THE HON PETER COSTELLO MP

Treasurer

Joint Press Conference with

THE HON MARK VAILE MP

Deputy Prime Minister

Minister for Transport & Regional Services

Parliament House

Canberra

Tuesday, 6 March 2007

5.20 pm

SUBJECTS: Qantas, David Johnston

TREASURER:

On the 5th of February I received an application by Airline Partners Australia under the Foreign Acquisition and Takeovers Act notifying of a bid they proposed making in relation to Qantas Airways.  The bid has been examined by the Foreign Investment Review Board and its report has been forwarded to me.  Separately to that process Qantas has negotiated a Deed of Undertaking with both the Deputy Prime Minister and Minister for Transport and me in respect of certain undertakings that the bidders will make.

In view of the undertakings that they have made in this legally enforceable deed, I have concluded that there are no objections under the Foreign Acquisitions and Takeovers Act or foreign investment policy for the bid to proceed.  Whether or not the bid is successful will be a matter for the existing shareholders. 

The Deed of Undertaking sets out that foreign majority ownership of Qantas will not occur.  Foreign control of Qantas will not occur.  A majority of directors of Qantas must be Australian citizens and Qantas must remain based in Australia.  In addition to that, the facilities of Qantas taken in aggregate in the provision of scheduled services, for example maintenance, housing of aircraft, catering, flight operations, training and administration must be located in Australia as opposed to any other country and that condition appears at 5.1 (h). 

Additional undertakings which have been received by the Government and are set out in clause 5.5 include that Qantas and Jetstar will expand internationally and within Australia, the Qantas Group will offer an integrated network of international, domestic and regional our transport services, the Qantas Group will support regional capacity growth and regional network improvement and the current review of maintenance repair and overhaul operations will continue with a view to building on existing capabilities for wide and narrow bodied maintenance to create an onshore globally competitive in house maintenance repair and overhaul operation.  The Deed of Undertaking also requires Qantas to continue its Frequent Flyer Programme with no loss of frequent flyer points. 

Given this legally enforceable Deed which the Commonwealth can enforce, which guarantees the continuation of Qantas in Australia, the regional network, Qantas continuing its frequent flyer programmes, Qantas remaining an integrated service, guaranteeing in the articles of association, majority Australian ownership, majority Australian directors, principal place of operation in Australia the Government will allow the bid to go to the existing shareholders. 

These terms and conditions in the articles of association and in the Deed of Undertaking continue Qantas as an Australian majority owned company controlled by Australians with important undertakings to maintain its position in this country.  That position will be buttressed by the Qantas Sale Act, by this Deed of Undertaking and by ongoing monitoring under the terms of this Deed to ensure that Qantas continues to offer a service, a valuable service, to Australia as an Australian company.

DEPUTY PRIME MINISTER:

Thanks Treasurer.  Whilst the Foreign Investment Review Board process has been undertaken there has been another process operating in parallel to that and that is the assessment by my department, the Department of Transport and Regional Services and the Australian Government Solicitor for the bid’s compliance with those conditions contained in the Qantas Sale Act and the Airports Act of 1996.  The advice provided by my department and the Australian Government Solicitor indicates that on the information that has been provided by Airline Partners Australia the proposed acquisition does comply with the regulations set out in those two Acts. 

So, and added to that, as the Treasurer has just indicated the public commitments and undertakings that Airline Partners Australia have given both verbally and in the bid document are now a part of the legally binding Deed of Undertaking that we have negotiated with Airline Partners Australia.  It goes to those particular issues that the Treasurer mentioned with regard to the operation of Qantas and Jetstar regional services, the maintenance operations, the frequent flyer programme and importantly the Deed ensures that we the Government have access to the information required to monitor the regulatory compliance with the Deed and with the Qantas Sale Act and with the Airports Act.  And so it gives us the opportunity to monitor that regularly to ensure that that compliance is met.

TREASURER:

Any questions?

JOURNALIST:

Does the emphasis on the aggregate nature of these undertakings suggest there’s considerable scope in the future for a fairly light (inaudible) in the mix of business between Qantas and Jetstar either domestically or internationally?

TREASURER:

No, I don’t think so.  Both Qantas and Jetstar have operations overseas, they have to, they have airline staff in every port they fly into around the world.  So what this requires is that when you look at the operations that they have in Australia compared to the operations that they have overseas the principal operational centre will be Australian. 

JOURNALIST:

(inaudible) creating it is not Jetstar, not Qantas to get around this Deed?

TREASURER:

Well, let me make this point, under the current ownership what was to stop it?  The change of ownership doesn’t mean that Qantas has any new opportunity to set up a new subsidiary.  And in fact who would ban Qantas setting up a new subsidiary.  But what this Deed does is it strengthens the current position immeasurably by saying that Qantas and Jetstar have to have their principal operations in Australia.

JOURNALIST:

What are the penalties for breach?

TREASURER:

The penalties for any breach of this Deed will be that the Government can get legal injunctions against Qantas to enforce the deed and in fact as the Deed itself provides, in that event, the APA will have to actually submit to such an injunction.

JOURNALIST:

Treasurer can I just ask you is that unusual in the context of the FIRB looking at (inaudible) is those sort of undertaking something that you sought specifically for Qantas because of the political sensitivity…?

TREASURER:

Can I say that this Deed of Undertaking is probably the most extensive that I have ever seen from an Australian company.  Can I say it is not just under the FIRB but under the Qantas Sale Act and DOTARS and that is why it is a Deed which has been given both to me and to Mark.  Certainly as far as anything I have seen come through foreign investment this is the most extensive I have ever seen.  I don’t know if it is the most extensive that Mark has ever seen.

JOURNALIST:

Just to clarify something where it talks about the capital investment program of $10 billion over the next five years if for instance Qantas failed or APA the new owners failed to meet that, under this Deed could the Government step in and impose penalties or (inaudible)?

TREASURER:

Well, in relation to the undertakings if Qantas were to breach any of the undertakings the Government can step in, obtain a legal injunction that they observe those undertakings and as the agreement itself says APA must not oppose the granting of such an injunction.  So we have got the right to go to the Court and get an injunction and they must not oppose the granting of such an injunction.

JOURNALIST:

So there is no legal wriggle room?

TREASURER:

Well that is right.  They would have no legal recourse to breaching the agreement.

JOURNALIST:

(inaudible) you said that the Deed (inaudible) Mark Vaile you said that without the Deed you would have serious doubts about the deal?

TREASURER:

Well put it this way, I am happy for this to go to shareholders given the fact that the Deed has been executed.  The lady in front sir I don’t want her to be overridden by the gentleman behind.

JOURNALIST:

Treasurer thank you.

TREASURER:

In any circumstances.

JOURNALIST:

If Qantas (inaudible) about the $10 billion capital investment program, if Qantas failed to live up to that undertaking, if they failed to invest $10 billion it is perhaps because the company is not in the financial position in order to do so, so on that basis would the Commonwealth still get an injunction to effectively force the company to do something that might put it in peril?

TREASURER:

The Commonwealth will insist on this Deed being observed.  If the world changes somewhere down the track we will look at that in a changed world.  But as far as we’re concerned these have been hard negotiated terms and conditions and they will be enforced.

JOURNALIST:

Is an undertaking on jobs growth saying in the Deed (inaudible) saying that jobs growth will continue (inaudible) what does that mean and would that prevent the company from offshoreing core jobs?

TREASURER:

Well it is saying that Qantas has had a track record of increasing employment in this country.  I spoke to Geoff Dixon today about that.  The jobs growth for Qantas employees in this country has been quite considerable and what the Deed says is that that track record will continue, that is that there will be increased opportunities for people to work for Qantas in this country.

DEPUTY PRIME MINISTER:

The important point Mark is that Qantas as we know it today and as we knew it before this proposal came along had a development and expansion strategy in place.  The commitment by APA and then voiced by Geoff Dixon is that their view that that should continue – that expansion strategy should continue.  And that covers this issue.  And so they were always prepared to make that public commitment that has now been made in, or been codified if you like, in this Deed of Agreement, that strategy and that if you step back from it is a fairly powerful expression of the commitment that they have been making all along in sticking with the growth strategy that management had in place for the publicly listed company and they have been prepared to put it in this legally binding document.

JOURNALIST:

Can you go through the anti-competitive issues raised in 5.1 L concerning the airports and Macquarie Bank (inaudible)?

TREASURER:

Well the idea of that is that because Macquarie Bank has an interest in the terminals at Sydney Airport then Macquarie Bank cannot vote on any specific decision relating to access and that is because it could well have a conflict of interest.

JOURNALIST:

Treasurer you have had a fair bit to say about private equity deals are there, is there any undertakings in here about levels of debt (inaudible)?

TREASURER:

No.

JOURNALIST:

Did you have any concerns about that?

TREASURER:

Well I have voiced policy in relation to the macroeconomic effect of gearing levels, particularly that were widespread throughout the economy, but the Australian Government does not set gearing levels for any company.  We never have to my knowledge.  You know, we don’t do it for property developers, we don’t do it for miners.  The day the Australian Government starts telling companies what their gearing levels should be, is the day the Australian Government will start running those corporations.  But I have talked about the macroeconomic consequences of gearing levels if they should be ill-judged, and we and our regulators will keep a very careful eye on that. 

JOURNALIST:

There’s nothing in here to stop Qantas reducing services to the bush.

TREASURER:

No, I think there is an undertaking there in relation to regional…

JOURNALIST:

Is that implausible?  So if they reduce their five services a week to Broken Hill from Sydney, for instance, that would be potentially or technically a breach of this Undertaking?

TREASURER:

Could well be, yes.  Because they make an undertaking to support regional capacity growth and regional network improvement in line with market needs.

DEPUTY PRIME MINISTER:

Obviously, that is subject to market circumstances, but if there is a wholesale removal of services that is not in line with market trends, we are going to take a great deal of interest in that.

JOURNALIST:

So it is going to be up to the Government of the day, the call of the Government of the day what constitutes a reduction in regional services?

DEPUTY PRIME MINISTER:

Well, as I said, this document gives us the opportunity to monitor and regulate those commitments that they have made in here, and, you know, they have very clearly stated their intentions as far as regional services, as far as maintenance is concerned, as far as the overall operation is concerned and it is up to the Government if we take that decision that we are going to enforce that, move to take an injunction, then we can. 

JOURNALIST:

(inaudible) monitoring those regional routes and ensuring that they are…

DEPUTY PRIME MINISTER:

We will be, my Department will be responsible, for monitoring all the obligations that are set out here and making decisions and recommendations to the Government when and if any action is required.

JOURNALIST:

Mr Vaile, if you thought (inaudible) on regional services and then the company came back and said, market needs have changed and therefore we have to cut services to Broken Hill.  Are you saying they can not contest that injunction in the courts? 

DEPUTY PRIME MINISTER:

Quite clearly, when you talk about market needs, I mean, you are not going to be silly in terms of those circumstances but as I say, if they are worthy, this is about ensuring there is no wholesale withdrawal of services from regional Australia, given the significant position that Qantas, Qantas Link and its subsidiaries that service regional Australia have in the market place.

JOURNALIST:

But surely the company must be able to contest an injunction in court, they must be able to have that right.

TREASURER:

Look, they can argue about whether or not that is consistent with supporting regional capacity in line with market needs.  Can I make this point.  There is no point in requiring an airline to fly to places where there are no passengers.  I don’t think anyone would want to do that.  So I want five services a week with no passengers bound for such and such a town, you know, I don’t think you’d expect us to do it, I don’t think Qantas would want to do it.  But what you are trying to guard against is a situation where there is demand, where there is a market need, and for some reason or another, they close it down.

JOURNALIST:

…jobs (inaudible) stop.  It doesn’t ask them to build those (inaudible) capabilities for local maintenance. That they will review it with a view to building on that.  That gives them a clear out if their review towards to building up local operations means that they don’t need to add jobs. 

TREASURER:

And what is the Undertaking that they are under at the moment?

JOURNALIST:

Well they are not under one.  But my question is…

TREASURER:

No, let me stop you there.  So under this Deed they are under a more strict requirement than they are under at the moment.

JOURNALIST:

There are Coalition MPs that would have liked a stronger undertaking on jobs.  Could that not be done?  Was that too hard?

TREASURER:

No, no, no, I’ve made the point.  With all due respect, I think you made the point.  That as a consequence of this, Qantas is under a stronger obligation today than if this bid had not been allowed with go (inaudible)

JOURNALIST:

Treasurer, I just wondered if I could sidetrack you for a minute.  Do you share the Prime Minister’s confidence that the new Minister announced, Senator David Johnston is squeaky clean in his relations with Brian Burke?

TREASURER:

Well as I understand it, he’s given the Prime Minister that assurance.  And because he has given that assurance, of course, I accept it. 

JOURNALIST:

Mr Costello, just go back to this point about regional services, and Mr Vaile.  If we are not looking at the scenario for example where people, where Qantas is going to be withdrawing from the market, for example, with areas in your electorate, Mr Vaile, like Port Macquarie, the level of service is an ongoing issue of contention.  Aren’t you actually in a position now where this Government is going to be perpetually under political pressure about the level of Qantas service because you’ve got this Deed?  Isn’t it going to change the regulatory relationship between the Government and Qantas?

DEPUTY PRIME MINISTER:

Since you’ve raised the issue of Port Macquarie directly and you have good knowledge of it, I think that the best thing that we can do and what we are doing is try to encourage more competition on to that route from other carriers – like Rex, like Virgin – given the dominance in the market of Qantas.  And I think competition in groups like that is the best answer.

JOURNALIST:

What about that regulatory point that you are going to be in a position where – sort of like the ACCC with Telstra – you are actually in a position where Qantas and the Government could comfortably be testing this Deed in terms of what it is doing or the Government will be under political pressure to do so because you have got the (inaudible) that you have got now.

DEPUTY PRIME MINISTER:

Well you are talking about the two extremes – you are talking about an extreme in one case where pressure is on Qantas to provide more services, and certainly that can be an indication but the one way to ensure that that happens is to get more competition on to that route, onto that sector.  Because at the moment there is not.  And the other extreme is where there are passengers wanting to fly, a community wanting to be serviced, and for some reason their service has been withdrawn, it then has a detrimental economic impact on that regional community.  As the Treasurer said, you are not going to make anyone fly somewhere where there are not any passengers.  But certainly in terms of monitoring those activities as I indicated, we can do that on both of those extremes.  But I can make it quite clear for you that where there is a very strong market the best answer is greater competition.

JOURNALIST:

Treasurer, is this enough to ensure that the national iconic status of Qantas – the flying kangaroo will be retained and that the national airline will continue to serve a role, say in times of international disasters – where it has always come to the party in potentially a post-war situation – are you confident that Qantas going into the future is still going to serve that role?

TREASURER:

Sure, can I say, at the end of this transaction Qantas would be majority Australian owned, majority Australian controlled, with two-thirds of its board consisting of Australians, with its principal operations in Australia, that the legal techniques for enforcing that will be stronger than they are in relation to the current Qantas and as you read in clause 5.5J ‘Qantas’ practical assistance to Australians in times of emergency will continue’ – it is the bottom of page seven – so you know this is a process which has yielded the protections required to keep Qantas Australian.  Australian owned, Australian controlled and in Australia.  Now, whether this bid goes through or not is a matter for the shareholders.  The Government is not recommending this bid.  The Government will allow shareholders to make their decision.  And I think at the end of the day with those important protections that was the right decision to make in a difficult situation.

JOURNALIST:

Treasurer, why was this done by way a Deed rather than simply imposing conditions on the FIRB approval as you have done in other cases?

TREASURER:

Because the Deed is more legally enforceable.

JOURNALIST:

Whose idea was the Deed – was it your idea or their idea?

TREASURER:

Oh look, it was probably some genius Laura.

JOURNALIST:

(inaudible)

TREASURER:

Thank you.