Not that long ago, Qantas was considered the world’s most-profitable airline. Now the 93-year-old Australian carrier, famed for its unblemished safety record, is struggling to stay in the air without help from its government.
The “flying kangaroo,” as it’s known in Australia, lost its coveted investment-grade credit rating on Friday, December 6, after warning that it would lose up to $300 million for the half-year ending Dec. 31. It’s been forced to slash 1,000 jobs, and is expected to scale back unprofitable routes and cut spending on everything from IT to new aircrafts.
The rise and decline of Qantas reflects the shifting dynamics of the global aviation industry. After going public in 1993, the carrier for years reaped the benefits of its domestic monopoly and intense customer loyalty among Australians flying overseas, as reflected in its highly profitable frequent flyer business.
But then the competition crept in. With the exception of flights to North America, nearly all of Qantas’s rivals these days are either directly or indirectly propped up by national governments. In key offshore routes it faces competition from higher-quality, state-backed Asian flag carriers and cash-rich Gulf airlines competing for stopover traffic between Asia and Europe. (Qantas signed a partnership with Emirates to share flights and route customers headed for Europe through Dubai last year, but its international operations remain deeply in the red).
Its domestic business is the bigger trouble spot. The loss-making Virgin Australia is aggressively adding more planes and seats to key routes and undercutting Qantas, which controls about two-thirds of Australia’s domestic market, on price. Virgin (entirely separate from its north Atlantic namesakes) is also effectively majority-owned by foreign governments. Air New Zealand (53% owned by New Zealand’s government), Etihad Airways (owned by the UAE) and Singapore Airlines (majority owned by Singapore’s sovereign wealth fund and its government) own a combined 63% of Virgin, which Qantas says puts it at an unfair disadvantage.
Qantas would welcome its own sugar daddy, but legislation prevents any foreign entity from building a majority stake in its business. The airline wants these foreign ownership limits scrapped, which would open the door to the likes of Emirates or even China-backed China Eastern. Doing so isn’t simple: for starters, it would pit the government against powerful trade unions, Qantas employs around 35,000 people. More importantly, letting Qantas be owned by foreigners taps into a fear that forms part of the national psyche: Australia’s a sparsely populated country, an island continent, a long way away from just about everywhere, especially the bigger English-speaking countries (the UK and US) it most closely associates with culturally. A foreign owner might scale back flights both inside and outside the country. To this end, opposition leader Bill Shorten described Qantas as “an important part of Australia’s national security” and “an important part of Australia’s independence.”
Australia’s recent bout of protectionism (it blocked a US takeover of a key agricultural business just last week) makes foreign help seem unlikely. Yet despite suggestions of an equity injection or debt guarantee, the recently elected conservative administration has suggested it won’t come to the rescue. With no obvious way out of this mess, the Australian government will need to decide whether it’s more comfortable with foreign ownership or government ownership, and quickly.