Behind the pay wall on the Oz.
THE death of Nelson Mandela in early December was mourned around the world, but few could imagine it would be a prop for what Qantas hoped would be its own long walk to freedom. While flags were flying at half-mast from Stockholm to Sydney, the airline hatched a bold plot to use Madiba’s passing to ambush the Australian prime minister.
The national flag carrier was in desperate need of a circuit-breaker in its quest to persuade the Abbott government to change the ground rules of Australian aviation, remove the regulatory shackles upon it and safeguard its future.
For months, Qantas chief Alan Joyce had hammered his case with Joe Hockey and a reluctant Transport Minister Warren Truss about unfair playing fields, but Joyce had never won an audience with the Prime Minister.
Qantas knew Tony Abbott’s VIP plane could not get to South Africa in time for Mandela’s funeral so it was the natural alternative for Qantas to fly the Prime Minister to Johannesburg.
On December 9 when Abbott walked into the Qantas first-class lounge at Sydney Airport, Joyce was waiting for him.
After excusing himself briefly to say hello to Papua New Guinea’s Prime Minister Peter O’Neill, who was sitting across the lounge, Abbott sat down with a cup of tea and listened to the Irishman’s pitch.
Joyce didn’t mince words. Qantas was in urgent need of “open-heart surgery”, he told the Prime Minister. If the government would agree to guarantee Qantas’s debt, they would be providing the operating room for this surgery. If not, Qantas’s task would be akin to conducting open-heart surgery on a runner while he was running a marathon.
Joyce did not say that Qantas wouldn’t survive without government help, but his words left no doubt about the danger of doing nothing to help the national carrier.
Abbott listened politely and then returned fire. Adopting a tone described by one source as “constructively cynical”, he told Joyce that he agreed Qantas was hampered by the 1992 Qantas Sales Act which prevents majority foreign ownership and requires most maintenance to be done in Australia. However, any form of government intervention would be a serious decision and one that sat uneasily with its non-interventionist instincts. He was willing to consider such a step, but only if the government was utterly convinced that Qantas had “put its house in order”.
Abbott repeated the phrase “house in order” a half-dozen times before boarding the plane.
Joyce was left in no doubt what he meant. Open-heart surgery was not only an economic necessity for the ailing airline, it was now a political precondition for the government’s help. Either way, there would be a truckload of blood on the floor.
As Abbott’s plane took off that day, the Prime Minister is believed to have been undecided about Qantas’s case. Five days later, Abbott declared publicly for the first time that Qantas was being “shackled” by the sales act.
“They want to compete with Virgin on a level playing field (and I) don’t think that’s an unreasonable request on their part,” he said on his return from Mandela’s funeral.
The Prime Minister was not yet across the line but Qantas’s campaign - as one insider put it - “was living, it had a heartbeat”.
THE inside story of Project Harbour - Qantas’s self-named quest to persuade the Australian government to intervene and secure its future - is a Shakespearean saga which spans two years, three prime ministers, thousands of lost jobs and much red ink. It has been played out amid a bitter personal rivalry between the wily Virgin chief John Borghetti and Joyce, the pugnacious Irish scrapper who beat Borghetti to the top job at Qantas. The two men have driven one of the most brutal aviation wars in the nation’s history, a dogfight that has delivered cheap airfares to Australians but half-empty planes to Qantas and Virgin, dragging both companies deep into the red.
Qantas’s woes have forced the Coalition government to fundamentally reassess the role of a national carrier, pitting dewy-eyed nostalgia for the flying kangaroo against the cut-throat realities of modern aviation.
The irony is that this might never have been Abbott’s problem. The Weekend Australian can reveal that Qantas was also fast closing in on an assistance deal with former prime minister Julia Gillard when she was deposed by Kevin Rudd in June.
The origins of Qantas’s campaign to convince first the Gillard government and now the Abbott government to change the ground rules of Australian aviation can be traced to February 2012, when Virgin Australia announced a clever and controversial corporate restructure aimed at removing a 49 per cent cap on overseas investment in its domestic operations and opening the way for it to become majority foreign owned.
Qantas immediately cried foul, pointing out that the Qantas Sales Act limits foreign ownership of Qantas to only 49 per cent.
The bottom line, said Qantas, was that Virgin could now attract heavyweight foreign airlines to bankroll a domestic airline war against Qantas, which would be unable to respond in kind because of the sales act. In short, Qantas would be fighting with one hand behind its back.
In 2012 Qantas tried unsuccessfully to get the Foreign Investment Review Board to reject Virgin’s restructure and then tried to attack Virgin’s new foreign investors, in particular the Abu Dhabi-based Etihad Airways which had taken a 10 per cent stake in the company.
In a backroom lobbying campaign in Canberra, Qantas portrayed Etihad as a plaything for oil-rich sheiks who would coldly destroy the national carrier.
But Qantas got little traction from its complaints with politicians from both major parties looking at Joyce and his management team with dull eyes.
“Qantas has a long history of crying wolf,” explained one aviation insider. “From the days of (former chiefs Margaret) Jackson to (Geoff) Dixon and on issues from the arrival of Emirates and Etihad, the growth of Singapore Airlines and union issues, Qantas has been quick to complain.”
This time around, Qantas was adamant that the crisis was real, and that Borghetti was a genuine wolf albeit in sheep’s clothing.
Early last year, after Etihad and Singapore Airlines had each taken a 10 per cent stake in Virgin alongside Air New Zealand’s 19.9 per cent stake, Qantas decided to make its move.
On January 14 Joyce and his team met the then transport minister, Anthony Albanese, to raise the prospect of government support, especially to support its credit rating.
Labor was, and remains, implacably opposed to a repeal of the sales act for two reasons: first, because it believes that if Qantas becomes majority foreign owned the likeliest majority buyers would be a Chinese or a Middle Eastern airline, and that this would be electoral poison; and, second, because the sales act requires most of Qantas’s heavy maintenance to be done in Australia, so a repeal of that act would trigger fresh heavy job losses in Australia as Qantas sent work offshore.
Albanese told Qantas he could not consider changes to the sales act but that he was willing to consider other options for assistance.
“We considered the policy position in the longer term,” Albanese tells Inquirer, but he insists that no rescue package was ever formally prepared.
However, Qantas insiders are adamant that the government privately indicated to the airline in June that some form of assistance would be agreed on within weeks, most likely a stand-by debt facility or an equity injection.
Yet on the evening of June 26, as the Qantas board gathered for a meeting at the Sea Temple Hotel on the Gold Coast, opposite Ripley’s Believe It Or Not Odditorium, they saw something they truly could not believe.
Board members gather around the Sky TV channel outside the hotel’s boardroom and watched grimly as Kevin Rudd executed Gillard in the leadership ballot, knowing that Qantas’s hopes of assistance had also been executed.
Qantas scrambled to engage the new prime minister but Rudd was, in the words of one insider, “completely focused on the upcoming campaign - he had no time for the issue”.
The best Albanese said he could do was to provide a “letter of comfort” to Qantas to say how important the airline was in an attempt to ward off a downgrade in its credit rating.
But on August 30, a week before the federal election, Qantas was further unnerved by news that Virgin’s major shareholders - Air New Zealand, Etihad and Singapore Airlines - had committed to providing it with unsecured loans worth a total $90 million.
The loan showed that Virgin was running low on cash, having thrown everything at Qantas to shake the latter’s 65 per cent share of the domestic market.
But it also showed that Virgin’s new shareholders had deep pockets when Qantas was increasingly vulnerable.
Joyce had underestimated Borghetti’s persistence in challenging Qantas’s dominance of the domestic market and the war with Virgin, which saw both airlines dramatically increase capacity beyond demand, was taking an increasingly grim toll on Qantas.
Record fuel costs, a soft economy and ongoing high labour costs were promising to plunge the airline deep into the red.
What’s more, the losses for Qantas International were also growing contrary to forecasts as its competitors pumped extra capacity into Australia.
In October Etihad raised its stake in Virgin to 19.9 per cent, giving the three foreign airlines a combined 67 per cent of Virgin while its overall foreign ownership, when Richard Branson’s stake was included, was more than 77 per cent, compared with 40 per cent for Qantas.
With foreign owners now dominating Virgin’s share registry, Qantas moved to engage the new government. In early October Joyce met Joe Hockey, the new Treasurer, at his electorate office in North Sydney and Warren Truss, the new Transport Minister, at Sydney Airport.
Joyce - who declined to discuss any of his private meetings with government for this article - was blunt and to the point. The aviation world had changed fundamentally, he said. He explained to the new ministers each of the issues facing the flag carrier. The upshot was that Qantas was in deep trouble and needed to engage the government about its future. “Both Hockey and Truss were genuinely surprised at how serious things had become,” says one Canberra insider. “They went away to think about it.”
After listening to Joyce, Hockey and Truss had to make the most delicate of judgments. To what extent were Qantas’s problems the product of an uneven playing field or simply of bad management? Joyce was a fearless chief executive, having grounded the airline in 2011 to crush the unions, earning him considerable respect with the Coalition. But Joyce had also contributed heavily to Qantas’s losses by engaging in a mutual death spiral with Virgin as both airlines sought to cripple each other by adding far more capacity than either could afford. Was Joyce an innocent victim of the sales act, legacy of Qantas’s state-owned history, or a maverick chief executive asking the government to help cover his own shortcomings?
On November 14, the benefit of the doubt appeared to tilt towards Joyce and Qantas when Virgin said it would raise a whopping $350m in a move underwritten by major shareholders Air New Zealand, Singapore Airlines and Etihad. Borghetti said the move would give Virgin “more flexibility” but for Qantas it was the realisation of its worst fears. Three state-backed airlines were funding Virgin’s challenge to Qantas, which could not ask the same of the Australian government or tap into the same sort of foreign backing because of the sales act.
“This was a game-changer,” says one Qantas insider. “In that moment our world changed.”
A furious Joyce wrote a searing letter to Abbott and Truss saying that $350m capital injection was the “final act” by “predatory” state-owned airlines to undercut the national carrier, cripple it domestically and internationally and take over its routes.
He slammed the “outdated policy framework” under which Qantas had to work.
On the week of November 18, Joyce and his team met Hockey, Truss and their advisers at Parliament House.
According to well-placed sources, this was the key meeting when Hockey became convinced that something would have to be done.
“Hockey grasped it,” says an observer. “It was his ‘oh, f . . k’ moment when it dawned on him that he would have to act and how hard that was going to be.”
Hockey had always been one of the more sympathetic members of the Coalition to Qantas’s plight, having said publicly as early as June 2012 that Qantas was unfairly impeded by the sales act. But convincing his colleagues that Qantas was a special case when he was preparing to draw a firm line in the sand on corporate welfare would be a tough ask.
By contrast, Truss was more sceptical. Sources say he appeared to be unconvinced that the world had changed enough for Qantas to put in place some form of government assistance.
Qantas used the meeting to outline a range of proposals to the two ministers but said that its favoured option was a stand-by debt facility whereby the government, for a fee, would guarantee Qantas’s debt, allowing the airline cheaper access to funds.
Joyce also favoured removing or changing the Qantas Sales Act but knew this could not be done quickly enough to drag the airline out of its present malaise because it was opposed by Labor, the Greens and - crucially - Clive Palmer, giving it little chance of winning the approval of either the current or the future Senate.
On November 27, less than two weeks after this meeting with Joyce, Hockey decided to change the public discussion on Qantas in dramatic style.
At Sydney’s Intercontinental Hotel, at the Australia/New Zealand Leadership Forum, Hockey flagged lifting the foreign ownership restrictions on Qantas or providing the airline with some form of government support.
“So in relation to Qantas do you say - which you know will probably be my preference - do you say: ‘OK, we are going to remove all the shareholding restrictions and let it fly,’ in which case we agree that we are not going to have a national carrier,” Hockey told the forum. “Or do we say that we are going to have a national carrier, but we have got do something about it. And if it gets into any sort of challenging environment, we have got to be prepared to put our hands in our pockets?”
Qantas and Virgin executives in the room were stunned and quickly scuttled from the room, phones glued to ears, to spread news of this apparent hardening of the government’s position.
Virgin’s Borghetti feared he was losing the argument over Qantas. Two days later he wrote an angry open letter to the government querying Qantas’s claims and stating that Virgin’s aim was to create strong competition, not destroy that competition.
“If any government support was given to the dominant player, we would expect the same level of support,” he said.
Virgin is understood to have told the government privately that a debt guarantee would give Qantas an advantage of $100m through access to cheaper funds.
The following week, on December 5, the extent of Qantas’s woes became public when the airline provided a grim market update, warning it expected to lose a record $250m to $300m in the first half of the financial year.
That evening, at the annual dinner for the conservative HR Nicholls Society, Qantas chairman Leigh Clifford, a passionate advocate for the free market, pitched the case for some form of help for Qantas, telling his pro-market audience: “A purist can say let the free market rule, but the airline industry is a little different.”
The next morning, as Mandela’s death was announced in Australia, Standard & Poor’s downgraded Qantas’s debt to junk status.
At that same time, Qantas’s quest was being undermined by the national debate over the demise of Holden. Media articles on corporate welfare were lumping the companies together, undermining Qantas’s attempts to argue that the airline was a special case.
On December 9, the same day Joyce met Abbott at Sydney Airport, the chief executive typed his own opinion piece for The Australian saying bluntly that “Qantas is not Holden”.
“Since privatisation in 1995 Qantas has performed strongly with no taxpayer subsidies and no tax concessions, nor are we asking for any now,” he wrote.
But would this argument win over the Coalition given its staunch non-intervention in the demise of Holden, Toyota and SPC Ardmona?
By early last month, Hockey gave Qantas reason to believe. The Treasurer was openly flagging possible changes to the sales act or hinting at the potential for a debt guarantee, using emotive terms such as “ball and chain”, “shackled” and “handcuffed” to describe Qantas’s position.
Two weeks ago Hockey appeared to confirm that Qantas had persuaded the government to act to protect it from Virgin, which Hockey was now describing as “a 2000-pound gorilla”.
The Treasurer said Qantas’s request for help met four essential pre-conditions; the restrictions imposed by the sales act; the fact Qantas was an essential national service; the fact other sovereign nations were disadvantaging an Australian business; and the fact the airline was reforming its business.
“If you think the government is being dragged kicking and screaming on this one, you’re right.”
Qantas, understandably, thought it had won the debate on the debt guarantee. But in fact Hockey had spoken too soon. His comments that day were poorly received by his cabinet colleagues, many of whom were less than convinced about Qantas’s case for special treatment.
“Joe was off the reservation that day,” one senior government source tells Inquirer.
In truth, while Abbott had been sympathetic about changing the Qantas Sales Act since his meeting with Joyce in December, he was never any more than lukewarm about the concept of a debt guarantee for Qantas. Neither was Truss. Both men disliked the precedent they believed it would set.
Early this week, Abbott’s position hardened further. By Thursday morning the Prime Minister had decided he did not want to do it. Hockey had been rolled.
In question time on Thursday Abbott effectively killed the debt guarantee idea for the time being, although it remains an option for the future.
“Why should the government do for one what it is not prepared to do for all, or what is not necessarily available for all,” Abbott said, using words that would have warmed Virgin’s heart.
Instead, he indicated the Coalition would seek the longer-term solution of changing the Qantas Sales Act. He challenged Labor to support the concept, wedging it in a manner that allows the government to blame Qantas’s future woes on Labor’s refusal to repeal the act.
The change of heart blindsided Qantas and the Labor Party. Qantas was nervous all week, having sensed a change in the atmospherics of its interactions with the government. But it did not know for sure until question time Thursday that it had lost Abbott on the debt guarantee.
Hockey had led the national carrier on a flight of fancy.
For Qantas, Abbott’s rolling of Hockey means that Project Harbour is now a hollow triumph.
The two-year campaign has succeeded in winning Coalition support for a historic repeal of the sales act, which would open the way for future foreign ownership of Qantas and a more level playing field in Australian aviation.
But as things stand now, this legislation will be unpassable in the current Senate and from July in the new Senate. Qantas’s short-term problems would have been addressed in part by a debt guarantee but they will not be helped by unpassable legislation, no matter how far-reaching that legislation may be.
Like a Shakespearean tragedy, Project Harbour has never quite been able to provide the shelter for Qantas it has sought, having been stymied twice in the past year by two prime ministers at the 11th hour.
But it has been a lobbying campaign that will have profound implications for Australian aviation once the sales act is eventually repealed.
On Friday last week, Hockey attended a function for G20 finance ministers at Sydney’s Admiralty House when the overseas dignitaries received a surprise performance. Standing on the manicured lawns of the Governor-General’s residence were the pint-sized figures of the Qantas choir, in their trademark white tunics and black pants. The youngsters sang My Island Home and I still Call Australia Home to their delighted guests.
As he watched on in bemusement, Hockey might well have asked himself how long Qantas would be singing from that same song sheet.
No mention of where the cash drain is!! My opinion is there is little the Government could do if the same Board/CEO/Senior Management 'team' stay in place. Their talent for losing money is outstanding. As is their talent in awarding bonuses for same. In fact, I would tend to argue as Abbott does that they do indeed 'need to get their house in order'. Giving an addicted gambler money when they lose it is not going to solve anything.