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Thursday, 10 May 2012
Page: 3076

Senator XENOPHON (South Australia) (10:45): The Qantas Sale Amendment (Still Call Australia Home) Bill 2011 is in a sense parallel to the bill that we have just been discussing. I should acknowledge that it is a bill introduced with Senator Bob Brown of the Australian Greens. I would also like to thank Senator John Madigan for his support of this bill, and I understand he will be making a contribution on this. If I have to introduce a similar bill down the track I am very confident that Senator Madigan will be a close sponsor of any future legislation.

On 29 October last year Qantas CEO Alan Joyce took the unprecedented step of grounding the entire airline in response to so-called 'damaging industrial action', to quote him. Across the world 108 aircraft were stranded at 22 airports, over 70,000 passengers were affected and the whole exercise cost countless millions of dollars—estimated at well over $200 million—with an even greater cost to Qantas's image. It was an extraordinary decision for one man to make. It was a decision that affected the nation's economy. It was a decision that seemingly grounded Australia and brought Australia to its knees because of the impact that it had on the tourism sector and the disruption to business and to passengers around the country and around the world.

By this time the lockout was only one link in a chain of extraordinary incidents for a company that was once a byword for Australian values. What was crystal clear was that the current management of Qantas were prepared to alienate their loyal passengers in a similar way to how they alienated their loyal workforce. Furthermore, they did so against a self-portrait of an international operation already bleeding losses everywhere, an operation that they seemed happy to sacrifice to feed the offshore hunger of the Jetstar franchise. So what will be left behind?

This bill aims to amend the Qantas Sale Act to require that Qantas and its subsidiaries and associated entities that exercise Australian rights remain predominantly Australian based. The bill is a response to the very real fears about the future direction of Qantas and whether Australia will be left with nothing more than a shell company bearing the famous flying kangaroo brand.

Alan Joyce joined Qantas in 2000 after a stint at Ansett. He became CEO of Jetstar in 2003 and CEO of Qantas in 2008. He is clearly a very intelligent man, clearly very capable. His background in mathematics probably stands him in good stead for running an international airline. But his time at Qantas has been marked by major changes in direction for the airline and I think they are major changes that have been thoroughly endorsed by the board. Those changes concern me and they concern many Australians. What was once a leading premium airline in Australia is now at risk of being cannibalised by its own subsidiary, Jetstar. That is the problem.

I note that it was the Keating government that privatised Qantas, and I read the Hansard debates for when then Prime Minister Keating gave the reasons for that. It was about having a competitive airline; it was about ensuring that the Qantas brand could grow. But at no time during that whole debate was it anticipated by anyone, if you read the Hansard debates, that a subsidiary of Qantas could end up cannibalising the parent. At no time was it considered that a subsidiary would grow so big that it could be flogged off, perhaps in a private equity deal, and challenge the viability of the parent company. Right now there is nothing to stop Jetstar being sold off, perhaps in a private equity deal, so that it competes directly with Qantas.

When I have spoken privately to the management of Qantas they have said, 'Look, we would never do that. Why would we do that? Why would we damage our brand in that way?' My retort to that is: if that is the case, you would not oppose any legislation that would restrict your ability to sell off a subsidiary, because that is what is at risk here. I will talk shortly about how big Jetstar has grown compared to Qantas, how Qantas is shrinking in relative terms to Jetstar and the implications that has for our national carrier.

In 2005, in an interview with Alan Kohler on Inside Business, then Qantas CEO Geoff Dixon said he did not think that Jetstar would ever be more than 20 per cent of the size of Qantas. He was wrong. With 86 aircraft to Qantas's 198, Jetstar is now over 40 per cent of Qantas's size. Given that Jetstar has announced plans to grow its fleet to 131 aircraft by 2014, the budget airline is not done yet. If this increase is achieved, Jetstar will be over 60 per cent of the size of its parent. It really seems that for Jetstar the sky is the limit, whereas Qantas is in a completely different category. If Jetstar can achieve this rate of growth, there is a very real possibility that Qantas will be stymied because of competition from its own subsidiary. It is a case of its own brand being cannibalised, but there is nothing in the Qantas Sale Act that prevents that.

Of course, there is no guarantee that Jetstar will be able to meet those targets. But Bruce Buchanan, the CEO of Jetstar, in the Sydney Morning Herald in July last year, reported that Jetstar was planning to increase its fleet in the Asia-Pacific to over 400 aircraft by 2020. That would require a compound annual growth rate of something like 40 per cent. Unless I misunderstood what Mr Buchanan said, that is a lot higher than the compound annual growth rates estimated by the International Air Transport Association, which suggests 5.9 per cent growth in international passengers and 5.7 per cent in domestic. This is not a comforting thought for the future of Jetstar in this area, particularly given the performance of Jetstar Pacific and Jetstar Asia. And let's put this in context. A thousand Australians were made redundant at Qantas as a result of a strategy announced last year by Mr Joyce, saying that Qantas International was losing money—that Qantas International was struggling and that in order to survive it had to pare back and trim its international operations because they were not viable. He said that was why Qantas had to have a premium airline brand based in Asia, firstly in Singapore, then in Malaysia and most recently in Hong Kong. It is worth mentioning that, when Singapore fell through, off Qantas management went to Malaysia—to Kuala Lumpur—but that fell through as well. Announcements were made that that was not going to be viable. More recently, Qantas has announced that it is going to set up a hub, or an offshoot subsidiary, in Hong Kong. Well, the last time I checked, Qantas had not even secured rights to fly out of Hong Kong. I do not think they have checked the agreements that go back to the time of British colonial rule. They have not checked to see what Cathay Pacific will be doing. Cathay will be resisting that ferociously. So here we have a plan announced to the world when there are no actual rights to fly out of Hong Kong at this stage.

But let us look at what has happened with Jetstar Asia and Jetstar Pacific. In December last year the head of corporate communications at Qantas, Olivia Wirth, said, in an interview on the PM program with the ABC's Matt Peacock, that Jetstar Pacific was 'very close to break even'. That was in response to a report in Viet Nam Newsthat quoted the deputy head of the Civil Aviation Administration of Vietnam, Dinh Viet Thang, as saying during a briefing at the Ministry of Transport that Jetstar Pacific would merge with the national flag carrier, Vietnam Airlines, in a move that was considered the most feasible plan to save the airline from bankruptcy. On the other hand, according to a report in the Sydney Morning Herald, Jetstar Asia's profits have relied on aircraft it has been leasing back to Jetstar Australia. I have seen the books. It seems that but for those leasing arrangements Jetstar Asia, based in Singapore, would not be making any money; it would actually be losing money. So if the future of Qantas involves expanding through Jetstar to offshoots in Asia then I cannot see where the business plan is, given how they have been struggling.

Labyrinthine leasing agreements within the Qantas Group seem to be the way to do business. During a Senate committee inquiry into this bill, I asked Mr Alan Joyce about Qantas's leasing arrangement with New Zealand subsidiary Jetconnect. As a director of Jetconnect, Mr Joyce is required to sign off on the company's accounts. Despite this, he was unable—initially—to clarify a line in the accounts entitled 'aircraft operating variable', with an expenditure of $23.9 million. Often in the aviation industry that line refers to fuel costs. At first Mr Joyce thought this item would include fuel costs. However, he later corrected himself, after obtaining advice—and he should be given credit for that—stating that in Jetconnect's case this item did not include fuel but did include aircraft ownership costs and the lease of those aircraft.

He went on to clarify:

The Qantas group purchases aircraft and allocates them to Jetconnect business, and the Jetconnect business operates those aircraft and charges them back.

It should be pointed out that, as a result of a Fair Work Australia hearing into this, some very critical comments have been made about the nature of that arrangement and how little the CEO of Jetconnect knew about that arrangement at the time. Some say this is a sham arrangement, and I think there is some truth to that.

So it appears Qantas runs an international leasing business, purportedly at market rates, whereby it has significant control over one of the biggest items in Jetconnect's profit and loss account while at the same time keeping the balance sheet free of capital assets. But it gets even more confusing. Because Jetconnect is a wholly owned subsidiary, all this information is put back into Qantas's mainline books. To a financial layperson like me, Qantas seems to be charging itself to lease planes it already owns.

So what is the purpose of Jetconnect, other than the provision of a New Zealand entity—which can therefore employ New Zealand staff at a much lower pay rate than in Australia? I have spoken in this place before about my concern relating to the Qantas Group's allocations of costs versus profits, whereby Qantas seems to carry many of Jetstar's costs while most of the profits appear to be shifted the other way. Qantas and Jetstar management deny that. They say that is not the case. But it is very concerning that in February 2011 the Qantas Group was able to announce an underlying profit of $417 million for the half year ending 31 December 2010. However, on 24 August 2011—six months later—there was a drastic turnaround, with Qantas International reporting a loss of over $200 million and making comments that a continuation of this would be unsustainable.

But Mr Alan Joyce confirmed, in the context of the Senate inquiry that took place in November last year, that the accounting standards that apply to other parts of the Qantas Group's operations, such as the frequent flyer program and freight—Australian Accounting Standard 8, as I remember it—do not apply to Qantas International. So basically there is a lot of discretion in terms of what Qantas can say in respect of that. During the committee inquiry for this bill Mr Joyce indicated that this result was due to Qantas Domestic making enough profit to cover the international operation's losses. He also stated that releasing this information earlier, during the February announcement, did not fall under the disclosure requirements in the Corporations Act.

I think it is worth reflecting on what some commentators have said about Qantas's strategy. I think a very good summary was made by Ian Verrender in the business section of the Fairfax papers. In an article headed 'Joyce's Qantas is off course', dated 13 March 2012, Mr Verrender says that the Qantas Group claims its decision to establish a new premium airline in Asia was based on Qantas's financial state. In reality, as Mr Verrender wrote in the Fairfax media:

… it was first and foremost a threat—a hollow one—to its workforce rather than a legitimate blueprint to turn around the company's fortunes.

What has happened since then has confirmed that, given that there has been a flame-out of the Malaysian solution for Qantas. Now they have gone off to Hong Kong, and I think that will fall the same way.

Verrender goes on:

It would be unfair to label the abandoned Asian plan as half-baked for it never reached that stage.

You don't need to be an aviation expert to realise the problem facing the industry is overcapacity. So how on earth does establishing a new airline solve that? And wouldn't it merely cannibalise your existing business?

The concern then becomes: what was the intention of the Asia plan?

Qantas is currently bound by the 49 per cent rule in the Qantas Sale Act, which means essentially that no more than 49 per cent of the airline can be foreign owned, leaving the majority as Australian owned. But just because Qantas has to keep operating to satisfy the Qantas Sale Act does not mean that its assets cannot be shifted to another airline, one that is not bound by the act. It would seem, based on the fact that the Department of Infrastructure and Transport, with the imprimatur of successive governments, has turned a blind eye to the spawning of various subsidiaries, that any airline could fit that description—an airline, for example, operating as a budget airline in Australia or as a premium service in Asia. Correspondingly, there is nothing to stop those subsidiaries being sold off for a tidy profit, with no compulsion to reinvest in the original business. It would put serious pressures on Qantas if that occurred. Qantas say they will not do it. If they will not do it, what is wrong with having legislation in place to apply those rules to subsidiaries? I challenge the government and the opposition to deny that, under the current terms of the Qantas Sale Act, there is nothing to stop Jetstar being sold off to a private equity firm, a private equity firm that could then compete head-to-head with Qantas on the same routes that Qantas flies, in a way that would compromise the long-term viability of Qantas.

Recent announcements have seen the shedding of hundreds of Qantas jobs around Australia. So far the airline have promised that none of these jobs will go overseas. But these job losses do not take into account the critical mass needed for maintenance. I acknowledge the work that Senator Madigan has done on issues of Australian manufacturing, the importance of having maintenance in Australia. Qantas say that its A380 fleet is not big enough to have the maintenance done in Australia. With its Dreamliners, the Boeing 787s, I hope that Qantas will make a decision to locate in Australia for all its maintenance, including its heavy maintenance. If Qantas moves other maintenance offshore while phasing out its 747s, its maintenance activities here could become totally unviable. I hope we never get to that stage.

We have already seen the start of the end of some of Qantas's more significant maintenance facilities. In his book The Men who Killed Qantas, Matthew Benns writes:

Qantas built its enviable jet safety record on a superb, well-trained and well-funded engineering department that maintained planes to an impeccable standard.

Qantas is full of staff who reminisce about the good old days because the future does not look so bright. They are worried about what will happen tomorrow—not just to their jobs, but to the people who have trusted them with their lives.

There has been discussion about the intention of the Qantas Sale Act, about whether it should still be abided by or whether it is simply an extra burden for an airline to carry on in a difficult market. Most of the recent discussion has been centred around Virgin Australia's plans to drastically reshape its ownership structure to allow more foreign investment. Essentially, current laws limit Australian international flag carriers to a maximum of 49 per cent foreign ownership but allow domestic airlines to be fully foreign owned. The only way to maximise foreign investment is to separate the domestic and international operations into independently managed and controlled entities. That is why I asked a question in the Senate not so long ago about Virgin Australia's plans. This is an issue that affects not just Qantas but also other Australian based carriers that fly overseas.

In short, Virgin Australia could well become a domestic airline that owns an independently run international business. Something of a burning question for me is: who establishes that legal and practical independence and by what means? Importantly, is the decision transparent; moreover, is it reviewable? In the broad context of the intent of the Air Navigation Act, should the foreign ownership limitations be so easily avoided by a corporate restructuring as is proposed? And, in the narrower context of the Qantas Sale Act, should Qantas be free to do the same?

This bill is about not just the future direction of Qantas but the future direction of Australian aviation. We saw what the lockdown meant to the Australian economy and to the Australian people just a few short months ago. The Qantas Sale Act has loopholes that this bill is intending to rectify. My challenge to my colleagues in the opposition and in the government is to say that the act in its current form which has been endorsed by successive governments will not prevent Jetstar being sold off to a private equity company. When I sum up in relation to this bill, it will be worth reflecting on what would have happened to Qantas, one of the great Australian companies, one of the most recognisable Australian companies in the world, if that private equity deal that was mooted back in 2007 had actually gone ahead? If it had, I do not think we would have a Qantas today. That is why I urge my colleagues to support this bill.