Australasia's airlines must now decide between long-term growth or short-term profit as the battle for market share in the region heats up
Paul Phelan/CAIRNS
Asia Pacific's airlines have a simple choice in 2001. "They can either try to make profits, or they can prepare for the future by going after growth," says Peter Harbison of Sydney's Centre for Asia Pacific Aviation, summing up a dilemma all too familiar to the region's air carriers. Harbison believes most will select the second option: "They really have little choice. And one or two may still return a profit."
Nowhere is the quandary better illustrated than in Australasia, where a decade of fundamental change has launched the region's now fully deregulated air carriers into a 21st century more ripe with opportunity, but far less forgiving of complacency or misjudgment.
A new 'open skies' bilateral will soon stiffen competition even further across the Tasman Sea, which is the prime international route for both countries' international airlines. Under the memorandum of understanding (MoU), Australian, New Zealand/Australian and New Zealand airlines will be allowed unrestricted services across the Tasman and domestic services within both countries, while their international carriers will enjoy unrestricted "beyond rights". Significantly, either country will also recognise the other's regulatory certificates and approvals by 2003.
The two major players - the Air New Zealand/Ansett group and Qantas - are no longer equal partners in a protected duopoly, and the gap between them is still widening.
Domestic competition
Having begun the restructure and reform, Qantas has already bagged most of the benefits of rationalising its own once-monolithic structures and those of its domestic arm, the former Australian Airlines. It is now powering ahead with a growing market share and producing sound results, characterised by its AU$762.8 million ($424.5 million) pre-tax profit for 1999-2000. Air New Zealand/Ansett have yet to turn that corner, and the way ahead for the faltering group hangs on strategic decisions from Singapore - its new corporate centre of gravity.
Although domestic newcomers Impulse Airlines and Virgin Blue do not carry the industrial baggage of the regulated past, they lack the deep market penetration, the comprehensive route structures and infrastructures, the advantages of long-term strategic planning (such as fuel price hedging) or the operational flexibility with which the big incumbents are responding to their challenges.
Two Australian startup domestics - known as Compass Mk I and II - have already failed spectacularly in the past 10 years; two more have replaced them (although Impulse was already a small, established regional); and a fifth potential candidate, yet without a trading name, is still "making announcements" as it began doing well over two years ago. Now, under the twin banners of the Star and oneworld alliances, the two major groups are steeling themselves for challenge in Australia, while also carefully consolidating in New Zealand, where they see new startups as a lesser threat.
The Australian domestic market - the major prize - resembles few others, and is seen as the prime motivation for Singapore Airlines' market entry via its 25% interest in Air New Zealand, and the move to Singapore of 47% shareholder Brierley - the controlling interest in which is now an investment group controlled by the Singapore government.
In a continent almost the size of continental USA, but with the concentrated distribution of a population of only 20 million, 43% of all Australian domestic jet passengers (10.5 million) travel on just three flight sectors, known as the Brisbane-Melbourne-Sydney triangle. If Adelaide and Coolangatta are added in, the five top city pairs represent 56% of the 28 million passengers carried annually on the country's top 33 jet routes.
For at least another 10 years, the peak bottleneck at Sydney's Kingsford Smith Airport (KSA), with its legislated seven-hour curfew and 80 movements per hour capacity cap, will remain a key factor in the industry's future shape. This was recently enshrined by a government decision to delay a second airport for that period, to maximise government benefit from KSA's forthcoming privatisation sale. Already, the industry's nexus with KSA has been highlighted by a three-cornered contest between Ansett, Qantas and Impulse for control of Hazelton Airlines (holders of KSA's third-largest slot allocation). The bidding battle doubled the struggling regional's share value in a few weeks, but was slammed by the Australian Competition and Consumer Commission (ACCC) on 19 January. Qantas withdrew its bid, with its managing director designate Dixon saying: "If competition regulators are going to prevent the only major Australian-owned airline from taking part in that process, the industry in this country will be unable to keep pace and realise its full potential in a rapidly globalising world, and eventually will be relegated to 'cottage industry' status." Believing it may still sway the ACCC, Ansett extended its offer to 15 February.
Qantas Group
Since listing in 1995, Qantas has improved its profitability, and airline chair Margaret Jackson says it has positioned itself as "a disciplined and robust airline ready to meet the compound effects of additional domestic competition and other specific cost increases that will combine to put pressure on profitability".
Part of that positioning, now manifested in the carrier's market share vis-à-vis its major rival, has been to strengthen and refine its international services and alliances. The past 12 months have seen: the reintroduction of services to Canada and New York; the introduction of nonstop services between Melbourne and Los Angeles; considerable strengthening of US services through an expansion of code sharing with American Airlines; boosting of UK/European flights and code sharing within the region; the take-over of Ansett New Zealand's operations by franchising the Qantas New Zealand brand to its new owners; and the aggressive development and refinement of its domestic regional feeder service networks. This last strategy has already had an effect. On 23 January Air Transport Intelligence reported that Virgin Blue has filed a formal complaint against Qantas, and the ACCC has alleged predatory pricing practices.
The operator's growth initiatives have included the acquisition from British Airways of seven Boeing 767-200s over and above its forward fleet plan, supporting a vigorous confrontation with Virgin Blue and Impulse on key trunk routes. Although its fuel-hedging strategy has delivered savings of over $270 million in the last financial year, US dollar fuel prices have since risen an average of 39%, and the carrier expects fuel costs will end more than $170 million higher than last year.
Jackson sees strategic financial management as critical in Australasia's uncertain future business environment. Qantas' objective, she says, is "maintaining its current level of debt to equity ratio, and its current level of market gearing is 40 to 50%".
"We will continue to manage borrowings and leasing financing to maintain our balance sheet in an appropriate way," she added.
Qantas' future will be shaped by the 10-year fleet acquisition plan announced by Jackson last November. The AU$9 billion purchase includes 13 Airbus A330-200s and A330-300s with deliveries commencing in 2002; a launch order for six longer-range Boeing 747-400X variants and 12 Airbus A380s. Managing the project will be challenging, says Geoff Dixon: "Ten years ahead is a long time to be planning for your fleet, but there are quite a number of options, including retiring other aircraft early should circumstances make that necessary. So while we've taken our best guess at how we think the market is going to grow over the next 10 years, there is lots of flexibility."
Air New Zealand Ansett Group
Air New Zealand chairman Sir Selwyn Cushing last August toughed out a NZ$458 million ($205 million) full year net loss as a "one-off" to be attributed to its then-completed take-over of Ansett Holdings. That transaction had created a combined business group with access to gross assets of more than AU$6.6 billion, annual revenues of over AU$5.8 billion, and over 24,000 direct employees.
The expectation that under the Star Alliance it would be a formidable and equal competitor to Qantas and to British Airways, its oneworld partner and 25% owner, was based on Cushing's forecast of soaring profits from acquiring Ansett, whose net profit had slumped because of a fuel cost hike and fluctuating exchange rates. "The group now possesses an Australasian airline business which ranks among the world's top 20 airlines in terms of total passenger-carrying capacity and operating revenues," said Cushing, whose vision has yet to become reality.
Air New Zealand has now installed former Qantas chief operating officer Gary Toomey as its chief executive, and Toomey has hired two other former Qantas executives as the group's chief financial officer and group general manager of business enhancement.
The new management team must now grapple with reversing the group's growing debt, its falling market share, and a Standard & Poors reduced credit rate to BB+, which is below 'investment grade.' Former Ansett CEO Rod Eddington's words on joining Ansett in 1997 seem as valid now: "Ansett is a wonderful airline, but a very poor business."
More than a decade of uncertainty over ownership and future direction must soon be resolved if Air New Zealand's and Singapore Airlines' investments in Ansett are to be recovered and rewarded. While the group has pressed forward with restructure and reform, it has consistently been unable, unlike Qantas, to fund a capacity to meet current challenges. Domestic market share is down to about 38%. This means that while new entrants have not yet dented Qantas' armour significantly, Ansett has been deprived of the same defences.
It is symptomatic of the business's uncertainty and stagnation that Ansett has not hired a single new pilot in the past four years (although it is now interviewing Boeing 747-700 second officer candidates), and the airline has recently been hit by a series of high-profile incidents, springing from a maintenance bungle involving its Boeing 767 fleet which forced seven aircraft to be grounded during the Christmas rush. Airline sources attributed this to distractions from the main game as management focused on a major maintenance and engineering merger with Air New Zealand, aimed at eliminating duplicated facilities in the fleets.
Over two to three years, Air New Zealand and Ansett Australia will phase-in a merger of their overhaul and maintenance facilities at Auckland, Brisbane, Christchurch and Melbourne. The new organisation, Ansett Australia & Air New Zealand Engineering Services (ANNZES), has not yet defined how it will allocate functions between the bases, but the rationalisation is already causing major industrial rumblings in both countries at a time when Ansett needs them least.
Virgin Blue and Impulse
At Qantas' fleet announcement in late November 2000, CEO-designate Geoff Dixon told journalists: "I think the next six months will really tell whether the market can sustain four airlines." The comment is widely interpreted as a warning that Qantas will exploit all its current strengths to turn up the heat on a weakened Ansett and also on the newcomers.
Australia's two most recent startups are small and conservative hub-and-spoke operations based at the country's largest and third largest cities. They are now busy consolidating their limited operations. In mid-February, Sydney-based Impulse Airlines will add a further three Boeing 717s to the five with which it launched its low-cost challenge on Australia's two busiest routes, Sydney-Melbourne and Sydney-Brisbane, in June 2000.
Since its arrival, traffic growth on both those routes has outstripped the national average by about three percent, and Impulse says the addition of three aircraft is a response to average load factors in the mid to high seventies. The carrier adds that it has no immediate plans to expand onto lower-volume routes or even Brisbane-Melbourne, at least until it has further consolidated on its present two. Impulse owns an established regional turboprop division with hubs in Newcastle and Canberra, providing some regional passenger feed.
Brisbane-based Virgin Blue launched its Australian operation with the ambitious goal of servicing every Australian city with a population of over 50,000. The proposal's commercial realities soon became apparent and the carrier now operates five Boeing 737-400s from Brisbane to Sydney and Melbourne, with a sixth being prepared in Dublin for service entry in March, and it added Brisbane-Adelaide to its structure last December.
Both Impulse and Virgin Blue have clearly adopted a blend of the two choices defined by Harbison. They are conservatively trying to make profits where they are attainable while preparing for the future by going cautiously after growth.
If that conservatism prevails, and under the watchful eye of the ACCC, both may attain permanency and modest success. Harbison warns, however, that given the strength of Qantas and eventually the inevitable resurgence of Ansett, "2001 is going to be an interesting year."
Source: Flight International
