Qantas says Virgin not playing by the rules

Qantas Airways (ASX:QAN) has suggested that Virgin Australia Holdings (ASX:VAH) may not be acting within aviation laws, raising questions about foreign airlines’ stakes in its rival.

Virgin’s majority shareholders Singapore Airlines, Etihad and Air New Zealand (ASX:AIZ) combined, own more than half of Australia’s second largest domestic airline.  Singapore owns 20% along with Air New Zealand, which has requested approval to take its stake to 26%. Etihad currently owns 10%, but wants to increase that to 20%.

Qantas is concerned that Singapore Airlines may be able to use its stake in Virgin to gain access to Qantas’ most profitable Pacific routes, between Australia and the US.

Qantas says it is at a distinct disadvantage to Virgin, because it has to abide by legislation that restricts foreign ownership to a maximum of 35%, with no single investor allowed to own more than 25% of the national carrier. Qantas also reiterated that Virgin had circumvented the Air Navigation Act by splitting its business in two. The act limits foreign ownership to 49%, if Australian airlines are to benefit from traffic rights on international routes. Virgin’s split of its business allows foreign airlines to take a stake in it, while giving it an Australian designation for its international business.

Australian and International Pilots Association president Barry Jackson says the government needs to look at the laws governing our airlines, saying there were question marks over both airlines’ operations. Qantas’ Jetstar affiliates in Asia appear to have similarly side-stepped the same requirements.

Qantas says all it wants is a level playing ground. ”At the moment, one Australian-based airline has restrictions on how it operates and the foreign investment which it can attract, while the other has no such restrictions and is, in fact, now majority foreign-owned,” a spokesman has told Fairfax Media.

Foolish takeaway

Competition between the two carriers is intense, with the only likely winners to be travellers. Foolish investors might be wise to avoid either company, especially in the light of Virgin’s recent announcement that it would report a loss of around $100 million for the 2013 financial year.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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