The big aviation wedge: Why the government can’t say no again to Qatar

Oh, what a wedge! The government will surely be squeezed into allowing Qatar Airways to take a 25 per cent stake in Virgin Australia, regardless of whether it is in the national interest.

Because it’s certainly not in the Labor government’s interest to block the Middle Eastern carrier – again.

The optics of denying Qatar’s application to buy a 25 per cent stake in Virgin would be so damaging for the government that it would be reckless for Treasurer Jim Chalmers to even try.Credit: Marija Ercegovac

Without any cogent explanation, the government in July last year denied Qatar’s application to run 28 additional services into Australia.

The government was comprehensively skewered during last year’s Senate inquiry, facing allegations that it was acting as a Qantas puppet – at a time when Qantas was facing intense scrutiny for selling tickets on cancelled flights, illegally sacking ground staff and providing atrocious service for customers attempting to redeem COVID-19 pandemic-era flight credits.

Qantas was kryptonite at that time.

The optics of denying Qatar’s Foreign Investment Review Board application to buy a 25 per cent stake in Virgin would be so damaging for the government that it would be reckless for Treasurer Jim Chalmers to even try.

Meanwhile for Qatar, there is a certain elegance to potentially achieving the same outcome of running more planes into our capital cities, using a work-around.

Because, if successful, Virgin plans to wet lease aircraft from Qatar and run Virgin flights into Doha. So presto, Virgin becomes a long-haul international service to the Middle East using Qatar planes (or using its metal, as they call it in aviation parlance).

Virgin needs to get approval from the federal Transport Department to add flights to Doha, as well as from the Australian Competition and Consumer Commission and the Qatar government, which (you guessed it) owns the largest stake in Qatar Airways.

Receiving an “authorisation” tick from the competition regulator certainly looks like it should be a shoo-in, given two former ACCC chairs argued during the above-mentioned Senate hearings that additional flights from Qatar would enhance competition and reduce prices.

For Qatar, there is a certain elegance to potentially achieving the same outcome of running more planes into our capital cities, using a work-around.

(And bear in mind that Virgin’s current owner is a foreign private equity firm and its former owners were a bunch of foreign airlines and British entrepreneur Richard Branson.)

With his Foreign Investment Review Board hat on, Chalmers needs to assess Qatar’s application for part-ownership of Virgin with an eye to the airline’s character, national security, competition and the Australian economy.

And while Chalmers said on Tuesday he wouldn’t pre-empt the FIRB decision, he noted that more broadly the government wanted to see a strong competitive airline industry that delivered for consumers.

In terms of what it will mean for the Australian aviation landscape and for Virgin’s earnings prospects, the outcome is less clear.

The deal would pave the way to appoint a new chief executive to replace the current boss, Jayne Hrdlicka.Credit: Dan Peled

There has been plenty of brouhaha about this deal enabling Virgin to better compete with Qantas. It certainly will help Virgin, but it is difficult to imagine it will significantly elevate the airline to a new level of profit. That said, Virgin claimed on Tuesday that the deal would provide for scale and synergy benefits.

Remember when Virgin fell into administration, several foreign carriers had large shareholdings, including Singapore and Etihad.

The biggest boost Virgin has received recently in this regard was the collapse of Rex, which resulted in it pulling out of inter-capital city routes. That took out the competition at the margin on those lucrative routes, which would have been a bonus for Virgin and Qantas – but possibly more for Virgin, whose services were pitched similarly to those of Rex.

(Qantas is pitched at the premium end of the market and Jetstar travellers are at the discount end.)

So it was curious that Qantas’ share price took a 3 per cent hit on Tuesday when the Qatar/Virgin deal was announced.

Unfortunately, Virgin’s current majority shareholder, Bain Capital, which sold some of its shares to Qatar (and after this transaction would have 68 per cent of Virgin), did not disclose a price, so provided no insight into the valuation of Virgin, which is still working through the motions of listing on the ASX.

Assuming this deal is approved, Virgin has probably moved closer to having its listing ducks in a row – including paving the way to appoint a new chief executive to replace the current boss, Jayne Hrdlicka.

Perversely, the other issue that had been crimping Virgin’s ability to float was Qantas’ depressed share price.

Putting aside Qantas shares dipping on Tuesday, the shares have been steaming ahead – up 25 per cent over the past few months.

The good news for consumers is that this deal should increase competition on the Middle East and European routes – and with it some price relief.

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