Friday, 28 February 2014

Level airfields

I don't normally have a lot of sympathy for incumbents with large market shares, least of all for ones who have a long history of looking for and getting sweetheart regulatory protection from their governments, and airlines are amongst the worst serial offenders: I've blogged before about How governments rort their own countries' airline passengers, and have asked Is this the world's stupidest economic policy? when protectionist Aussie regulation means potential competitors to Qantas have to get the Aussie government's permission to expand capacity.

And yet. In fairness to Qantas, there's some justice to its complaint that in some respects at least the regulatory landscape is tilted against it. It's certainly ironic, since Qantas (and many other airlines) are recidivist exploiters of their regulatory environments, that regulation has blown up in Qantas's face. But it has. And it's possible that Qantas has other regulatory advantages in its backpack, unavailable to its competitors, that outweigh the grief the Qantas Sales Act 1992 is causing it. Even so Qantas, I reckon, has a decent case to make.

The Act (brought in when Qantas was privatised) creates two problematic issues
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One is ownership. The Act has limits on total foreign ownership (49%), on ownership by foreign airlines (35% in aggregate), and on ownership by any one foreign airline (25%). That contrasts with the ability of Virgin, Qantas's domestic competitor, to pick the pockets of three government airlines (the UAE, Singapore, and our own) when it needs money for investment.

The other is operational. Qantas can't outsource the bulk of its international operations: s7(1)(h) of the Act says Qantas's articles of association must "require that of the facilities, taken in aggregate, which are used by Qantas in the provision of scheduled international air transport services (for example, facilities for the maintenance and housing of aircraft, catering, flight operations, training and administration), the facilities located in Australia, when compared with those located in any other country, must represent the principal operational centre for Qantas". Its international competitors can organise their international affairs more efficiently, while Qantas is forced to employ a local workforce who are relatively expensive in the first place, and more expensive again because they've managed to build some of the benefit of this (and other) regulatory protection into their terms and conditions of employment. Qantas might think it's smart every time it gets some regulatory protection, but the reality is that the benefits of protection don't all flow through to the corporate bottom line: they get hijacked along the way by the likes of the pilots and the baggage handlers.

I'm not saying that all the problems that Qantas has are down to not getting a fair suck of the regulatory sav. When you find that you can lose 5,000 staff out of a total of 35,000 or so, you haven't exactly been on top of the cost control game (even accepting that Qantas hasn't had a fully free hand on what it can do), especially as 1,500 of those are apparently in back office management roles. And I just don't understand Qantas's core commitment (which you can find for example listed as a strategic priority on p5 of the company's Data Book) to a "profit maximising 65% market share". Maybe the financial models really do suggest you maximise profits at 65% of the market. Or maybe the real game is to protect market share, irrespective of its profitability consequences.

What I am saying, though, is that fair is fair, and if there are regulatory anomalies that have left Qantas disadvantaged, they ought to be remedied.

Of course, there are two potential ways of doing that. The self-evidently preferable one is to stop hobbling Qantas, and deregulate. The other is to hobble everybody more equally.

I wonder how it will play out: fewer market distortions, or more?

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