Qantas Bet on State Aid Fails as Abbott Blocks Debt Backstop

Qantas Airways Ltd. (QAN)’s bid for government aid suffered a blow as Australian Prime Minister Tony Abbott ruled out guaranteeing its debt and instead proposed allowing more foreign investment in the airline.

The government will seek to amend the 1992 Qantas Sale Act, which caps foreign ownership at 49 percent and forces Australia’s biggest carrier to keep most operations in the country. The legal changes have a “limited chance” of getting through the Senate, Qantas said in response.

The airline known as the ‘Flying Kangaroo’ last week announced 5,000 job cuts, the delay or sale of 50 aircraft, and a companywide pay freeze after a market share battle with Virgin Australia Holdings Ltd. (VAH) drove it to a A$235 million ($210 million) net loss. Chief Executive Officer Alan Joyce has been lobbying the government since November to “level the playing field,” accusing Virgin of using foreign government cash to undermine formerly state-owned Qantas.

“The market is losing confidence” in Joyce’s leadership, Evan Lucas, a market strategist at IG Ltd., said by phone today. “If the shareholders lose confidence in you, you’re in trouble and your time is numbered.”

Qantas’s public campaign since November, highlighting the urgent need for government assistance, hasn’t been positive for the company’s shares, Simon Robinson, a senior wealth manager at Shaw Stockbroking Ltd., said by phone from Brisbane.

Photographer: Brendon Thorne/Bloomberg

A traveler enters the Qantas Airways Ltd. domestic terminal at Sydney Airport in Sydney. Qantas, which made 18 consecutive annual profits up to 2011, has lost its investment-grade credit ratings since forecasting the first-half loss in December. Close

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Photographer: Brendon Thorne/Bloomberg

A traveler enters the Qantas Airways Ltd. domestic terminal at Sydney Airport in Sydney. Qantas, which made 18 consecutive annual profits up to 2011, has lost its investment-grade credit ratings since forecasting the first-half loss in December.

‘Notoriously Problematic’

“You have to ask whether buying shares in Qantas is a risk worth taking, given the views that are coming out of the company on a daily basis,” he said. “Airlines are notoriously problematic anyway.”

Shares in the airline fell 1.3 percent to A$1.13 at the close in Sydney, their lowest level since Feb. 12. The cost of insuring Qantas debt against non-payment through credit-default swaps rose 5 basis points to 265 basis points as of 4:54 p.m. in Sydney, according to Westpac Banking Corp. prices.

Qantas, which made 18 consecutive annual profits up to 2011, has lost its investment-grade credit ratings since forecasting the first-half loss in December.

The airline faces “significant operational challenges as a result of the heavy competition, both domestically and in its principal offshore markets,” Moody’s Investors Service Senior Vice President Ian Lewis wrote in a credit opinion Feb. 27.

Foreign Ownership

The carrier had sought a facility that would reduce its borrowing costs, Transport Minister Warren Truss was cited as saying last month in the Australian Financial Review newspaper. That won’t now be forthcoming, Abbott said yesterday.

“I think what Qantas would like most of all is for the government to play favorites,” Abbott said yesterday. “Well, that’s not how this government operates.”

The government will instead seek to repeal part of the Qantas Sale Act. That would allow it to split its international and domestic units to comply with other legislation that requires Australian-based international airlines to have majority local ownership, Abbott said.

Virgin in 2012 carried out the same split and Qantas has said it’s studying whether to have separate licenses for its domestic and international units.

“Qantas can jump up and down and turn blue, but it cannot expect the government to do more than it has done,” Grahame Morris, federal director of lobbyists Barton Deakin, said by phone yesterday. “I don’t think that Qantas has ever proved in this debate that it has cleaned up its own house.”

For Discussion

The proposed law change was criticized by Shadow Transport Minister Anthony Albanese yesterday.

“It’s not an Australian airline if its head office is not in Australia, if its board is not in Australia, if its maintenance activity is not in Australia, if the majority of its ownership is not in Australia,” Albanese said.

Parts of the legislation, including limits restricting a single foreign company to 25 percent of Qantas shares and total foreign airline holdings to 35 percent, may be up for discussion, Albanese said.

“We have consistently said that removal of foreign ownership provisions that apply uniquely to Qantas is an important longer term objective to create a fair and free aviation market in Australia,” Qantas said in a statement. “However, it’s clear that such a move would have limited chance of passing through the senate.” The government lacks a majority in the upper house.

Virgin’s Backers

Virgin has been backed in its fight against Qantas by shareholders Air New Zealand Ltd. (AIR), Singapore Airlines Ltd. (SIA) and Etihad Airways PJSC.

The three government-controlled carriers, which compete with Qantas internationally, have a combined stake of about 64 percent in Virgin, according to data compiled by Bloomberg, after committing to spend as much as A$316 million on a capital raising late last year. It’s a strategy designed to weaken Qantas, Joyce has said.

Virgin said in an e-mailed statement yesterday it was “very pleased with the outcome” from Abbott’s government.

Changing the sale act would result in Qantas’s assets being stripped and a debt guarantee for Qantas alone wouldn’t be fair to Virgin, according to Steve Purvinas, federal secretary of the Australian Licenced Aircraft Engineers Association.

“Qantas’s political campaign has failed,” he said by phone today. “The campaign needs to end now, with the removal of Alan Joyce and the members of the board who’ve supported this stunt.”

To contact the reporter on this story: David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net

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