State Interference and the Bailout Debate - Qantas Airlines - Case Study Example

State interference and the bailout debate: case of Qantas airlines Name: Tutor: Course: Date: Introduction Qantas airline has been facing industrial disputes, diminishing profitability and reputation in the recent years. The government of Australia responded to the woes facing the airlines through a bailout. Although the airline is partially owned by the government, there is a general feeling that the carrier represents aspirations and interest of the Australian people. Interference of state on issues internal to the management of a company may happen because the state is a shareholder or desires to salvage its image that is manifested in the company (Miron, 2009). In market economy systems, the role of a state in determining inputs, costs, and prices is limited to the shareholding structure and private investment (Mcchesney, 1997). The mere existence of state control over the company may not necessarily construe state interference in decision-making regarding inputs, costs and prices (Andrews, 2009). The aim of this essay is to argue the Qantas ‘bailout’ debate and the justification of the government to bailout the company. State interference and the Qantas ‘bailout’ debate The influence of the state on privately owned firms has been a raging debate among academicians, scholars and practicing government economists. Specifically, the Economists had been worried that the responses of many governments to the global financial crisis is to bailout poorly performing companies when they basically need radical managerial transformation. The Australian bailout debate has hit Qantas, which was formerly a government-owned company. In reality, Qantas has been facing liquidity crisis with debts and bills going over $7.5 billion (The Guardian, 2011). These debts cannot be paid because the company has little assets or cash to cover the costs. However, those opposed to the debate argue that a bailout is a waste of public taxes in salvaging a failing private company (McLaughlin, 2014). On the other hand, those for the bailout insist that the company flies the ‘Kangaroo’ which is the icon of Australian heritage, sentimental attachment and pride (ibid). Government interference in decisions of a public company may help big players to take advantage of small players. Varrender (2014) agrees that liquidity problems facing an industry may lead to insolvency especially in the vulnerable airline industry. The author further notes that without Federal Government assistance, a formal insolvency destroys a lot of values, and thus corporate reconstruction becomes impossible. The Australian government sought to protect the bigger picture of serious implications for tourism and disruption of the economy if the airlines grounded (The Guardian, 2011). However, Painter (2009) argues that the decisions of government are discretionary, and that bailouts create moral hazards for owners and managers receiving the bailouts. The author further notes that management in some companies inconsistent with the interests of customers, creditors, and shareholders may sometimes combine with a severe government regulation and lead to a bailout. McChesney (1997) observes that in ‘public choice theory’, political factors play out at a time economic resources are allocated not by the markets but by the government. Departures from fiduciary principles may happen on who allocates resources where politically influenced markets gravitate around government actors (Andrews, 2009). For example, a legislator may favor a company in their district as a fiduciary obligation to the electorate and not necessarily favoring their campaign contributors. Politics influence policy based on the character of the electorate and public servants through substantive and procedural laws defining controls in politicized decision-making. Laeven and Valencia (2008) lament that bailouts are occurring widely and often are an expansion of a risky credit evidenced by misguided federal policy and private risk taking as a long-standing practice. For example, the banking sector that has a history of receiving bailouts designed for financial markets, expected the government to cushion losses emanating from risky mortgage debts. In a rejoinder, Miron (2008) suggests that from an economic perspective, bailouts adopt uneconomically sensible goals by preventing insolvent institution’s failure. Moreover, it encourages perverse institutional failure where bailed firms acquire toxic assets and take enormous risks in capital injections. Qantas may have become inefficient and uncompetitive to a point of taking the risk on its assets. A bailout could have been the only option if not an acquisition from other leading companies such as Virgin Australia (McLaughlin, 2014). McLaughlin (2014) notes that Qantas is known for strong financial performance and good reputation and those first-time losses should not be construed as a dying company. The author further observes that the company is four or three times bigger that it’s closest competitor in every single market segment and has huge bank deposits. The bailout is not necessary given that people instead of looking at the facts are getting bogged down by emotions (Gianetti& Simonov, 2009). Moreover, the Guardian (2011) observes that Qantas was in for blame game instead of examining its own inferior customer service and sought government intervention or bailout. The argument was that the airline was warped in legislated foreign restrictions just like Virgin with foreign state-owned shareholding and enjoying massive cash injections from the Australian government. Gianetti and Simonov (2009) agree that bailouts are beneficial to the performance of firms through interventions on sales growth and investment at the firm level as well as employment opportunities at a national level. The authors assert that contemporaneous growth rate of a firm benefit from interventions in an economic environment. Australia relies on the performance of its service sector to deliver less unemployment rate, rapid economic growth and increased credit rating globally. By injecting cash to Qantas, it was attempting to solve these economic variables that may have a significant effect on Australia’s reputation on the global stage (Varrender, 2014). However, Nakaso (2001) objects that recapitalization may dilute existing shareholders and that capital injection from the government may weaken their shareholding power and positions. On the other hand, inefficiencies from the private sector are transferred to the public in terms of public taxes use for bailouts (Dorn, 2008). Qantas shareholders being primarily foreign owners may feel shortchanged and underestimated in their capability to influence a financial turnaround of the company. Painter and Richey (2009) assert that implementation of bailouts, given the existing government ethics rules, erodes public confidence and does not justify the expensive decisions taken by the government. There are enormous government expenditures and intricate relationships between firms receiving bailouts and others (Higgs, 1997). In individuals benefiting from bailouts in the service industry will have greater social and wealth influence (ibid). According to Andrews (2009) policymakers have the discretion to decide on companies that may be deemed ‘too big’ to fail or in whatever costs should not fail. This indicates that government decisions mainly emanating from political appointees can be arbitrary and may cause an adverse reaction in the capital markets. Qantas is perceived as a national carrier despite its transfer from state-owned to the privately owned firm. Bailing out Qantas has its basic argument on the fact that a single failure of such big firm may contaminate the entire Australian airline industry. The government must safeguard this public good. Smith (2011) argues that through regulations and incentives, the government attempts to exercise its protection but spreads its safety net if that fails. On the other hand, when the airline industry becomes overprotected, the system gets infected by agency conflicts and moral hazard likely to emerge from excessive risk taking (Dorn, 2008). This is applicable to non-systemically important airlines like Qantas, the Australian national pride, but no government can prevent a little moral hazard equivalent of a nuclear disaster. Dorn (2008) asserts that bailouts, ironically, are necessary whether a government undertakes one or not. The situation that created the bailout demand will still turn around and face the government hence the need to get involved economically (Smith, 2011). A by-product of a competitive and active global airline is a systemic risk, but the bailouts have large costs if aimed at remedying the risk (Smith, 2011). The mess left behind by the failure of large financial and corporations institutions should be cleaned up by governments. Possible options are financial intervention, economic stimulus efforts and unemployment insurance. The bailout of Qantas is much disliked but necessary. Government intervention in private firms disregards the free-market theory and abuses the taxpayers’ resources (Smith, 2011). For example, a bailout of Qantas prevents market forces from taking the necessary corrective measures to turn around the airlines. Some observers perceive bailouts as underserved shareholder positions’ guarantees taken on by speculators in too-big-to-fail and large airlines (Hamilton, 2008). Failure of such entities could be a result of managerial greed, folly and irresponsibility (Higgs, 1997). To Australians, Qantas bailout means bailing out the airline managers themselves if allowed to keep their pensions, jobs, severance pay and stocks. The government interferes with the internal control of a company by subsidizing funding costs and accepting guaranteed moral hazards, and future airline industry regulators are anticipated to adopt a failure-proof regulatory regime (Painter & Richey, 2009). Such actions could deny airlines expansions or mergers into new product areas as it was in the 1980s. Liquidating and rescuing failed institutions should come at a cost to the directors of large airlines that they will be held liable for any loss of public funds used (Shiller, 2000). To the airline industry, and Qantas specifically, a bailout was necessary to meet operational costs. Conclusion State interference in operations of private firms is necessary where a public good is being safeguarded (Painter & Richey, 2009). However, prohibiting bailouts to Qantas could likely cause more harm to the Australian economy that protection of taxpayers’ money. Although the bailout of Qantas was expensive and immoral, it was economically efficient to sustain employment levels, and socially necessary to safeguard the national pride of Australia (The Guardian, 2011). The stand by the government was justified in funding the ailing airline to save the face of Australian public and its credit rating globally. The essay concludes that state interference and bailout of Qantas was justified. References Andrews, E.L. (2009). Lender’s Role for Fed Makes Some Uneasy, New York. Dorn, J. A. (2008). Creating Financial Harmony: Lessons for China. Cato Journal 28 (3): 535– 53. Gianetti, M. & Simonov, A. (2009). On the Real Effects of Bank Bailouts: Micro-Evidence from Japan. Stockholm School of Economics. Sweden. Hamilton, J. D. (2008). Investment Advice for a Wild Market. Econbrowser Blog: www.econbrowser.com/archives/2008/11/ investment_advi.html. Higgs, R. (1997). Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War. Independent Review 1(4): 561–90. Laeven, L., and Valencia, F. (2008) Systemic Banking Crises: A New Database. IMF Working Paper, WP/08/224. Mcchesney, F.S. (1997). Money for nothing: Politicians, Rent Extraction, and Political Extortion. New York. McLaughlin, A. (2014). Borghetti critical of Government moves to support Qantas. Australian Aviation. Miron, J.A. (2009). Bailout or Bankruptcy? Cato Journal. 29 (1) 1-17. Nakaso, Hiroshi, 2001, The Financial Crisis in Japan during the 1990s: How the Bank of Japan Responded and the Lessons Learnt, BIS Papers 6. Painter, R.W. (2009). Bailouts: An Essay on Conflicts of Interest and Ethics When Government Pays the Tab. New York Times, June 13, 2009. Painter, R.W. & Richey, S.W. (2009). Getting the government America deserves: How ethics reform can make a differences. University of Minnesota Law School. Shiller, R. J. (2000). Irrational Exuberance. Princeton, New Jersey: Princeton University Press. Smith, R.C. (2011). The Dilemma of Bailouts. The Independent Review. 16 (1): 15–26. The Guardian. (2011). Qantas chief executive lobbying government for bailout, 2nd September 2011. Varrender, I. (2014). Is Qantas too big to fail? ABC News, Sep 1, 2014. http://www.recreationalflying.com/threads/is-qantas-too-big-to-fail.123428/ Read More