Commentary 28th Feb 2014

What should the government do about Qantas?

The headline from yesterday's Qantas media conference should have been simple:

"Qantas attempts to rip off domestic customers and Australian taxpayers".

In the media conference the CEO of Qantas, Alan Joyce claimed that:

  1. Qantas domestic is profitable.
  2. Jetstar domestic is profitable.
  3. Other domestic airlines operating in Australia, such as Virgin Australia, are not profitable.
  4. Qantas' domestic advantage is due to its "network" and because its domestic operations have a "scale advantage" compared to its domestic competitors.
  5. All of Qantas' losses are due to its international operations.
  6. But Qantas sees its Asian international operations of Jetstar as a key part of Qantas' future.

These points raise three questions for Australia's taxpayers, airline customers and politicians.

First, if the domestic operations of Qantas are profitable, and all the losses are due to the international operations, why is Qantas complaining so long and hard about the domestic competition that is lowering airfares and benefiting customers?

The official Qantas answer is that its domestic competitors are somehow competing unfairly.

How?

Well, for example, they are increasing domestic capacity and trying to expand operations to match Qantas' "scale advantage". Apparently it is fine for Qantas to have a large market share and enjoy network and scale advantages, but if its competitors try and expand their capacity and market share by competing hard against Qantas, this is unfair.

Sorry Mr Joyce, that is competition. And it is the competition that is pressuring your profits, prices and service on domestic routes. Your domestic profits are falling due to this competition and the lower fares and improved service are benefiting domestic customers.

However, there is a second element to this argument. Apparently these domestic competitors, like Virgin Australia, have major overseas shareholders. Even worse, some of these shareholders are themselves partly or fully-owned by foreign governments. How can we trust them to be competing fairly and maximising profits?

Sorry again Mr Joyce, but hopefully Australia has moved on from that sort of xenophobic, nationalistic claptrap. The fact that the New Zealand government owns part of Air New Zealand, which owns part of Virgin Australia, does not raise the spectre of evil intent by our kiwi friends. And for Qantas, with its Emirates partnership, to be complaining about Etihad owning part of Virgin Australia smacks of hypocrisy.

So the answer to the first question is simple. Qantas would like to limit domestic competition to raise its own profits and make its shareholders better off. And it appears that Qantas doesn't care if this profit increase is through a subsidy from domestic taxpayers, via a government debt guarantee and/or through higher prices to domestic customers.

Second, does Qantas have legitimate grievances and if so what should the federal government do about them?

Yes, Qantas have legitimate grievances. Qantas is a private company. The Australian government hasn't owned it since the mid-1990s. However, the Qantas Sale Act prevents Qantas from restructuring and accessing international capital markets like Virgin. The restrictions that prevent Qantas from being majority foreign owned are unnecessary and simply restrict Qantas' viability. The federal government (with the support of the opposition) should remove them.

But the government reforms should not stop there. Australia continues to have out-of-date restrictions on international air competition under the Air Navigation Act. This places ownership restrictions on any Australian international airline and restricts competition to and from Australia by international carriers. These restrictions, that go back to the 1920s, should be replaced by an 'open-skies policy' for international air travel which will allow all legitimate international carriers who want to service Australia to do so. The ownership restrictions on all Australian international airlines should be removed.

So the federal government should act to unshackle Qantas. Indeed, it should unshackle Australia's international air transport market from old-fashioned, out-dated regulations.

Professor Stephen King

Professor, Department of Economics

Finally, should the federal government guarantee Qantas' debt?

This sounds like a free lunch. It is not. A debt guarantee means that Qantas gets a one-sided bet, underwritten by the Australian taxpayers. Qantas will pay less when it borrows money and this will boost its profits and benefit its shareholders. But the risk will be borne by Australian taxpayers. If Qantas continues to bleed money on its poorly performing international services, then it may face insolvency. And under a government debt guarantee, that means that the Australian taxpayer will have to bail Qantas out.

Of course, if Qantas is able to turn itself around, the debt guarantee will not be exercised. Qantas will have gained the extra profits by borrowing cheaply, thanks to the guarantee, but these will go to shareholders, not returned to the taxpayers.

The federal government should not be guaranteeing the debt of any private company.

So the federal government should act to unshackle Qantas. Indeed, it should unshackle Australia's international air transport market from old-fashioned, out-dated regulations. But it should not support Qantas to restrict domestic competition so that Qantas can use its profits from domestic air travellers to fund its loss-making overseas operations. And the federal government should not enter into a one-way bet at taxpayers expense by guaranteeing Qantas' debt.

Professor Stephen King works in the Department of Economics in the Faculty of Business and Economics at Monash University. This article has previously appeared in The Conversation.

By Stephen King