The Nuclear Option works! Now, that’s a problem.

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I spent much of my time on the weekend trying to work out what on earth Qantas was doing. What had been the incentive for Qantas to take the ‘nuclear option’ – to close down the airline worldwide, an action that would cause huge damage to all stakeholders, including shareholders and workers?

I wake this morning and find that overnight, Qantas has apparently had a win under our industrial relations laws. Industrial action is terminated for 21 days and Qantas flights will resume today.

So apparently the incentive is in our IR laws. Supporters of those laws on the ABC news this morning complained that Qantas did not need to ‘go nuclear’ but had other alternatives (including the Prime Minister on AM – transcript will be up later today).  But it appears that the Qantas action has led to a ‘win’ for the company. Qantas has had union action ‘terminated’.

I am not an IR law expert but the lesson seems simple. If the laws create incentives for companies to ‘go nuclear’ then the laws need to be changed.

16 Responses to "The Nuclear Option works! Now, that’s a problem."
  1. As Joshua pointed out though, the incentive to “go nuclear” is only there for companies with near-monopoly positions in the market.
    Any other company that tries this will simply put itself out of business, because the Government won’t step in if the company isn’t in a position to cause significant damage to the wider economy.

  2. Hmmmh. It seems that calculus (Stephen’s calculus that is ) forgets about reputational damage incurred with customers, government, and workers. And the resultant consequences for morale and productivity on the part of the latter in the long run which surely will translate into dollars and cents lost. As, of course, will the damage with customers. Plus if negotiations in the next three weeks do not lead to some outcome agreeable for both sides, it will all depend on the result of FWA’s compulsory arbitration. Not clear how that outcome will look like but (given Qantas’s balance sheet, for example) I doubt Joyce will come out too happy. So, it seems way too early to judge whether the IR laws are flawed or whether Joyce is indeed losing it. Time might tell. In the meantime, I am sure, Borghetti is celebrating.

  3. Andreas – clearly Joyce knows all about the potential damage to the Qantas brand and either (1) it is still worth while to go nuclear because this creates a benefit for Qantas that outweighs the cost or (2) he has convinced the board to go along with a big stuff up. I understand that the grounding decision was made by the board on Saturday (that is the official Qantas line). So, while Qantas is clearly taking a risk, the board appear to believe that the benefits outweigh the costs – or they are all ‘losing it’!

    As both Joshua and kme note, the benefits from going nuclear are bigger under the legislation if this causes significant damage to the Australian economy – and this is more likely if the relevant firm has a large market share. As I understand the Act, the ‘significant damage’ provision is a trigger for potential direct Ministerial intervention.  

  4. Stephen – I hear you but boards have been known to be wrong, and very wrong indeed, and so have people like Joyce. Plus, most boards are rubber-stamping exercises and captured, much to the detriment of the company.

    It’s very hard to compute benefits and costs in these kind of cases and I doubt that the board, or Joyce for that matter, have drawn out the game tree all the way; they rarely do. So their backward induction is possibly severely flawed. I personally am convinced of that but am also open to the empirical evidence showing otherwise. Time will tell.

    It will be an interesting couple of weeks. 

  5. I thought the law did what it was supposed to: force the two parties to reach a negotiated settlement. Repeated strike action over an extended period by the unions (legitimate grievances or no) is going to trash the Qantas brand and disadvantage customers as much as Joyce’s “nuclear option”.

  6. Andreas, the Chairman (Leigh Clifford) of the board at Qantas is right behind this and is probably the architect.  If it goes bad the board will probably try to just wrap it up and hang it around Joyce’s neck.  Perhaps that is why they needed to further pad his golden parachute before this started?

    I agree with Stephen, there needs to be more options for management than just shutting the whole show down – and incentives to use those options!

  7. I agree with Andreas assessment. Qantas is in the service business and just alienated their entire workforce. Not the same as alienating miners or dock workers.

    Mr Joyce has presented it as a either or scenario but I’m convinced. Does anyone with knowledge of the airline industry, industrial relations, and the recent history of the dispute between Qantas management and the unions explain if alternative options were available that might achieve management objectives without the damage?

  8. Apart from the long-term brand damage Qantas has a big problem from this action even in the short term.  If no agreement is reached in 21 days then one will be imposed by FWA arbitration.  Both sides know such arbitration is likely to be unfavourable to Qantas & will negotiate accordingly.

    That’s because the union demands really are modest – a 2.5% pay rise and promises, not really ironclad, of job security.  In turn, that’s because Qantas’ A380s become liable for their first major (stripped-down-to bolts-and-nuts) overhaul in 2012 and the unions are afraid of them going to the Phillipines.

    An imposed solution that grants those promises will have teeth that an agreed solution does not because the FWA will bite a lot harder if Qants breaches those promises if the FWA, rather than the unions, has extorted them.

  9. I disagree with Andreas a bit, as I reckon the strategy and game plan was brilliant to demonstrate credibility.  That look, you people are well paid and have generous benefits and we are happy for that, and you are complaining?  Put up or shut up. 

    Baggage handlers are paid more than teachers, and that strikes me as a bit odd.  I think one of their claims was for job security.

    Nothing I have read demonstrates that Qantas has significant market power like it used to – clearly there are competitors.

    Who has job security these days, anyway.

    If the shareholders don’t like it, then they have the option to just sell.  Or not, as I reckon what was done was to put a little ointment on a wound to stop it getting infected.  Was it a bad decision to go neclear?  I think not.

    Because otherwise the results would be far worse than a two day shut down.  It could have been an Enron.

    I think they demonstrated good corporoate governance in asserting some authority, and whilst not entirely transparent, we do know enough details.

    On a lighter note, being 6 foot 2 makes it impossible for me to fly on Qantas as their seating arrangements are designed for people about 5 foot tall at the most.

  10. The nuclear option is unlikely to work.

    to get efficiencies and reduce costs you need to get the co-operation of the workforce.

    They have dissed them ful and proper.

    moreover ther HUGE increase in salary for the CEO means no credibility.

    I would be looking for very covert disputation from now on.

  11. It is not clear to me why Joyce could not have gone to the minister and said: “We will shut the airline down in 72 hours” and then got the intervention without actually hurting the public. If the legislation requires him to actually shut down before the government can step in – in other words if there has to be damage rather than impending damage – then the legislation is indeed flawed and needs to change.

  12. It would be illegal for FWA to direct Qantas to undertake heavy maintenance in Australia or anything along those lines.  They would be off to the High Court.  Read Ron McCallum on this – and he is no friend of the company.

  13. Interestingly, one of the  issues that has arisen from the Senate grilling of Mr. Joyce is the “threat” to break Qantas up. This may actually be a good thing for Qantas’ shareholders and potentially Australian travellers. Qantas could sell its (loss making) international operations to an overseas carrier and the government could remove the remaining restrictions that require international airlines to seek permission to fly through Australia and onto third country destinations. Qantas/Jetstar would remain a competitor in the domestic market. Maybe the threat should become a promise?

  14. Stephen, can you say a little more on the open skies policy you moot in your last comment. Wouldn’t it be better for us to have an open skies policy whatever the status of Qantas’s international operations?

  15. Hi Nic
    As I understand it, the Australian government still limits ‘fly through’ by international carriers. This was illustrated by the government’s refusal in 2006 to allow Singapore airlines to fly between Sydney and LA, on the grounds that there were not sufficient benefits to Australia. So Australian consumers pay higher fares to fly to the US because of government restrictions that favour Qantas.
    Should these restrictions be removed regardless? Yes. They are simply a form of protectionism for Australian carriers. A nice story on the 2006 decision from USAToday is available at the following link:
    http://www.usatoday.com/travel/flights/2006-02-21-singapore-sydney_x.htm
     

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