Kissed by a rainbow. The good news on oil prices we didn't see coming

How'd we get so lucky? The price of oil halved in a matter of months and hardly any of us saw it coming.

Back in September when the oil price was $US93 per barrel Australia's Bureau of Resource and Energy Economics forecast "a gradual decline" to a figure still north of $US90. What happened was a collapse to $US46.

If it stays near $US50 (and there's talk or $US40 or less for two or three years) the typical Australian family will save $14 a per week according to the AMP's Shane Oliver.

He bases his calculation on an average petrol price of $1.13 per litre (it's already fallen to to 99.9 cents in some places) and an average top up per week of 35 litres.

Put in perspective, $14 per week is more than the benefit per family from another cut in mortgage rates. It's around $730 per year, worth as much as a pay rise of $1100 to someone on the typical tax rate.

There's every reason to believe families will spend some of it, giving businesses the confidence to put on more workers.

Not only will the new much lower oil price boost the economy directly, but by cutting inflation to as little as 2 per cent (that's what's expected when the next figure comes out) it'll give the Reserve Bank more than enough room to cut interest rates as well if it wants to do more.

It's like the sudden emergence of the resources boom all over again, except that where that showered Australia with income, the halving of the oil price will slash costs, for businesses as well as consumers. The mining industry, the makers of plastics that feed their way into almost everything we buy, the trucks that deliver them to shops - all of them rely on oil and all of them will face much lower costs.

The other (not so good) difference from the mining boom is that whereas that boom brought the government more revenue and repeated budget surpluses, this one will eat into government revenue. The prices of Australia's liquefied natural gas exports are contractually linked to oil prices. They will slide with the oil price, cutting the tax take from those projects...

Since September the share price of Santos has halved, the price of BHP has slid 22 per cent and the price of Woodside has slid 16 per cent

The December budget update factored in the slide in the oil price to that point and revised down revenue from the Petroleum Resource Rent Tax by $760 million. In the four weeks since the oil price has slid a further 20 per cent.

So why did the experts miss it? Partly because the oil price had been unusually steady for an unusually long time. For three years from mid 2011 to mid 2014 it was usually stuck between $US100 and $US110 a barrel.

But the apparent stability was deceptive. Beneath the surface the high price was making it economic for the United States and Canada to extract oil in ways they once never could have. The United States did it by fracking - using high pressure water to fracture rocks. Canada did it by refining tar sands, both expensive processes.

American production climbed to within striking distance of Saudi Arabia's. At the same time wars in Iraq and Libya cut production from the Middle East leaving the worldwide total little changed.

Until Iraq and Libya returned to production and demand from China tapered off.

Then a sudden oversupply pushed prices south until the Organization of the Petroleum Exporting Countries met in November. The US and Canada are not members of OPEC. It could have decided to wind back production to restore prices as it had done in the past, and many experts expected it to again. But that would have been a gift to the upstarts and also to Russia which isn't a member. Instead it decided to destroy their business model. Maintaining production and allowing the oil price to plummet would hurt the US and Canada far more than it would hurt OPEC.

New Canadian tar sands projects are thought to be uneconomic at prices of between $US70 and $US60 a barrel, new US fracking projects at prices between $US60 and $US50. Saudi Arabia makes money all the way down to $US25.

The latest price of $US46 is sufficient for the Middle East to rid itself of its North American rivals. When their existing projects close they won't open new ones. But that will take a while, suggesting we are set for low prices for years to come.

It is possible that the Middle East will lose its nerve, but unlikely. Qantas lost its nerve after years of a capacity war with Virgin in which it kept piling on extra seats to match Virgin's extra seats. It gave up after evaporating its profit, and prices climbed back.

But Middle Eastern producers such as Saudi Arabia are different. Unlike Qantas they have very low costs and (barring political turmoil) the ability to keep prices low for years.

And unlike Qantas there's something in it for them if the entire world grows more strongly. The International Monetary Fund says the new lower price will boost global economic growth by between 0.3 and 0.7 per cent in the year ahead. That'll mean more oil is sold, and make a fresh economic crisis less likely. Except in high cost producers such as Russia, Venezuela and Nigeria. Their economies are now in deep trouble, collateral damage of the oil war between the Middle East and North America.

For Australia it's on balance good news, news we've scarcely begun to come to grips with.

In The Age and Sydney Morning Herald


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'Twas the dollar that killed Holden, not the carbon tax

At the risk of labouring the obvious

What do Holden and Qantas have in common?

Here’s a clue. It isn’t that they are being strangled by the carbon tax.

(Although you might think they were. In his letter to Holden on Tuesday the deputy prime minister Warren Truss said axing the carbon tax would “lower the cost of producing cars in Australia”. The truth is the cost would scarcely budge. The cheapest new Commodore sells for $35,000. Holden says the carbon tax costs it $45 per car. That’s right, only $45. It’s a decimal place of a per cent.)

And nor are Holden and Qantas being done over by rapacious unions.

During the global financial crisis Holden’s workers accepted half shifts in order to stop job losses. In April this year they signed up for a three-year wage freeze in exchange for a commitment from Holden to stay in business beyond 2016. Each production line worker put in an extra quarter hour per day.

They are literally the most productive in the 37 countries General Motors in which General Motors manufactures cars.

“Every 60 seconds a vehicle rolls down our assembly line,” Holden boss Mike Deveraux told the Productivity Commission this week.

“The people making cars in Adelaide have to deal with a significant amount of complexity as each car comes past them - much more than many and most other GM plants. They will build a couple of Cruzes, they will build a Commodore, a sports wagon, a Caprice, another Cruze. I mean, a different car and a different job comes at these people every 60 seconds, and on Cruze, they are loaded to 56 seconds out of that 60-second cycle time, balanced across hundreds of people on that assembly line.”

“It's the highest loading in GM plants anywhere that build the Cruze"...

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And yet Australian workers cost more than their less agile counterparts overseas.

Around 80 per cent of the cost of making a car is people.

Deveraux asked rhetorically: “Is the cost of labour higher in Australia than it is in Asia?”

He answered: “Of course it is. We have a very good standard of living here and I don't think I would be making anybody surprised when I say that people in Australia make more than they do in many other places in the world.”

Holden told the Commission it cost twice as much to make a car in Australia as in Europe, four times as much as in Asia.

Holden never needed to close that gap. The deal it had struck with the Gillard government (which the Abbott government reneged on) wouldn’t have closed the gap. But it would have closed it somewhat, enough to make it worth staying.

A global corporation like GM can tolerate having loss-making plants in affluent markets like Australia. Its general philosophy is to “build where we sell”. And it knows the dollar might one day turn down.

The dollar is the common thread that’s linking the death spirals of Qantas and Holden. Not as obvious or as politically charged as less important issues like the carbon tax or industrial relations it has jumped to where it has jumped to a height never before seen in its 30-year history as a floating currency and hasn’t yet moved too far down.

In the quarter of a century to January 2010 the Aussie averaged 72 US cents. In recent months it has been 105 US cents. It has been great for car buyers, great for travellers. A foreign car that used to cost $20,000 now costs $14,000. A foreign air ticket that used to cost $2000 now costs $1400.

For companies like Holden and Qantas that were on the edge before the dollar soared, it means anything they try to sell overseas costs 45 per cent more. Its why Golden Circle is closing its canneries and moving to New Zealand, its why Electrolux is closing its factory in Orange and will source fridges from Asia and Eastern Europe. It’s why neither Holden nor Qantas can survive. Unless the dollar falls.

On Friday the Reserve Bank governor Glenn Stevens abandoned his usual reserve and said he would prefer a dollar nearer to 85 US cents than 90 where it has recently been. It’ll need to go lower still if we are regain our competitiveness. When mining prices were high and earnings were flooding in, it didn’t much matter whether the rest of the economy was able to make money. Now that they are not, and that the Australian dollar is still high, we have a problem.

One way or another we will have less buying power next Christmas. Either the dollar will be dramatically lower allowing us to compete again or more and more Australian firms will collapse, bringing on a recession. It’s time to talk seriously about how we can bring the dollar down.

In today's Canberra Times, Sydney Morning Herald


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No flight, no service, no tax says Qantas; which wants to keep the tax it collected in any case

It'll be decided in the High Court today

The High Court will rule today on whether Qantas can keep an extraordinary $34 million it has collected in goods and services tax from customers who didn’t show up in a landmark judgement that will help define the meaning of the word “supply”.

The Tax Office says Qantas and its subsidiary Jetstar owe it $26.6 million in GST it collected on forfeited flights in the first eight years of the tax. It owes it a further $7.6 million in GST it collected on tickets for which customers never bothered to claim refunds.

Qantas says it can’t owe the money because it didn’t supply a flight, meaning it didn’t supply a service. The Tax Office says the fact that Qantas kept the fares and persuaded its customers it had done enough to keep the fares meant it did supply a service of some kind.

The Tax Office submission says the definitions of the words “supply” and “consideration” in the GST Act are deliberately broad - “as wide as language can make them”.

Qantas barrister Roderick Cordara told the High Court in June that “in the real world” when customers put down the phone after speaking to travel agents and are asked what happened they say something like: “I have just booked my flight to Melbourne”.

“They do not say: I have just made an agreement that Qantas will hold itself ready for a period, in case I turn up”.

But GST specialist Gina Lazanas from Balazs Lazanas & Welch says the Qantas position is complicated by its action in holding on to forfeited airfares as if it had fulfilled the terms of a contract.

Should Qantas win today - convincing the High Court it didn’t provide a service - she says it could face a class action from customers wanting their money back.

“It would be a windfall to Qantas - it would have collected goods and services tax but not passed it on on the ground that it did not supply a service,” she told the Herald.

“I could imagine a litigation funder getting involved"...

Hotels, tour operators and other businesses that sold and charged GST on non-refundable tickets would be watching with interest.

The government twice attempted to close what it fears might be loopholes regarding the payment of GST where the supply of services is in doubt, the most recent being draft legislation released in last week.

“A lot of people want clarity, I think Qantas might be doing this for clarity,” Ms Lazanas said.

The High Court last year dismissed an appeal by the maker of an Italian delicacy known as Mini Ciabatte on the basis that it was a “cracker” and subject to GST rather than “bread” which would have been exempt. At issue was whether the product contained yeast and was made with a lamination process.

Federal Court judge Richard Edmonds said the fact that such an issue ended up in the High Court made a mockery of the former Treasurer Peter Costello’s prophecy that the GST would simplify the Australian tax system.

“I am conscious that this conclusion is very much a function of the back down by the government of the day to provide an exemption for what was called “basic food”, he said. “However, it is illustrative of a complexity in the system of the GST, as distinct from the tax system itself, that provides fertile ground for uncertainty.”

Treasury calculations show extending to the GST to presently untaxed fresh food would raise an extra $6 billion per year. Budget papers show GST revenues failing to keep pace as spending on untaxed items including rent, education and health climbs faster than spending on items subject to the GST.

In today's Canberra Times and Sydney Morning Herald


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Europe ought to be a wake up call. David Murray on the future

Future Fund chief David Murray has backed Qantas in its dispute with its workforce saying unless it and companies like it tackle entrenched union privilege Australia risks the same fate as Europe. And he says the government is aping Europe by borrowing to buy votes.

“My European banking counterparts tell me they can’t cut jobs without offering three years redundancy,” he told an forecasting conference in Sydney. “We are creeping towards that in the new industrial relations framework. It gives unions a right to bargain in areas traditionally the management's prerogative.”

“Australia started out after the second world war making work arrangements a little bit more reliable, introducing the rule of law, but the process has gone too far - it gets to the point of unaffordability.”

“Qantas management have no option but to do what they are doing. They are running an unviable airline. With terrible productivity internationally they are hostage to competitors domestically.”

“The stakes are high. Qantas is not the only companies,” Mr Murray told the business economists.

Appointed chairman of the Future Fund in 2004 by Coalition Treasurer Peter Costello the former Commonwealth Bank chief steps down in April. He has already accepted a part-time role with the global investment bank Credit Suisse.

“I don’t see anything concrete on productivity,” he said. “I don’t see governments trying to wind back their debt positions rapidly, I don’t see people coming off subsidy arrangements for industry, in fact new arrangements are more the norm.”

“I would have thought what is happening in Europe would be one of the most timely wake up calls in Australia's history... Yet it is being completely ignored because we’ve had twenty years of growth. The size of complacency here is outrightly dangerous.”

“What is it that’s wrong? It is the process by which public debt is used to buy votes with the promises of entitlements. If you borrow to buy votes you are expropriating the savings of other people.”

Asked whether now was the right time to slash spending and cut back on debt Mr Murray said it was better to do it when unemployment was around 5 per cent than later when it went higher.

The carbon tax and the mining tax were also badly timed.

“Irrespective of what you believe about climate change, given what’s happening in the world the timing of the the policy response is not good at all. The timing of introduction of a mining tax when the terms of trade boom was just about to end is not good at all either.”

Mr Murray said a simpler way of redistributing mining income would have been to end the tax deductibility of royalty payments and use the proceeds to cut company tax. “It could be done in two lines of code, a few lines of legislation,” he said.

Mr Murray acknowledged that government debt was low by world standards, but he said Australia’s net foreign liabilities were high by world standards. “And its the second one that matters, because it’s all got to be repaid.”

Treasury chief economist David Gruen disagreed telling the conference later Australia had high foreign liabilities because it was investing a huge amount in order to “most likely generate future export earnings”.

“We have yet to get the output from the mining boom that we expect to see. Some of our productivity will recover naturally as those investments coming to fruition,” he said.

Published in today's SMH and Age


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Saturday Forum: The Qantas protection racket gets set in stone.

All that was missing from this week's orgy of self-congratulation and the sea of red and white on the newspapers and TV were the rousing strains of I still call Australia home.

The Treasurer had pulled off a deal that he said would ensure Qantas remained “Australian owned, Australian controlled and in Australia”.

The foreign-financed consortium bidding for Australia’s national airline is delighted – the Foreign Investment Review Board and the Treasurer will allow its bid to proceed. The overwhelming mass of Qantas shareholders are delighted – they can now get $5.60 a share for an investment whose price has typically ranged between $3 and $4.

And the Treasurer Peter Costello has defused a political time bomb – how to appease those members of his backbench concerned about what will happen to jobs under the new owners and also those concerned about the implications of blocking the world’s biggest airline takeover.

What’s not to like about a political fix designed to deliver the airline’s shareholders $11 billion and to ensure that it remains one of Australia’s biggest employers?

When the dust settles, I fear that there will be a lot not to like...

Indeed: for airline customers, for the Australian economy, for the Australian taxation system and for the Australian government itself the outcome looks to be about the worst possible.

In order to understand why it is essential to recognise that Qantas is far more than just another Australian company. The Treasurer himself acknowledged this in announcing his agreement with the biding consortium on Wednesday. He said one of its clauses requires the new owner to continue to provide “practical assistance to Australians in times of emergency”.

Qantas has long been and will remain an agent of the Australian government for some purposes. Australia needs a national airline and would be unlikely to let it collapse. When the privately-run Air New Zealand faced bankruptcy a few years ago the New Zealand government injected money and bought it back.

In addition the Australian government has long been and is set to remain an agent of Qantas. Our government negotiates access to foreign air routes on behalf of Qantas, and from time to time blocks foreign airlines from competing with Qantas on routes to Australia.

Right now there is hardly any price competition on the most lucrative of Qantas’s routes – Sydney to Los Angeles. Our government continues to block Singapore Airlines from competing with Qantas and United ensuring that travelers to and from the US pay an estimated 38 per cent more than they need to.

According to work done for Singapore Airlines by the Canberra consultancy Econtech an extra airline on the route could boost the number of travelers moving between Australia and the US by as much as 8 per cent, and boost spending by visitors to Australia by more than $100 million.

The Australian government has blocked requests for access the Australia-US and Australia-Japan routes not because it was acting in the interests of Australian travelers or the Australian economy, but because it was acting in the commercial interest of Qantas. (And also in the potential interest of Virgin Blue in the case of Los Angeles, should it start flying on the route.)

Until now an unwritten deal has seen our government has protect Qantas from competition in return for Qantas acting as a good corporate citizen – among other things paying around $200 million a year in tax, employing Australians, and being on call in times of need.

But the takeover bid approved by the Treasurer this week could reduce the Qantas tax bill to something close to zero. Most of the $11 billion that the consortium is spending to buy Qantas will be borrowed. The interest payments, potentially $700 million a year are likely to obliterate the airline’s reported profit and its annual tax bill. (As is the case with all negatively geared transactions, the new owner will in theory be liable for capital gains tax when it eventually sells Qantas for an expected profit, but it is likely to structure the deal in such a way as to avoid as much of the tax as it can.)

And notwithstanding the employment and other guarantees in the deed of undertaking it signed this week, its mammoth interest bill will put it under immense pressure to cut costs.

The five partners in the bidding consortium are the US-based Texas Pacific equity group, Canada’s Onex group, Australia’s Macquarie Bank and Australia’s Allco Finance Group and Allco Equity Partners. Texas Pacific has form when it comes to running airlines. It has taken over
Continental, America West, and the Irish airline Ryanair. Its cost-control at Ryanair is said to be so severe that the airline’s pilots are not allowed to charge their mobile phones at work.

After the Qantas bid became public a number of commentators including myself applauded it as a welcome development. I wrote that “a takeover of Qantas led by money-hungry over-indebted American spivs could be the best thing that ever happened to the Australian traveling public”.

My thinking then was that if the new owner behaved in a totally commercial fashion our government would abandon its implicit contract with Qantas and instead start serving the interests of the traveling public.

Bruce Baird, one the Coalition backbenchers deeply concerned about the takeover encouraged me in this view.

Previously a big supporter of shielding Qantas from competition he told me then: “If it becomes just another company, and for instance starts moving jobs offshore, all bets are off”.

But it turns out that Bruce Baird was a key player in this week’s accord.

He has told me that he had a number of discussions with the consortium and the Qantas chief Geoff Dixon and told them: “if you want to settle people down these are the areas you need to give assurances in”.

He says they listened and replied: “Well that’s what we are planning to do anyway”. He suggested a guarantee.

On the face of it the bidders have got what they want – approval for their takeover – and backbenchers such as Bruce Baird have got what they need – a guarantee on jobs and the like.

But the guarantees in the consortium’s deed of undertaking are full of holes. For example it notes that the consortium has “no intention” of breaking up the airline and “no intention” of reducing regional routes.

That’s why backbenchers such as Bruce Baird are keeping something in reserve. He says for the moment talk of open skies is off the agenda: “We will allow the deal to proceed and then see 12 months into it how they are performing, whether they are living up to their assurances or not,” he says. Only if the consortium misbehaves they will it be threatened with real competition.

The implication is that Qantas will remain protected - perhaps indefinitely - in order to ensure that it continues to act pretty much as it has been.

For travelers, and for the Australian economy, it looks like the worst possible outcome.

But it gets worse.

Baird and his fellow backbenchers believe that if the new owner does abandon its stated intention and indicate that it needs to cut back its Australian workforce they can threaten it with competition.

They may not be paying sufficient attention to the likely financial state of Qantas at the time and the government’s need for it to survive.

After the takeover Qantas will be some $11 billion in debt, with only $3.5 billion in equity. On an operating basis it will be financially precarious. Any unexpected development such as a terrorist scare or an oil price hike could push it to the edge of survival. If in those circumstances it announced that it had to cut staff or move jobs offshore it would be plain that it would not be able to survive an injection of competition.

The threat that Baird and colleagues believe that they are holding in reserve would become worthless. If the new owner does abandon some of the guarantees it has given this week, any punishment to make it comply might run the risk of pushing it under.

Qantas is too important to the Australian government to be allowed to fail. If the consortium does get into trouble there will be a political imperative to help it further rather than harm it by opening Australia’s skies.

The consortium’s financial weakness will become its political strength. That’s part of the genius of the consortium’s takeover plan. It is likely to never have to face real competition and the government is likely to do whatever is needed to ensure that Qantas survives. The fortunes of the government and a group of ruthless foreign-backed takeover merchants will become tied together. If you would like not to be ripped off when you travel overseas, you are now likely to have to wait a very long time.

Read more >>

Tuesday Column: Qantas - the protected kangaroo

At last! The price of petrol is on track to fall below one dollar. But what about the price of flying?

The cost of jet fuel peaked in July when Israel launched air strikes against Lebanon.It has been falling for most of the time since.

But Qantas has been sparing in its cuts to the fuel surcharge. It has cut the surcharge on flights to Europe from $185 to $170, on flights to the US from $145 to $133 and on domestic flights from $31 to $26.

It says it will do more when it is able. The Australian Competition and Consumer Commission hasn’t taken much of an interest. A spokesman told me that what Qantas did was a matter for the market. Competition should sort things out.

But the problem is that there isn’t much of market. Even less than there is for the selling of petrol.

On most routes within Australia there are only airlines: Virgin Blue, which also has a fuel surcharge and Qantas, which sometimes uses the name Jetstar.

On other routes there is no competition whatsoever... The ANZ’s Chief Economist Saul Eslake is a reluctant Qantas/Jetstar customer. He tells me that when he flies to Tamworth to give a presentation he has no choice to use Qantas. It charges him far more for the Sydney-Tamworth leg on which it has a monopoly than it does for the much –longer but somewhat competitive Melbourne-Sydney leg.

Saul is a bit upset with Qantas/Jetstar at the moment. After a presentation in North Queensland on Friday he found himself waiting in the Hamilton Island airport for most of the afternoon instead of back at his desk at work. He says the excuses varied. It was either a mechanical problem, or bad weather back in Melbourne. He changed the greeting on his mobile and office phones to one that explained that he had planned to be back in the office at 3.30pm, “but thanks to Jetstar's monumental incompetence and ineptitude, I am spending about three and half hours twiddling my thumbs at the Hamilton Island airport. If you have an alternative to flying on Bogan Air, as I call Jetstar, please take my advice and use it.”

His point is that on most routes people don’t have alternatives. It is a generally established principle in economics that two is a particularly poor number of competitors when it comes encouraging genuine competition. (One is, of course, even worse.) Think of Optus and Telecom in the early days of phone deregulation, think of Woolworths and Coles, think of Hoyts and Greater Union before the arrival of Dendy in Canberra.

Where there are two big firms in an industry usually one sets its price just a bit below the other and there the competition stops. But when there are three or more competitors, as there are today when it comes to providing mobile telephone services, real price competition is quite likely.

There is scarcely any price competition on the most lucrative of Qantas’s routes – Sydney to Los Angeles. Only Qantas and United Airlines fly the route and they make quite a lot of money doing so.

According to the Canberra consultancy Econtech Qantas charges 38 per cent more per kilometre for Sydney-Los Angeles flights than it does on the Sydney-London route on which it faces more real competition.

Econtech was commissioned to conduct the study by Singapore Airlines, which has been trying to fly between Sydney and Los Angeles and provide real competition for more than a decade. At every turn the Australian government has blocked Singapore Airlines saying that such competition from it would not be in the national interest. It wants Virgin Blue to enter the market instead.

But if the government was serious about serving the interests of travelers, rather than those of Australia’s two big airlines (neither of which the government owns, and one of which may soon be taken over and so loaded up with debt that it will pay little tax) it would encourage as many competitors as possible to fly to and from Australia.

The effect could be dramatic. Econtech says the extra capacity and the lower prices on the route that would result from opening it up would be likely to increase the number of travelers moving between Australia and the US by as much as 8 per cent, and could boost spending by US visitors in Australia by more than A$100 million.

But these aren’t the economic figures that the government finds persuasive when it considers whether or not to allow an extra foreign airline to fly to Australia. When it asks “What’s in it for Australia?” it means “What’s in it for Qantas and Virgin Blue?” Its attitude seems to be that it will only allow air travelers to and from Australia to benefit if other countries allow Qantas or perhaps Virgin Blue to land so that they can benefit.

It is attitude long ago abandoned when to comes to imports. Australia used to once say that it would only allow in cheap imports and assist Australian consumers so long as other countries allowed in imports from Australian firms benefiting those firms. Australian consumers were held hostage to the interests of Australian manufactures.

But two decades ago the Hawke government decided that it would bring Australia’s tariff walls no matter what. It decided that its most important responsibility was to assist Australian consumers rather than the firms that employed them.

In aviation it remains different and we pay for it flight after flight. As Saul Eslake puts it: “The interest of Australia when it comes to manufacturing and agriculture is seen as the same as that of the purchasers of goods, but the interest of Australia when it comes to aviation is not seen as that of Australian flyers, but rather that of Qantas.

It would be nice to think that the proposed private takeover of Qantas will change that. It’ll no longer be owned by Australian citizens - the government might cut it lose. But I am more pessimistic about that than I used to be. A few weeks back it reported that government was close to deal under which it would allow the takeover on the condition that Qantas kept jobs in Australia.

Almost every other firm in Australia has lost the right to play the jobs card. The government should tell Qantas that all bets are off and that its time for the rest of us to travel cheaply.

Read more >>

Qantas: bring on the spivs!

A takeover of Qantas led by money-hungry over-indebted American spivs could be the best thing that ever happened to the Australian traveling public. Not because the new owners would make Qantas more efficient and immediately pass on the savings to travelers. Quite the reverse.

The modus operandi of the new breed of American “private equity” funds such as the Qantas suitor Texas Pacific to load up their prey with debt and ramp up charges and the like to pay it off.

And anyone who has driven on a Macquarie Bank toll road or tried to catch a taxi or park a car at the Macquarie Bank-controlled Sydney Airport will know that Macquarie, Texas Pacific’s partner in the bid for Qantas, isn’t shy about jacking up prices either.

Not that they are likely to get the chance. The $11 billion takeover, still in the “preliminary discussion” stage according to Macquarie, is most unlikely to fly.

The Australian Competition and Consumer Commission gets to run its eye over takeover bids. Its Chairman, Graeme Samuel knows all about the Macquarie Bank. He was its Executive Director in the early 1980’s.

He knows too that the proposed takeover would see Macquarie controlling Australia’s busiest airport and owning 15 per cent of the airport’s biggest customer – the sort of arrangement that the ACCC was set up to stop, should it be likely to be anti-competitive.

The Treasurer gets a say as well. As the Minister responsible for the Foreign Investment Review Board he is able to block any foreign bid for the airline, even one that obeyed the letter of the law relating to Qantas and kept foreign ownership below 49 per cent.

He certainly won’t be easing that restriction in order to make it easy for the predator...
He said yesterday that Qantas “flies the Flying Kangaroo and the Flying Kangaroo says Australia - and as far as I'm concerned that means majority Australian ownership”.

The Foreign Investment Review Board guidelines are so broadly drawn that if the Treasurer so wanted he could block the bid for Qantas with as little as a phone call and a press release, as he did for the Shell bid for Woodside Petroleum in 2001.
With an election due next year and with the genuinely untested legal issues that would accompany a foreign bid for Australia’s national flag carrier there is every likelihood that he would.

The share market recognised this yesterday the Qantas buying stopped.
But what if the bid did succeed? What if Qantas became effectively American controlled?

It would lose the special place it has held in the hearts of Australia’s politicians. In the 13 years since Qantas at first became part-private under the Keating Government (and became one-third British owned) our politicians have continued to act as if what is in Qantas’s interest is in the nation’s interest.

They have blocked bids for competition on the Qantas’ rivers of gold – the air highways that stretch from Sydney to Los Angeles and from Tokyo to Sydney. All in the national interest, they have assured us.

The real national interest is in opening the skies to complete competition, so that we (and the foreign tourists who are considering coming to Australia) can enjoy world’s-best low prices when we travel.

An American takeover of Qantas, with the associated bad publicity about Qantas no longer being special and about jobs going offshore might just persuade our Government to flick the switch to full competition.

Read more >>