Will Qantas split in two?

The Flying Kangaroo is running out of options

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Beleaguered airline Qantas Airways (ASX: QAN) says the Coalition’s plan to repeal the Qantas Sale Act won’t help it.

Not that the government can actually repeal the Act at the moment, as both Labor and the Greens oppose the legislation, suggesting Qantas could become foreign owned and jobs will head offshore.

“We have consistently said that removal of foreign ownership provisions that apply uniquely to Qantas is an important longer term objective to create a fair and free aviation market in Australia. However, it is clear that such a move would have a limited chance of passing through the Senate.” says Qantas.

The Qantas Sale Act sets limits on the level of investment in Qantas foreign entities. But Qantas and the government both say it acts like a ball and chain, restricting the airline from competing effectively.

Qantas had set its hopes on receiving a debt guarantee from the government, which would likely save the airline hundreds of millions of dollars in interest. The theory goes that as Qantas has its debt guaranteed by the Australian government, ratings agencies would then rate Qantas’s debt higher than its current ‘junk’ status, leading to lower interest rates.

But the government has rejected Qantas’s request for a debt guarantee, saying that if they gave one to Qantas, they would likely have to give debt guarantees to other sector players, including Virgin Australia Holdings (ASX: VAH) and Regional Express Holdings (ASX: REX).

With no relief from those two moves, the next best move may be for Qantas to begin formulating plans to separate its domestic and international operations into two, similar to how Virgin has configured its business.

That could allow foreign entities to invest in Qantas’s domestic operations, while keeping limits on the international operation.

Another fly in the ointment is the growing gap between Qantas management and the government. Prime Minister Tony Abbott says he believes Qantas can be profitable again ‘under good management’. That could see any government help tied to management changes.

Foolish takeaway

No matter which way the government and Qantas go, the underlying issues remain. It’s a highly capital intensive, commodity-selling business with far too many major issues outside of management’s control. Qantas is unlikely to ever be investment grade. If you currently own shares in Qantas, you need to be fully aware of the enormous risks you face of losing your capital.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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