The Hockey test for corporate welfare

The AFR sets out the four point test that the Abbott government will be adopting when deciding on corporate welfare:

Mr Hockey acknowledged the airline was different to other businesses because some of its challenges were the result of government policy. These “legacy issues” were “a ball and chain around the leg of the business”, he said.

Mr Hockey said another consideration necessary for government aid was whether companies provided an essential national service and whether they were in an environment where other sovereigns were engaged in direct compeition to “the massive disadvantage” of an Australian business.

He added that businesses also needed to show they were doing heavy lifting on reform themselves.

Okay – of those 4 items:

  1. Is the firm subject to unique regulation that impedes its business model?
  2. Does the firm provide an essential service?
  3. Does the firm compete against foreign State Owned Enterprises?
  4. Is the firm working to restructure its operations?

There is only one that government should worry about – that is number 1.

Even if we believed that Qantas offered an ‘essential’ service, Qantas hardly offers a unique service. I have no doubt that aeroplanes will the Australian skies – maybe not Qantas planes. Given the ubiquity of SOEs and (now) sovereign wealth funds the fact that an Australian firm is competing against an SOE or SWF controlled firm can hardly be a screening criteria.

Finally we get to the question of whether the firm is voluntarily restructuring. Firms that run into enough trouble to justify a massive restructure need to do three things:

  1. Get rid of the people who got them into trouble
  2. Fix the balance sheet
  3. Fix the income statement

 
Running to government is fixing the balance sheet. What are Qantas doing to fix their income statement. Here two things need to happen. They need to get paying customers and control costs.

Now if financial markets thought Qantas could fix its income statement, Qantas would have no problem raising the capital to fix their balance sheet. But, of course, for the Qantas sale act – that unique regulation that applies only to Qantas.

I don’t know if Qantas can ever get enough paying customers to be viable – the level of service they offer compared to the prices they want to charge seem out of kilter to me. But that is an open question. Alan Joyce does seem very smart and very sensible.

Joe Hockey should not be providing any assistance to Qantas except to repeal the Qantas Sale Act. To get the Parliament to agree to repealing the act he should explain the consequences of not repealing the act: No more Captains Club at the Canberra airport.

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54 Responses to The Hockey test for corporate welfare

  1. Tel

    Running to government is fixing the balance sheet. What are Qantas doing to fix their income statement. Here two things need to happen. They need to get paying customers and control costs.

    Same situation if they sell to foreign owners. I don’t accept the argument that they need re-capitalization, because Qantas are hardly a shoestring startup with lots of unlockable potential. They are a very mature business with a well understood model, amongst other equally mature businesses running almost identical models.

    An injection of foreign capital may look good for a while if it fixed the balance sheet, but how that addresses the “get paying customers and control costs” side of things is beyond me. Besides that, there’s no shortage of Australian capital available, it’s just that the fund managers know they don’t want to dump money into Qantas. Could be a reason for that.

  2. HK_Brother

    I didn’t really understand the conext of the Qantas Sale Act until I read this overview…Cut it loose Hockey.

  3. Johno

    Joe Hockey should not be providing any assistance to Qantas except to repeal the Qantas Sale Act. To get the Parliament to agree to repealing the act he should explain the consequences of not repealing the act: No more Captains Club at the Canberra airport.

    Spot on.

    Hockey’s four points seem designed to justify risking my money on QANTAS’ management and intransigent unions., but containing his need to risk in on other bludgers. I’m glad to see he is trying to contain the risk, but he should be putting pressure on Green Labor to ‘save Aussie jobs’ and repeal the dumb stupid Act.

    Looks like the end of the ‘Age of Entitlement’ didn’t last that long.

    With Abbott running around drought affected parts of the bush, expect more ‘entitlements’ to start flowing.

  4. Tel

    Joe Hockey should not be providing any assistance to Qantas except to repeal the Qantas Sale Act.

    Why does the ability to sell it to foreigners change any of the reasons you already stated about raising capital in Australia?

    Do you think that foreign fund managers are more stupid than Australian fund managers?

  5. entropy

    that isn’t the only restriction of the Qantas sale act, tel.

  6. JC

    Tel

    If a foreign entity purchased a sizable stake in quaintarse they could do lots of things to improve performance such as outsourcing a good amount of the maintenance, employ less costly staff in Asian hubs.

    I tend to disagree with sinc’s conclusions Qantas is rooted because of our labor market laws and the fact that the airline is competing with firms subsidized by various governments with deep pockets. For quaintarse to survive it has to move its operations and staffing rules out of australia. Both the balance sheet and income statements are impacted by these factors.

    If the government was serious about helping the airline it may think about exempting it from fairwork at the very least on the promise the airline would take on the various unions Grace Collier style.

  7. JC

    Let keep in mind that the Liars party was telling us our economy was the envy of the world. It may then want to explan why the national carrier is basically on its knees.

  8. Jock

    I agree entirely. I am sure Qantas needs to do more to fix its Cash Flow. All Labor costs and entitlements on the table. Fuel costs would be comparable but fixed costs need to be assessed.
    To be fair the ROE required by an SOE or SWF or even a foreign Pension Fund is way below that required by an equity investor anywhere in the world. However I am sure there is an innovative way to even the playing field.

    Any thoughts on how to put in place regulations or systems that ensure SOE and SWF are competing fairly?? I should add that these entities usually invest for sovereign strategic reasons and can forego cash flow ad infinitum. Joyce is correct in this respect.

  9. JC

    I want to explain my disagreement with Sinc , if that’s what it could be called, is that the destruction of shareholder wealth in quaintarse is primarily the fault of the government. I also think the carrier has a fair complaint about foreign airlines acting in a predatory manner when both their cost of capital and fuel are subsidized.

  10. Squirrel

    The most telling word in those four criteria is “unique” – I trust that those who drafted, cleared, approved etc. those words reflected on that point.

  11. Tel

    http://www.ausbt.com.au/the-qantas-sale-act-explained

    * Any single foreign investor is limited to a 25% stake in Qantas
    * Foreign airlines can hold no more than 35% of Qantas shares in total
    * Total foreign ownership of Qantas is capped at 49%

    If you delve into the comments linked above, you see that other airlines don’t even want the 25% stake, so that’s irrelevant. Foreign ownership capped at 49% is imposed by our international treaty obligations and the Air Navigation Act anyhow, but most likely does not apply to Jetstar. So yeah, they have options for raising international capital.

    None of that changes the fundamentals, which Sinclair has already explained:

    Now if financial markets thought Qantas could fix its income statement, Qantas would have no problem raising the capital to fix their balance sheet. But, of course, for the Qantas sale act – that unique regulation that applies only to Qantas.

    Ya! And every foreign investor faces the same proposition (worse actually because in Australia, surviving as an investor also depends on political acumen just the same as surviving as a business does), which might be why those not-as-dopey-as-they-look foreigners haven’t rushed to buy just yet.

  12. JC

    Any thoughts on how to put in place regulations or systems that ensure SOE and SWF are competing fairly??

    This is a hard one because you don’t want to the consumer adversely affected by losing out with cheap tickets. I think the best thing for Qantas going forward would be to get them out of Fairwork, allow them to create Asian hubs with non- Australian staff and get rid of act.

  13. Sinclair Davidson

    Squirrel – the numbered points are my summary of the test that I gleaned from the AFR article.

  14. Tel

    If a foreign entity purchased a sizable stake in quaintarse they could do lots of things to improve performance such as outsourcing a good amount of the maintenance, employ less costly staff in Asian hubs.

    So it’s about union busting, not about capitalization. Well thanks for that, at least I’m not insane.

    A foreign owner can more effectively bust unions than a local owner, and then Abbott / Hockey can suck their little fingers and say, “Gosh! How did that happen?” That does at least make sense.

  15. Sinclair Davidson

    Any thoughts on how to put in place regulations or systems that ensure SOE and SWF are competing fairly??

    None whatsoever.

  16. Bruce of Newcastle

    I think the Parliament of Australia should immediately give Qantas $106 million a year.

    Mr Shorten can do this by instructing his MP’s to pass the carbon tax repeal in the Senate.

    Until he does it he and Albanese, who says today that “a decision to support the carrier should be made soon”, are absolute hypocrites.

    Read Albo’s comments at the link. Breathtaking hypocrisy.

  17. Grigory M

    With Abbott running around drought affected parts of the bush, expect more ‘entitlements’ to start flowing.

    Drought declarations, made in accordance with laid down criteria, are the determinant of whether or not specified ‘entitlements’ can be availed of by primary producers and others in drought-affected districts under the standing Commonwealth/State National Disaster Assistance Arrangements. Tony Abbott (and others) ‘running around drought affected parts of the bush” is just ensuring that they are seen to be showing concern for those affected.

  18. JC

    Good point Bruce.

    If forget about the carbonic tax that was estimated to cost Qantas around 100 million per year while the foreign airlines aren’t.

    What a disgusting bunch of economic vandals the liars party/ human trash coalition are.

  19. Johno

    Tony Abbott (and others) ‘running around drought affected parts of the bush” is just ensuring that they are seen to be showing concern for those affected.

    Yeah! Right. And I believes on fairies at the bottom of the garden to.

    How long do you think those ‘criteria’ will last if Barnaby and his socialist mates in the National Party start pushing for extra ‘entitlements’?

  20. JC

    So it’s about union busting, not about capitalization. Well thanks for that, at least I’m not insane.

    No, that’s going tOo easy. It’s about destroying and putting the unions in a lead coffin once and for all.
    Don’t forget the leader of this thug union openly discussed the idea of destroying Qantas last year.

  21. JC

    Instead of removing the carbonic tax Qantas may think about sticking windmills and solar panels on each fuselage in order to take advantage of renewballs. After all there’s tons of wind and sun at 30,000 feet and would be a source of cheap and sustainable energy, like I think Greg Combet once suggested. :-)

  22. Baldrick

    As at 6 March 2013 (the latest figures) Qantas already had 39.8% foreign ownership and is capped at another 10%.

    The question isn’t why we should limited foreign ownership in Australian products but rather what other goods or services can we provide which the rest of the world want to invest.

  23. Squirrel

    “Sinclair Davidson

    #1191386, posted on February 16, 2014 at 3:29 pm

    Squirrel – the numbered points are my summary of the test that I gleaned from the AFR article.”

    Point taken, but the gist of the first of those points (whatever the actual wording) would be meaningless (and quite satirical) without “unique”, or something close to it.

    Politico/bureaucratic drafting is typically a form of gymnastics, requiring double joints, little or no sense of shame, and often performed with the assistance of a rear-vision mirror – while wearing an eye-patch (sometimes on both eyes). A childhood spent playing Twister! could well be an advantage.

  24. Louis Hissink

    They could also get rid of the feeding troughs in the terminals – Qantas Club facilities. Never have I seen so many snouts gorging themselves on the free food etc. Don’t these people eat at home?

  25. 2dogs

    If a decision is made to “fix” a firm, the previous owners should lose title to it, and only receive what they would have got in the event of a liquidation.

    Anything more is moral hazard.

  26. JC

    You don’t eat in the lounge, Louis?

  27. Baldrick

    Louis Hissink
    #1191427, posted on February 16, 2014 at 4:07 pm
    … Don’t these people eat at home?

    Yeah. What is it with people gorging themselves on airline terminal food? How could anybody be that hungry?

  28. Demosthenes

    Never have I seen so many snouts gorging themselves on the free food etc. Don’t these people eat at home?

    http://www.gizmodo.com.au/2014/01/genius-man-used-one-first-class-airplane-ticket-to-eat-free-for-a-year/

  29. Infidel Tiger

    They could also get rid of the feeding troughs in the terminals – Qantas Club facilities. Never have I seen so many snouts gorging themselves on the free food etc. Don’t these people eat at home?

    The Q Club and the Frequent Flyer program are worth more than the airline.

  30. Grigory M

    I believes on fairies at the bottom of the garden

    There are none.

    How long do you think those ‘criteria’ will last if Barnaby and his socialist mates in the National Party start pushing for extra ‘entitlements’?

    Here you go – have a read: Drought Relief

    Meanwhile, the on-topic discussion of Qantas issues continues.

  31. Fisky

    From Demos’ link –

    News.com.au relays a report from Kwong Wah Yit Poh of a genius man in China who took advantage of the free perks of those airport lounges. He booked a first class ticket on China Eastern Airlines and went to the VIP airport lounge at the Xi’an airport in Shaanxi, China and ate a delicious meal before his flight. Just like any first class traveller would. Except he never takes the flight. After he finished eating, the man changed his flight’s departure for another day and went back home. Until tomorrow. Armed with a brand new first class ticket for a new day, he comes back to the airport lounge, eats another fantastic free meal and after he finishes up, yep, pushes his flight back again. Lather. Eat. Repeat. For free.

    In fact, he pretty much got a year of free meals out of this trick because he changed his flight itinerary over 300 times in the same year. The man sure knows how to work a loophole.

    The best part though? When China Eastern Airlines started investigating this heroic man for changing his flights too many times, he simply canceled his aeroplane ticket and got a full refund. Well done, sir. Well done.

    FTFW!

  32. rickw

    “Joe Hockey should not be providing any assistance to Qantas except to repeal the Qantas Sale Act.”

    Wrong.

    He also desperately needs to establish an industrial relations environment where Qantas can reform its work practices and salary structures. I also believe that Alan Joyce firmly understands that this needs to be done.

    I spent 15 years working in Aviation related support services where I interfaced regularly with QF ground staff. Give me an auto-worker any day! Those guys completely suck.

    Complaining about shitty service on QF? Again, QF is stuck with a whole raft of grumpy old cabin crew who would be out on their backsides in any other service industry.

    The reason for the success of new start airlines such as Virgin, and the very reason QF started Jetstar is because they could establish employment arrangements from scratch. QF had no ability to do that, and you’ll notice fought very hard to prevent bleeding of QF employment practices into Jetstar.

    QF also has a relatively homogenous fleet, the other big killer of airlines, as compared to Ansett which owned atleast one of pretty much every passenger aircraft built.

    In inability to reform work practices will kill Qantas a surely as it killed Ford, Misubishi, GM and Toyota, sale act repealed or not.

  33. egg_

    As they have historically been under the Transport and Communications portfolio, a comparison with Optus (the privatisation of Aussat) was that in taking over the then $700 million Aussat debt in oreder to gain a Carrier licence, the Optus staff Award was approximately 10% greater pay but without the Govt staff’s 9-day fortnight.
    The ridiculous duplication of services such as a second transcontinental fibre link and the purchase of The Movie Network for c. $600* M (where Hollywood took naive Aussie execs to the cleaners) cost them dearly.
    (UK) Cable & Wireless bought out (US) Bell Pacific but eventually sold Optus to SingTel (Singapore Govt).

    *The $600M debt was carried until a ‘Content Sharing Arrangement’ was struck with Foxtel (part owned by Telstra, part owned by Aust Govt) and the ACCC and was traded for capacity on the new C series satellites**.

    **Also carrying capacity for the Aust Defence forces, so they are effectively running internal Oz Defence comms over a network 100% owned by a foreign entity.

  34. Helen

    With Abbott running around drought affected parts of the bush

    we now know he is close to god, becasue it is raining where he is!

  35. wreckage

    How long do you think those ‘criteria’ will last if Barnaby and his socialist mates in the National Party start pushing for extra ‘entitlements’?

    The same criteria have been in since the last time they were in government. And at this stage I’d say the Nats are probably more market-liberal than the Liberals, depending on context.

  36. Ant

    I wish auto workers had the guts to take a leaf out of the Tennessee VW workers’ book.

  37. Tel

    Yeah. What is it with people gorging themselves on airline terminal food? How could anybody be that hungry?

    If you have ever caught a Virgin flight, you want to make sure you sate your hunger and thirst before you get into the aircraft.

    Then again, on Virgin you only pay for what you use, i.e. getting from A to B.

  38. will

    In inability to reform work practices will kill Qantas a surely as it killed Ford, Misubishi, GM and Toyota, sale act repealed or not.

    No.

    The ability to form equity partners will allow QF to offshore and share costs of maintenance and other back office functions. It will allow it to survive. The brand has considerable value.

  39. Alain

    Hockey clearly wants to bail out Qantas because he must still love Olivia Wirth, Alan Joyce’s right hand woman and currently Paul Howes’ bedmate. Its been interesting watch Warren Truss the Transport Minister be quite tough in talking down the chances of assistance and demanding IR issues be fixed.

  40. blogstrop

    I have no doubt that aeroplanes will [...] the Australian skies

    Word missing? Fly?

  41. blogstrop

    Flying commercial to anywhere is vastly over-rated. Anything but glamorous or enjoyable.

  42. blogstrop

    Olivia, however, may be wirth it.

  43. JC

    I flew in from Sydney earlier, with Qantas. I had an issue with the seat allocation machine and was forced to go to the regular desk to be assisted by their human version. What a freaking arsehole attitude. I asked if there was an earlier flight we could get on and was told that if the machine didn’t offer it then there were any. I asked her to check herself and she was reluctant to do so. I then pointedly asked her to check and she grudgingly did so after I had to explain that the machine we used told us to go to the desk.

    The attitude of these arseholes is breathtaking. The firm is on it’s knees and they’re still bickering and being unhelpful with customers. Unbelievable. Sack’em all and start again.

  44. sabrina

    Alan Joyce does seem very smart and very sensible.
    Anyone who can convince the board to get rid of John Borghetti and progress from Aer Lingus – Ansett – Jetstar to Qantas, and get a 71% remuneration increase to $5million in the year of grounding the fleet is smart indeed! He is no less inept than some of the unionised staff there.

  45. JC

    Sabrina

    Joyce is actually a pretty decent CEO. He’s got a shit firm to work with and was a better choice than Borghetti. Joyce inherited a rats nest.

  46. sabrina

    JC, I am not sure. I remember getting stuck in Europe, so were few of my colleagues without any advance notice. It was a total disregard for customers who pay his salary. It takes two to tango, he is not spotless.

  47. candy

    With Abbott running around drought affected parts of the bush

    we now know he is close to god, because it is raining where he is!

    I hope the rain keeps up, Helen. What a welcome change. Tony Abbot is a rainmaker! Even our wonderful Scott Morrison could not do that.

  48. egg_

    Sack’em all and start again.

    Definitely a path to reform.
    Or in Aunty’s case, flog off the lost cause to be completely rebuilt from the ground up.

  49. JohnA

    JC #1191411, posted on February 16, 2014 at 3:45 pm

    Good point Bruce.

    If forget about the carbonic tax that was estimated to cost Qantas around 100 million per year while the foreign airlines aren’t.

    What a disgusting bunch of economic vandals the liars party/ human trash coalition are.

    Same linky shows that Virgin was hit with a $50mill bill, so the net “value” to Q would be abuot $56mill in competition against Virgin, but yes, full $106mill against total foreigners.

  50. JohnA

    rickw #1191456, posted on February 16, 2014 at 4:46 pm

    QF also has a relatively homogenous fleet, the other big killer of airlines, as compared to Ansett which owned atleast one of pretty much every passenger aircraft built.

    Sorry, but no.

    Apart from the owners, what hurt Ansett a lot was maintenance: too many types, with massive spares investments, duplicated staffing and therefore underutilised engineering personnel, not to mention the union problem.

  51. JohnA

    will #1191597, posted on February 16, 2014 at 7:42 pm

    In inability to reform work practices will kill Qantas a surely as it killed Ford, Misubishi, GM and Toyota, sale act repealed or not.

    No.

    The ability to form equity partners will allow QF to offshore and share costs of maintenance and other back office functions. It will allow it to survive. The brand has considerable value.

    You appear to be in furious agreement.

    Qantas wanted to offshore its maintenance but union intransigence sees the major maintenance stuck at the Jetbase in Mascot. That imposes hidden costs including scheduling restrictions and/or non-revenue transit flights just for maintenance.

    Every transport business faces the cost of what is called “dead running”, and has to decide how to locate depots and maintenance facilities to minimise dead running factors. Road transport operators domestically don’t have the opportunity to internationalise that in the way airlines can.

    Qantas is working with a hand tied behind its back on this one.

  52. rickw

    Will (work practices), JohnA (a/c fleet) – I think we are all in furious agreement ??

  53. Aristogeiton

    One despairs. Shirley Robin Letwin, in her excellent book “The Anatomy of Thatcherism”, notes the following:

    The paradigm for political action for at least a century has been extremly simple: first identify what is wrong, then get the government to do something about it. To the Thatcherite, this paradigm has in itself seemed part of the problem. It has had to be replaced with a different paradigm: first, identify the problem; second, discover whether the problem is caused by government action or government inaction; third, if the problem is caused by government action, put an end to that action; and fourth, only if the problem is caused by government inaction, get the government to do something about it.

    As an aside, Letwin’s posthumously published “On the History of the Idea of Law” should be essential reading for undergraduates (alongside H. L. A. Hart’s “The Concept of Law”). Instead, these days we get Critical Legal Studies, Marxist deconstructions and so forth.

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