Chapter 2 - Background
Introduction
2.1
Late in 2006, a private equity consortium, Airline Partners Australia
Limited (APA), announced that it proposed to acquire Qantas Airways Limited
(Qantas). APA's proposed acquisition of Qantas must comply with the Qantas Sale
Act 1992 (the Act). However, some persons and organisations have expressed
concerns about the implications of the proposed takeover for Qantas
subsidiaries, particularly Jetstar Airways.
2.2
The Qantas Sale (Keep Jetstar Australian) Amendment Bill 2007 (the bill)
seeks to address these concerns. This Chapter provides some background material
in order to give context to the bill and the issues raised in submissions. First,
it gives an outline of the provisions of the bill and the national interest
safeguards in the Qantas Sale Act. It then looks at the implications of the
proposed Qantas sale for Jetstar as identified in the media and briefly
outlines proceedings established to consider aspects of the proposed sale.
Finally, it examines the Deed of Undertaking signed by the Government and
Airline Partners Australia.
Provisions of the bill
2.3
The bill seeks to add additional subsections to section 9 of the Qantas
Sale Act to require Qantas to ensure that:
- Qantas and associated entities (that is, Jetstar)[1]
continue to locate their head offices and facilities such as catering and
maintenance in Australia (proposed paragraphs 9(5)(a) and (b));
- at least two-thirds of the boards of Qantas and associated
entities are Australian citizens (proposed paragraph 9(5)(c)); and
- an Australian citizen presides over any meetings of the boards of
directors of Qantas or associated entities (proposed paragraph 9(5)(d)).
2.4
Proposed subsection 9(6) would also prohibit Qantas and associated
entities from seeking to avoid these requirements.
2.5
The bill's provisions mirror to some extent the 'national interest
safeguards' in Section 7 of the Act except they place requirements on Qantas to
ensure certain things in relation to itself and its associated entities,
whereas Section 7 specifies various provisions (the 'mandatory articles') that
must be included in Qantas' articles of association. The committee will now
turn to the Qantas Sale Act and will also consider the national interest
safeguards in the Act.
Qantas Sale Act 1992
2.6
The Qantas Sale Act contains the legislative and administrative
framework that enabled the sale of Qantas.[2]
It took account of different possible outcomes for the sale process, including
the fact that varying levels of ownership could be sold during the 'trade sale'
process prior to the ensuing public float.
2.7
The Act also reflects key sale requirements relating to the following:
- national interest safeguards required with the sale of 100 per
cent of Qantas;
- recapitalisation of Qantas;
- reconstruction of its debts in preparation for the change of
ownership; and
- terms and conditions of employment for its staff.
2.8
The bulk of the Act is concerned with the removal of both Qantas and
Australian Airlines from the ambit of a variety of Commonwealth legislation so
that, post sale, the expanded Qantas group would be treated the same as other
private sector enterprises generally. The part of the Act that continues to be
relevant today and by which Qantas is bound is Part 3 which contains the
'national interest safeguards'.
Part 3—Requirements regarding
Qantas' articles of association
2.9
Section 7 in Part 3 of the Act, specifies certain provisions that must
be included in Qantas' post-sale articles of association. Currently,[3]
these:
- impose restrictions on the issue and ownership (including joint
ownership) of shares in Qantas so as to:
- prevent foreign persons from having relevant interests in
Qantas shares that represent in total, more than 49 per cent of the total value
of issued share capital of Qantas (paragraph 7(1)(a));
- prevent foreign airlines from having relevant interests in
shares in Qantas that represent, in total, more than 35 per cent of the total
value of the issued share capital of Qantas (paragraph 7(1)(aa)); and
- prevent any one foreign person having relevant interests
in shares in Qantas that represent more than 25 per cent of the total value of
the issued share capital of Qantas (paragraph 7(1)(b)).
Other provisions that
must be included in the articles of association include provisions:
- limiting the number of foreign directors (at least two-thirds
must be Australian citizens) (paragraph 7(1)(i)) and denoting who can vote for
them (paragraph 7(1)(c));
- requiring that the director presiding at a meeting of the board
of directors is an Australian citizen (paragraph 7(1)(j));
- preserving the name of 'Qantas' in the company name (paragraph
7(1)(e)); and for the company's scheduled international air transport passenger
services (paragraph 7(1)(f));
- stipulating that Qantas' head office be located in Australia
(paragraph 7(1)(g)) and that it be incorporated within Australia (paragraph
7(1)(k)); and
- requiring the principal operational centre for Qantas facilities
used in the provision of scheduled international air transport services (eg
facilities for the maintenance and housing of aircraft, catering, flight
operations, training and administration) to be in Australia (paragraph 7(1)(h)).
Proposed Qantas sale
2.10
In February 2007, APA lodged a bidder's statement setting out the terms
of its offer for Qantas. This offer closes on 3 April 2007 (unless extended or withdrawn).[4]
APA made a commitment in its bidder's statement that Qantas will remain
majority Australian-owned and controlled, as required by the Qantas Sale Act.
2.11
Although the Qantas Sale Act places a number of restrictions on Qantas,
including restrictions on foreign ownership and control, some have raised concerns
about the application of the Qantas Sale Act to Qantas subsidiaries such as Jetstar.
About Jetstar Airways
2.12
Jetstar describes itself as 'Australia's and Singapore's low fares airline
for Australia and Asia-Pacific'.[5]
Jetstar's Australian operation is wholly owned by Qantas, but is managed
separately and operates independently. Jetstar's Australian headquarters are in
Melbourne. Jetstar's intra Asian operation is a Singapore-based partnership which
includes Qantas.[6]
2.13
Jetstar started flying within Australia in May 2004, and within Asia
just over six months later. It began international long haul flights from Australia
to Asia in November 2006.[7]
Application of the Qantas Sale Act
to Jetstar
2.14
Media reports suggest that the requirements of the Qantas Sale Act do
not apply to subsidiaries of Qantas, including Jetstar.[8]
Legal advice given to the government indicates that, although Jetstar is owned
and operated by Qantas, it is a separate legal entity, managed largely
independently and operates in its own right. The advice concluded that, as a
result, the provisions of the Qantas Sale Act do not apply to Jetstar. The
Department of Transport and Regional Services confirmed this at the public hearing.[9]
2.15
If the provisions of the Qantas Sale Act do not cover Jetstar, there is
a concern that Jetstar could be used as a device to move jobs and operations
offshore.[10]
In his second reading speech to the bill, Senator Fielding stated his concern
that:
...there is nothing to prevent Jetstar being sold off to
overseas buyers, and jobs and operations being sent offshore, if the Qantas
takeover succeeds.[11]
2.16
For example, it has been reported that unions are fearful that Qantas
will use Jetstar on regional services, and hire cheaper overseas-based cabin
crew to staff Jetstar's international service. Similarly, there are concerns that
conditions imposed on Qantas to keep maintenance operations in Australia would
not apply to Jetstar.[12]
Related proceedings
2.17
The Australian Competition and Consumer Commission has examined the
proposed Qantas takeover. It did not oppose the proposed acquisition, on the
basis that it would be unlikely to substantially lessen competition in any
relevant market (which would be in contravention of section 50 of the Trade
Practices Act 1974).[13]
2.18
The Federal Court is also currently considering the application of the
Qantas Sale Act to Jetstar. On 26 February 2007, the Australian and
International Pilots Association launched legal proceedings in the Federal
Court alleging that Jetstar's international services breach the Qantas Sale
Act. More specifically:
The Federal Court proceedings allege that Jetstar's fast-growing
international services breach section 7(f) of the Qantas Sale Act, which
prevents Qantas from operating scheduled international passenger services under
any brand other than Qantas.[14]
2.19
The timeline of this case is unclear, although the Australian and
International Pilots Association is apparently seeking to have it brought
forward.[15]
Deed of Undertaking
2.20
The Foreign Investment Review Board (FIRB) has considered the proposed
acquisition under the Foreign Acquisitions and Takeovers Act 1975 and
reported to the Treasurer. Based on the FIRB's report, the Treasurer concluded on
6 March 2007 that 'there are no objections under the Foreign Acquisitions and
Takeovers Act or foreign investment policy for the bid to proceed'.[16]
2.21
At the same time, the Treasurer and Minister for Transport and Regional
Services announced that they had negotiated and received a legally enforceable 'Deed
of Undertaking' from APA.[17]
Key provisions of the Deed relevant to the bill, include undertakings that:
- Qantas and Jetstar Airways brands will be maintained both locally
and internationally (paragraph 5.5(a) of the Deed of Undertaking);
- Qantas and Jetstar Airways will expand internationally and within
Australia to provide a sustainable mix of full service and value based
offerings in line with market needs (paragraph 5.5(d));
- the Qantas Group (defined in the Deed to include Qantas and its
subsidiaries) will offer an integrated network of international, domestic and
regional air transport services (paragraph 5.5(e));
- the Qantas Group will support regional capacity growth and
regional network improvement in line with market needs (paragraph 5.5(f));
-
the current review of Qantas Engineering's maintenance, repair
and overall operations will continue, 'with a view to building on existing
capabilities for wide and narrow body maintenance to create an onshore,
globally competitive in-house operation' (paragraph 5.5(g));
- the Qantas Group's track record of offering competitive
conditions, jobs growth, career opportunities and extensive apprenticeship
training will continue in line with market conditions (paragraph 5.5(h)); and
- the facilities used by the Qantas Group (including facilities for
maintenance, catering, training and administration) in the provision of
scheduled services must represent the principal operational centre for the
Qantas Group when compared with those located in any other country (paragraph
5.1(h)).
2.22
Clause 6 of the Deed provides for the Commonwealth to enforce the Deed
in the event of a possible breach.
2.23
Clause 2.3 of the Deed affirms APA's statements in relation to the
acquisition of Qantas, including that it:
- plans to keep the Qantas and Jetstar brands and has no intention
to break up the airline;
- has no intention to reduce regional services; and
- supports Qantas' existing strategy of continuing maintenance
operations in Australia.
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