Virgin Airlines may survive. Voluntary administration allows administrators to restructure. If they settle Virgin’s massive debts with lenders at a heavy discount, the airline becomes more attractive to buyers.
But it is not a done deal.
Today is not a good day to buy an airline. Nobody can say for certain when travel restrictions will be eased. It is perhaps possible business and public servants, now they know how, will continue to meet by videoconference rather than flying around the country.
If there is a sale, buyers will want to delay as long as possible so they can reduce uncertainty. After sale, a new owner will take time to find its way. So even if Virgin survives, competition will be lower in the short term.
The worst case however is Virgin does not find a buyer and we are left with a Qantas monopoly. This will mean higher fares and lower services. We know it from experience. Alan Fels, competition regulator at the time of the Ansett collapse in 2001, says fares went up following the airline’s demise.
The situation was perhaps a little more complex. Qantas had the marketing savvy not to suddenly ramp up prices. But it did exploit its near monopoly. It bought up landing slots and gate access at airports to make it harder for a competitor. It used spare capacity to dominate routes. It discounted less.
At that time there was already a fledgling competitor in the market, Virgin Blue, a low cost and holiday operator. It expanded to become a second major airline over time. Competition increased slowly; in 2011 the airline became Virgin Australia and began to compete seriously on full-service air travel.
Today, if Virgin does collapse, there is no existing operator with the expertise or financial backing to be able to come into the market quickly. Qantas will have a dominant position.
Could the government buy Qantas? Internationally, Italy’s national carrier Alitalia has been nationalised; Brussels Airlines and one of the world’s oldest, Germany’s Lufthansa, are possible candidates; part-government-owned airlines like Air New Zealand and TAP (Portugal) may move to full government ownership following bailouts.
But even were the Australian government so inclined — and the Morrison government isn’t — nationalisation probably could not happen here.
In 1945 privately owned Australian National Airways (ANA) had a near monopoly over domestic aviation. The Chifley government passed a law to nationalise airlines, as an essential public service. ANA took the government to court. In the Airlines Case the High Court found that while the Commonwealth could establish its own airline it could not acquire an existing airline.
The government then established its own airline, TAA, and there was some competition — but not too much. The Two Airlines Policy maintained a duopoly: prices, schedules, even catering standards were kept on par. Australian travellers were the losers. Air travel was for the wealthy, people with no choice, and public servants and business executives whose fares were paid by their employer.
The Hawke government’s then transport minister Gareth Evans introduced a deregulation package. He was aided by an interdepartmental taskforce. I was its economic adviser and amongst other things analysed competition and contestability in a deregulated market.
It was clear that Australia could sustain two domestic airlines in competition. Some of Australia’s city pair routes (Sydney-Melbourne, Sydney-Brisbane) were and still are amongst the busiest in the world, with plenty of room for two or more competitors.
What changed was the 1992 decision to allow international operator Qantas to take over TAA. An airline that can operate both domestic and international services and move passengers seamlessly from one to the other has a huge competitive advantage. It, amongst other factors, loaded the dice against Ansett.
The government therefore might consider forcing Qantas to split into separate domestic and international businesses. While an option, it’s not the most likely. Australia, unlike the US, has not been inclined to break up integrated monopolies.
Both the ALP and the Australian Council of Trade Unions argue the government should buy a stake in Virgin. If the government had a majority stake and was an active shareholder it could influence the market (with a risk it could also make a hash of it). This is also an unlikely option, for political reasons.
However, reliance on competition regulation through the Australian Competition and Consumer Commission (ACCC) will not be adequate.
The ACCC is the current safeguard aimed at preventing Qantas from exploiting its position during the lockdown — and is probably resourced sufficiently to do that. But if Qantas does indeed gain a monopoly, Australia will need a strong industry-specific regulatory regime, with legislated powers for the regulator to obtain information, investigate pricing, issue instructions and intervene to prevent exploitation.
Heavy regulation would be better than letting a monopoly rip, but has disadvantages — high costs, and the risk of unintended mistakes by the regulator accidentally harming consumers.
Australian travellers, even Qantas itself, would be better off if a genuine competitor can emerge from the Virgin administration.
Stephen Bartos is the former deputy secretary of the Finance Department and a director of Pegasus Economics.