After 94 Years as Australia's Airline, Will Qantas Get a Foreign Owner?

At Qantas Airways, the red isn’t only on the airline’s iconic kangaroo tails—it’s also running rampant in the Australian carrier’s financial results. Qantas reported a A$252 million ($227 million) loss on Thursday and said it would cut another 5,000 jobs atop the 1,000 it announced two months ago.

The loss over the second half of 2013 stems largely from a ruinous airfare war with rival Virgin Australia; Qantas executives have pledged not to cede any of their 65 percent domestic market share. The situation has grown increasingly dire in recent months as Virgin has expanded with the help of foreign investors, and Qantas has sought greater foreign investment and government assistance.

Qantas is working to pare A$2 billion ($1.8 billion) in costs from its operation by 2017. To do so, the airline said Thursday it will defer eight new Airbus A380s and three Boeing 787 Dreamliners and stop growth at its Jetstar budget airline. Atop the pressure of cheap fares, Qantas has higher staff costs than other international carriers such as British Airways, Lufthansa, and Air New Zealand, the Australian newspaper reported today, citing research from Macquarie Equities.

The financial difficulties at Qantas could also lead to changes in an Australian law that may leave Qantas majority-owned by a foreign investor for the first time in its 94-year history. Qantas is widely considered to be the second-oldest continuously operating airline in the world, after KLM, the Dutch carrier that was founded in 1919 and is now owned by Air France.

In 1992, before Qantas was privatized, lawmakers passed the Qantas Sale Act to ensure that the airline would remain majority Australian-owned. Since then Qantas says the competitive landscape has changed to such a degree that it can no longer survive without greater foreign investment. On Tuesday, Prime Minister Tony Abbott called the law “a ball and chain” that is hampering the airline.

Changing or scrapping the Sale Act could be a “game changer,” allowing Qantas to outsource more of its operations and lower costs, analyst Scott Ryall, head of Australia research at CLSA Asia-Pacific Markets, wrote in a client note.

The Qantas act caps the airline’s foreign ownership at 49 percent and limits foreign airlines from holding more than 35 percent; any other foreign shareholder may not own more than 25 percent. The law also makes Qantas keep most of its maintenance, catering, flight operations, and training in Australia. Other countries, including the U.S., also limit foreign ownership of airlines. “You can’t keep things in Australia just to protect local industry when you have international competition which will inevitably go to the places where things are more efficient,” Graham Turner, managing director of Australia’s largest travel agency, Flight Centre Travel Group, told the Sydney Morning Herald.

Virgin Australia is 60 percent-owned by three foreign airlines—Air New Zealand, Singapore, and Etihad—which have invested in expansion despite financial losses. Richard Branson’s Virgin Group also owns just over 7 percent of the airline, and the billionaire has decried Qantas’s calls for government loan guarantees.

If Australia’s parliament amends the law—and it’s far from certain that Abbott will persuade the opposition Labor Party to agree—it remains unclear who might be interested in purchasing a sizable stake. Emirates and Qantas announced a broad alliance in March 2013 but the Gulf carrier took no equity stake as part of that deal. Emirates President Tim Clark has said publicly that his airline isn’t interested in a Qantas stake because it does not have a “bottomless pit of cash.”

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE