Bills Digest no. 55 2013–14

PDF version  [856KB]

WARNING: This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Tarek Dale, Economics Section
Jonathan Chowns, Law and Bills Digest Section
25 March 2014

 

Contents

The Bills Digest at a glance

Purpose of the Bill

Background

Australia’s aviation markets

Corporate structure and strategy

Market share and profitability

Qantas Regulatory arrangements

The Regulation Impact Statement and the Prime Minister’s exemption

Committee consideration

Policy position of non-government parties and independents

Position of major interest groups

Financial implications

Parliamentary Joint Committee on Human Rights

Statement of Compatibility with Human Rights

Key issues and provisions

 

Date introduced:  6 March 2014

House:  House of Representatives

Portfolio:  Infrastructure and Regional Development

Commencement:  Sections 1-3 commence on Royal Assent. Schedules 1-2 commence six months after Royal Assent unless earlier by Proclamation.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.

 

The Bills Digest at a glance

Qantas was privatised between 1992 and 1995. Under the Qantas Sale Act 1992 (QSA) foreign ownership is capped, the airline must keep ‘Qantas’ in its name and it must remain substantially based in Australia.

This Bill repeals those rules, leaving only foreign ownership to be regulated by legislation - the Air Navigation Act 1920. Some of the other requirements under the QSA continue to be addressed in ‘designation criteria’. These are the conditions established by the licensing authority that an Australian airline must satisfy to be designated as an ‘Australian International Airline’ under the Air Services agreements and arrangements that Australia has with other countries. The ‘designation criteria’ are not set out in legislation.

The effect of the Bill is that that Qantas will fall under the same regime as Virgin Australia, Australia’s other international carrier.

The Bills Digest Background includes a discussion of a number of market and corporate issues followed by a discussion of the regulatory regime for airlines in Australia.

Purpose of the Bill

The purpose of the Bill is to change the foreign ownership and other restrictions applying to Qantas under the Qantas Sale Act 1992 (QSA).[1]

Background

Qantas and government assistance

The Qantas Group (Qantas) is a corporate group whose primary business is operating flights within Australia and international flights to and from Australia. Qantas was founded in 1920 and nationalised in 1947.[2] Its privatisation was announced in 1992 and completed in 1995, subject to certain restrictions in the QSA.[3]

In November 2013, Qantas chief executive officer Alan Joyce wrote to the Prime Minister, the Deputy Prime Minister and state premiers. Mr Joyce argued for intervention in a capital raising by Virgin Airlines Holding (VAH; Virgin Australia), on the basis that it ‘represents a material threat to the Qantas Group across its domestic and international networks and is consequently contrary to the national interest’.[4] Later in the month media reported that Qantas was seeking a guarantee on its debt as credit agencies were believed to be considering a downgrade to Qantas’ credit rating (which subsequently took place in January 2014).[5] The former Minister for Infrastructure and Transport has indicated that the Government provided a ‘letter of comfort’ to Qantas in August 2013.[6]

On 13 February 2014 the Treasurer appeared to suggest that the conditions upon which the Government might provide a debt guarantee were satisfied.[7] However, the Prime Minister subsequently confirmed that a debt guarantee had been refused.[8] On the 3 March 2014 the Government announced its intention to introduce legislation to remove the foreign ownership restrictions under the QSA (see below for further details).[9]

Australia’s aviation markets

There are effectively two linked but distinct Australian aviation markets – a domestic market (flights within Australia), and the international market (flights between Australia and other countries).

In the market for international flights to and from Australia, Qantas and Virgin Australia use capacity available to Australian carriers under air service agreements (ASAs – see below for more detail) to compete with each other, and with other airlines which are using the non-Australian capacity in each ASA. In the domestic market, the two dominant providers (Qantas and Virgin Australia) are also in competition with a number of smaller airlines (such as Rex).[10] The changes in the Bill are intended to align the conditions under which Virgin Australia and Qantas operate, by changing ownership restrictions to create a ‘level playing field’.[11]

The legislative and policy changes involved in removing the existing ownership restrictions on Qantas through this Bill reflect choices and trade-offs between the benefits of having a national carrier (which may run at a higher cost but also provide external benefits through employment, technological spill-over and ensuring independent national capacity) and a more open market that enables lower cost transportation and does not require government support or subsidy.

In both domestic and international markets, airline profitability depends on input costs (including fuel, labour and costs in accessing capital), supply choices (which flights to offer on which routes at which standards of service), and demand factors (influenced by changes in tourism travel, currency valuation and other factors).

Ian Thomas, Managing Consultant of CAPA Consulting included in his opening statement to the Senate Standing Committee on Rural and Regional Affairs and Transport inquiry into Qantas's future as a strong national carrier supporting jobs in Australia:

The economic fundamentals of the airline industry have changed irrevocably, with an increasing focus on cost of delivery and cost of product. This has given rise to immense challenges for Qantas in realising acceptable returns in markets where it has a distinct cost disadvantage. Qantas has been and continues to be a major contributor to the domestic economy through employment, the travel and tourism sector, the supply network, and international and domestic freight. Until relatively recently, it was one of the most profitable airlines in the world, with a track record of delivering robust earnings growth even through periods of global crisis such as 9/11, the SARS epidemic, Gulf wars and the global financial crisis.[12]

Government ownership of international airlines

Qantas has argued that it faces a significant disadvantage because of the ownership restrictions under the QSA.[13] Shadow Minister for Infrastructure and Transport Anthony Albanese noted that ‘By and large Qantas’s major competitors are all government-backed - Etihad, Emirates, Singapore, Air New Zealand - all of these airlines have government support’, and the issue has received some attention in the media.[14]

The large number of airlines operating internationally makes it difficult to comprehensively assess the extent of government ownership. The Australian Broadcasting Corporation’s research concluded that ‘Top 10 rankings of airlines based on objective measures such as passenger traffic, capacity, financial results, fleet size or employee numbers consistently include a majority of privately owned airlines.’[15]

However in the market for international flights to and from Australia, the top ten operators (ranked by the number of passengers transported in the 2013 calendar year) include a number of government owned airlines. While government ownership may offer few direct advantages in operating flights to and from Australia, government ownership may provide easier access to capital (directly if a government is willing to accept lower returns on its investment than private investors, and indirectly if real or perceived government support can lower the cost of borrowing charged by banks and other lenders).

Table 1 Market share of passengers flying to and from Australia

Operator	2009	2010	2011	2012	2013	Level of Government ownership (a)
Qantas Airways	21.0	19.0	18.2	17.7	17.0	Privately owned
Emirates	7.7	8.1	7.9	8.5	9.3	Majority government ownership
Singapore Airlines	9.9	9.2	9.0	9.2	8.9	Majority government ownership
Air New Zealand	8.6	8.2	8.3	8.0	7.8	Majority government ownership (b)
Virgin Australia	5.9	6.2	6.7	8.3	7.7	Privately owned (c)
Jetstar	7.8	8.1	8.0	8.3	7.7	Privately owned
Cathay Pacific Airways	5.6	5.3	5.1	4.9	4.5	Some government ownership
Malaysia Airlines	3.6	3.8	4.2	3.7	4.1	Majority government ownership (d)
AirAsia X	2.1	2.8	2.4	2.8	3.4	Privately owned (e)
Thai Airways International	3.9	3.3	3.2	3.5	3.2	Majority government ownership (f)

Sources and Notes: Parliamentary Library estimates based on data from the Bureau of Infrastructure, Transport and Regional Economics (a) Unless otherwise stated, government ownership status is taken from the Australian Broadcasting Corporation’s (ABC’s) ‘Anthony Albanese wrong on government ownership of world’s top airlines’, ABC website, 5 March 2014, accessed 19 March 2014; (b) New Zealand Government, ‘The Companies’, New Zealand Government website, accessed 21 March 2014; (c) Virgin Australia International Holdings is privately owned, and complies with the Air Navigation Act’s ownership requirements that no more than 49 per cent be foreign owned, however see below for more detail on Virgin Australia’s corporate structure; (d) P McGrath, ‘Government urged to re-nationalise international arm of Qantas’, The World Today, transcript, Australian Broadcasting Corporation (ABC), 28 February 2014; CAPA Centre for Aviation, ‘Penerbangan Malaysia Berhad’, CAPA Centre for Aviation website, accessed 21 March 2014; (e) AirAsia, ‘Substantial shareholders’, AirAsia website, accessed 21 March 2014; (f) Thai Airways, ‘History’, Thai Airways website, accessed 21 March 2014.

The Carbon Pricing Mechanism and aviation costs

The public and Parliamentary debate on Qantas has included discussion of the impact of the carbon pricing mechanism (CPM) on profitability.[16] Both Qantas and Virgin Australia were liable to the CPM through an increase in the aviation fuel excise from 1 July 2012. This applied only to domestic flights and not to international flights.[17]

On 3 March 2014 Qantas issued a press release entitled ‘Claims about Qantas made in the media’, which stated:

ISSUE: Claims that the carbon tax is a key issue facing Qantas                      

FACTS: The major issues faces Qantas are not related to carbon pricing.

We have been clear that levelling the playing field is the most important policy measure that needs to be fixed, and with some urgency.[18]

Subsequently, on 5 March 2014 Qantas issued a press release that stated:

We have said that the price on carbon is a cost to our business that we have not been able to recover through fare increases, because of the intensely competitive market we operate in. Domestically, it cost us $106 million in FY13 and $59 million in HY14. It is among the significant challenges we face, including an uneven playing field, capacity increases in the international market and record high fuel prices.[19]

Both Qantas and Virgin Australia estimated the surcharge added to their fares with estimates ranging from approximately $2-8 dollars, depending on distance.[20] There was no clear pattern in overall ticket prices following the introduction of the carbon tax.[21]

Some media coverage has suggested that the two airlines (Qantas and Virgin Australia) asked to ‘opt-in’ to the emissions trading scheme. This represented a desire to better manage a liability, through purchasing carbon credits, rather than paying a higher fuel excise levy.[22]

Corporate structure and strategy

Qantas’ structure

The current structure of the Qantas Group (the parent entity for Qantas) does not directly reflect a domestic/international split. Rather the Qantas Group operates two brands (Qantas and Jetstar Group Airlines) both of which operate domestically and internationally. Additionally, the Qantas Group has a number of subsidiary entities, such as Qantas Freight Enterprises and Qantas Frequent Flyer.[23] Jetstar Group Airlines includes a number of subsidiaries, with either majority or minority ownership by Jetstar Group Airlines.[24]

Foreign investment in Virgin Airline Holdings

Qantas’ chief executive officer Alan Joyce stated on 27 February 2014:

The Australian domestic market has been distorted by current Australian aviation policy, which allows Virgin Australia to be majority-owned by three foreign government-backed airlines – yet retain access to Australian bilateral flying rights.

Late last year, these three foreign-airline shareholders invested more than $300 million in Virgin Australia at a time when, as Virgin Australia reported to the ASX on 6 February, it was losing money.  That capital injection has supported continued domestic capacity growth by Virgin Australia despite its growing losses.[25]

Virgin Australia began operations in 2000 as a domestic airline, and launched international flights in 2004.[26] The parent company for Virgin Australia’s operations in Australia is Virgin Australia Holdings Ltd (VAH). Under the Air Navigation Act 1920 (ANA), the foreign ownership limit of ‘Australian international airlines’ like Virgin is 49 per cent (Qantas will become subject to this rule under this Bill, being presently subject to the same requirement, and others, under the QSA. See below for an outline of the regulatory arrangements).

In 2012, as foreign ownership of VAH approached 49 per cent, the statutory limit under the ANA, VAH was ‘evaluating options’.[27]  

This resulted in the creation of a new unlisted entity, Virgin Australia International Holdings (VAIH).[28] VAH and VAIH were expected to have an ongoing relationship:

Central to this relationship will be a long term Service Agreement between VAIH and VAH. Under the terms of the Service Agreement, VAH will provide to VAIH all of the services it will require to operate as an international airline. In addition, VAH will have representation on the board of VAIH, will support VAIH financially through a loan agreement and will hold a small shareholding (expected to be less than 1%) in VAIH.[29]

A key intention of this new structure was to ensure compliance with the ANA:

The New Structure is intended to separate the ownership and control of the International Airline Business from VAH so that VAH Shareholders are able to trade in their VAH Shares without being subject to the foreign ownership restrictions under the ANA whilst ensuring ANA compliance by the International Airline Business.[30]

After announcing the new structure, Virgin Australia Airlines applied to the Australian Government’s International Air Services Commission to transfer its capacity on a route to Indonesia to the new organisation, VAIH on 23 February 2012.[31] Qantas provided a submission on the application, arguing that:

The Virgin proposal is designed to permit the foreign shareholding in VAH to exceed the 49% limitation imposed on Australian international airlines. In fact, once the proposed structure is implemented, there is nothing preventing VAH from becoming wholly owned by foreign shareholders. Subject to FIRB approval, there is also nothing preventing VAH from being acquired by one foreign shareholder.[32]

Qantas also recommended that ‘the Commission undertakes 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’.[33] The then Department of Infrastructure and Transport also provided a submission, reviewing the issues raised by Qantas and concluding ‘we do not believe Qantas’ suggestion that there be a public inquiry is either necessary or appropriate in the context of this application’.[34] In March 2012 the Australian Government’s International Air Services Commission approved Virgin Australia’s application to transfer capacity.[35]

VAH, as of 14 November 2013, was partially owned by a number of foreign airlines or other organisations:

• Air New Zealand was a 22.9 per cent shareholder
• Etihad Airways was a 19.9 per cent shareholder
• Singapore Airlines was a 19.8 per cent shareholder and
• [36]

Air New Zealand is majority owned by the Government of New Zealand, Singapore airlines is indirectly controlled by the Government of Singapore, and Etihad is the national airline of the United Arab Emirates.[37]

Qantas’ 65 per cent domestic market share target

Qantas has consistently attempted to maintain a market share of 65 per cent in the domestic aviation market. As stated by Qantas’ chief financial officer:

The 65 per cent strategy is about giving our customers a market-leading choice of destinations, frequencies and seats at the times they want to travel.  That scale is part of the premium service we offer and the fares we sell, and it reflects the investment we have made over many years in our regional operations and in building a national low‑fares network with Jetstar.  It is prized by our customers and it is a very real competitive advantage that allows us to maximise earnings in even the toughest market conditions.[38]

The Australian Financial Review explained:

Qantas has insisted on maintaining a 65 per cent share of the domestic market because it believes that gives it an ideal—and disproportionate—share of revenue under what is called the ‘S curve effect’. According to the theory, it would too expensive to be worth going for 70 per cent market share, and falling below 60 per cent would soon lead to a collapse in its ability to charge higher fares than its rivals.[39]

The 65 per cent market share strategy has been criticised by a number of market analysts, with a former Qantas chief economist stating that ‘Qantas should bite the bullet and admit that its 65 per cent market share target is wrong. Removing the market share target will free-up the airline’s capacity decisions and enable it to better align its capacity with the economic cycle’.[40]

While a portion of market share has shifted from the Qantas to Jetstar brands, the overall Qantas Group share has fallen slightly.

Figure 1 Domestic market share

 

 

Source: Qantas, The Transformation Continues: Qantas Data Book 2013, p. 38, accessed 25 March 2014.

Industrial relations and employment in Australia

Qantas has also received significant attention in relation to employment issues. In 2011, Qantas suspended flights in response to industrial action by employees.[41] Senators and Members have stated the importance of Qantas employing Australians, while some submissions to Senate inquiries raised concerns about the implications of transferring maintenance work to offshore facilities in countries with lower labour costs. [42]

Virgin Australia argued in a submission to the Senate Economics Legislation Committee inquiry into this Bill that:

it would be highly inefficient as well as impractical for Qantas to undertake any significant proportion of its operations from Australia (both domestic and international) with staff domiciled overseas, precluding the possibility that the Bill would result in the transfer of skills or loss of jobs overseas.

… If Qantas chooses to adjust the level of its Australian operations, this will occur as the result of a strategic or management decision unrelated to the changes proposed by the Bill.[43]

In its submission to the Senate Economics Committee Inquiry into the Qantas Sale Amendment Bill 2014, the Australian Licensed Aircraft Engineers Association (ALAEA) discussed changes to how Qantas’s offshore maintenance was supervised and stated:

We suspect these changes were initiated to cut costs and prevent Qantas LAMEs [licensed aircraft maintenance engineers] highlighting poor maintenance … and reporting errors to the appropriate authorities and the ALAEA.

… We have serious and genuine reservations for the long-term health of the Qantas fleet as the reduction in oversight by Qantas of outsourced maintenance may have resulted in undetected errors laying dormant for long periods before they become a problem.[44]

A group of researchers in an Australian Research Council Linkage Project also provided a submission, building on their research on aircraft maintenance in Australia, arguing that it was important for Qantas to continue maintenance work in Australia, to ensure the existence of workforce with relevant skills and experience.[45]

Table 2 shows key statistics for Qantas and Virgin Australia’s workforces, including the proportion described as based in Australia. Both employ a similar proportion of their workforce in Australia, but while Virgin Australia’s employment levels have been rising from a low starting point, Qantas has a higher number of employees that has remained relatively constant in recent years.

Table 2 Virgin Australia and Qantas employee statistics

		2009	2010	2011	2012	2013
Employees	Qantas (FTE) (a)	33,030	32,490	32,695	33,584	33,265
	Virgin Australia (total number)	N/A.	6,476	7,263	8,367	8,423
Per cent based in Australia	Qantas	90.4	93	91	93	93
	Virgin Australia	N/A.	92.85	92.73	93.38	93.84

Sources: Parliamentary Library estimates based on Qantas, The transformation continues: Qantas Data Book 2013, p. 20; Qantas, Qantas Data Book 2012, p. 20; Qantas, Qantas Data Book 2011, p. 18; Qantas, Qantas Data Book 2010, p. 18; Qantas, Qantas Data Book 2008/09, p. 24; Virgin Australia, Annual report 2013, p. 163; Virgin Australia, Annual report 2011, p. 139, accessed 25 March 2014.

Notes: (a) FTE = full time equivalent

Market share and profitability

Over recent years Qantas has experienced a slight decline in international market share (Figure 2).

Figure 2 International market share over time

 

 

Source: Parliamentary Library estimates based on Table 1, Airline by country of port data - 2009 to current, Bureau of Infrastructure, Transport and Regional Economics.

Because many of its subsidiaries are wholly owned by the Qantas Group there is limited information on the costs and revenue associated with different segments; however recent reporting by Qantas suggests that the Qantas International and Jetstar segments have contributed to deterioration in the company’s position.

Table 3 Underlying earnings before interest and tax – 2012–13 financial year and six months to December 2013

Segment	Half year results – July-December 2013 ($m)	Results for the 2012-13 financial year ($m)
Qantas Domestic	57	365
Qantas International	(262)	(246)
Qantas Loyalty	146	260
Qantas Freight	11	36
Qantas Brands Eliminations	-	3
Qantas Brands	(48)	418
Jetstar Group	(16)	138
Corporate/Unallocated	(92)	(185)
Eliminations	-	1
Underlying EBIT (a)	(156)	372
Net Finance Costs	(96)	(180)
Underlying PBT (b)	(252)	192

Sources: Qantas, Qantas group financial result, media release, 27 February 2014; Qantas, The transformation continues: Qantas Annual report 2013, p. 55, accessed 25 March 2014.

Notes: (a) EBIT = Earnings before interest and tax (b) PBT = profit before tax. 

Qantas has also experienced a fall in profit levels (figure 3 shows absolute profit levels, not per cent returns). 

Figure 3 Profit levels (overall, including both domestic and international) over time

Source: Reported Net Profit After Tax (NPAT) after Abnormals as recorded in the Morningstar DatAnalysis database.

Aviation Economics wrote in its submission to the Senate Economics committee:

If Qantas cannot become capital and manpower efficient, it is our belief that Qantas will continue to contract internationally and will ultimately be forced to operate more of its existing international services using Jetstar, and/or One World code share flights; assuming it even elects to continue operating internationally.[46]

Additional investment and the cost of capital

The policy impact of this Bill, if passed, is that foreign investors will no longer be subject to the more restrictive caps in place on Qantas (25 per cent ownership for any single foreign investor, and 35 per cent for foreign airlines in aggregate). This can be expected to lower Qantas’ cost of capital, to the extent that it makes it easier for Qantas to access additional equity funding (or debt funding, if additional equity investment resulted in a greater willingness by banks to lend). A key part of this is the potential that Qantas might restructure its operations (including using a similar structure to Virgin Australia, to maximise investment in domestic operations).

However the benefits to Qantas only occur when there is a significant increase in investment in Qantas. Media commentary has included speculation about potential buyers:

… aviation analyst Peter Harbison said he believed there would be significant demand for Qantas equity from a range of players regardless of whether the domestic arm was stripped out. … He pointed to Delta Air Lines, the world’s biggest airline, which had recently bought a half-share in Virgin Atlantic from Singapore Airlines, as one of many possible investors. ‘‘Etihad is buying into people all over the place, as are a number of the Chinese airlines, such as Hainan Airlines,’’ Mr Harbison said. ‘‘Air Nippon Airways is also making investments . . . you would immediately think any one of those airlines would have the inclination.”[47]

However there has been no clear statement, and demand among international investors may be low:

Then it [Qantas] will have to find a foreign carrier, or group of carriers or investors, that want to pour hundreds of millions of dollars of equity into the airline. Partner Emirates has not indicated it plans to take a stake, something it could do now if it wanted. State owned Chinese entity China Southern would run into enormous political obstacles if it wanted to take over Qantas domestic.[48]

Additionally, any investment might also take some time to finalise.[49]

Qantas Regulatory arrangements

Under the current regulatory arrangements, so far as they are affected by this Bill, Qantas is regulated under the Qantas Sale Act 1992 (QSA)[50] and must also satisfy ‘designation criteria’. These are the conditions established by the licensing authority that an Australian airline must satisfy to be designated as an ‘Australian International airline’ under the Air Services agreements and arrangements that Australia has with other countries.

Under section 11A of the Air Navigation Act 1920 (ANA),[51] ‘Australian international airlines’ are subject to a 49 per cent cap on foreign ownership. Qantas is currently expressly excluded from definition of ‘Australian international airlines’.

Under the Bill, Qantas would cease to be subject to the QSA, would become subject to the 49 per cent cap on foreign ownership of ‘Australian international airlines’ under the ANA. It would still have to satisfy the ‘designation criteria’. These elements are outlined below.

Qantas Sale Act 1992

Section 7 is in Part 3 of the QSA which will be repealed by the Bill. Section 7 requires that the Qantas Articles of Association (now called the Constitution) include certain provisions the effect of which is summarised here:

• foreign persons must not own, in total, more than 49 per cent of the issued share capital (para 7(1)(a))
• foreign airlines must not own, in total, more than 35 per cent of the issued share capital (para 7(1)(aa))
• no single foreign person can own more than 25 per cent of the issued share capital (para 7(1)(b))
• the votes of substantial foreign shareholders cannot be counted in respect of the appointment, replacement or removal of more than one third of the directors of Qantas who hold office, at any particular time (para 7(1)(c))
• directors must have powers to transfer shares; to remove or limit voting rights attaching to shares; and to end the appointment of a person as director, in order to give effect to the restrictions in paragraphs 7(1)(a),(b) and (c) above
• Qantas is prevented from changing its company name to one that does not include “Qantas” (para 7(1)(e))
• Qantas is prevented from conducting scheduled international passenger flights under a name other than its company name or a name that includes “Qantas” (para 7(1)(f))
• Qantas must have its head office in Australia (para 7(1)(g))
• Qantas must maintain Australia as its ‘principal operational centre’ for international air services having regard to the location of its facilities that are used for international air services, such as facilities for the maintenance and housing of aircraft, catering, flight operations, training and administration (para 7(1)(h))
• at least two thirds of Qantas directors must be Australian citizens (para 7(1)(i))
• the chair of any meeting of the board of directors of Qantas must be an Australian citizen (para 7(1)(j)) and
• Qantas must be incorporated in Australia (para 7(1)(k)).

Designation criteria: Air Service Agreements

The website of the Department of Infrastructure and Regional Development explains the regulation of international aviation. This is a summary of the material that is relevant to this Bill.

Air services agreements and arrangements are a key part of the regulation of international aviation.[52] These agreements and arrangements (Australia is a party to 86) establish the respective rights of the ‘designated’ airlines of each country to fly over, into or out of the other country. [53]

The Department’s website says:

Air services arrangements are usually comprised of a treaty level Air Services Agreement supplemented by arrangements of less than treaty status between aeronautical authorities, such as Memorandums of Understanding and/or exchanges of letters. It is Australian Government practice to publish all treaty-level agreements. However, arrangements of less than treaty status are generally not published as they are traditionally regarded as being confidential between aeronautical authorities.[54]

An airline wanting to operate international scheduled services over, into or out of Australian territory must have an International Airline Licence issued by the Department.[55] In applying for a licence, an applicant must provide information required by the Department.[56]

The Guidance Notes issued by the Department for applicants for an International Airline Licence sets out the eligibility criteria for Australian Airlines seeking an International Airline Licence:

Australian airlines seeking an International Airline Licence to operate international air services are required to demonstrate that they can comply with the requirements of the relevant international air services agreement and/or arrangements between Australia and the country or countries to which they wish to fly. This is particularly important in relation to issues of substantial ownership and effective control, country of incorporation and principal place of business and/or incorporation.

The Australian Government requires Australian international carriers to meet a number of national interest criteria in relation to ownership and control requirements.

Ownership provisions require that:

Foreign shareholdings be limited to no more than 49 per cent of the total value of the issued share capital of the Australian airline.

Control criteria require that:

• At least two-thirds of the Board members are Australian citizens;
• The Chairperson of the Board is an Australian citizen;
• The airline’s head office is in Australia; and
• The airline’s operational base is in Australia.

Separate legislative provisions apply to Qantas Airways Ltd. [57]

These are the same five criteria mentioned in the Explanatory Memorandum to the Bill:[58]

Qantas’ international operations will remain subject to designation criteria in order to access negotiated air traffic rights under Australia’s international air service agreements. Australian airlines seeking designation are required to demonstrate that:

• they are substantially owned and effectively controlled by Australian nationals;
• at least two-thirds of the Board members must be Australian citizens;
• the Chairperson of the Board must be an Australian citizen;
• the airline's head office must be in Australia; and
• the airline's operational base must be in Australia.[59]

Currently, for Qantas, the designation criteria impose no greater regulatory burden than the QSA as they all have equivalents in section 7 of the QSA. At the moment, compliance by Qantas with the QSA means that it continues to satisfy the designation criteria. Table 4 sets out the designation criteria and the equivalent provision in the QSA.

Table 4   Designation criteria and equivalent Qantas Sale Act provisions

Designation Criteria	Qantas Sale Act – equivalent provision for Qantas only
substantially owned and effectively controlled by Australian nationals	(para 7(1)(a)): 49 per cent cap on foreign ownership
at least two-thirds of the Board members must be Australian citizens	(para 7(1)(i)): at least two thirds of Qantas directors must be Australian citizens
Chairperson of the Board must be an Australian citizen	(para 7(1)(j)): the chair of any meeting of the board of directors of Qantas must be an Australian citizen
airline's head office must be in Australia	(para 7(1)(g)): Qantas must have its head office in Australia
airline's operational base must be in Australia	(para 7(1)(h)): Qantas must maintain Australia as its ‘principal operational centre’ for international air services having regard to the location of its facilities that are used for international air services, such as facilities for the maintenance and housing of aircraft, catering, flight operations, training and administration.

 

The repeal of section 7 of the QSA will mean that the 49 per cent cap will be dealt with under the ANA and under the designation criteria but, in both cases, only in relation to the international operations.

The other four matters will be dealt with as designation criteria only. Again, these apply only in relation to international operations. This represents a loosening of the arrangements in relation to matters dealt with in the second, third and fourth criteria as listed in the table, which under the QSA apply to both domestic and international operations. The fifth criterion—that Qantas have its operational base in Australia—already applies only to international operations under the QSA.

Air Navigation Act

The ANA deals with foreign ownership of an ‘Australian International airline’ a class from which the Act, as it is now drafted, expressly excludes Qantas.[60] Under the Bill, this exclusion would be removed, making the ANA foreign ownership rules apply to Qantas, but only in relation to international operations. This issue is explored further below.

The foreign ownership rules in section 11A of the ANA are materially the same as paragraph 7(1)(a) of the QSA which currently provides for a 49 per cent cap on foreign ownership of Qantas, but is being repealed by this Bill.

The Regulation Impact Statement and the Prime Minister’s exemption

The Australian Government Guide to Regulation states that a regulatory impact statement (RIS) is ‘mandatory for all Cabinet submissions’ and that ‘If a decision is not going to Cabinet, a RIS is still required where the policy proposal is likely to have a measurable impact on business, community organisations or individuals’.[61] However, the Prime Minister may grant an exemption ‘in exceptional circumstances’.[62] The Explanatory Memorandum notes that an exemption has been granted by the Prime Minister.[63]

Committee consideration

Senate Economics Committee

The Bill has been referred to the Senate Economics Committee for inquiry and report by 24 March 2014. Details of the inquiry are at: http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Qantas_Sale.

Senate Standing Committee on Rural and Regional Affairs and Transport

The Senate Standing Committee on Rural and Regional Affairs and Transport is also conducting an inquiry into Qantas’ future as a strong national carrier supporting jobs in Australia. Details of the inquiry are at: http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Rural_and_Regional_Affairs_and_Transport/Qantas_Jobs.

Policy position of non-government parties and independents

The Australian Labor Party

The Australian Labor Party has stated its support for repealing some of the restrictions contained in the Qantas Sale Act 1992—specifically, the 25 and 35 per cent restrictions on foreign airline ownership and single ownership:

We clearly indicated that from 2009 we have had a position on the 25 per cent and 35 per cent rules and we would be prepared to have constructive discussions about that or any other support that would be available.[64]

The Shadow Minister for Infrastructure and Transport also stated:

In terms of our position, we unequivocally stand for Australian jobs. Qantas has the safest record of airlines around the world—it is known for it. Are we really saying that there is no relationship between that safety record and the skills of those Australians who maintain the aircraft and those engineers who work for Qantas, that there is no difference between where that work takes place?

… This is about cold, hard analysis of Australia's economic interests. But it is also about who we are as Australians. I make no apology for acknowledging the fact that the flying kangaroo is a source of national pride. It is a source of national pride which brings jobs to Australia, because every time people see the flying kangaroo, wherever in the world, it is an ad for Australian tourism. Qantas, of course, play a critical role in Australian tourism … They do all of that because they are an Australian company. If you remove that, there is a difference between the flying kangaroo and replacing that with an emblem of another country. It is about Australian jobs; it is about the national interest.[65]

Senator Nick Xenophon

Senator Nick Xenophon has criticised the management decisions of Qantas, describing them as ‘stupid, asinine and baffling’,[66] and stated in a press release:

Alan Joyce and the Qantas Board have brought one of the world’s great airlines and a national icon to its knees … Their botched strategy of pouring hundreds of millions of dollars into Jetstar’s Asian operations seems to be the real cause of the demise, and Australians shouldn’t believe Mr Joyce’s lame excuses.[67]

Mr Andrew Wilkie MP

Mr Andrew Wilkie MP has commented on the importance of Qantas to Tasmania, and the potential for government investment:

What is the relevance of Qantas to Tasmania? … there is a call centre in Glenorchy city employing more than 200 of my constituents. They are nervous …I would favour the federal government taking a financial stake in the airline and giving Qantas the financial muscle to compete with its competitors, all of which enjoy largesse from their own governments, whether the Singapore or New Zealand government.[68]

The Australian Greens

The Australian Greens oppose the changes to the Qantas Sale Act 1992,[69] and have expressed some limited support for debt guarantees or government ownership of Qantas.[70]

Mr Bob Katter MP

Mr Katter publicly stated his support for stronger requirements for airlines to qualify as Australian,[71] and voted against the Bill.[72]

Position of major interest groups

Australian Council of Trade Unions

The Australian Council of Trade Unions (ACTU) ‘opposes this Bill in its current form and recommends that the Committee reject it.’[73] The ACTU argued that:

This Bill is predicated on the presumption that a level playing field can be created in the aviation sector. We refute this predication. Qantas competes with airlines that receive various forms of assistance from their governments in order to promote their countries’ national interests. Without similar government assistance, there is no level playing field for Qantas in the global aviation sector.

… There is a strong national interest in ensuring a viable Australian airline which maintains a true Australian identity and supports local employment and investment.

 If the Committee is convinced the business case of Qantas warrants adjustments to the foreign ownership provisions of the QSA, it must be satisfied that those financial benefits could not be provided to Qantas by simply repealing the restrictions[on] a foreign airline ow[n]ing more than 35% and an individual foreign entity owning more than 25% of Qantas, whilst maintaining the overall restriction of 49% total foreign ownership and a requirement that the majority of facilities remain in Australia.[74]

Australian and International Pilots Association

The Australian and International Pilots Association (AIPA) supported the repeal of paragraphs 7(1)(aa) and 7(1)(b) of the QSA (the 25 and 35 per cent ownership restrictions), but noted concerns over the current regulatory framework. AIPA strongly opposed the repeal of paragraph 7(1)(h) and proposed a stronger test for the principal base of operations than currently in place under the ANA framework.[75]

The AIPA also stated:

AIPA believes that the proposed amendments, unamended, will allow Qantas to replicate the Virgin restructure and, subject to Foreign Investment Review Board (FIRB) approval, sell off up to 100% of Qantas Domestic. We note that Qantas currently has that option with Jetstar, but has made no moves in that direction.

There would be no immediate benefit to the broader Australian economy because any initial foreign capital investment will flow to the shareholders rather than Qantas. Qantas would not gain a capital benefit until such time that there is one or more major shareholders on the register who have the capacity and willingness to participate in a capital raising.

There may be an overall loss of benefit to the broader Australian economy if the ACCC is unable to restrain a cashed-up Qantas in the domestic market, based on the “two for one” threat to Virgin.

Given the vagueness of the requirements for international airline licensing under the ANA, there may be an overall loss of benefit to the aviation sector and the broader Australian economy if a Qantas freed from the restraints of the QSA moves quickly to offshore as much of operational and support functions as the Department will permit but fails to achieve a consequent improvement in downstream economic benefit to Australia.

There would be no immediate direct benefit to the broader Australian economy since the proposed amendments are a rearguard domestic action that does nothing to address the distortions in the international market faced by all Australian international airlines.[76]

Qantas

In a submission to the Senate Economics Committee inquiry into the legislation, Qantas stated:

Qantas supports the Qantas Sale Act Amendment Bill 2014 and the repeal of Part 3 of the Qantas Sale Act 1992. We also support the amendment of the Air Navigation Act 1920 which will allow Qantas to be included in the definition of an Australian international airline.[77]

Qantas Engineers’ Alliance

The Qantas Engineers’ Alliance, representing three engineering unions, opposed the Bill:

The future of Qantas as a national carrier is of paramount importance to Australia. This importance stems from the role of Qantas as a generator of skills, technology and investment, an employer and as a provider of transport and other infrastructure, especially in times of national emergency.

… It is worth noting that Qantas itself has stated that amendments to the Sale Act would not address the critical near term issues relating to domestic market irrationality.

The Government’s chosen approach to address the challenges facing Qantas will see the demise of Qantas as a national carrier.[78]

The Qantas Engineers’ Alliance proposed alternative options including a debt guarantee or an equity injection.[79]

Regional Express

In a statement issued 20 February 2014, Regional Express (REX) stated:

Rex shares the position of the Regional Aviation Association of Australia (RAAA) that a level playing field should be the rule in the private sector. Rex believes that the Qantas Sale Act no longer serves any practical purposes and should be repealed by Parliament.[80]

Virgin Australia

In an open letter on 29 November 2013, Virgin Australia CEO John Borghetti stated:

The Qantas Sale Act is a matter for the Government and Qantas. We have no issue with the Act being repealed. Furthermore, we have no issue with any amendments to the legislation which would allow Qantas to mirror the current structure of Virgin Australia by separating its international and domestic operations.[81]

Virgin Australia also supported the Bill in its submission to the Senate Economics Committee:

In accordance with previous public statements, Virgin Australia supports the repeal of the provisions of the Qantas Sale Act 1992 (Cth) (QSA) which place unique regulatory restrictions on Qantas Airways (Qantas). This aspect of the QSA is outdated and reflects a period of transition in Australian aviation associated with the deregulation and privatisation of the industry. Virgin Australia also considers legislation for individual companies to be undesirable in a competitive market. Through the removal of Part 3 of the QSA and amendments to the Air Navigation Act 1920 (Cth) (ANA), the Bill will create an industry-wide legislative framework for the regulation of foreign investment in Australia’s international airlines and remove foreign investment restrictions in relation to Qantas’ domestic operations.[82]

Financial implications

The Explanatory Memorandum states that the ‘Bill will have no financial impact’.[83]

Parliamentary Joint Committee on Human Rights

In its fourth report of the 44th Parliament, the Parliamentary Joint Committee on Human Rights noted that it ‘seeks further information as to the likely impact of the bill on the right to work’.[84]

In its discussion of the right to work, the Committee stated that it ‘considers that an assessment of the compatibility of the bill with the ICESCR [International Covenant on Economic, Social and Cultural Rights] should have included some assessment of whether and how the Bill might affect employment opportunities in Australia’.[85]

The Committee on Human Rights also expressed its intention to write to the Minister for Infrastructure and Regional Development to seek further information on issues relating to the right to work.[86]

Statement of Compatibility with Human Rights

The Statement of Compatibility with Human Rights can be found at page 2 of the Explanatory Memorandum to the Bill. As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the ‘amendments proposed by this Bill to the QSA and ANA do not engage any of the applicable rights or freedoms’.[87]

The Explanatory Memorandum also states that ‘the Bill will not impact Australia’s broader workplace relations regulatory framework. The Bill will therefore not impact on human rights relating to employment under articles 6(1), 7 and 8(1)(a) of the International Covenant on Economic, Social and Cultural Rights.’[88]

Key issues and provisions

Schedule 1 repeals Part 3 of the Qantas Sale Act 1992.

Schedule 2 amends the Air Navigation Act 1920 so that Qantas is no longer excluded from the definition of Australian international airline. This makes Qantas subject to the 49 per cent foreign ownership cap.

The date of commencement of Schedules 1 and 2 is to be fixed by Proclamation; however, if this does not occur within six months of the Act receiving Royal Assent, then they commence six months after receiving Royal Assent.

These modifications to the Qantas Sale Act 1992 and the Air Navigation Act 1920 will result in changes to the regulatory regime applied to Qantas (see Qantas Regulatory arrangements above, p. 13).

Some points for consideration

Not all matters dealt with in QSA are covered by ANA or designation criteria

Some matters dealt with in the QSA will not, under this Bill, be dealt with under either the ANA or the designation criteria. That is, there are no equivalents in the ANA or the designation criteria of the following existing QSA requirements on Qantas:

• foreign airlines must not own, in total, more than 35 per cent of the issued share capital of Qantas (para 7(1)(aa))
• no single foreign person can own more than 25 per cent of the issued share capital of Qantas (para 7(1)(b))
• the votes of substantial foreign shareholders cannot be counted in respect of the appointment, replacement or removal of more than one third of the directors of Qantas who hold office, at any particular time (para 7(1)(c))
• Qantas is prevented from changing its company name to one that does not include “Qantas” (para 7(1)(e))
• Qantas is prevented from conducting scheduled international passenger flights under a name other than its company name or a name that includes “Qantas” (para 7(1)(f))

Status of designation criteria – not legislated

Under the Bill, the regulation of Qantas will move from a framework in which restrictions are found directly in the QSA to one in which it would be subject to the 49 per cent foreign ownership cap in the ANA, but otherwise only be required to satisfy the designation criteria established by the Department.

The status of the designation criteria—and their susceptibility to change by the Department—may attract attention.

The short point here is that the designation criteria are not set out in legislation. Rather, they are Departmental criteria which are founded on the terms of air services agreements. Some are more well founded than others and therefore, it would seem, more immune from change. Two of the five concerning the citizenship of directors and the Chairperson of the Board appear to be the least necessary to give effect to the terms of the air services agreements generally. These could probably be modified without putting them at odds with the underlying agreements. The other criteria are clearly based on the explicit terms of several air services agreements and are therefore reasonably immune from change unless the underlying agreements were also changed. An explanation of these conclusions follows.

The International Airline Licenses—Guidance Notes, (part of which is extracted at pages five and six above) states:

Australian airlines seeking an International Airline Licence to operate international air services are required to demonstrate that they can comply with the requirements of the relevant international air services agreement and/or arrangements between Australia and the country or countries to which they wish to fly. This is particularly important in relation to issues of substantial ownership and effective control, country of incorporation and principal place of business and/or incorporation. (emphasis added)

The Australian Government requires Australian international carriers to meet a number of national interest criteria in relation to ownership and control requirements.[89]

The Guidance notes then list the five designation criteria already listed.

The suggestion in the Guidance Note is that the designation criteria are found in the international air services agreements. 

The Department maintains a public list of the air services agreements it has with other countries.

Of a sample of agreements surveyed by the Parliamentary Library, all deal with the conditions that must be satisfied by an airline for it to be treated as a ‘designated airline’ of a country. There is no universal definition however; each agreement is different, although there are some common features.

Some examples are set out below with the significant parts in bold text.

Belgium

Australia’s agreement with Belgium says that the requirements for designation as an Australian international airline are that:

i) Australia has and maintains effective regulatory control of the air carrier; and
ii) that airline is incorporated and has its principal place of business in the territory of Australia; and
iii) that airline is established in the territory of Australia and is licensed as an Australian airline (Article 2(b)).

Indonesia

Australia’s agreement with Indonesia requires that for designation as an airline of a country:

(a) the airline is substantially owned and effectively controlled by the Party or nationals of the Party designating the airline (Article 2(2)).

New Zealand                                                                                                 

Australia’s agreement with New Zealand provides in Article 2 that designation requires that:

(a) the airline is incorporated and has its principal place of business in the territory of the Party designating the airline;

(b) effective control of that airline is vested in the Party designating the airline, nationals of that Party, or both;

(c) the airline is qualified to meet the conditions prescribed under the laws, regulations and rules normally applied to the operation of international air transport by the Party considering the application or applications.

United States of America

Australia’s agreement with the USA includes the requirement in Article 3 that:

1.  substantial ownership and effective control of that airline are vested in the other Party, nationals of that Party, or both;
2.  the airline is qualified to meet the conditions prescribed under the laws and regulations normally applied to the operation of international air transportation by the Party considering the application or applications; and
3.  the other Party is maintaining and administering the provisions set forth in Article 6 (Safety) and Article 7 (Aviation Security).

United Kingdom

Australia’s agreement with the UK includes the requirement in Article 4 that ‘in the case of an airline designated by Australia’:

(i) Australia has and maintains effective regulatory control of the airline; and

(ii) it has its principal place of business in Australia.

Thailand

Australia’s agreement with Thailand, includes this requirement in Article 7:

(1) Each Contracting Party reserves the right to withhold or revoke the rights granted under Article 3 in respect of an airline designated by the other Contracting Party, or to impose such conditions as it deems necessary on the exercise of those rights, in any case where it is not satisfied that substantial ownership and effective control of the airline are vested in the Contracting Party designating the airline or in nationals of that Contracting Party..

From this survey of the designation criteria in these and other agreements it is evident that the Department has taken the first criterion—that an airline be substantially owned and effectively controlled by Australian nationals—directly from some agreements like the Indonesian and New Zealand agreements. 

In the case of the criteria requiring that the head office and operational base be in Australia, these are the Department’s reasonable interpretation of the requirement in many agreements (UK, NZ, Belgium, for instance) that an airline have its ‘principal place of business’ in a country.  

The Department’s requirements concerning the citizenship of the board and chairperson were not found in any of the agreements surveyed. However, according to the Guidelines, these criteria go the test of control that is found in many agreements. As there is already an explicit test for control in the first criterion these are possibly superfluous and their removal would probably not put the Department’s criteria at odds with the underlying agreements.

This analysis is summarised below.

Departmental Designation criteria	Found in an air services agreement?
substantially owned and effectively controlled by Australian nationals	Yes, for example, in agreements with Indonesia, USA
at least two-thirds of the Board members must be Australian citizens	Not found in these terms in a surveyed agreement
the Chairperson of the Board must be an Australian citizen	Not found in these terms in a surveyed agreement
the airline's head office must be in Australia; and	Principal place of business requirement is found, for example, in agreements with UK, New Zealand, Belgium
the airline's operational base must be in Australia.	Principal place of business requirement is found, for example, in agreements with UK, New Zealand, Belgium

Under the Bill it would be only Qantas’ international operations that will be regulated

The QSA imposes requirements on Qantas generally in relation to both its domestic and international operations. The designation criteria and the 49 per cent cap in the ANA apply only to international operations.

The arrangements proposed under this Bill would mean that under both the ANA and in satisfaction of the designation criteria, Qantas’ international operations only would be regulated.

This would give Qantas the scope to structure its affairs in order to allow its domestic operations to be subject to foreign ownership in excess of 49 per cent. Further, none of the other restrictions on place of incorporation, place of operation, location of head office, company name or citizenship of directors would necessarily apply to Qantas domestic operations.

 

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.

 

For copyright reasons some linked items are only available to members of Parliament.  

---

© Commonwealth of Australia

Creative Commons

With the exception of the Commonwealth Coat of Arms, and to the extent that copyright subsists in a third party, this publication, its logo and front page design are licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia licence.

In essence, you are free to copy and communicate this work in its current form for all non-commercial purposes, as long as you attribute the work to the author and abide by the other licence terms. The work cannot be adapted or modified in any way. Content from this publication should be attributed in the following way: Author(s), Title of publication, Series Name and No, Publisher, Date.

To the extent that copyright subsists in third party quotes it remains with the original owner and permission may be required to reuse the material.

Inquiries regarding the licence and any use of the publication are welcome to webmanager@aph.gov.au.

Disclaimer: Bills Digests are prepared to support the work of the Australian Parliament. They are produced under time and resource constraints and aim to be available in time for debate in the Chambers. The views expressed in Bills Digests do not reflect an official position of the Australian Parliamentary Library, nor do they constitute professional legal opinion. Bills Digests reflect the relevant legislation as introduced and do not canvass subsequent amendments or developments. Other sources should be consulted to determine the official status of the Bill.

Any concerns or complaints should be directed to the Parliamentary Librarian. Parliamentary Library staff are available to discuss the contents of publications with Senators and Members and their staff. To access this service, clients may contact the author or the Library‘s Central Entry Point for referral.