Speculation that Qantas will ‘‘do a Virgin’’ and split its international and domestic arms to attract foreign airline investment is understandable, but after the Senate’s compromise deal on foreign ownership of the airline, it can go only so far.
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A split is technically possible, but as things stand it would not open the way for the heavy foreign ownership that has emerged at Virgin Australia, where Singapore Airlines, Etihad and Air New Zealand between them control almost 80 per cent of the company.
The Air Navigation Act restricts foreign ownership of Australian ''flag carrier'' international airlines to 49 per cent. Virgin Australia complies with the law and gets access to international routes and airport slots as a result, but in 2012 it separated its international and domestic arms, and moved legal ownership of the international business to a shelf company that duplicated Virgin’s Air Navigation Act-compliant share register, and froze it.
It still has an economic interest in the international business because the shelf company pays it to resource and run it. It is free of the 49 per cent international ownership limit that the Air Navigation Act imposes, and is now more than three-quarters foreign owned.
Qantas is different. Its flag-carrier status derives from a 49 per cent ownership limit in the Qantas Sale Act, the legislation that guided its privatisation and public float in the first half of the 1990s.
It would be subject to the Air Navigation Act's separate 49 per cent foreign ownership restriction on its international business if the Qantas Sale Act’s 49 per cent foreign ownership cap was scrapped, or if it copied Virgin Australia and moved its international arm into a shelf company.
The 49 per cent foreign ownership limit in the Qantas Sale Act does still exist, however. It originally limited foreign ownership in Qantas to 49 per cent, foreign airline ownership to 35 per cent, and ownership of a single investor to 25 per cent. The compromise that the government struck to get changes through the Senate last week retained the 49 per cent cap, but removed the other limits.
Over at Virgin, Singapore Airlines, Etihad and Air New Zealand have financially supported a market share war with Qantas that may be easing, but has pushed both airlines onto heavy losses. Qantas is expected to post a loss of about $750 million for the year to June 30 just ruled off, and may take write-downs that push its total deficit above $1 billion. Virgin is likely to post an underlying loss of about $250 million.
Qantas’ ability to compete would be improved if it had at least one cornerstone airline shareholder, but the continuation of the 49 per cent foreign ownership limit is a problem because foreign institutional shareholders already own 38 per cent of the company.
Placements that dilute existing foreign ownership are a possible workaround, but to even get to that point, Qantas would need to either locate or be targeted by a foreign airline it would welcome.
Etihad was once a code-share partner with Qantas, but it, Singapore Airline and Air New Zealand are now aligned with Virgin. Qantas’ new alliance partner, Emirates, does not take minority stakes in other airlines. British carrier BA took a 25 per cent stake in Qantas ahead of the Australian group’s public float in 1995, but sold out in 2004, and examined and rejected a merger with Qantas in 2008.
There are other possibilities. Government-owned Qatar Airways is one, and China Eastern Airlines is a shareholder in the Jetstar Hong Kong franchise that has been dogged by regulatory hold-ups. Qantas also has a six-month-old code-share agreement with China Southern Airlines, which looked at participating in a Qantas buyout in late 2012.
Potential buyers would seek assurances that Qantas’s profitability was recovering, and the group’s August 28 full-year profit briefing will be crucial in that respect. Chief executive Alan Joyce will give a briefing on Qantas’ plan to cut costs by $2 billion, possible partial asset sales (Qantas’s frequent flyer business and Jetstar are candidates) and capacity expansion plans that will indicate whether the loss-making market share war with Virgin is continuing to ease.
Qantas has been looking at its restructuring options for some time. It was working earlier this year on splitting its air operating certificate between its domestic and international arms, for example, something that would be needed if a Virgin-style split of the international and domestic arms is to be attempted. The work was halted in March as Qantas focused on its $2 billion cost-cutting programme, but if revived could probably be completed by early next year.
The retention of the 49 per cent limit in the Qantas Sale Act means that Virgin Australia’s heavy foreign ownership cannot be replicated, however. The Senate compromise deal itself reflects the underlying reality: any major move to boost foreign influence on the Flying Kangaroo is going to be politically controversial, and subject to foreign investment review.