Whilst he probably has some valid arguments here it does sound like a bit of a tantrum, not unlike his shutting down the airline rant a few years ago.
Joyce blasts Virgin deal
Qantas has demanded the federal *government halt a $350 million foreign capital injection into Virgin Australia Holdings, claiming it is the “final act” by “predatory” state-owned airlines to undercut the national carrier, cripple it domestically and internationally, and take over its routes.
In a searing letter to Prime Minister Tony Abbott, Transport Minister Warren Truss and all state governments, Qantas chief executive Alan Joyce said the situation also compounded the disadvantage Qantas experienced from the restrictions imposed by the Qantas Sale Act. He demanded this “outdated policy framework” be urgently revisited as part of any examination of the capital raising proposal.
Qantas’s immediate priority is the $350 million capital raising announced last week which Mr Joyce said would “substantially increase” what he said has been a gradual foreign takeover of Virgin Australia and was designed to circumvent foreign investment restrictions. He demanded it be “forensically examined” by the Foreign Investment Review Board as an acquisition.
The letter, a copy of which has been obtained by The Australian Financial Review, says the $350 million raising from three state-owned airlines – Air New Zealand, Singapore Airlines and Etihad Airways – would increase the total ownership of Virgin by the trio from 63 per cent to 72 per cent.
Mr Joyce’s ultimate fear is that the capital raising, “supported and largely underwritten by three foreign governments’’, is the latest in a strategy of subsidising Virgin so it can continue to undercut Qantas on profitable domestic routes until Qantas could no longer support its international network.
His other key concern was that *Virgin Australia would soon be effectively owned by three foreign governments but Virgin International would still be designated an Australian *carrier. This would give the three airlines, all of which compete with Qantas internationally, access to lucrative routes, or traffic rights.
This fear was exacerbated last week when Virgin chief executive John Borghetti said the three airlines would be offered board seats.
Ongoing battle
Mr Joyce argued the capital injection, required to bolster Virgin’s *balance sheet amid an ongoing battle with Qantas, “can directly be attributed to its profligate and irresponsible *strategic campaign, underwritten by its sovereign shareholders in the Australian domestic market over the last 12 months’’.
“This has seen damaging levels of capacity introduced into the market with the single objective of damaging Qantas to the ultimate benefit of *Virgin’s foreign backers.’’
Mr Joyce described the capital injection as the “final act’’ in a scenario that has been playing out for months and has “all the characteristics of predator behaviour [to] substantially weaken a major competitor, Qantas Group, and recoup the costs at a later date’’.
“It represents a material threat to the Qantas Group across its domestic and international networks and is consequently contrary to the national interest,’’ Mr Joyce said.
“Their investment,” he said of the three government-owned airlines, “ultimately will be quickly recouped in the international market.’’
Mr Joyce, who will be in Canberra this week to lobby the government directly, said the “proposal goes well beyond what should be considered a legitimate investment to one of foreign control of a strategically important Australian business with objectives to damage Australia’s national carrier’’.
“It would place in the hands of foreign governments which control these airlines extraordinary power well beyond the intention which underpins Australia’s policy of allowing foreign ownership of Australian domestic carriers. The government and FIRB must urgently consider this proposal as an acquisition with worrying strategic intent, and not as an investment in a start-up airline.’’
A Qantas spokesperson confirmed the veracity of the letter and submission but the airline declined to comment.
Last week, Mr Borghetti did not dispute the reasoning for the move, which came after Virgin Australia posted a full-year loss in August.
“This capital raising is designed to enhance liquidity and the gearing position of Virgin Australia to ensure we are in a stronger position moving forward,” Mr Borghetti said in a statement.
The capital raising would replace a $90 million undrawn debt facility extended to Virgin by the three airlines.
Bid to lure more business travellers
He told the AFR the raising would help with Virgin’s “game change” strategy of trying to lure more business travellers and to compete with Qantas on regional and low-cost routes.
It was unclear whether Virgin would return a profit this year as well. “Given the ongoing uncertain economic environment, competitive challenges and market volatility, we are unable to provide profit guidance for the 2014 financial year at this time,’’ Mr Borghetti said.
Qantas has been voicing concerns publicly about Virgin’s foreign partners since at least June last year when Etihad started increasing its share in the airline above 5 per cent.
“Virgin/Etihad will be able to flood the market with capacity until its competition is forced to significantly reduce its own operations or worse,” Qantas said in a submission to the then Labor government.
Virgin rejected the accusation at the time, saying the investment “has absolutely no impact or influence on the company’s management or strategy”.
Also at the time, then shadow treasurer Joe Hockey did not rule out changing or abolishing the Qantas Sale Act to enable the airline to compete on a level playing field, including being able to enter into similar foreign equity arrangements. “We have to make a decision about whether Qantas does become a major international airline with a majority ownership overseas, or whether we want to retain it and pay a price for retaining it as an Australian icon,” he said.
In October this year, Mr Hockey approved Air New Zealand’s FIRB bid to lift its stake in Virgin to 25.9 per cent. Etihad and Singapore are awaiting rulings to move above 19.9 per cent each.
At present, foreign airlines could buy 100 per cent of Virgin Australia’s domestic operations while, under the 1992 Qantas Sale Act, foreign investment is capped at 49 per cent, total ownership by foreign airlines is capped at 35 per cent and a single foreign investor can buy no more than 25 per cent.
National interest at threat
Mr Joyce’s submission said the policy of allowing 100 per cent ownership of Australian domestic airlines such as Virgin Australia “while at the same time maintaining the restrictions in the Qantas Sale Act in Qantas, including Qantas’s domestic operations, has resulted in serious distortions in the domestic market . . . of a kind not applicable to any other industry in Australia’’. It says the capital raising by Virgin Australia highlights the inequity.
“A shift in the market architecture as radical as this must be judged against the contemporary circumstance of the Australian market,’’ the letter says. “Much of the current policy was framed over a decade ago in very different circumstances than those present today.
“The government cannot realistically judge this proposal against an outdated policy framework. The proposal from Virgin compounds the challenges already present in the Qantas Sale Act.
“The government must urgently revisit the policy framework as a part of the examination of the proposal.”
Mr Joyce argues the national interest would also be at threat because Virgin International would be able to maintain its designation as an Australian carrier under international air services agreements.
“Because designation can be challenged by foreign governments, we are now faced with the absurd situation that the governments of Abu Dhabi, New Zealand and Singapore, which are beneficiaries of an acquisition, will be the determinants of Australia government policy in this sensitive area.’