Qantas Sale (Keep Jetstar Australian) Amendment Bill 2007
Database Senate Committees
Date 13-03-2007
Source Senate
Place Canberra
Page 21
Status Final
Questioner CHAIR
Senator O’BRIEN
Senator JOYCE
Reference Qantas Sale (Keep Jetstar Australian) Amendment Bill 2007
Responder Capt. Thorpe
Mr Somerville
System Id committees/commbill/10099/0003

STANDING COMMITTEE ON ECONOMICS - 13/03/2007 - Qantas Sale (Keep Jetstar Australian) Amendment Bill 2007

CHAIR —Welcome. Thank you for appearing. Is there anything you would like to add about the capacity in which you appear today?

Capt. Thorpe —I am a 747-400 captain.

CHAIR —Would you like to make an opening statement?

Mr Somerville —Yes.

CHAIR —Any discussion and questioning are to relate solely to the bill before us, and not to other matters. Your comments will need to be relevant to the bill.

Mr Somerville —Certainly, Senator. We have had the benefit of listening to some of the material provided in previous evidence, and note that the discussion has been fairly wide-ranging in relation to the purpose of the bill. We would like to commence by making an opening statement. I have copies of that and also a bundle of documents to go with that opening statement.

CHAIR —I take on board your comments about the range of discussion, but can I be assured that you will keep your comments relevant to the bill?

Mr Somerville —Certainly.

CHAIR —Thank you.

Mr Somerville —Captain Ian Woods, the president of the association, is unfortunately in court in Melbourne today, so he is unable to attend; he sends his apologies. Captain Peter Thorpe is here with me. He is a member of the AIPA committee of management and also a 747-400 captain, so he has some direct experience in operating airlines—or at least very large parts of them.

Qantas is a strategic national asset and not just another company. The evidence for that of course is that it has its own act of parliament, the Qantas Sale Act, and is the national flag carrier, from which it derives a major element of its marketing strategy. Any real threat to the viability of the national flag carrier would see the federal government step in—you only have to look at the New Zealand example to see that—and it is why we are here and talking about the future of Qantas.

The Treasurer, in our view, was quite wrong when he said that if the consortium ran into problems they would be on their own. Firstly, if they did run into problems there would also be problems for the employees of Qantas and their families. Secondly, I assume that no Australian government would let the national flag carrier and a company like Qantas go down without a significant effort.

It is important for us to note, in the context in which the committee is considering the bill—and I have been listening to some of that today—that APA has sought to alleviate concerns, and quell any opposition to its bid, by publicly stating what its intentions are for Qantas. They are contained in the deed of undertaking, which is the first document in the bundle I have given you. Those intentions were set out as being: to keep the Qantas and Jetstar brands, having no intention to break up the airline; not to reduce regional services; to support the capital investment program; to support Qantas’s existing strategy as it relates to a continuation of maintenance; and that there will be no loss of frequent flyer points for members of the frequent flyer program. From our perspective it is important to determine whether APA’s intentions will or can be carried through, and what safeguards there are in relation to both the sale of Qantas and ensuring that APA carries out its promised intentions.

The bill currently before the committee is an important means of safeguarding the sale of Qantas. APA’s stated intentions are set out in the deed of undertaking, at clause 2.3. Those intentions have been repeated elsewhere, notably in the bidder’s statement and in the presentation APA made to government members on 13 February 2007. The difficulty is that intentions can and do change. The disclaimer in the bidder’s statement is headed ‘4 Airline Partners Australia’s intentions’. On page 18 of the bundle, there is a heading ‘4.8 Basis of intentions,’ which is in reality a disclaimer. The second-last paragraph says:

As such, statements set out in this section 4—

that is, the intentions of APA—

are statements of current intention only which may change as new information becomes available or circumstances change.

CHAIR —What was the source of that document?

Mr Somerville —The bidder’s statement. It is chapter 4 of the APA bidder’s statement.

CHAIR —That is a public document, isn’t it?

Mr Somerville —It is. It has been sent to Qantas shareholders and is available on the ASX’s website. Clearly, those intentions—and we have heard about them in the deed of undertaking and elsewhere and how we can have confidence in that deed—are subject, in APA’s words, ‘to change as new information becomes available or circumstances change’. In the presentation that was made to some government members on 13 February, which is at page 19, there is a disclaimer. I must say that the presentation was fairly light on. I have a copy of it and had an opportunity to look at it. The third complete paragraph is worth considering when we look at APA’s intentions and how binding the deed of undertaking is. It reads:

Any forward looking statement (including any statement as to intentions) included in this document involves subjective judgment and analysis and is subject to significant uncertainties, risks and contingencies, many of which are outside the control or, and are unknown to, the APA Group. No representation, warranty or assurance (express or implied) is given or made in relation to any forward looking statement by any person. In particular, no representation, warranty or assurance (express or implied) is given in relation to any underlying assumption or that any forward looking statement will be achieved. Actual future events may vary materially from the forward looking statements and the assumptions on which those statements are based. Given these uncertainties, you are cautioned not to place undue reliance on such forward looking statements.

That is APA’s own disclaimer in regard to their intentions.

Another means from our perspective of ascertaining APA’s intentions for Qantas is to examine the track record of the bidders in the consortium. Although the APA bidder’s statement refers to APA bringing substantial aviation experience to Qantas, TPG is the only member of the group that has had direct experience with an airline—although even that experience is subject to significant doubt, as is the claim about patient capital. These matters are currently being dealt with in APA’s application to the takeovers panel currently being considered by the panel. Information on TPG’s—

CHAIR —Sorry to interrupt. I just had a look at your submission and your opening statement, and this is getting right out there. We are limited by time. I am happy for this to be tabled. I do not think these matters are relevant to the inquiry. There was a point of view which you legitimately put in your submission and which made no mention at all of any of these matters. They are matters that the committee may or may not take into account when it brings its report down. The way we are going, the time will run out before there is any time for questions, and I assume that Senator Fielding, in particular, will want to have some confirmation of matters with you.

Senator FIELDING —Chair, with respect we did start early with these, so I think there should be a bit of latitude here.

CHAIR —It is not only a timing issue. I do not think this is relevant. These are matters that the committee will not form a view on and discussion about these matters is totally irrelevant. It cannot be challenged by any of the players mentioned and I do not think it is appropriate. Unless anyone has any strong objection, I think we will move on.

Senator FIELDING —I think the matters are of relevance to the bill, so I think they should be heard.

CHAIR —These matters were not raised in the submission. There is no opportunity for the company that is alleged to have behaved in this way to defend itself. If it were part of the submission that was sent to the committee then that is one matter, and that would have given them an opportunity. I think a general spray is not appropriate in these circumstances. The committee can take on board, to whatever extent they want, the comments that are raised. We should return to the matters in the submission.

Mr Somerville —Certainly, Senator. I go to the submission. Point 7 of our submission states:

This inquiry takes place against the background of the proposed takeover of Qantas Airways Ltd by Airline Partners Australia and the focus that the proposed takeover has brought to the legislative and regulatory environment the Qantas Group operates in.

We go on to say about the Qantas Sale Act itself:

The Act contains certain provisions in regard to national interest and other considerations that were deemed important on the privatization and subsequent sale of Qantas. In the context of the proposed takeover, a significant issue has emerged in regard to whether the Act has a substantive application to Qantas and its subsidiaries including Jetstar.

I am about to turn, in my opening statement, to the Qantas Sale Act. Clearly, we had also set the stage in our submission to talk about the broader issues, the contextual issues—the legislative and regulatory environment in which the takeover is occurring.

Senator O’BRIEN —Mr Somerville, would you be happy for this to be incorporated in Hansard so that we do not use the time to read it out?

Mr Somerville —Certainly. I might pick out some parts of it which are relevant in the opening statement and go through them quickly. It will take me another two or three minutes. There are also linkages in the bundle of documents to public documents or to documents that we have previously made available to government.

CHAIR —It can be tabled but it will be in the context of relevance to the matter that we are discussing today and not for wider matters.

Mr Somerville —Certainly. I will resume from paragraph 13 of the opening statement and then speed through. The Air Navigation Act has been raised as a safeguard here; we have heard about that. A fact that is reasonably well recognised is that a 25 per cent stake in a corporation can equate to control, let alone a 49 per cent interest. The Qantas Sale Act, with its 35 per cent on foreign airline ownership, recognises that at least 35 per cent interest gives effective control of the airline. That was experienced during the days of British Airways, when they had a significant say in the operations of Qantas.

The final safeguard that the government has put forward is the Qantas Sale Act. The Foreign Acquisitions and Takeovers Act has no application here. The fact that it is a deed of undertaking and not a condition imposed under the Foreign Acquisitions and Takeovers Act speaks to that matter. The Qantas Sale Act and the safeguards it contains in regard to this sale is why the bill currently before the committee is necessary. AIPA became aware of that issue last year and presented legal advice to the government, to Minister Vaile in January and to Qantas and APA.

Subsequently a second advice was obtained. I have attached that advice in the bundle of documents. It is from Mr Brett Walker SC and it highlights the difficulties of subsidiaries, and in particular Jetstar, and the relevance of the Qantas Sale Act to that issue. Minister Vaile, under the Qantas Sale Act, has the primary remedy with regard to seeking injunctions to restrain Qantas from acting contrary to the Qantas Sale Act. He has so far declined to do so. In fact, Captain Ian Woods, the association’s president, commenced legal proceedings before the Federal Court last week to ensure the Qantas Sale Act is complied with.

There has been this morning—and elsewhere—reference to the Qantas Sale Act and interpretation of the second reading debate. The statement of Senator MacGibbon in the Senate on the issue of Australia Asia Airlines has been referred to on a number of occasions. We say there was no conflict with the continuing operations of Australia Asia Airlines at that time, because once Qantas was—

CHAIR —I am sorry, Mr Somerville, but this is just not relevant to this inquiry. Can you please go to those matters that are.

Mr Somerville —Certainly. I thought this bill was aimed at the issue of ensuring that a subsidiary—

CHAIR —With the greatest respect: quite frankly, I just do not think that your giving opinions about whether it did or did not apply is relevant.

Senator O’BRIEN —Presumably the committee can determine whether it is relevant or not. For the sake of a couple of minutes, do not be too heavy-handed, Chair.

Mr Somerville —It may save some questions later. I was hoping to put this on the record and speed the process. We are trying to deal with an issue that has arisen—and we anticipated it would arise but we were not certain in that sense. Once Qantas was privatised and no longer a government owned airline, the Chinese government’s objections to Qantas operating into Taiwan would go. So Australia Asia Airlines was never an issue once the airline was privatised. It was only an issue because the Chinese government objected to a government owned airline flying in.

The privatisation of Qantas was planned for the first part of 1993, within six months of the passage of the Qantas Sale Act. I can understand in one sense why departmental advisers, as it says in the second reading debate speech—not ministerial advisers; they may have been, but I am not certain; the speech says departmental advisers—gave that view to Senator MacGibbon. Also, in the context of the privatisation of Qantas, which was agreed, no individual or corporation that had power to do so had an interest in enforcing the act. That has now changed. If you go to Senator MacGibbon’s quote, you will see that he makes no reference to subsidiaries generally. He makes reference to one subcompany. We have a view about subsidiaries and whether it applies to subsidiaries, but we see that this bill will deal with some of those concerns. That is all I wish to say in my opening statement.

Senator FIELDING —How do you react to Qantas’s comments today that Qantas workers’ jobs are ‘all under review’? Are your members concerned that their jobs are threatened?

Mr Somerville —Yes, clearly concerned. It must be said, though, that pilots are keen to be part of a growing and profitable Qantas. That is one of the things we have said for some period of time now. Although there are artificial restrictions on pilots moving between the Qantas mainline and Jetstar, we do wish to be part of a growing and profitable Qantas and so are concerned to hear the CEO talk in those terms.

Senator FIELDING —Do you think the deed of undertaking is adequate when compared to the bill before us today? If not, what are your concerns?

Mr Somerville —No. I must say I am somewhat surprised. Firstly we have issues about the enforceability of the deed of undertaking. It was a point I was making with regard to the stated intentions of APA. In our view, most of those stated intentions as set out in the deed are unenforceable. I can take you to one specific point and one general point. You will see that on page 5 of the bundle of documents which I gave you, which is the deed, at 2.3 it says:

APA has publicly stated that:

If you could now go to page 10 of the bundle, at 5.5 ‘Additional undertakings’, the deed states:

Each of APA and TrusteeCo confirm and undertake that its plans and strategies for Qantas are that:

What is missing is the stated intention:

... no intention to break up the airline ...

And that is not recorded anywhere else in the deed. Seeing that one of our concerns has been the potential to spin-off Jetstar, we are most concerned by that fact. The general point I make in regard to 5.5:

Each of APA and TrusteeCo confirm and undertake that its plans and strategies for Qantas are that—

is that these additional undertakings, on our advice, are plainly unenforceable. APA may well have stated its plans and intentions on the date this deed was made, but, of course, it may well change at some later point. The only enforceability lies in circumstances where it could be shown that APA did not have those intentions at the date the deed was entered into. In our view, and on our advice, items at 5.5, which go to all of the so-called enforceable undertakings dealing with regional services, frequent flyer points and maintenance, are unenforceable. I looked at the words of APA carefully too, and 5.5 also states:

That may not result in loss of points, but, maybe now, instead of costing 20,000 points to get to Sydney from Melbourne, it will cost 40,000 points. Even that level of detail I suppose is not relevant because if the deed is not enforceable then it is hardly relevant to the actual words contained in the undertakings. So we do have significant concerns.

Senator FIELDING —Is there a difference between a jet flown by Qantas and a jet flown by Jetstar? I think that most people would assume there are differences in the service levels and leg room in the cabins. Are there operational differences from the point of view of the pilots association? Are these reasons Qantas may not want subsidiaries covered by the Qantas Sale Act?

Capt. Thorpe —Qantas has been at pains to keep the operation of Jetstar and Qantas at different points. Jetstar operates under a completely different AOC. They have completely different manuals and completely different trainings systems. You would have to say it would require retraining for a pilot to transfer to the other airline even on the same aircraft—procedures and everything are different.

Mr Somerville —There are different standards between Qantas and Jetstar. Jetstar meets the minimum standards imposed by CASA. Qantas traditionally has a very proud record and, there is no doubt, has higher standards. It does not mean that the pilots are any better or worse; it means that the airlines operate to different standards. For example, Qantas does four licence renewals a year for pilots. They have to be undertaken and failing any one of those licence renewals could result in the loss of a licence and loss of livelihood. Some years ago Qantas reduced that from four to three and noticed a reduction in standards and went back to four. Jetstar does two licence renewals a year. Qantas command training is five months; Jetstar command training is five weeks. So there are different standards between the airlines.

CHAIR —Mr Somerville—

Senator FIELDING —To help the chair out here, the question was: are there any reasons Qantas may want subsidiaries not covered by the Qantas Sale Act? These are some of the issues we are exploring here, so it is quite relevant to this inquiry and the bill, and it is a fair question. They are just outlining some of those concerns.

CHAIR —I think it is disappointing that, if it is believed these questions are relevant, why they were not put to Qantas when they were appearing.

Senator FIELDING —My question was: do you have a view as to why Qantas may not want subsidiaries covered by the Qantas Sale Act? It seems a relevant question to me.

Mr Somerville —We believe there is a business plan to transfer the business of Qantas into subsidiaries, in particular Jetstar, and that is demonstrated by what has happened with Australian Airlines. I noticed before there was a reference to Australian Airlines now operating under the Qantas brand. When Australian Airlines was set up, Qantas was having difficulties competing on some leisure routes into Japan. They decided to set up a subsidiary operation in Cairns. They came to the associations, negotiated a 20 per cent reduction on the cost base and terms and conditions, but it was located in Cairns so it was a reasonable trade-off—

CHAIR —Are you suggesting there is some secret business plan?

Mr Somerville —We are just on the outside; I am setting out what we have observed.

CHAIR —What evidence have you got for that?

Mr Somerville —I will just go through it and demonstrate how it has operated with Australian Airlines and how the next step will be to have it operate with Jetstar.

CHAIR —Have you seen any evidence of this?

Mr Somerville —I am just going to—

CHAIR —No, I am asking the questions. You are alleging there was a secret business plan; what evidence do you have of that?

Mr Somerville —I have not used the word ‘secret’. In fact, I am going to the—

CHAIR —You have said there was a business plan.

Mr Somerville —Yes.

CHAIR —No-one has talked about it. Have you viewed this?

Mr Somerville —The document?


Mr Somerville —No.

CHAIR —What evidence do you have that there is a plan?

Mr Somerville —I am just going through it now and I will outline the facts which will help you draw that out. Australian Airlines was set up and operated for some period of time. On 30 June last year it was closed down. Essentially, if you remember, Australian had its own livery—its own uniforms, its own call signs. At 1 July this year, it became Australian Airlines wet leasing and it has now commenced to fly Qantas mainline aircraft, white with red tails with Qantas uniforms on Qantas routes. The company achieved a 20 per cent reduction in cost base because the same terms and conditions of employment apply. It does not take—and I am not highly skilled in business matters—much to see that an option in regard to growing the organisation and the stated claim with regard to growing Jetstar and growing it exponentially internationally is to undertake the same process.

CHAIR —That is an entirely different matter to raise than to say there is a business plan. Yes, there may be an option according to you and that may or may not be legitimate, but to say to this committee there is a business plan, I think is totally inappropriate. You are saying there is an option available.

Mr Somerville —Maybe I should have said there is a business plan in regard to Australian Airlines and, given the model that has evolved through Australian Airlines and its use as a wet leasing arrangement for Qantas mainline, in our view, it is highly likely that that will occur with Jetstar.

CHAIR —Thank you for that clarification.

Senator FIELDING —With regard to the legislation we are considering today and the court case that AIPA are pursuing, could you outline any of the areas that may affect the legislation or throw any light on what is being pursued with this legislation?

Mr Somerville —What Captain Woods has done in his capacity as a shareholder of Qantas is apply for declarations of the Federal Court to clarify this issue in regard to subsidiaries—how in regard to part of the Qantas Sale Act dealing with the need for Qantas to operate scheduled international passenger services they must do so under the name of Qantas or a name including the word ‘Qantas’. So in circumstances where the government has publicly said that subsidiaries do not attract the Qantas Sale Act, then Captain Woods has asked the Federal Court for declarations with regard to that.

Senator JOYCE —So they cannot try to open up ‘China budget airfares’ or something like that, which would be operated by Qantas but outside the scope of the act.

Mr Somerville —Yes, and certainly Qantas have made that clear. One of the key elements, though—and it has certainly come through in Mr Walker’s advice, which I have given you in that bundle of documents—is whether Qantas are conducting the subsidiary. It may be, for example, a partly owned Qantas subsidiary. I think it has often been mentioned about Jetstar Asia. In terms of the Qantas Sale Act, Jetstar may not be conducting that subsidiary, but the three directors of Jetstar are Geoff Dixon, Peter Gregg and Mr Johnson, the general counsel. The Qantas board make announcements and decisions about aircraft purchases. They have made it clear they do not cannibalise each other’s routes. It is clear to us that Qantas are relevantly conducting this subsidiary and are caught by the Qantas Sale Act.

Senator FIELDING —To cover this once more, Qantas said this morning and in their submission that in principle they have no objection to the bill that we are discussing at this hearing, but they have also said that there is no need for it. Why do you think there is a need for the Qantas Sale Act to be amended to cover subsidiaries like Jetstar? Qantas do not think there is a need for it at all. The bidders, Airline Partners, do not believe there is a need for the amendment to the Qantas Sale Act. Can you help explain why there is a need?

Mr Somerville —From our perspective, there certainly is the issue of maintaining employment and maintaining jobs relevantly in Australia. We also see that there is an issue in historical terms. The Australian public and the Australian government have contributed very strongly to Qantas. This is another reason why part of that should result in jobs, employment opportunities, skills and other matters being more closely focused in Australia rather than elsewhere. We also see that one of the bases of the Qantas Sale Act was the national interest obligations imposed on Qantas, and we see that extending across other entities of the Qantas group. Those are the significant reasons.

Senator FIELDING —Do you think it appropriate that parliament clarify the meaning of the Qantas Sale Act rather than having it up to the future buyers and others?

Mr Somerville —Certainly. As it happens, it is almost coincidental that these matters have arisen. The focus on the sale act has come about because of the bid by APA, and there is an opportunity at this time to highlight that matter and hopefully to make certain that the safeguards we understood and thought were in the sale act are there.

Senator FIELDING —So you would support the premise that the Qantas Sale Act has a condition for Qantas to have services and operations predominantly based in Australia and that at the moment the Qantas Sale Act does not impose those conditions on Jetstar and subsidiaries, and you would say that that would be the right thing to do?

Mr Somerville —Yes, certainly with regard to Jetstar. It does not answer the legal point we have raised with regard to the branding of the Jetstar operations, and that Federal Court case will go on, but in general terms we are highly supportive.

Senator BERNARDI —I have a couple of questions with regard to some of the statements you made about frequent flyer points and subsidiary airlines, particularly Australian Airlines or Australian wet leasing as it is now.

Mr Somerville —Yes.

Senator BERNARDI —Your objections and concerns about future business practices are, to me, no different to existing business practices. You have talked about subsidiaries; that is already happening. It is not like a new threat that is going to be imposed upon Qantas, because it is already happening. You have talked about frequent flyer points and bumping those up; your quote was 20,000 points to 40,000 points; that is no different from what Qantas did on its international frequent flyer routes 18 months ago. I just want to put on the record that I think they are difficult objections to reconcile with this inquiry, given that they take place under current management rather than simply that they are going to take place under future management.

Mr Somerville —Firstly, the changed circumstance that is occurring in the context of this bid is the significant additional load of debt that this company will carry. For a long time, pilots have had concerns about the increasing pressure on their professional standards as Qantas has become keener and keener and more competitive. One of the problems we have with Jetstar is that Qantas mainline pilots cannot go to Jetstar. Qantas group puts up an artificial barrier to stop that. Australian Airlines is a different case in point. In Australian Airlines, the pilot group moves between the mainline and Australian Airlines in terms of seniority, and in fact you will find young pilots who go to Australian to take a promotion or to move up. We say pilots are the best means of auditing the safety standards of Qantas. They are working with the company but if you give them sufficient standing and confidence they will do that. For example, the Qantas group moved four A330 aircraft over to Jetstar to start their international services. They took the aircraft. What didn’t they take? The pilots.

CHAIR —I am sorry, but we are off on another tangent again.

Senator BERNARDI —Equally, can I pick you up on that point. This is existing business practice. You have raised no questions about safety. You said that Jetstar pilots comply with minimum CASA safety requirements. You said Qantas pilots are subject to four reviews on an annual basis. But it is existing business practice. You have raised nothing new, apart from this concern about debt. They may hasten and move down that path.

CHAIR —Can you ask your question, please? Put your points as questions, not statements.

Senator BERNARDI —I will ask another question in regard to your comment about control of the airline being possible with the 25 per cent. Am I to understand then that you would support a 24 per cent maximum foreign ownership?

Mr Somerville —That was in regard to ownership by a foreign airline; that is what that requirement was in regard to—35 per cent or 25 per cent in regard to a single foreign owner. Secondly, the Foreign Acquisitions and Takeovers Act does apply above 14.9 per cent.

Senator BERNARDI —It does, and—

Mr Somerville —That is why it is not triggered here.

Senator BERNARDI —Airline Partners Australia are complying with—

Mr Somerville —Indeed they are.

Senator BERNARDI —the Foreign Acquisitions and Takeovers Act, being that it is 14.9 per cent—that is the maximum foreign shareholding—and at 40 per cent voting control; I have just sought confirmation of that. So that goes some way to alleviating your fears, I guess.

Mr Somerville —I suppose, first of all, the mere discussion that we had on the Foreign Acquisitions and Takeovers Act has been pretty unhelpful and unenlightening throughout this process because those who have observed the bid believe that APA was correct. So this whole process of voluntary referral and reference to the FIRB has been, in my view, a charade, because everyone knew that it did not apply. Otherwise we would have conditions on the purchase of shares and not a deed of undertaking.

Senator BERNARDI —But it does comply with the FATA Act?

Mr Somerville —That is the advice the FIRB has obviously come up with, yes—and I think they are right.

Senator BERNARDI —Thank you.

Senator JOYCE —I want to follow up on Senator Bernardi’s now-and-later scenario. He is saying—which is a reasonable point to put—that if it is not a problem now, why should it be a problem later? You stated that it will be a problem later because of debt. Do you believe that there is a control issue that is associated with the person who provides the credit—that they have an aspect of control over a company? Do you think that is a reasonable proposition to put?

CHAIR —Unless someone tells me that I am entirely wrong, I do not see the relevance of that question to this bill.

Senator JOYCE —The question is that the situation of them shelling the company out through a subsidiary could be brought into play by the force not so much of a nominal shareholding but by those who have lent the company billions of dollars wanting to make sure they secure their terms.

CHAIR —The impact of debt is purely hypothetical.

Senator JOYCE —It will not be after this goes through. It will be far more than hypothetical; it will be very real.

CHAIR —It is just not relevant.

Senator BERNARDI —This bill does not propose to the level of debt.

CHAIR —This is not relevant. Other questions please.

Senator JOYCE —I think it is relevant because there has to be the issues that actually force the agenda of exacting the company to follow the plan of trying to cut costs by shelling the company out to a subsidiary and there has to be some impetus to do it.

CHAIR —I have ruled that it is not relevant. I am happy to have a private meeting about it if you want to, but I do not think it is relevant.

Senator FIELDING —The issue to hand is that we have made it quite clear that Qantas is covered by the Qantas Sale Act, Jetstar is not. Are there pressures with this high debt level to force more jobs through Jetstar leaving a bigger loophole in place where there are not conditions placed on Jetstar to keep jobs and services in Australia? This is an important issue.

Senator BERNARDI —If we accept Senator Fielding’s point then his bill should address the maximum level of debt that the company can incur. It is completely irrelevant to this discussion.

Senator FIELDING —With respect, Senator Bernardi, if you want to add additional items to the bill I am more than happy to look at those issues if you support the bill as you are saying—

Senator JOYCE —I will go to another issue.

CHAIR —The matter is resolved, thank you.

Senator JOYCE —We often hear that there is nothing to be concerned about with respect to them doing this because they have done it before with Ryanair and Continental and they have great expertise in the management of Ryanair and Continental. Do you think that the group has great expertise in the operation of other airlines such as Ryanair and Continental?

Mr Somerville —That is the subject of a complaint that AIPA has made to the takeover panel which goes to the history of the bidding consortium and in particular TPG and the statements about patient capital. On our advice, we do not believe that TPG in particular does have that experience. They sold into and out of America West in 18 months.

CHAIR —Again we are getting off into other areas that are unrelated to this bill. They might be terrific in the public domain to talk about and they might be matters that could be discussed elsewhere but not in this context. We have our friends from the unions here who are anxious to get on and there are other questions so let’s keep it relevant to the bill.

Senator JOYCE —I will go to one of the documents you have tabled, the deed of undertaking, and page 11 point 5.5(f). What is your understanding in this document, which you have tabled, of the point:

The Qantas Group will support regional capacity growth and regional network improvement in line with market needs.

What does that mean?

Mr Somerville —I do not know.

CHAIR —That is probably the answer.

Mr Somerville —Regardless of what that specific item means, it is the general words prior to those additional undertakings which are simply statements of what APA plans and has strategies for Qantas as at the date of the making of this deed. Of course, they can change at any time. I think even before you try to interpret what that subclause means you have to look at the preliminary words.

Senator JOYCE —You are saying it is unenforceable.

Mr Somerville —It is unenforceable

CHAIR —This is a question that would have been better off put to APA. It was their document. It is not these  witnesses’ document.

Senator JOYCE —Is there the capacity under the current act for the company to set up a subsidiary or utilise Jetstar to shell the company out through a subsidiary or Jetstar? Is there that capacity currently under the act? Do you have advice that that is the case?

Mr Somerville —Yes, we do and it is why a simple notion that the act does not apply to subsidiaries is risible because it would be all too easy to simply transmit the business of Qantas airways into a subsidiary and avoid the Qantas Sale Act.

Senator O’BRIEN —So in essence your view is that the view expressed in paragraph 51 of Mr Walker’s and Mr Moore’s advice is the correct interpretation of the Qantas Sale Act and hence the legal proceedings. On the one hand, if that is right, the bill before us does not need to proceed; on the other hand, if it is wrong, you are of the view that the bill needs to proceed?

Mr Somerville —Yes.

Senator O’BRIEN —And the reasons you have outlined in your tabled written comments today, as added to in the document that is headed AIPA 1 that we have been given this morning, are the justification for that?

Mr Somerville —Yes.

Senator JOYCE —Even if that is the case, even if this loophole exists and we close it, is that really going to give us any further protection for Qantas?

Mr Somerville —For Qantas itself?

Senator JOYCE —Yes, maintaining the entity as an Australian based entity and protecting it from possible adverse actions by reason of its leverage?

Mr Somerville —Certainly the lenders to APA will ultimately determine the fate of the organisation—Qantas—should it run into problems.

CHAIR —I would presume that you view the job protection as the most important aspect of this bill or one of the most important aspects of it?

Mr Somerville —Yes.

CHAIR —But in your submission you said:

As it stands, the proposed wording of the Bill permits substantial off-shore leakage of jobs in associated entities and suppliers of their facilities.

Mr Somerville —That is why—

CHAIR —And therefore it does not achieve its stated aims, but I put it to you that the deed does.

Mr Somerville —No, because the deed adopts the same words. They have picked up the wording that currently applies to Qantas under the sale act.

CHAIR —What you are saying in your submission is that the bill does not meet its intent in relation to the protection of jobs.

Mr Somerville —It will assist, but in our view it can be improved by making it clear that the principal place of business is in Australia when taken in the aggregate. I think the example we gave in our submission under the current wording was that you could have 25 per cent of the operations in Australia and five other countries with 15 per cent.

CHAIR —But you stand by your comment that the bill permits substantial offshore leakage of jobs in associated entities and suppliers?

Senator FIELDING —I think also, Chair, you have to read the rest of the stuff. It says that it supports it and thinks it needs to have other stuff added to it too. So you can take that out of context.

CHAIR —Indeed—I am glad you brought that to the committee’s attention. The submission actually seeks many alterations to the bill. I just want to make sure that you still stick by your view that the proposed wording of the bill permits substantial offshore leakage of jobs in associated entities and suppliers of their facilities.

Mr Somerville —I have to be fair. I have been in the odd witness box and elsewhere and I have asked questions myself. I think it has to be viewed in the context of the entire submission. It would be a mistake to isolate a particular part of the submission and only go to that. I understand the point you make, but with respect—

CHAIR —I could go to a lot of other aspects. You say there is not sufficient protection for the Australianism of the board and there are other pieces but I will not go to those. You have made the comment about jobs and I take it that you still support that. In paragraphs 11 and 12 you say:

... safeguards in the Act can be avoided by Qantas simply transferring its business to a subsidiary such as Jetstar.

Wouldn’t the provisions of 5.1 under the legally enforceable deed and even 5.2—aside from the Air Navigation Act and other matters—cover that situation, specifically in relation to the transfer of shares?

Mr Somerville —Where did you want to take me to?

CHAIR —Paragraph 12 of your submission states:

... safeguards in the Act can be avoided by Qantas simply transferring its business to a subsidiary such as Jetstar.

Isn’t the protection for that contained in 5.1 and 5.2 of the deed?

Mr Somerville —In what specific way?

CHAIR —In relation to transfer of shares and what undertakings have been given.

Mr Somerville —We are not talking about transferring shares; we are talking about transferring assets and business. Shares can remain as they are.

CHAIR —Which aspects of the business are you talking about?

Mr Somerville —The business of Qantas: the aeroplanes, the employees, the routes—

CHAIR —Are you seriously suggesting that Qantas is going to keep the shares under the banner of Qantas and shift all the operations to Jetstar?

Mr Somerville —And rename it whatever. You can sell a licence or a business name; you can shift assets—you can do any of that, of course. This is a large consortium with a very serious level of debt.

CHAIR —I put it to you that the community would view that comment with utter disbelief.

Mr Somerville —You may say that. We have an advice—

CHAIR —I take it you disagree.

Mr Somerville —We have an advice to that effect from someone who, if not the leading senior counsel in this country, is one of the top three. From my perspective, I am comfortable with that opinion from Bret Walker that that could occur.

CHAIR —I was not suggesting that there might not be scenarios where it could occur. I do not know what the legalities of that are. Do you honestly believe that, with the level of public scrutiny that would involve, that is ever going to be an option that would be seriously considered by the consortium partners?

Senator FIELDING —I think they are saying that they are raising it as a serious concern and why should that concern be left open to interpretation in the Qantas Sale Act.

CHAIR —Senator Fielding, it is very generous of you to answer the question. Do you seriously suggest that the Australian community or a government of any persuasion, or indeed Senator Fielding, would countenance that scenario?

Mr Somerville —It is already happening: as routes transfer from Qantas to Jetstar; as we find that Australian Airlines wet leasing is now flying white aircraft with red trails. I am not sure if you have flown on any of those flights, but I wonder if you have been able to notice that difference. This is not something that is going to happen overnight; it will happen over a period of time. It is not a matter of whether the Australian public could seriously countenance it. If it happens in steps, it can certainly happen, and it is already happening. It does not need to be done in a big bang way. I would expect that if this consortium were to do it—in the way that it has, from its perspective, sensibly structured its bid to avoid the Foreign Acquisitions and Takeovers Act—it would be looking at all of these potential options in its business plans. I for one am not unsubtle enough to think that it would happen in a big way from one day to the next, but it could happen.

CHAIR —Thank you very much for your time and your detailed submissions.

Mr Somerville —Thank you, Chair.

Proceedings suspended from 11.03 am to 11.20 am