The public fears of Qantas Airways have come true, but its most recent challenge to Virgin Australia’s foreign ownership seems to be making no more headway than did its first. If Virgin’s gambit has succeeded, airlines in other countries with similar laws might be able to copy its example to avoid their own foreign ownership limits.
Etihad, Air New Zealand, and Singapore Airlines have boosted their stakes in Virgin’s domestic arm to a combined total of 67%, confirming Qantas’s concerns. But this seems unlikely to worry Australian regulators.
In March 2012 Virgin Australia formed a separate unlisted company to take over all assets and routes held by its international airline. This new corporation required and still requires that Australian citizens own a majority of its shares and hold at least two-thirds of the seats on its board, and that it maintain its head office and operational base in Australia.
This new corporation is owned by the same shareholders who owned Virgin Australia on March 21, 2012. On that date, the original company was majority-owned by Australians, so the new company is too.
This arrangement released Virgin Domestic from the 49% foreign ownership cap that expressly applies to Australian international carriers. Foreign stakes in Virgin Domestic still require approval from the Foreign Investment Review Board, but this is the same for any Australian business.
When Virgin first announced this corporate revamp Qantas opposed it. The Oneworld carrier raised most of the same arguments that it raises now about foreigners taking over Virgin’s domestic business. It also claimed that financial arrangements between Virgin Domestic and Virgin International give the former “effective control” over the latter.
Those financial arrangements consist of service and loan agreements. Their terms remain confidential, but they probably involve funding for Virgin International’s 777s. The critical point, however, is that Virgin Domestic holds no shares in Virgin International.
This seemed to satisfy Australia’s transport department when Qantas complained about this in 2012. Officials found that the structure of Virgin International “was consistent with the regulatory requirements for a designated Australian international airline”. Rejecting a Qantas call for a public inquiry, they responded: "In the light of the department's role in monitoring the operations of all Australian international airlines for ongoing compliance with regulatory requirements, we do not believe Qantas's suggestion of the need for a public inquiry is either necessary or appropriate . . ."
This apparent lack of interest in the agreements between the Virgin corporations stands in sharp contrast to the probing examination that the US DOT made into the Virgin Group’s franchise documents with Virgin America. But US law requires that its airlines be “under the actual control” of US citizens. Australian law contains no such requirement, and regulators seem uninterested in reading one into it.
In any country whose laws parallel Australia’s, airlines would seem to have Virgin Australia’s option to split themselves into separate entities so long as they ensure that their international arm honours the foreign ownership rules.
But the wider question is how much difference foreign ownership limits really make. John Thomas, manager director at Boston-based LEK Consulting and head of its global aviation and travel practice, doubts that many airlines feel a need to follow Virgin Australia’s example.
“The biggest capital need for airlines is aircraft,” Thomas says. He says that leasing and the myriad other sources of air finance reduce the need for capital. More broadly, he contends that an airline only needs foreign ownership if the capital markets in its home country are inadequate to fund its needs.“I would argue that most well-performing airlines around the world have little problems accessing capital in their local markets,” Thomas says. “So the foreign ownership laws really don’t affect them at all.”
Thomas also stresses that the ever-increasing number of joint ventures operating with antitrust immunity “achieve a significant portion of the benefit that airlines would hope to achieve through cross-border mergers and acquisitions – another reason often given for the need to loosen foreign ownership laws.” His company’s analysis shows that these ventures now account for 30% of the world’s airline capacity.
Yet, pressure remains for countries to relax their foreign ownership laws, as India did last year.The European Commission is still pushing the USA to ease its 25% foreign ownership cap. Meanwhile, initiatives such as IATA’s Agenda for Freedom do not tackle ownership limits head-on, but seek to circumvent them.
Aside from general foreign ownership caps, some countries also limit ownership of their carriers by foreign airlines. The three carriers that have bought into Virgin Australia are attracted by its potential for strategic partnerships. The reason Qantas is so upset may be because the specific law governing its ownership blocks foreign airlines from holding more than 35% of its shares, thus denying it a chance to do exactly what Virgin Australia is doing.
Source: Cirium Dashboard
