DAVID KNIBB WELLINGTON
Ansett Australian Airlines has apparently flown into history, leaving only Virgin Blue to challenge the domestic dominance of Qantas Airways. The deal to revive Ansett after six months in administration has ended in failure. Melbourne millionaires Lindsay Fox and Solomon Lew, who headed a group that was slated to relaunch the 66- year-old airline, backed out two days before their scheduled take-over, following four weeks of tense negotiations. They cited a host of unresolved issues ranging from incomplete airport and aircraft leases to the lack of an airline designator code.
Observers close to the talks suspect they were mostly a pretext to avoid a deal that no longer seemed promising. Arrangements with several suppliers, including Sydney airport, had not gone well. Especially daunting was the prospect of a bloody battle between Ansett, Qantas and Virgin Blue. Fox and Lew had claimed they were ready to lose around A$120 million ($62 million) in the first year before breaking even in the second - but their ardour seemed to cool after negotiations with Sir Richard Branson over a possible Virgin Blue-Ansett link broke off.
Administrators are now talking with parties interested in various Ansett assets, but no-one has stepped forward to ask about buying the airline itself. Singapore Airlines, which has a long-standing interest in Australia, has been mentioned as a possible buyer, but it has made no move. Thus Ansett is effectively dead. Labour unions, Fox, Lew, and the federal government have been busy blaming each other for the demise of an Australian icon. Ansett's administrators say they will not sue Fox and Lew for breach of contract, but unions are investigating possible claims. Three thousand staff lost their jobs when Ansett collapsed.
With only Qantas and Virgin Blue left, domestic competition is set for a shake-up. Qantas controls about 85% of the market, and Virgin Blue's 18 month target is 25%. Now that local transport giant Patrick Corporation has agreed to buy half of Virgin and inject additional capital, the airline promises to be even more aggressive - aiming ultimately for half the domestic market.
The 50% stake is costing Patrick A$260 million, with more to come depending on the airline's performance. Qantas dominates business travel on the trunk routes, and there is little prospect that low-cost Virgin will make significant inroads into that. But pushing the other way, Qantas will have15 single-class Boeing 737-800s by the end of the year to challenge Virgin in the budget sector.
To compete in that market the biggest challenge for Qantas is to lower its costs. Most Qantas staff have agreed to a bonus plan in lieu of higher wages, but its mechanics are still holding out. Tensions could also rise with the Australian Competition and Consumer Commission, which has already voiced concerns about the loss of competition and is working on predatory pricing guidelines.
For Virgin Blue, the biggest challenge will also be to keep costs down. It is an immediate issue, as the carrier considers whether to bid on Ansett's attractive airport terminals. When Virgin was one of three domestic airlines, it could stick to a segmented market strategy. Now that it is number two, Virgin will face pressure to move away from its no-frills role and offer an alternative to Qantas.
This has already started as the Star Alliance looks to it as a potential Australian member to replace Ansett. So far, Virgin's attitude is that it will gladly interline, but "we will not change our cost-effective model to cater for international airlines."
The carrier's talks with Air New Zealand on traffic-feed to trans-Tasman flights could yield a different result. Instead of pursuing its own request to fly to, and within New Zealand, Virgin Blue could take over Freedom Air, ANZ's discount unit, and use it to accomplish the same result
Source: Airline Business
