Fighting-fit Kiwi v bloated marsupial

PATTRICK SMELLIE
Last updated 05:00 12/12/2013

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OPINION: At an end-of-year primary school concert in the affluent Adelaide hill suburb of Crafers on Monday this week, the anxious talk among parents was all about what skills their children should pursue in an Australian economy facing some of its toughest restructuring in decades.

One catalyst for these South Australians' concern: confirmation that 1600 jobs at General Motors' Holden plant in North Adelaide will be lost when it closes in 2017, with predictions that a total of 13,000 direct and indirect jobs will be lost as a result.

That's because the federal government has finally bitten the bullet and will add no more to the billions of dollars of taxpayer subsidies that keep that country's car industry afloat.

Toyota, a major employer in Melbourne and operating on the same subsidised basis, is threatening to shut up shop, too, unless it gets trade union agreement this week to axe decades-old allowances that contribute to cars being far more expensive to make in Australia than in other countries.

In summary, a policy that has kept both job numbers and car prices high in Australia for decades is finally starting to come apart at the seams. As many as 50,000 jobs - direct and indirect - are on the line.

But if the car industry looks sick, the Australian national airline looks even sicker.

Qantas is foreshadowing massive losses and, in the best traditions of this most mercantilist of Australian businesses, has been lashing out at its competitors and hoping the federal government will come to the rescue.

Qantas's chief executive, Alan Joyce, insists he's not looking for a bail-out. Qantas is "not a Holden", he said this week.

Rather, he's seeking a level-playing-field approach to domestic competition, where Virgin Australia is eating Qantas' lunch while absorbing huge losses of its own.

Available actions include allowing foreign investors to own more than 49 per cent of Qantas, which is currently prohibited, a tougher investment test for foreign investors in Qantas' domestic competitors, and government-backed debt guarantees to shore up the airline's investment-grade credit rating.

The last of those options became more urgent this week, with rating agencies cutting Qantas bonds to "junk" status.

Qantas is getting a soft run in the Australian media, where it says its problems are caused by the actions of "deep-pocketed" foreign airlines rather than commercial errors on its part.

These big-spending alien invaders are Virgin Australia's three cornerstone shareholders: Abu Dhabi-based Etihad, Singapore International Airlines, and little old Air New Zealand, which, unlike Qantas, has been making a habit of being profitable in recent years.

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Indeed, to a jaundiced Kiwi's eye, there's something almost laughable about the idea that Air New Zealand is a threat to Qantas when the Australian airline's attitude to its trans-Tasman counterpart has never amounted to much more than a contemptuous "kill or consume".

Now, the boot is on the other foot, with Air New Zealand rated a buy on upgraded profit projections this week and Deutsche Bank expecting a "strong period" through to at least the end of the 2016 financial year.

Qantas, however, is facing an aggressive "cost-out" strategy involving perhaps 1000 job losses and A$2 billion (NZ$2.2b) in savings over the next three years. In the current financial year, it's forecasting a half-year loss of up to A$300 million, which could balloon to A$850m by year-end.

Among the invidious choices it faces are the sale of its cut-rate secondary brand, Jetstar, and at least part of its lucrative frequent flier programme, to realise cash.

For a New Zealand audience, fixated on domestic market issues and the grizzly public debate on partial privatisation, none of this may seem terribly important.

But at stake for Air New Zealand is the realisation of the ambition that propelled it disastrously into buying failed Qantas competitor Ansett in the early 2000s - that is, a serious slice of the Australian domestic aviation market and the feeder traffic that traffic creates for its international routes.

That's why our national carrier is willing to stump up its contribution to the A$350m capital-raising that will keep a loss-making Virgin Australia flying head-to-head with Qantas. For its part, Qantas appears to have believed that an uncontested decade of leadership in the most valuable parts of the Australian domestic aviation market would be unassailable if it just fought a discount war with Virgin for long enough.

The evidence so far is that Qantas was wrong. Its recent tie-up with Emirates of Dubai - Etihad's longer-running Middle Eastern rival - is a defensive move, as is last week's announcement that Qantas will begin code-sharing with a new global pretender, Guangzhou-based China Southern Airlines.

This all makes Air New Zealand's next moves in Australia worth watching. It continues to enjoy the kind of dominance in its domestic market that Qantas once had in Australia, and is growing its profitability when its nearest competitor is mired in red ink.

In a mirror image of the New Zealand economy's improving outlook, compared with Australia's, so a fighting-fit Kiwi airline looks ready to give its bloated marsupial competitor a serious run for its money.

- © Fairfax NZ News

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