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Dec 6, 2013

Qantas' playing field isn't level -- it has poor managers running it

Qantas should have a much stronger balance sheet than it has, writes Crikey's aviation expert writes. So why is the airline in crisis? Most of the cuts are self-inflicted.

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Insiders in the Qantas bunker are suggesting that group CEO Alan Joyce decided to go “over the top” into a hail of bullets on impulse last Tuesday week, ignoring what might be seen to have been wiser counsel.

But Joyce had to jump. His lobbying campaign against the Virgin menace in the domestic market in Canberra had not achieved much in the dying days of the Rudd interregnum, and in the early days of the Abbott government Joyce was getting dire intelligence from within the company as to how badly “everything” was going.

Joyce needed to heed the requirements of continuous disclosure to the ASX in relation to anything that would be of material importance to investors within the financial year. Word about how bad things really were with his already failed 65% line-in-the-sand defence of the domestic market was threatening to leak out “everywhere” (currently Qantas brands, including Jetstar, hold a less than 64% share).

The risk became acute after Virgin Australia CEO John Borghetti announced a “clever” 5:14 potentially $350 million capital raising program at 38 cents per share.

It needs to be kept clear that this capex move has almost nothing to do with international flying in its own right. Virgin Australia does very little overseas flying. Its big three foreign airline stakeholders — Air NZ, Etihad and Singapore Airlines — all do about as much international flying between Australia and the world as their various traffic treaties allow anyhow, including under Open Skies arrangements like those between Australia and Singapore, where the limitation is more about not committing self-harm than anything else.

But $350 million is compellingly useful for domestic purposes, and for settling a few competitive scores with Qantas, in a situation where in recent months the bigger Australian carrier had next to no chance of succeeding in an equity-for-cash offer because of its depressed share price.

The Virgin forces knew very well that in the past Qantas had always been able to go to the capital raising market and come away oversubscribed for anything it asked without there being the slightest problem with the restrictions on foreign-domiciled shareholders written into the Qantas Sale Act of 1992.

But not any more. After five years of arguably appalling mismanagement, Qantas can’t access such shares for cash issues. Especially not at a share price stubbornly below $1.50, and yesterday trading as low as $1 and closing not much higher.

Qantas had created the perfect opportunity for Singapore Airlines, Etihad and Air NZ to deliver Virgin Australia the relief it needed in the domestic capacity war it was fighting with the Qantas group and at some damage to its own finances.

Deputy PM and Transport Minister Warren Truss sweet-talked Qantas yesterday as to how good and strong the company was, but gave it no lolly.

As Truss pointed out, without foreign capital there would have been no Virgin, and perhaps more importantly for a country politician, no REX Regional Express. REX is the Singapore-controlled regional airline that stops Qantaslink treating the bush like its own fiefdom and screwing it as hard as it used to, back in the days when it expected rural Australia to pay whatever it asked.

Early yesterday there was a board of directors telephone meeting at Qantas to approve a profit downgrade announcement that would satisfy the requirements of continuous disclosure, as Joyce mentioned in a sotto voce aside.

Joyce justified this on the preliminary results of the November traffic figures and yields numbers crunching, which is a little odd, in that Qantas normally doesn’t release the previous month’s data until much later in the following month.

There is much more Joyce needs to justify. He has not put in writing any requests for action by the government to save Qantas from the consequences of his quite shockingly bad management of the airline, in which more than $1 billion worth of resources appears to have been squandered on loss-making adventures in Asia, and of course $200 million worth of collateral from his stranding tens of thousands of customers in October 2011 to resolve an industrial impasse of managements own making.

One of the prices Qantas faces from any of the notions now being floated from a cash bailout to a partial renationalisation or a rewriting of the Qantas Sale Act is a demand from the lobbied politicians for an accounting for the “missing money”.

Qantas should have a much stronger balance sheet than it has. Where has the money gone?  If there is to be government assistance for Qantas of any direct financial benefit, it will come with government oversight of and intervention in its affairs, to stop management wasting it on failing or underperforming offshore excursions. Such a surrender by Qantas is as unlikely as the prospects of real monetary assistance from government.

Qantas is in for a hammering, whether or not it changes its entire management, whether or not the Qantas Sale Act is amended, and whether or not it persuades Emirates, or a Dubai sovereign fund, to buy as much as 35% of the company.

This isn’t about a level playing field, as Qantas claims. It is about the quality of its management, and the deep levels of harm it has inflicted on the carrier.

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