Waiting For The Last Card To Fall

Sydney Morning Herald

Wednesday February 21, 2007

Mark Davis

Anyone with a stake in the future of Qantas is busy lobbying but the final decision rests with the Treasurer, writes Mark Davis.

ON MONDAY the Federal Government backbencher Bruce Baird hosted a select gathering of supporters at a $250-a-head fund-raising lunch in the Rooftop Terrace of Sydney's Park Hyatt Hotel. At the top table, next to the guest of honour, the Minister for Communications, Helen Coonan, was the Qantas chief executive officer, Geoff Dixon.

With the fate of an $11 billion takeover offer for Qantas hinging critically on the Government, Dixon wasn't about to miss any opportunity to press his case to a cabinet minister. Nor to demonstrate support for his old friend Baird - even though the Sydney MP is leading the push inside the Government for sweeping conditions to be imposed on the takeover.

The bid by the Airline Partners Australia consortium for Qantas was hatched in Macquarie Bank's boardrooms. Dozens of investment bankers, lawyers, accountants and advisers have worked on getting it onto the runway.

Yet just one man, the Treasurer, Peter Costello, could undo the work of these corporate high-flyers. Costello has the power to block, or to impose significant conditions on, the Qantas deal under Australia's foreign takeovers legislation.

The Qantas decision is a serious political headache the Government could do without in an election year. It will be Costello's most important foreign investment verdict since 2001 when he shocked the oil company Shell by blocking its takeover bid for Woodside Petroleum on the grounds that it would be against Australia's national interest.

The Qantas decision has the potential to upset thousands of voters with a direct stake in the airline.

If Costello blocks the deal, thousands of Qantas shareholders would miss the opportunity to cash in. The consortium is offering $5.60 a share for their stakes, well above the $3 to $4 range the stock had traded in for the three years before word of the deal hit the markets.

But if Costello clears the deal without conditions, the unions will cry foul about the impact on Qantas's 37,000 employees, at a time when the Government is trying to counter the broader union campaign on industrial relations and job security.

The unions reckon the high levels of debt the consortium will use to fund the buyout make it inevitable that the new owner will embark on a major cost-cutting exercise if it gains control of the airline.

Their concern is that services on less profitable routes to country towns could be reduced and that jobs such as aircraft maintenance and backroom administrative functions could be sent offshore to cheaper countries.

Costello is likely to announce his decision within the next two weeks, although it is open to him to extend the 30-day deadline under the foreign takeovers legislation.

The looming decision has triggered a furious lobbying offensive in Canberra. Qantas's government relations manager, David Hawes, a former official at the Department of Foreign Affairs and Trade, must have worn out several pairs of shoes traipsing the corridors of Parliament House during the past fortnight of parliamentary sittings.

And senior members of the APA consortium, including directors Bob Mansfield and Peter Yates, have also met dozens of Coalition and Labor MPs to press the case for the buyout.

The airline unions have brought delegations of Qantas workers to Canberra to speak to Coalition MPs about their concerns over the future of their jobs. The sensitivities over regional services and jobs have turned the usual dynamic on Qantas in the Coalition on its head.

Qantas has enjoyed favourable treatment on competition issues from the Coalition. Last year the Government rejected a push by Singapore Airlines to fly in competition with Qantas on the lucrative route between Australia and the United States.

Qantas's supporters in Cabinet have included the Prime Minister, John Howard, and successive transport ministers, including the former Nationals leader John Anderson and Warren Truss.

Along with the Foreign Affairs Minister, Alexander Downer, the Tourism Minister, Fran Bailey, and the Workplace Relations Minister, Joe Hockey, Costello has pushed for more competition on international routes.

On the Coalition back bench, pro-Qantas MPs have been led in the past by Baird, whose electorate of Cook in the Sutherland Shire is next door to Sydney Airport and home to considerable numbers of Qantas and airport employees.

However, now Baird, a close supporter of Costello in the Coalition, is deeply concerned about the takeover. "I will not support any sale until we get assurances on the key issues," Baird said yesterday.

"We need guarantees on issues such as shifting maintenance offshore, on regional air services, on Qantas remaining a full-service domestic airline, on asset stripping, on questions as to whether the plan is to evolve Qantas into Jetstar and the offshore provisioning of air crews."

Anxiety about the Qantas deal is highest among the MPs who have been closest to the airline's management on the competition issue in the past. That's an irony not lost on Costello. Nor is it lost on him that the airline unions are opportunistically using the takeover to pressure him to impose the kind of job guarantees they would have no hope of extracting in normal industrial negotiations with the company.

Support for Baird's position is widespread in the Coalition party room. The West Australian Liberal MP Don Randall says the takeover would leave Qantas financially vulnerable to economic downturns because of the amount of debt which would be on its balance sheet.

The consortium says it will keep a cash reserve of $2 billion as a buffer against such downturns. Mr Randall says this should be a binding condition.

"I am concerned about private equity buyouts because they are generally short-term and the taxpayer is often left with the aftermath. There needs to be further reassurances about that which at the moment is just slick statements," Randall said.

Another West Australian MP, Judi Moylan, says there is widespread community anxiety about Qantas. "It reminds me a lot of the Woodside situation, where there were national interest considerations," Moylan said.

"If that purchase had gone ahead, Shell would have mothballed Woodside resources projects for a period and that would have denied WA in the region of $4 billion in income."

But some Government MPs say it would be at odds with Liberal Party philosophy to intervene in a market transaction, given that Qantas is about 46 per cent foreign owned.

A former minister, Geoff Prosser, says there is no comparison with Woodside. "Woodside was a strategic resource and there was the opportunity for Shell to develop their gas reserves in other parts of the world rather than here," he said.

"Qantas is very different. We should let the takeover go ahead but then have more competition for Qantas in the interests of consumers and small businesses."

Prosser says that despite the campaign by the unions, there would be little political downside to the Government from the Qantas deal. "The sun will still come up the next day. Qantas aircraft will still be painted red and white with a kangaroo on their tails. Nothing will change."

So where does Costello stand?

Since news of the takeover emerged last November, Costello has refused to say, publicly and privately, whether he is considering either blocking the deal or imposing any conditions.

This is his standard operating procedure when dealing with foreign takeover applications. He is aware that one of the few legal grounds for challenging an adverse decision is to argue that the decision-maker displayed bias.

But there have been two consistent themes to Costello's public remarks on Qantas in recent weeks.

First, he has emphasised that the Government will enforce the Qantas Sale Act, the 1992 legislation authorising the airline's privatisation. It provides that Qantas must be at least 51 per cent Australian owned, with two-thirds of its directors to be Australian citizens and with its head office in Australia.

Significantly, the act also requires that Qantas keep enough of its aircraft maintenance, catering, flight operations, training and administration facilities in Australia to ensure this country is its principal operational centre.

These provisions are the law of the land and APA has already ensured its bid complies with them.

So Costello's emphasis on the Qantas Sale Act may suggest he is laying the ground politically for any decision to approve the deal by pointing to existing legislative conditions designed to preserve Qantas's identity as the Australian national carrier.

But Costello has also emphasised several times that Qantas is Australia's only domestic "full-service" airline.

A full-service airline is one with a substantial network, operating regular services to a large number of destinations, offering different classes of travel ranging from business to leisure, and providing lounges and other airport facilities for its customers.

"I think we all want to see a good full-service domestic airline," Costello said after the bid was formally announced. "Since the demise of Ansett we have had other airlines come in on domestic routes but they are not full service, they have a particular niche in the market.

"And I think the travelling public would want to know that."

BUMPY RIDE FOR THE FLYING KANGAROO

July 1995: Labor government privatises Qantas - 25 per cent to British Airways and 75 per cent in a sharemarket float, raising $2.1 billion. Private investors pay $1.90 a share; foreigners allowed to own up to 49 per cent.

December 2006: Airline Partners Australia offers $5.60 a share. The consortium is made up of Macquarie Bank, Allco Finance Group, Allco Equity Partners, Texas Pacific Group and Onex Partners. It says it will spend $10 billion over the next five years to upgrade the fleet, including buying more than 70 planes to increase capacity by 40 per cent. Foreign shareholders own about 46 per cent of Qantas. If the buyout succeeds, the foreign shareholding will be 49 per cent (or about 39 per cent of voting interests).

© 2007 Sydney Morning Herald

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