Senator Nick Xenophon -
Dissenting Report
1.1
The
aim of the inquiry was to consider what steps the Parliament could take to
ensure Qantas remains a strong national carrier that supports aviation jobs in
Australia. Unfortunately, at this stage I believe there are too many ‘known
unknowns’ to be able to come to a firm conclusion, particularly given the
current management and erratic direction of Qantas. However, I also believe
there are some points that can be accepted as a foundation when considering
this issue:
- Qantas is in a
financial crisis largely of its own making, in large part due to its failed
foray into Asia with its Jetstar operations;
- Current
Australian accounting rules do not prevent cost-shifting from one part or
entity of a group to another;
- Rather than
amending the Qantas Sale Act, which as proposed could lead to a massive
offshoring of jobs, changes to the Air Navigation Act should be
considered to address the ambiguities that are best demonstrated in the current
Virgin Australia structure and its international operations; and
- The Open Skies
policy needs to be critically examined, as there appears to be no other nation
that has such an open slather approach to aviation.
1.2
At
the outset, it is important to make it clear that the short time available for
this inquiry barely allowed the committee to scratch the surface of the issues
surrounding Qantas and the Australian aviation sector. Without further
examination, it is impossible to make appropriate policy decisions in this
area, and as such the recommendations in the committee report should not be
supported at this stage.
1.3
Of
particular concern is the significant distrust felt by Qantas staff towards the
current management and Board. Mr Stephen Purvinas of the Australian Licenced
Aircraft Maintenance Engineers Association provided evidence from a survey
taken by his union of Qantas and Virgin Australia employees, stating:
The first one is, of Qantas engineers,
how many of them think the company will improve in the next 12 months. It was
three per cent. The Virgin engineers were at 84 per cent. Of Qantas pilots,
only three per cent think the company will improve over the next 12 months. It
was 91 per cent of Virgin pilots.[1]
Mr Purvinas went on to state that,
according to the survey, only one per cent of both Qantas engineers and Qantas
pilots said they trusted the Qantas management[2].
1.4
This
is a significant burden for a company to overcome. It also supports the view
that CEO Alan Joyce and Chairman Leigh Clifford are not the people to manage
Qantas through this stage. I note that others, including the Government, have
said these are matters for shareholders; however, if the Government is
considering taking action to assist Qantas, then clearly this becomes a matter
for the Government and for the people of Australia, on whose behalf the
Government is acting.
1.5
The
issues relating to Qantas management strategy are many and complex. Australian
accounting standards and the structure of the Qantas Group mean it is often
difficult to get a full understanding of its financial operations. In
particular, my concerns centre around the apparent focus on the Jetstar brand
at the expense of Qantas. This includes the rapid growth of the Jetstar fleet
(now estimated to be nearly 60 per cent the size of Qantas’ fleet) and suggestions
of cost-shifting between the arms of the business to make Jetstar appear a
success, and Qantas International a financial failure. I note that under
current Australian accounting and corporate governance rules, this level of
cost-shifting within group accounts is permissible.
1.6
Tied
in with this is the establishment of the Jetstar brands in Asia and in
particular Jetstar Hong Kong, which has not yet received regulatory approval to
operate. This has resulted in the airline’s nine Airbus planes being stranded
in France and unable to fly, at an estimated cost of $3 million a month.[3]
There are also questions regarding leasing arrangements between Jetstar in Asia
and the Qantas Group, and whether they are structured so as to deliver a profit
to the Asian carriers. In the March 14 hearing, Mr Joyce justified criticism of
Jetstar Hong Kong by comparing it to that levelled at Jetstar Australia when it
was being established:
But the same comments were made in
relation to Jetstar, the same comments that it was not going to work. It did
lose money in the first year when we set it up, but in 10 years Jetstar
Australia has contributed over $1 billion in profits to the group. It has been
an amazing success story because of the entrepreneurial nature of the group. In
the Asian ventures that we have, I have absolutely no doubt that the Japanese
venture in particular is going to be similarly successful for the Qantas group.[4]
1.7
It
is impossible to deny, however, that Jetstar Australia was established in a
very different financial climate, both globally and within the Qantas Group. I
would hope that Mr Joyce has acknowledged this and has not based his strategy
on the assumption that what worked in 2003 will work now.
1.8
I
also feel it is important to note Mr Joyce’s inconsistencies in recent months.
His appeals for Government support have included an amendment to the Air
Navigation Act to bring Virgin Australia under the same foreign investment
requirements as Qantas, a repeal of the Qantas Sale Act, and a debt
guarantee. His comments regarding the impact of the carbon tax on Qantas have
also varied, firstly saying that it was not to blame for the company’s problems
and then reversing his position just two days later.[5] I am
concerned that these inconsistent messages may demonstrate serious confusion
and a lack of strategic direction within Qantas.
1.9
Further,
Mr Joyce’s evidence to the committee seems to indicate a lack of understanding
of Qantas’ downward spiral. In particular, in response to a line of questioning
about subsequent financial result announcements in 2011, Mr Joyce said,
surprisingly, he did not recall making statements that indicated a financial
loss for Qantas International:
Senator
XENOPHON: Mr Joyce, on 17 February 2011, in
announcing half-yearly results, you said that Qantas improved yield by nine per
cent, that it demonstrated a strong revenue recovery across both international
and domestic businesses. Yet, on 22 June 2011, you said that Qantas
international was forecast to generate a loss, before interest and tax, of
approximately $200 million. Could you please explain what happened to the
trading environment in 3½ months? What happened to Qantas international?
Mr Joyce: Sorry,
Senator, could you give the dates again?
Senator
XENOPHON: Sure. You made a statement on 17
February 2011 that Qantas improved yield by nine per cent. You also stated that
it demonstrated a strong revenue recovery across both international and
domestic businesses. Then, on 22 June 2011, you singled out the international
component of Qantas for special attention, saying that Qantas international, in
financial year 2011, was forecast to generate a loss, before interest and tax,
of approximately $200 million. I am just trying to establish what occurred in
that period from 17 February to 22 June 2011.
Mr Joyce: I
think we will have to take that on notice because I do not remember the
statements.
Senator
XENOPHON: They were very well reported at the
time.
Mr Joyce: They probably
were. But, as you know, it was three years ago and I would say may we take that
statement on notice and come back.[6]
1.10
Mr
Gareth Evans, Chief Financial Officer of Qantas, later sought to clarify these
comments by stating that this period was the first in which Qantas
International was reported as a separate business segment[7]. However,
Mr Evans did not adequately justify or explain why the losses occurred in such
a short period.
1.11
Qantas’
assertion that Qantas International is in ‘terminal decline’ and unable to
compete has also been rejected by the Australian Competition and Consumer
Commission in its assessment of the alliance deal with Emirates. The ACCC’s
determination states:
In particular, the ACCC does not accept
or rely on the applicants’ claim that Qantas International is in ‘terminal
decline’ and unable to compete effectively or operate profitably absent the
alliance.[8]
1.12
The
ACCC continues:
The ACCC does
not accept or rely on Qantas’ claim that Qantas International is in ‘terminal
decline’ and unable to compete effectively or operate profitably. The ACCC
considers that the scope of Qantas’ international operations in the likely
future without the proposed conduct would not be materially different to the
likely future with the proposed conduct.[9]
1.13
In
my view, the ACCC’s finding was a major rebuff to Qantas management. If anything
is in ‘terminal decline’, it is the credibility of Mr Joyce, Mr Clifford and
the Board.
1.14
Ultimately,
there are serious concerns regarding a number of decisions made by the
management and the Board. On 17 February this year, I wrote to the Treasurer,
Prime Minister and Deputy Prime Minister outlining these matters, and to date I
have not received a response. The letter is attached for the committee’s
information.
1.15
Evidence
provided to the Senate Economics Legislation Committee inquiry into the Qantas
Sale Amendment Bill by the Australian and International Pilots Association
(AIPA) also outlined the possible failures in the bill, which aims to remove Part
3 of the Qantas Sale Act. Part 3 relates to foreign ownership provisions
and also requires that the majority of Qantas’ operations remain in Australia.
By removing Part 3 and instead bringing Qantas under the remit of the Air
Navigation Act 1920, from which it is currently exempt, the Government’s
position is that the playing field will be levelled and Qantas will be able to
access greater levels of foreign investment.
1.16
However,
as AIPA pointed out, provisions relating to Australian operations for
Australian international airlines under the Air Navigation Act are
contained in a Departmental Guidance Note rather than appropriate regulations
or legislation. This means that, while the foreign ownership restrictions are
enshrined in the Act (at least relating to international airlines), there is
nothing equivalent in the legislation to require the majority of an Australian
international airline’s operations to remain in Australia.
1.17
The
most obvious example of the gaps in the legislation is the Virgin Australia
restructure that occurred in 2012, where Virgin Australia created a separate,
non-listed private company to act almost as a ‘placeholder’ for its
international business. Virgin Australia International Holdings (VAIH) has been
designated an Australian international airline by the Department for the
purpose of the Air Navigation Act as it meets the 49 per cent foreign
ownership cap and the other requirements set out in the Guidance Note.
1.18
An
article by Michael Janda and published on ABC’s The Drum earlier this
month echoes the concerns laid out in AIPA’s submission[10]. As Janda
points out, VAIH may meet the requirements of the Act, but while it does have
its own Board of Directors, it does not have its own management, its own
aircraft or any of the crew, maintenance, HR or customer support resources that
an international airline could reasonably be expected to have. Instead, it is
wholly reliant on the resources owned and operated by Virgin Australia
Holdings, the domestic arm of the business which, under the Air Navigation
Act, can be wholly foreign-owned.
1.19
Some
may say this is merely good business practice: that is, seeking out any
available opportunity for a ‘better deal’, but it has created a serious
precedent in the industry. I see it as a questionable practice that highlights
the flaws in the Air Navigation Act that fail to protect the national
interest. To date, Virgin Australia has maintained its principal place of
business and the majority of its employees in Australia, but there is
opportunity under the Act for it to offshore a significant portion of its domestic
business, which is in turn supporting the international arm, without breaching
the Act. While the extent to which this is practical for a domestic airline is
debateable, there is no denying the opportunity to do so, or rather the
loophole, exists.
1.20
This
has worrying implications for Qantas if the Government’s bill should pass. If
Qantas were free to replicate Virgin Australia’s structure under the Act, we
could potentially see a one hundred per cent foreign-owned Qantas Domestic with
full operating control over a Qantas International that is little more than a
sham company allowing foreign interests access to Australia’s bilateral air
services agreements. It is also worth noting that Jetstar as it stands could
potentially access this loophole, as it has never been confirmed whether it is
fully covered by the Qantas Sale Act.
1.21
It
could be argued that this is the real endgame for the management and Board and
the discussion around foreign ownership is largely a furphy, as the repeal of
this provision would allow a wholesale shift of as much of their operations
offshore as they can get away with.
1.22
It
is also important to note that Qantas has not formally announced its intention
to replicate the Virgin Australia structure if the Government’s bill were to
pass, although it is fair to say that the general assumption is that will be
the case. However, Mr Joyce’s own disconcertingly vague answer to the Senate
Economics Committee inquiry into the bill adds further confusion:
Mr Joyce: I think we are
going into hypotheticals. At the moment, I do not know what will happen into
the future with relation to Qantas. I am saying that there is a domestic and an
international arm today. This is all about giving Qantas the same flexibility
that Virgin has both in ownership and in the structure. That is what we are
talking about here, that it is a level playing field and the repeal of part 3
of the act provides a way of giving that level playing field.[11]
1.23
With
respect, I believe the CEO of a company requesting a specific legislative change
from the Government should be able to say very clearly what will happen in the
future with the company if that legislative change were to go ahead. Mr Joyce’s
comments are not constructive and only add to the uncertainty, confusion and
doubt surrounding his governance of Qantas.
1.24
All
of these signs point towards an organisation with no clear and consistent
policy in terms of its future direction, or at least not one that they are
willing to discuss in the public sphere. I am concerned that legislative
changes made by the Government or other measures, including a debt guarantee,
may not have the intended impact if there is not the ability or the will within
Qantas to take advantage of them, or an understanding on the part of the
Government how they are to be used. Indeed, the legislative changes proposed by
the Government may have a significant negative impact, particularly on
Australian jobs, by allowing further offshoring of Qantas operations.
1.25
Qantas
has also not stated a strong position on what specific changes it needs to
recover, other than insisting it is operating on an ‘un-level playing field’
compared to Virgin Australia. It would perhaps be more useful and inspire
greater confidence on the part of employees and consumers if Qantas were to
have a clear strategic plan and a ‘wish list’ of actions for the Government.
This would demonstrate an engagement on the part of Qantas and assist the
Parliament in ensuring any action taken has the desired outcome.
1.26
In
conclusion, the ‘Qantas problem’ cannot be fixed with a band-aid solution such
as the Qantas Sale Amendment Bill 2014 proposed by the Government or the
debt guarantee proposed by the Opposition. The appropriate response should have
two parts: firstly, to determine exactly what the current financial situation
is within Qantas and how Parliamentary action can support Qantas’ recovery; and
the broader aviation sector in Australia and the challenges faced by Australian
airlines on a geographical and regulatory basis.
Recommendation 1
That the
Government, as a matter of urgency, consult with industry and relevant bodies
to formulate terms of reference for a comprehensive review of Australia’s
aviation sector, including the Open Skies policy, and its impact on operators
and consumers, to be undertaken by the Productivity Commission.
Recommendation 2
That the
Government take no further action on legislative or other reform and provide no
assistance or guarantee to Qantas until an independent audit of the company has
been completed, which should also seek to establish the level of any
cost-shifting between Jetstar and Qantas.
Recommendation 3
Subject to
Recommendation 1, that the Air Navigation Act 1920 be amended to address
the apparent loophole that allows the foreign investment cap to be obviated,
as demonstrated in the restructure of Virgin Australia.
Senator Nick Xenophon
Independent Senator for
South Australia
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