Qantas Airline - Bailout Debate - Case Study Example

Qantas Airline ‘Bailout’ Debate Name Institution Course Professor Date For a long time, the government role in corporations has been an issue that often elicited mixed reactions and arguments. In 2014, the debate over private ownership versus the state was once again reopened due to the need for government to intervene and bail out companies. Qantas requested support from the government to help it overcome its difficult financial situation. This prompted a raging debate over whether the government should honour this request or not. As expected, Qantas competitors such as Virgin Australia were against the proposal to bail out Qantas and that they will ask for the same assistance if the request is accepted by the government. On the other hand, some argue that the government should have offered Qantas a debt guarantee because the company was heavily regulated and it faces stiff competition from foreign governments. This essay discuss Qantas ‘bailout’ debate and argues that the government stance was justified by drawing upon theories of the role of state. Qantas was founded in 1920 as an Australian national carrier. In 1947, it was nationalised and was later privatised through the Qantas Sale Act 1992 (Lafferty 2012, p. 91). In an effort to retain the status of the company as a national airline, several provisions were included in the Act. It also meant to ensure Qantas remains a predominantly Australian owned, managed and operated airline (Lafferty 2012, p. 91). Restriction of foreign ownership was capped at 49 per-cent; no foreign airlines can own more than 35 per-cent and foreign individuals are restricted to ownership percentage of no more than 25 are some of the provisions of the Act (Morrel 2013). Furthermore, the Qantas Sale Act require that the two-thirds of the airline directors should be citizens of Australia and the presiding director at any board meeting to be an Australian citizen. The 1992 Act also prohibits the incorporation of Qantas in any place apart from Australia. These legal requirements were part of the debate on the government bailout to Qantas. Qantas ‘bailout’ debate is a classic example of what role should the government do in the business. The role of the state is changing in most of advanced democracies like Australia. Globalisation and stiff competition have necessitated a prompt response to effectively deal with challenges presented by globalisation. The welfare state is also experiencing overload on the public resources (Mendoza & Vernis 2008, p. 389). This argument was presented in defence of government not to guarantee debt to Qantas. It was argued that Qantas should be bailed out in order to remain competitive. It was thought that subsidies would ensure that the airline can compete effectively with airlines such as government-backed Virgin Australia. However, a company competes successfully in the market by creating competitive advantage (Longenecker & Ariss 2002, p. 640). By offering subsidies to the airline, Qantas would have been dependent on corporate welfare. In this case, the airline could not be globally competitive since a competitive company strategically use the resources at its disposal in being competitive hence avoiding financial crises. In avoiding financial crises and major company failures, governments have resorted to debt guarantees (Suarez-Villa 2015, p. 147). This is seen as a form of corporate welfare. This has resulted in increasing government debts obligations to an unsustainable level that threatens the financial apparatus of the country. Critics point out that by guaranteeing debt to Qantas, it would significantly increase the already overloaded government debts. Furthermore, it was argued that large chunks of taxpayers’ money will be put at risk since it is not certain how the airline can be competitive through the subsidy. Furthermore, the bailout is seen as a discouragement to companies to be competitive as it rewards inefficiency in conducting company operations and loss-making behaviour (Carney 2006 ). It is argued that companies will depend on corporate welfare in the long run hence accountability and efficiency in using its own resources are compromised. Corporate welfare has potential of harming competitors, taxpayers and consumers. By bailing out Qantas, those against the idea points out to the possibility of disadvantaging competitors. Corporate welfare hurts competitors (Carney 2006). Corporate shifts money to businesses that belong to taxpayers. It takes power from consumers to the government (Carney 2006). It is, for this reason, that Virgin Australia rejected the idea of the government bailing out Qantas as they see it as strengthening their competitor. Instead of guaranteeing debts to Qantas, it was suggested that government should undertake rigorous campaigns aimed at encouraging foreign investment by removing the limits that foreign shareholders can hold at Qantas. The arguments for the government to bail out Qantas mainly centred on the need to prevent the airline from failing. The protective role that the state performs is pointed out in justifying the need for government to intervene and guarantee debt to Qantas (Cavusgil et al., 2014, p. 241). It is often argued that the state protects its citizens from harm caused by financial disaster or crisis by bailing out banks that are failing (Petitjean 2013, p. 17). In the same context, by bailing out Qantas, the government will be protecting citizens that have shares at the airline from huge financial losses if the company came under. However, this argument proves to be problematic in the long run. For example, businesses fail more often and someone is harmed by it. The question, therefore, remains whether the state should attempt to bail out all the failing businesses or not. Moreover, which criteria should be used in helping failing businesses as it would be absolutely costly if the state tries to bail out all the failing companies. Corporations’ fails due to various reasons ranging from misappropriation of funds by the management to inefficiencies. The people that would suffer economic losses when a company fails are those not responsible for its failure. This analogy was used in arguing that the government should bail out Qantas as those who would be harmed in case it fails are the ones not responsible for this kind of situation. The liberal view sees the role of the state as a regulator and does not involve itself so much in supporting businesses (Groose 2011, p. 178). Competitiveness changes when government acts a regulator by ensuring that organisations do not practice anti-competitive behaviours. It guards fair competition, promote social welfare and regulate price and market entry (Groose 2011, p. 178). Furthermore, competitiveness change when it acts as a subsidiser and it is seen to be doing its role as a protector. Bailing out Qantas is therefore regarded as ‘rightfully’ role of the government. In an efficient economy, it assumed to function as a self-regulating market. Nevertheless, the state from time to time intervened to correct inequalities and inefficiencies by carrying out regulation. In any modern economy, the state must promote the welfare of its citizens (Gilpin 2005, p. 300). In fact, the liberal ideology demands that the government should undertake a positive action in the economy in safeguarding interests of its citizens. Nevertheless, the objectives emphasis varies from one society to another. Furthermore, the role that the state plays in a market economy differs in every market economy. It ranges from the generally laissez-faire, non-interventionist approach in United States to the central role of the state in the overall management of the economy in Japan (Gilpin 2005, p. 301). The welfare of consumer and market autonomy is emphasised in a ‘liberal’ society. In this case, the role of the state tends to be minimal. The predominant role of the state is to correct market failures and provision of public goods (Karagiannis & Madjd-Sadjadi 2007, p. 29). In contrast, the role of the state tends to be more interventionist and intrusive in societies where there is prevailing collective or communal purposes. The government stance on the Qantas bailout debate is justified to some extent. In Australia, the state has mostly played an interventionist role (Bayari 2012, p. 12). Neo-liberals in Australia have continually targeted elite opinion and they have succeeded in achieving hegemony over agendas. In 19th-century liberalism, the economy was seen as a self-regulating and self-contained system and the maintenance of the status quo was the role of the state. The economy is objectified in such a way that is managed appropriately by the state for the benefit of society. Capital is identified with the public interest and what is good for the capital is also good for the entire society. In this case, what the state does to improve the efficiency of the market has unquestionable benefits for all according to liberalism (Bayari 2012, p. 12). This is in tandem with both socialism and liberalism political ideologies that advocates for government to promote economic equality and opportunity. The government refused to bailout out Qantas because it sees it to be the right decision and it would benefit everyone including the airline competitors who were opposed to the idea of bailing out Qantas. Bailing out Qantas would have been a counterproductive strategy in the long run but a good political move in the short run. Australia is a mixed economy. The state has on many occasions intervene to protect the welfare of its citizens by bailing out companies that are in a difficult financial situation. In 2014, Qantas asked the federal government to assist it by offering a debt guarantee. The government refused and argued that it will be counterproductive in the long run. In a liberal economy, the main role of the state correcting market failures. Although the government refused to help Qantas and correct a potential company failure, its stance was justified. Bailing out companies encourages corporate welfare which has adverse effects on competitors, consumers and the taxpayers. Taxpayers are forced to pay large chunks of money to a company that were not responsible for its situation. It is, therefore, prudent not to bail out such companies as it can be seen as misappropriation of public funds. References Bayari, C 2012, Australian economy and neo-liberalism: Manufacturing, trade and bilateral links with Japan in the post-Keynesian age, Lit, Berlin. Borisova, G, Brockman, P, Salas, J. M & Zagorchev, A 2012, Government ownership and corporate governance: Evidence from the EU, Journal of Banking & Finance, vol. 36, no. 11, pp. 2917-2934. Carney, T. P 2006, The big ripoff: How big business and big government steal your money, John Wiley & Sons, Hoboken. Cavusgil, S. T, Knight, G. A, Riesenberger, J. R, Rammal, H. G & Rose, E. L 2015, International business: The new realities, 2nd edn, Frenchs Forest, N.S.W, Pearson Australia. 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