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Qantas arcs up at Virgin’s restructure plan

Qantas has lodged an objection against the Virgin Australia’s plan to restructure its operations to take on board new stakeholders, such as Etihad Airways, by calling on the International Air Services Commission to hold a public inquiry into the proposals.

The move really means that Qantas is seeking to bring on a public debate before an independent body into the fairness of the restrictions imposed upon it by the Qantas Sale Act.

This is a debate that the federal Minister for Infrastructure and Transport, Anthony Albanese, tried to avoid several weeks ago when he said Virgin Australia’s plans were entirely its commercial prerogative, while reiterating the government’s opposition to relieving Qantas from any of the foreign-ownership restrictions imposed upon it in 1992, when the Keating government merged state-owned domestic carrier Australian into state-owned international carrier Qantas and brokered a 25% foundation stakeholding by British Airways in a new Qantas, which was ultimately listed on the ASX in 1995.

Qantas is bringing on a debate, if its application to the IASC for an inquiry is approved, that various managements have unsuccessfully urged on successive federal governments since Qantas became a private company with a 49% cap on foreign domiciled investment.

The IASC has become the conduit for this latest attempt because Virgin Australia needs its approval to transfer its international traffic rights to a new Virgin Australia International Holding company, which will be unlisted but wholly owned and controlled by listed Virgin Australia Holdings.

The actual trigger was Virgin’s initial application to make such a transfer of its rights to serve Denpasar, one of Australia’s most robust leisure destinations.

The proposed Virgin Australia restructuring would mean that VAH as a domestic-only airline owning 100% of an international-only subsidiary would not be subject to any foreign investment restrictions under existing Australian laws, and could bring on board new foreign equity holders, including the likes of cashed up Etihad Airways, which has already said it is interested in such a stake.

At present Virgin Australia is almost 49% foreign owned, its major overseas shareholders being Richard Branson’s private family company with 26% and Air New Zealand with 19.9%.  Those stakes leave no room for an Etihad or other foreign airline or sovereign fund entry so long as it is legally a domestic and international carrier subject to the same foreign ownership limit as Qantas.

Whether Qantas is drawing a long or short bow remains to be seen. The Virgin Australia restructuring has some superficial similarities to the manner in which Ansett quarantined its Ansett International operations as being majority Australian-controlled at a time when the domestic carrier was 100% owned by Air New Zealand.

In its letter to the IASC, Qantas general counsel Brett Johnson says:

… should Virgin Australia Holdings be substantially (or wholly) acquired by one foreign shareholder, that shareholder has … effective control of both Virgin Australia Holdings and Virgin Australia International Holdings.”

The Qantas letter urges the IASC to undertake “a comprehensive, public review to confirm that VAIH will at all times in the future be in a position to comply with the requirements to be designated as an Australian carrier under the relevant Air Services Agreements”.

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