Qantas Bailout Debate - Literature review Example

Qantas Bailout Name Tutor Unit Code In 2014, Qantas, previously a government-owned airline, requested the federal government for assistance. It put a request to the government for a debt guarantee that would better its credit rating. The airline was facing financial difficulties after it reported a half-year loss of $252 million in 2013-14 reporting period. Qantas was also facing stiff competition from other airlines, particularly Virgin Australia. The company intended to resolve in job cuts, where around 5000 people would lose their jobs, and sale of around 50 aircrafts in order to save around $2 billion in 2016-17. The company also faces challenges regarding the foreign ownership clause as outlined in the Qantas Sale Act. This issue raised serious debate in the parliament and among other key parties particularly on the role of government in bailing out Qantas. Tony Abbott, Australia’s prime minister, opposed the intervention of the government in Qantas affairs. Abbott argues that the government should be fair to all businesses; what the government does for one business should be done for all businesses. This was therefore, a difficult affair. However, he supported the amendment of the Qantas Sale Act that would alter the foreign ownership component and create “a level playing field” (Lane, 2014). The Sale Act requires that Australian based carriers should have at least 51 per cent of the shareholding owned locally. The rules need to be changed to allow restructuring of local businesses and the same time ensure that Australians keep a huge ownership stake in its international corporations. Moreover, Lane (2014) points out that a debt guarantee for Qantas is sentimental and has no convincing case for it. There was the possibility of risking public money in corporate issues and that Qantas would benefit from cheap debt. It is also expected that commercial companies should survive devoid of government contribution. Bailouts may well be interpreted as a reward for inefficiencies and loss-making actions considering that Qantas C.E.O Alan Joyce has been accused of lacklustre guidance of the airline through poor planning and bad management. From when Qantas was privatised in 1995, the airline has operated smoothly devoid of government prop up or tax allowances. A government bailout cannot be the sole solution to a company that has been performing so well. It is likely that its business model needs to be adjusted instead of making Qantas reliant upon corporate welfare that may well turn into a vicious cycle unless it is stopped. In fact Verret (2009) argues that through bailouts, governments take huge ownership and control of commercial companies leaving corporate welfare and practice in shambles. It will result in undesired control on other shareholders. This will induce undue government interference is the financial sector since it will be perceived as a protectionist move in a free market economy According to the Institute of Public Affairs (IPA) (2015), government subsidies to Qantas will upset the Australian airline industry in the coming times. They will make Qantas the company to rely on corporate welfare. Worse still, Qantas may fall into the bad state that the Australian manufacturing sector found itself after a protracted government support through quotas, and tariffs, as illustrated by the cases of Toyota, SPC Ardmona, General Motors (under Holden) and Ford despite the glaring warning signs. The IPA argues that Qantas can only stay globally competitive if it is left to battle its financial difficulties by itself and learn to stand on its own feet. To add pain to the insult, the IPA states that the government is battling with record high debt levels. Therefore, the millions of dollars collected from taxpayer must not be used up in supporting just one company. It is also ironical that the government has a strong will to cut down large market shares in some segments of the retail industry due to unsatisfactory competition. At the same time, the same administration appears to mull over expending public coffers in propping up Qantas’ that enjoys a massive 65 per cent market share in the domestic airline industry (IPA, 2015). However, Alan Joyce greatest worry is the competitive pressure from “foreign government-backed” airlines such as Virgin Australia. The competition has led to reduced domestic travel fares. Her feeling was that Qantas faced unfavourable competitive pressures. This is because Virgin Australia is supported by Singapore Airlines, Air New Zealand and Etihad that are supported by their respective local governments. The point here is that other ­governments are involved and that creates a distortion in the market (Tingie, 2014). There is also the argument that Qantas ought to be bailed out because it is not like the other companies that were not supported. Toyota and Ford, for example, are big multinational corporations with are highly profitable. Qantas has not parent company to depend on for support other than the government. Therefore there is a special case for Qantas that need to be addressed differently. Joe Hockey, the parliament treasurer continues to argue that Qantas does not operate in a free market and therefore should be supported (Tingie, 2014). According to Hockey, Qantas operates in a market that is threatened by foreign highly competitive foreign airlines and is very much regulated. He says that there is a genuine argument that Qantas faces detailed regulation that limits it just like Telstra and others. Therefore, the general public has to shoulder the burden for the right to control the free operation of that ­business. Proponents for the bailout also state that if foreign participation is allowed to go up, Qantas could fall and break-up. More jobs will go to foreign countries. This will take away the pride that Australia has in Qantas, which is seen as an Australian tourism brand (Mullins, 2014). Qantas is also a desired national carrier that has served the national interest for the many years it has been there and in the spirit of nationalism, the government must not simply watch as it caves in. However, Mullins (2014) also argues that this national carrier idea has been passed by time and also government intervention in airline’s operations so as to serve the people given the high capital costs involved is not feasible. The present world is dotted by overseas carriers, such as Emirates, that have built enough muscle to deal with the likely financial risks and still offer competitively priced air travel given their economies of scale. Such airlines can provide efficient and comfy international flights to Australia, and offer far-reaching local airline services through their share in Virgin Australia. Moreover, Mullins (2014) argues that the troubles of Qantas cannot be linked to nationalism. A simple comment of Qantas as an 'Australian icon' is sentimental and cannot be linked to the 1990s rebirth of nationalism and its racially prejudiced connotations. With the budding Emirates Airlines, the Asians are overtaking the events in Australia and at this time it does not make sense for the government to support the struggling Qantas. The main role of government in supporting business is to create a level playing field by implementing good economic and regulatory policies. Qantas has been badly affected by a bad regulatory environment created by the former Gillard and Rudd governments. The regimes created a regulatory framework that is anti-competitive, limits foreign investment, and supports an industrial relations framework that is out-of-date. The current administration should amend the Qantas Sales Act so as to let in foreign investment by taking away the current barriers to foreign participation. Its move is by and large befitting the business community. More foreign investment is disposed to benefit Qantas’ passengers, shareholders, and employees. The IPA (2015) also argues that the present administration ought to settle Australia’s anti-competitive industrial relations rules rather than waste taxpayers’ money on a bailout. The rules give workers, through their union (Transport Workers Union (TWU)), too much liberty such that a company has little say on their employees. For instance, in 2011, Qantas lost about $68 million to industrial actions by three separate unions, 70,000 passengers were affected as 600 flights were called off. In a nutshell, there is much opposition towards the government bailout for Qantas. In the current business environment government involvement in financial and commercial sectors needs to be checked. This will cut down on government interference on business operations that may result in government control that other shareholders would not desire. The main role of government in a free market economy is to ensure a smooth economic and regulatory environment for all businesses. As Australia’s Prime Minister pointed out, the government needs to create a level playing field. Therefore, government denial of a debt guarantee to Qantas was the best move that wielded much support. The governments push to amend to Qantas Sale Act also is in the spirit of creating a good regulatory environment to allow competitive operations. References Bird, R. M. and A. D. Tarasov (2004) ‘Closing the Gap: Fiscal Imbalances and Intergovernmental Transfers in Developed Federations’, Environment and Planning C: Government and Policy, 22, 77–102. Lane, A. (2014). Qantas needs to grow up – a bailout won’t solve its problems, The Guardian Newspaper, 28, February 2014, . Höijer, R. (2004) ‘Theft by Bandits and Taxation by Kings: A Critique of Mancur Olson on State-formation’, Political Studies Review, 2, 24–38. Inman, R. P. (2003) ‘Transfers and Bailouts: Enforcing Local Fiscal Discipline with Lessons from U.S. Federalism’, in J. Rodden, G. S. Eskeland and J. Litvack (eds.) Fiscal Decentralization and the Challenge of Hard Budget Constraints, Cambridge, MA: MIT Press. IPA, (2015). Government must rule out Qantas bailout, 29 November 2013, . Kornai, J., E. Maskin and G. Roland (2003) ‘Understanding the Soft Budget Constraint’, Journal of Economic Literature, 41, 1095–1136. Mullins, M. (2014). Ugly nationalism in support for Qantas bailout. 2, March 2014, Oates, W. E. (2005) ‘Toward a Second-generation Theory of Fiscal Federalism’, International Tax and Public Finance, 12, 349–373. ODPM (2004). Balance of Funding Review – Report, July, London: Office of the Deputy Prime Minister. Stiglitz, J. E. (2000). Economics of the Public Sector, 3rd ed. New York: W. W. Norton. Tingie, 2014). Qantas bailout still possible. 6, February 2014, . Verret, J.W. (2009). How the bailout reshapes corporate theory and practice, 30, August 2009, . Read More