By Sinclair Davidson, RMIT University
So it begins – a company running to Canberra with a good story and in need of some or other political favour. To be fair, these companies tend to have very good stories – consumer safety, national security, skills development, employment prospects, and the like. It is very hard to say “No” and for a long time Canberra has tended to say “Yes”.
The problem being that the amount of money available to be spent on corporate welfare is finite, the demand for corporate welfare infinite, and the prospects of those companies needing corporate welfare poor.
To its credit the Abbott government has being saying “No” to some companies – but not others. We know that government is poor at picking winners, so while saying “No” is an improvement on previous practice there are likely to be problems with the new practice.
It looks like Joe Hockey has developed a four point test to inform his decisions on corporate welfare.
These four points can be summarised as follows:
- Is the firm subject to unique regulation that impedes its business model?
- Does the firm provide an essential service?
- Does the firm compete against foreign State Owned Enterprises (SOE)?
- Is the firm working to restructure its operations?
The Abbott government is likely to argue that Qantas meets all four criteria. My opinion is that it meets one, at best, with the other criteria being arguable or irrelevant.
Qantas is subject to the Qantas Sale Act and this does impede its business model. The solution to this problem is to repeal, or at least relax, the Act. This is the course of action that the government should pursue to the exclusion of any other support. Prime Minister Tony Abbott has signalled support for this option. Unfortunately it appears there is little political will in the Parliament for it.
Who should do the heavy lifting to help return Qantas to profitability? Jasoneppink/Flickr
We need to be clear – Qantas does not provide an essential service. We need to differentiate between the service being provided and the service provider. It is true that the failure of the company would cause a temporary disruption and inconvenience to the travelling public, but very quickly we would find planes flying the same routes and providing much the same service.
Competing against a state-owned enterprise is a furphy. Every single Australian firm that competes in any international market is competing against an SOE on some margin. We in Australia decided long ago that the government had no business running airlines (or most other types of business) - it was a good decision to privatise Qantas and that decision should not be revisited.
Finally there is the question of whether the firm is restructuring its own operations, with Abbott stating Qantas must get its “house in order”. The Abbott government is looking closely at industrial relations when thinking about this question. Quite rightly so, but that isn’t enough.
Premium price for premium service?
Qantas appears to be pursuing a strategy where it will provide a premium service while charging premium prices. I’m not convinced – as a long-time Qantas customer – that it’s succeeding in providing a premium service. Nor do I believe Qantas will be able to maintain its premium prices. As Sam Wylie explained in the Australian Financial Review, the capital markets share this opinion.
Qantas has a book value of A$6 billion and a market value of just A$2.7 billion. Qantas has turned each dollar invested into 45c. Turning that around is going to be a lot harder than being tough on unions or cutting back on the drinks menu.
Allowing Qantas to borrow at the government bond rate – even if it has to pay a fee – will distort the market. The thing is that Qantas can borrow – just at junk bond rates. Borrowing at the government rate would mean Qantas could borrow more and more cheaply than the market thinks it should. That means Qantas would maintain its size and dominance when the market thinks it should contract.
Government has no business propping up businesses that should be contracting. As things stand Qantas is a poor investment. Yes; unique government regulation is partly to blame for that and the Qantas Sale Act should be repealed. Yet I suspect Qantas’ current strategy has more to do with its troubles than the Qantas Sale Act.
By repealing the Qantas Sale Act Qantas will have to survive on its own terms - this is the outcome that would best serve the interests of the flying public (broadly defined). Any other form of assistance is likely to leave Australians worse off in the long run.
Sinclair Davidson is Professor of Institutional Economics at RMIT University and a senior fellow at the Institute of Public Affairs. He has previously held research grants from the Australian Research Council.
