While the Government grapples with Qantas, it should also look at tightening a loophole in the Air Navigation Act that Virgin has been more than happy to exploit, writes Michael Janda.

The political debate of the past week has centred on whether the Qantas Sale Act should be amended to level the playing field with Virgin Australia.

But perhaps politicians and the media are asking the wrong question.

The alternative question is whether the Air Navigation Act (ANA) should be amended to close off the legal loophole being used by Virgin Australia to Qantas's disadvantage.

It's a question Qantas hasn't asked because, should the Sale Act be amended, it's the same loophole Qantas would use to allow foreign shareholders to own more than half the airline.

You see, about two years ago Virgin hatched a nifty plan to circumvent a requirement of s11A of the Act that Australian international airlines must be no more than 49 per cent foreign owned.

At the time, foreign players had just about reached the limit, and the Virgin board was going to have to knock back further share purchases by overseas buyers to avoid breaching the Act.

The restriction also meant that capital injections of the kind the airline undertook to raise $350 million late last year - much of it from its foreign airline owners Air New Zealand, Etihad and Singapore Airlines - would have been impossible.

Virgin Australia's other choice would have been to offload or close down its international arm.

And, in theory, offloading its international division was what it did. In theory. In law. Not in reality.

What Virgin did was create a separate, non-listed private company called Virgin Australia International Holdings (VAIH).

At a time when Virgin Australia Holdings (VAH) (the ASX listed company) still had less than the maximum 49 per cent foreign ownership, it gave its then shareholders one share in the new holding company for its international operations (VAIH) for every share they owned in VAH.

Except they wouldn't control the shares. A trustee controls the VAIH shares "owned" by the then VAH shareholders on their behalf. These "shareholders" cannot even sell their shares, except to a subsidiary of Virgin Australia.

Therefore, Virgin Australia International Holdings is, in the words of Virgin from its 2012 information statement, a wholly owned subsidiary of VAH Sub, itself being a wholly owned subsidiary of VAH.

VAIH does have its own board, with a majority of independent directors.

However, VAIH does not have its own management. That is contracted out to Virgin Australia under a service agreement.

Neither does VAIH have its own planes, nor does it lease any - it uses Virgin Australia's aircraft.

It also uses Virgin Australia's crew; maintenance and engineering; intellectual property; IT systems; lounge access; distribution, marketing and sales; check-in counters and office space; risk management services; insurance; frequent flyer program; operations services; administrative and secretarial services; assistance with reporting requirements; tax services; accounting; human resources services; and "all other support services necessary to operate the Australian International Airline business".

VAIH also gets loans from Virgin Australia to "ensure VAIH has access to sufficient funding to continue to carry on the Australian International Airline business."

In short, Virgin Australia International Holdings does not exist, except on a bit of paper at ASIC's offices, and with the minimum indicia of corporate life to tick the regulator's boxes.

Its sole purpose is to provide the legal edifice that defeats the Air Navigation Act's restriction of foreign ownership in Australian international airlines to 49 per cent.

It can do that because the ANA refers to ownership, not control.

Because clearly, Virgin Australia is in practical, if not legal, control of a subsidiary that contracts out almost every aspect of business to it. VAIH has no life or purpose if Virgin Australia ever pulls the plug.

There's currently no point in Qantas performing this legal magic, because the Qantas Sale Act limits foreign ownership in both its international and domestic divisions.

If the Sale Act goes, expect Qantas to perform a similar trick, or just separate and cast off its loss-making international division altogether - although it's not clear if there's anyone out there who will buy it.

So, if the Government can't get its changes to the Qantas Sale Act through the Senate to level the playing field that way, perhaps it could tighten the Air Navigation Act to do what it was intended to and ensure that Australia's international airlines are not only technically owned, but actually practically controlled, by Australian shareholders.

Otherwise, while it's getting rid of s3 of the Qantas Sale Act, the Federal Government may as well ditch s11A of the Air Navigation Act too, because Virgin has found a relatively painless legal workaround and the legislation is now not worth the paper it's written on.

Michael Janda has been the ABC’s Online Business Reporter since 2009. View his full profile here.