Qantas wanted to bust open the debate about aviation competition in Australia, and it has succeeded pretty spectacularly.
Federal Treasurer Joe Hockey used a business lunch yesterday to flag the possibility of regulatory changes and even using public money to support the airline in the face of aggressive overseas investment in Virgin Australia. Everything seems to be up for debate.
Both sides of politics agree there should be some intervention – but what exactly that looks like is massively unclear at the moment.
Labor leader Bill Shorten says he wants a firm proposal from Hockey, rather than “thought bubbles”. It’s a pretty accurate description of Hockey’s musings so far. But looking at the options, the dramatic ones are unlikely, and there are some smart things the government could do.
Tipping hundreds of millions into the airline in cash is not a solution. Taxpayers wouldn’t wear it for a start, but more importantly the challenges for Qantas are about competition and industry structure, not cash.
Virgin’s ability to raise money from overseas means can keep discounting its fares and taking market share from Qantas domestically. The chart on the right from Credit Suisse, issued last month, shows exactly what the problem is for Qantas: the competition has seen its domestic arm is haemorrhaging, and its load – the amount of capacity filled – reached an all-time low this year.
Changes to the Qantas Sale Act might help with some of the structural industry challenges, but the political parties don’t agree on what the changes might be, and Qantas says it’s not what it’s looking for anyway.
Authorities could take the step of blocking Virgin’s $350 million capital raising – but it would be a breathtaking step and supremely weird for a government that took office just two months ago saying Australia was “open for business”.
There are plenty of businesspeople and investors who hate Qantas. One hedge fund manager told me they should be “thrown to the wolves”. This is not an uncommon sentiment.
But as I wrote last week, a national carrier isn’t like other businesses. It’s a strategic economic asset, and that, coupled with its hugely powerful brand in the Australian community, is what has both sides of politics broadly agreed that the airline should be helped.
There are other options and a few were raised by Jamie Freed in this morning’s AFR:
Other forms of support could include guarantees on Qantas debtand a requirement for all government employees to fly with the carrier. The government could also help subsidise some loss-making routes.
Now both of the two options in that first sentence would have a huge impact.
A government guarantee on Qantas debt could take a few forms. It’s not like the government hasn’t given public companies guarantees before: it did – and still does, but to a lesser extent – guarantee bank deposits during the GFC.
But fundamentally it would mean Qantas debt would be pretty much as reliable as government bonds. One credit analyst from a major investment bank we spoke to this afternoon said a government-guaranteed Qantas debt instrument would attract huge interest on the markets. “It’s something we are having to consider,” he said. Critically, it would allow Qantas to refinance its debt at a much lower rate, freeing up funds to maintain competition on price against Virgin.
(Just by way of indication, the Qantas CDS was trading lower today, down from 209 basis points yesterday to 200 today – the market already sees the debt as more secure.)
Then there’s the second option: guaranteed government travel with Qantas. When the government put its travel out to tender in 2011 it estimated it would spend an eye-watering $1.5 billion over three years flying civil servants around. The successful domestic applicants were Regional Express, Jetstar, Virgin Blue and Qantas.
If Qantas secured that income all for itself, it would go some way towards sandbagging the airline against Virgin. And the money is being spent anyway, and it would simply be a reversion to a previous arrangement.
The end result might not be as dramatic the current tension indicates.
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