In the media this week, there has been a great deal of reporting in relation to the Qantas & Virgin fiasco. The rival airlines, which have been in competition for just over a decade, have both released fiery statements aimed at one another. Both sides of Federal politics have intervened, with the matter now set for a large public (and possibly political) debate.
Shane Wallace, a solicitor in the Aviation Law Team, provides a brief overview of the situation.
Airline Finance
In Australia, public corporations usually raise capital in one of two ways – debt or equity. Debt involves borrowing from a third party (in many cases a bank) whilst equity involves the sale of shares. Generally, equity capital raisings are a substantially cheaper source of finance.
Airlines require a substantial amount of ongoing capital in order to finance their operations. Annual expenditure for both of these airlines is in the billions, whilst profit margins as a percentage of revenue are relatively modest. In order to be competitive in the market, airlines need access to flexible finance on favourable terms.
Air Navigation Act 1920 (Cth)
Under International law, governments of sovereign states negotiate and execute treaties with one another allowing airlines to carry traffic (that is, passengers and freight) along international routes. These are known as bilateral and multilateral air services agreements. In order to obtain the benefit of an Australian bilateral or multilateral air services agreement, Australian based airlines must comply with the Air Navigation Act 1920 (Cth). This act restricts foreign ownership of Australian airlines to 49%.
Qantas Sale Act 1992 (Cth)
Qantas was privatised by the Federal government in 1992 following the enactment of the Qantas Sale Act 1992 (Cth). The key provisions of the act restrict foreign ownership of the airline to a cap of 49%. The act further restricts a single foreign entity from owning more than 25% of the airline.
So what’s the issue? Both Virgin & Qantas are restricted to 49% foreign ownership, right? Wrong.
Virgin’s Restructure
In 2011, Virgin restructured its operations by splitting its international and domestic travel businesses. As domestic air travel does not rely on any bilateral or multilateral air services agreement, Virgin’s domestic business, Virgin Australia Holdings Ltd, no longer needed to comply with the foreign ownership restrictions under the Air Navigation Act. Increased foreign investment was sought, and now almost 70% of the business is owned by foreign airlines including Etihad Airways, Singapore Airlines, Air New Zealand & Sir Richard Branson’s British Virgin Group.
In November, CEO of Virgin John Borghetti announced a $350 million capital raising from its existing shareholders. The raising was to be underwritten by its current major shareholders (foreign investors), which all but guaranteed a successful injection of cash. Mr Borghetti has said the cash injection ‘will create more flexibility’ for Virgin’s operation, as well as providing ‘greater liquidity and gearing to ensure a stronger position’.
Qantas’s Reaction
Qantas, through its CEO Alan Joyce has publicly stated that Qantas is not on a level playing field with Virgin and has called on the government to halt Virgin’s $350 million capital raising. They say that due to Virgin’s circumvention of the foreign investment restrictions laws, Qantas can’t compete with Virgin. Qantas has called on the government to ensure that the air travel in Australia remains competitive. Qantas has called foramendments to the Qantas Sale Act arguing that easing restrictions on foreign investment is needed. Alternatively it has suggested that the Federal government should guarantee Qantas’ debt so that its credit rating makes it an attractive borrower (and thus reduced borrowing costs), or even buying directly into the airline’s and becoming a shareholder.
Federal Government’s Reaction
Both sides of Federal politics’ have commented on the public stoush.
The Federal Treasurer, Mr Joe Hockey, has said that Australian tax payers must pay a price to retain Qantas as an Australian owned Airline, saying that the foreign investment restrictions place it in ‘regulatory handcuffs’. Prime Minister Tony Abbott has also commented that he would like to see the airline remain a national icon, though has not commented further on proposed solutions.
Opposition Leader Bill Shorten has stated that he too would be opposed to amendments to the Qantas Sale Act, which would see foreign investment in the airline increase. The Labour party, in a rare show in bipartisan support in federal politics, have indicated that they are willing to work with the Government in order to find a solution, including backing a proposal which could see the government buy into Qantas.
Comment
Whilst it is still unclear how the Qantas & Virgin saga will unfold, it is a surety that the federal government has it in its sights, with further discussion likely to take place early in the New Year.
It should be noted however, that there has been much recent talk in the industry of the ‘opening of the skies’ across the Asia – Pacific region to local international carriers. This would in effect, negate the need for the web of bilateral and multilateral agreement air services agreement and, thereby opening up local international carriers for foreign investment.
Carneys Lawyers will closely monitor any developments and their likely effect on the aviation industry. Please feel free to contact Shane or the Aviation Law Team at Carneys for a confidential discussion on how this may affect your business.
Author
Shane is a solicitor and former practitioner at Carneys specialising primarily in the areas of Aviation & Transport, Insolvency & Dispute Resolution.
