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Qantas is waving the Australian flag … goodbye

There is more behind the Qantas lockout than short-term industrial disputes. AAP

As the initial shock of the Qantas lockout of its workforce abates, it is time to consider the wider implications of this action.

One lesson is the folly of national identification of companies that are increasingly chasing each other across the globe in search of ever-higher profits. In order develop this insight it might be useful to take a step or two back in time to see how corporate Australia has been evolving.

The first part of the story takes us back to December 2006, when a private equity firm called Airline Partners of Australia launched an $11 billion ($5.60 a share) takeover bid for Qantas.

Airline Partners of Australia was a consortium of companies that included Macquarie Group, the now-failed Allco Finance and the Texas Pacific Group. The bid, which was almost $1.50 above the prevailing share price (and $4.00 a share premium on the current share price) was supported by the then board of Qantas.

But when the bid closed in May 2007, after widespread public opposition, it failed to gain majority shareholder support and was withdrawn. One of the key lines of opposition was that a private equity buyout might mean Qantas would no longer call Australia home.

Alan Joyce is looking to expand offshore operations. AAP

Since the failed takeover bid, Qantas has pretty much followed the plans laid out by the private equity firm, expanding its low cost carrier, Jetstar, offshoring more of its workforce and leveraging its successful Frequent Flyer program (more on the way this is playing out shortly).

Flags of convenience

The next step back in time is to 1985, when BHP had to defend a bid from the corporate raider Robert Holmes a’Court’s, Bell Group. Back then, BHP was a diversified company with activities in manufacturing as well as mining and oil and gas.

There is an interesting financial story here because in the early 1980s BHP used its retained earnings to pay down debt. Sound finance, but it created the capacity for a small company like Bell Group to borrow against BHP shares to launch its bid.

The Bell Group’s strategy was to break up BHP, sell off its manufacturing business, and concentrate on international mining.

In defending the takeover bid BHP made much of itself as the “Big Australian”, even though the takeover was from a local, albeit West Australian, firm.

In the end, BHP teamed up with another Melbourne-based corporate raider, John Elliot’s Fosters Brewing, in an exchange of shares (which later unravelled in spectacular fashion). In this takeover battle, played out as national and regional identity politics, John Elliott was reported as saying that he was invited to join the takeover bid but thought he would be finished in corporate Melbourne if he had done so.

BHP itself also launched a number of takeovers of international mining activities, partly to increase its debt and to make leveraged takeovers more difficult.

BHP has since sold off its manufacturing activities, become more focused on global mining, oil and gas activities, and merged with the South African global mining giant Billiton. It long ago shed its marketing image as the Big Australian, and has become in many ways the company Holmes a’ Court foreshadowed.

BHP’s approach to matters Australian is situated within this logic of global profitability. BHP Billiton has driven a very hard bargain on mining royalties, on industrial relations and despite being the beneficiary of some of the world’s lowest-cost mines during a long-term boom in commodity process, it was instrumental in the campaign to soften the Rudd Government’s mining tax.

Job departures

Qantas has been busy offshoring its work for some time. Its wholly owned subsidiary Jet Connect runs all its New Zealand flights and although badged with the Qantas kangaroo, is run out of New Zealand and pays staff about 30% to 40% less than comparable Qantas employees.

Pilots and cabin crew flying for Jetstar out of Singapore are reportedly paid about half of Australian rates.

This is a firm that clearly sees wages as matters that can be lowered by starting new enterprises, or locating to lower-cost countries. Until recently, Qantas denied it was using this strategy, with management promising to still call Australia home. Now, management is being much clearer about its long-term agenda.

But Qantas is now as much a financial institution as it is an airline. Its Frequent Flyer program has expanded from a humble loyalty program to a major seller of bonus plans for retailers and banks.

The Frequent Flyer business is a major contributor to the profitability and value of the company. As one analyst recently noted, “the Woolworths-linked points program brought in $189 million (pre-tax) in 2010 versus $143 million for Jetstar and $165 million for Qantas.”

Qantas is keen to “convert” the points to flights for the lowest possible cost, and herein lays a major driver for strategies that put downward pricing pressure on Qantas the airline.

Not only does Qantas increasingly think and act like a global firm scouring the world for profitable opportunities in the air, its profit calculations are calibrated like a risk-managing private equity fund. Board remuneration policies are just another expression of that development.

This highlights another longer term implication of the Qantas dispute. It is further reminder that the (contested) link between economic growth or productivity and rising wages that characterised most of the 20th century has been broken.

Overseas-based Jetstar workers are paid below local rates. AAP

Qantas is saying that not only will wages not grow along with company profits, future profits will come from finding ever cheaper labour wherever it can. This is probably what makes capital markets so excited about the symbollic significance of this dispute.

Another takeover bid?

However, with the Qantas share price now languishing at around a $1.50, Qantas may actually be worth more in bits than as a whole.

There has been murmuring for some time that another private equity bid could be in the offing, and this time the price will not be anything like $6.00 a share.

Faced with this sort of scenario, corporate boards tend to get jumpy. When it is also recognised that key members of the Qantas board have form in anti-union action, conversations at Qantas meetings about ways of defending the firm and showing the share market it is still a virile action-oriented board can be easily imagined.

One of the clear implications of this history and continuing developments in the international corporate world is that in thinking about commercial activity, it is less and less helpful to use labels (including marketing labels of corporations) that invoke country or nation.

While the Qantas board is saying it is just looking after its future as an Australian-based firm, detractors charge it with “betraying” the nation, or worse still “Asian-ising” the airline.

Such labels can however also have negative implications for individual managers as well. In the current conflict, Alan Joyce, unmistakeably Irish in accent, has made Australian industrial relations the battle ground. For his leadership, nothing less than a decisive victory will do. As his namesake and compatriot James Joyce once warned, “Come forth, Lazarus! And he came fifth and lost the job.”

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