Qantas Airline
Introduction
This article discusses both sides of the arguments used in the Qantas bailout debate in 2014. The study highlights whether the position of the government was justified. This is based on the theories on the role of the state.
Background
Qantas is the third largest airline worldwide. It was founded in 1920 (Wilson, 2008). Thereafter it assumed the international flights role in 1935. The name Qantas is a collection of acronym of Queensland and Northern territory. The airline is based in Sydney airport. It holds an approximate 65% of the country’s local market. The airline is proud to be transporting more than 18.7% of the passengers moving in and out of the country (Saurine, 2013). The airline operates a fleet of Boeing and Airbus aircrafts.
There has been a debate that the Australian government should offer some form of assistance to the Qantas Airlines (Preliminary Final report, 2013). Economists have been emphasizing the need of the airline to stand up and resolve its challenges without involving the government. The opponents have been demanding that the government help out in the financial struggle the corporation is undergoing. This stand has failed to analyze the long-term economic repercussions to the nation.
Selling the airline would be far reasonable. This stand is attributed to the economic hardships the airline is presently facing. There is therefore needed to make legislative changes in the imbalance. This is also attributed to the fact that the airline is no longer in danger, from the prevailing experience. The airline has had reduced public demand after it was privatized (Gelineau, 2011). The remaining loyalty customers are due to the constant flyer program offered. Currently the airline is in no risk. It has sufficient financial reserves to help in managing any reconstruction. Furthermore, it has a minimum 65% market share, its operating costs is high and still insists on running unprofitable units. Therefore, the little problems it is going through have to be internally managed. The company is big and therefore it can readily manage permanent challenges on its own. Temporary problems can be settled by insurance firms and even financial reserves. Taxpayer’s assistance from the government is likely to support a loser. If the government is to help, such help would be counterproductive as winners in the business forum will move to invest in other countries. From the historical experience, supporting this airline would be catastrophic economically (Wilson, 2008).
Cost of providing a Government Guarantee
In considering the Qantas debt, there is need of a government guarantee. There are two methodologies of solving this issue. First, if the airline would be insolvent. Secondly, the yearly cost of providing the guarantee. In calculating the estimated cost, market data is used. In case the government would have chosen to support the airline, a guarantee would be necessary. In providing such, there is need to restrict the financer obligations. These are inclusive of the loans and the capital markets. This as at the end of June, 2013 totaled up to$ 6.4 billion (McDonald, 2010). The airline is expected to pay an annual charge of around 125 million. This is expected to reflect the market cost of the guarantee. For the government to provide such a guarantee, it needs to carry the expected loss of $2.39-$3.05 billion. This is the case if Qantas would be insolvent, especially in relation to its background default averages. This is also based on the Ansett experience.
In case the government was to support the airline
In case taxpayer’s assistance was to be provided, there were costs that were to be incurred. Previously, the government has assisted various companies using taxpayer’s money. Before analysis, there is need to enquire whether the proposed assistance is far or whether the assistance is necessary. In case the assistance is far, there is need to enquire whether the recipient is unfairly treated, whether the assistance is equal to the imbalance and the cost of such assistance to the wider economy. The analysis of whether the assistance is necessary, there is need to enquire whether the business has assumed all the reasonable steps to stop the present situation. There is need to look at a realistic possibility of the looming failure in absence of the assistance and whether the proposed assistance is equal to the permanent problem and result.
The proposed assistance to the airline
The issue of fairness largely lies with the Qantas sale Act. This places it in unfair limitations on the balanced of shares for an international shareholder. According to the Act, the airline must have balanced rights in relation to the Virgin to attract international shareholders. These shareholders are to support the airline’s strategy for sustenance of the market share of a minimum of 65%. This position is currently unbalanced. By changing this Act, the public would view it as opening a balanced playing field. The present federal parliament is not in a position of pass such legislation. There is therefore needed to look for other alternatives.
A counter argument is that the airline is a special case of a national transport system. Therefore, no foreigner should be allowed to own the airline. Previously foreign companies have been possessing Australian companies. This has at the face of the introduction of cheap airlines. The cheap airlines are seen as a strategy to show the public of how costly Qantas has been. Therefore to the airline has been based on the frequent flyer program.
In case the Act is to be changed, then the applicable legislation is to correct the imbalance (Easdown, 2006). The question of a guarantor to cover for the debts is still unclear as the creditors are yet to be revealed. The effect of the guarantee incase it is to cover for the bank and the capital markets, would be lower than the expected risks (O’Sullivan, 2013). Therefore, the airline is to request for larger financial assistance at a lower interest rates. This is to change the competitive landscape for the airline to receive an unfair advantage against its local and international competitors. This guarantee will also create a moral hazard situation as the airline will be encouraged to recklessly behave. The taxpayers are also to suffer loss if the airline is to lose. Therefore, very few taxpayers are likely to support such a move. Moreover, incase such legislative changes can occur, industries and companies are likely to expect balanced solutions in their cases in future.
In providing assistance to the airline, the government is to tax more other efficient industries and companies. Thus this move is seen as penalizing the hard working companies and rewarding the reckless ones. If this is to take root, more companies will rely on lobbying rather than concentrating on research and development. This will continue and more companies will decide to invest overseas rather than bear the burden of supporting poor performing companies. Hence, the government will lose in the long run. Economists on the other hand will be uncomfortable with such an arrangement as markets in comparison to the government are said to be picking winners. This implies that governments have the tendency of picking poorly performing airlines for support rather than the winners in the market (Upe, 2013). This comes as part of the historical events where governments have been supporting the loser airlines at the expense of other companies. The reasons have been catastrophic.
Necessity of the proposed Assistance
In using the taxpayer’s money, Qantas is able to support the fact that is has been irresponsible in its financial records. This is seen as businesses have been able to prepare for any risks and manage any upcoming events. These preparations have involved reduction of costs while increasing the profits. Qantas is seen as responsible for the loss. This is analyzed as it has been on the competing edge with Virgin. It has gone to the extent of risking maintaining the present market shareholder of 65%. (Paylor, 2013) The airline has not paid its dividend to its shareholders for three good years. This is an indication of a long financial underperformance. Nevertheless, the senior management has been on the forefront receiving their remuneration and performance bonuses. The non executive directors have been receiving a $2.7 million as remuneration and other benefits for all this time without fail. The average costs have been maintained all through. This has been inclusive of the expensive workforce and unions. The airline has further retained its unprofitable union with Emirates.
Based on these reasons, the airline had many areas where it could have corrected before requesting for government help (Easdown 2006). Other businesses would feel unfairly treated if the airlines could have received government help. The prevailing situations are similar to other companies abroad, such as the Ford, and the GM. There framework applied in such cases is to be used in this case too. Banks which required bailouts is the adequate backdrop for the businesses before taxpayer’s money could be used in these cases. Moreover, the senior administration and the directors should receive a limited amount in terms of remuneration. The salaries for the general staff should equally be reduced. Benefits should be totally removed. A clear plan of how the business is to profit should be outlaid and a practical proposal of co-investing for the taxpayers and the shareholders should be received for future profit sharing.
Recommendation
Requesting for taxpayer’s assistance should be discouraged. This is because businesses are to set aside reserves for unexpected situations. Mechanisms such as insurance can be used to cover for temporary challenges. Considering the timeframe in approval and implementation of the solution, the temporary solutions were to be availed after the problems has been solved. The temporary problems foreseen were the high cost levels, management of nonprofit organizations and the market share intention. The airline requires no explanation for the issues and should be encouraged to solve its own problems.
Conclusion
The position of the government was therefore justified. In as much as the government guarantee has no cost to the government. The airline should look for its own solutions to the present predicament. This is compared to an insurance policy. This is because there are no charges in providing the insurance. Therefore, the airline is to benefit against the competitors. In the long run, the suppliers will have an easy time proving for the airline, and the cost of debt would be cheaper.
References
Easdown, G. Qantas through the Years: The Herald Sun. 22 November 2006.
www.thehearaldsun.au/news/natioanl/qantas-through-the-year-stories/
Fickling, D. & Wang, J. Qantas, China Eastern Plan Cheap Flights for Asia Middle. Bloomberg.
26 March 2012.
Gelineau, K. Qantas to Slash 1,000 jobs, Start New Asian Airline. Globe and Mail. 2011, 16th August 2011.
Preliminary Final Report. Qantas Airways Ltd.. 2013
http://www.qantas.com/the original
MacDonald, J. “Qantas Plans $80m outlay—on ground. The Age. 2010, 28 April.
O’Sullivan, M. Ditching Sale Act won’t end Turbulence for Vexed Qantas. Sydney Morning Herald. 2012, 25th June
Paylor, A. Qantas warns of half-year losses, announces 1,000 staff cutbacks: Air Transport World. 2013, 5 December.
Saurine, A. Qantas bans ham on flights in and out of Dubai after Emirates deal: News.com.au. 2013, 5th April.
Upe, R. Qantas derided as the ‘flying Mosque-a-roo’ over pork ban: The Age. 2013, 11 April
Wilson, S. (1998). Boeing 707 Douglas DC-8 & Vickers VC10. ACT, Australia: Aerospace Publications. p. 185.