international airlines that would be interested in buying into Qantas?

This is the difficult question. Virgin has already secured the investment of three key regional players, who would be unlikely to buy into Qantas in order to strengthen it. However, there is no reason to believe that any of the Gulf state airlines would see any benefit in acquiring Qantas, either for its domestic or international networks.

The US airline industry remains relatively weak and the recent tie up between American and US Airways is likely to preoccupy both for some time. European airlines are still financially fragile and unlikely to see any reason to invest here, particularly with Virgin already well established.

It’s likely investment would come from outside the airline industry, from venture capital looking to invest, rationalise, divest of unprofitable sections, etc. This is the most unpalatable option that would put jobs and services at risk. But there are carriers from the emerging economies of China, India, Indonesia that might consider expansion into the Australian market as something worth considering. Would, for example, China Southern consider Qantas a worthwhile acquisition, particularly if the purchase included Jetstar and its Asian subsidiaries?

Overall, the future of Qantas as either a nationally owned and controlled or as an internationally owned airline is uncertain. I would imagine that the different scenarios for its future must preoccupy Alan Joyce and his team as well as Joe Hockey, the unions and the populations of remote communities that are reliant on the carrier for ease of access to the major centres of population.

Sinclair Davidson, Professor of Institutional Economics at RMIT

What’s changed since the Qantas Sale Act was enacted in 1992?

Australia doesn’t need a national carrier. We just need to have an airline that flies between cities.

In the 1990s everyone was talking about only having two carriers, arguing it would be a disaster if Ansett left. When Ansett did collapse the market was quickly filled with other players like Virgin and Tiger; other airlines did come in.

There will always be airlines flying between cities and consumers aren’t as brand loyal as they used to be, so having an Australian carrier isn’t as meaningful now as it was before.

Who will win from a further sell-off of Qantas to foreign interests?

Qantas is at a cost of capital disadvantage because it has to source capital from Australia as opposed to global markets.

It is a good idea to have the Qantas share register totally globalised. Should Australians have a disproportionate share to everyone else?

Airlines are a risky business and long-run returns haven’t always been very good. Due to the ownership restrictions Australians probably have a disproportionately high share in Qantas that maybe we shouldn’t have.

By selling it to foreigners and allowing portfolio managers to hold the shares they deem sensible everybody is actually better off and Qantas would probably enjoy a lower cost of capital.

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