When former Cathay Pacific managing director Rod Eddington took control of financially struggling Ansett Australia earlier this year, it didn't take him too long to work out what was wrong with his new charge. 'Ansett is a terrific airline but a poor business,' was his prognosis.
Diagnosing the cancer was relatively easy, but recuperation promises to be a tougher assignment. Just how tough was demonstrated in May when Eddington risked the ire of unions by asking staff to delay half of a wage increase brokered last year under an enterprise bargaining deal. The US$12 million in costs which that will defer doesn't seem like much. But it demonstrates just how close to the bone Ansett is operating these days.
Insiders say the airline will report a loss of $2.3 million in its current financial year, which ended on 30 June. On the face of it, this appears disappointing but hardly disastrous. However, it includes more than $41 million in losses from international operations, offset by only $39 million in income from operations within Australia.
Eddington has set management and workers on a hectic road to recovery, aiming for an ambitious turnaround in less than three years. By then he expects Ansett to be reporting operating profits of up to US$235 million, a mammoth target for a carrier with a persistently scratchy recent performance.
Complicating the task will be a costly but desperately needed fleet re-equipment programme, which is to be launched by the end of 1997 to prune the carrier's wide array of aircraft types.
Ansett's salvation doesn't only depend on internal restructuring. Real profitability hinges on an ability to reap benefits from its fledgling alliance with Air New Zealand, now its 50 per cent owner, as well as its existing link with United and its new partnership with Singapore Airlines. Ansett also needs an easing of the bilateral restrictions between Australia and New Zealand, which severely limit codesharing beyond Australia to Asia.
An additional complication is the possibility that Singapore Airlines could eventually become part-owner of Ansett by buying a major portion of News Ltd's half share. There have already been 'tentative discussions' on equity, although any deal will take longer to finalise than a commercial relationship. Eddington has also given strong signals that Ansett will be floated once it returns to a stronger financial position.
Substantial returns
Meanwhile, Air New Zealand is keen to start seeing substantial returns on its investment. Following a record net profit of $180 million in 1995, Air New Zealand's own income in the 1996 year slipped 13 per cent to $155 million. The first six months of 1996/7, ending 31 December, saw net earnings plunge 43.2 per cent to $52.9 million.
That's a worrying trend for Air NZ, which paid $370 million for TNT's half of Ansett in September last year after two years of tortuous negotiation.
The Ansett interest contributed $11.5 million to Air NZ's earnings in the three months to December 1996, and Air NZ now codeshares on some 300 of Ansett's Australian domestic flights, as well as sharing frequent flyer benefits and airport lounge access.
Neither carrier has been specific about potential financial benefits, but the alliance was initially expected to lift Ansett revenues by more than $25 million a year, while cutting expenditure by $25-40 million. Given that Air NZ might expect similar benefits, that would imply a combined $150 million boost to their bottom lines.
Clearly such benefits will take time to accrue, but progress has been slow so far. While the sale took place in September, Eddington didn't arrive until early 1997, then had to spend two months familiarising himself with Ansett's position. The two airlines waited until April before setting up 13 joint task forces to work out detailed programmes for merging vital functions.
Target areas include information technology, catering, network, engineering, cargo, fleet acquisition, ground handling and marketing. While the two will retain their individual brands, it is likely that many back-office functions will be integrated. This will take time, however, because permission will be necessary from competition authorities in both countries.
Eddington says he can't yet put any numbers or time scale on the programme because the working groups 'have got to scope through the projects to get clear targets to shoot for'. This process could also be delayed while the Singapore Airlines alliance is finalised, since SIA may be included in some of the integration.
Still, Eddington wants to set 'aggressive' targets in most areas by the end of this year. 'If the business is going to be viable and provide sensible returns to its shareholders and generate the cash you need to re-invest, then you need to be shooting for profit margins of 6 to 10 percent of turnover.
'So if you look at the turnover and apply that formula you end up with a figure of about A$250-300 million (US$195-235 million). That figure isn't plucked out of the air. The best airlines, the most profitable airlines that run themselves as a business, produce profits somewhere in that 6-10 per cent range.'
A crucial part of achieving that will be fleet re-equipment, which has to be done with a view to gaining some commonalities with Air NZ.
Eddington says Ansett has far too many aircraft types; its 70 aircraft include the B747, B767, B737, A320, BAe146 and F28. Air NZ is an all-Boeing operator, with 34 B747s, B767s and B737s.
'Clearly, if we are going to take advantage of the synergies of the Air NZ relationship then we've got to try and come to a common view on fleet . . . that's airframe and powerplant. That moves on to buying jointly, to common maintenance and engineering opportunities. All of that flows from common specification.'
Eddington indicates that both Boeing and Airbus are in the running for Ansett's new order. The US planemaker can bring better opportunities for synergy on international operations, but the group operates narrow bodied aircraft from both manufacturers, and Ansett could end up placing orders with both.
Outsourcing applications
Ansett and Air NZ have announced plans to merge their domestic air freight and courier businesses in New Zealand, and data processing is likely to bring early synergies. In May, Air NZ announced it had signed an outsourcing contract with IBM to manage its reservation system, as well as about 60 other airline applications, such as pilot scheduling. While no decision has yet been made, it is certain that Ansett will go the same way, while merging its IT departments with those of Air NZ.
Wherever Ansett and Air NZ decide to merge their operations, both will benefit from eliminating duplicated staff. Unlike many airline bosses, facing rationalisation decisions, Eddington refuses to commit to numbers when he talks about staff cuts among Ansett's 15,000 employees.
'You can't duck the fact that there's going to be some job shedding, but you have to try and minimise the people implications around that. We don't have a broad target across the organisation because my view is that you can't set them. You have to take it function by function, department by department.
'Setting an arbitrary number and then looking to slash and burn across the organisation is asking for trouble. For a start you cut flesh and bone as well as fat. We'll end up with a target for the organisation but it will be a summation of the individual department rationalisations, a flexible target, and if we get this process right we will build a strong business. We will be growing jobs as well as shedding them.'
Foreign ownership rules
Eddington is extremely cautious about commenting on Ansett's international operations because he is executive chairman only of Ansett Australia, not the separate entity Ansett International, which is 51 per cent owned by Australian institutional investors to satisfy foreign ownership rules for international operators.
Air NZ does not have a direct investment in Ansett International. Its influence is through the 50 per cent stake in Ansett Australia Holdings, which in turn holds 49 per cent of Ansett International.
That aside, the practical reality is that any decisions taken by Ansett Australia and Air NZ take into account and affect the operations of Ansett's international arm. International and domestic operations of both carriers feed off each other and the rationalisation and network synergies among them all are important in cutting costs and lifting revenue.
Eddington does consider that Ansett International's major priority is growing its route network throughout Asia. Japan, Korea and China are the chief priorities for growth, adding to Ansett's existing routes to Hong Kong, Jakarta, Bali, Kuala Lumpur, Taipei and Osaka. The carrier needs to build higher frequencies into all its markets. 'It's about developing critical mass. But clearly there's an issue here about Ansett Australia and Ansett International being part of a broader global aviation alliance.'
Both he and Air NZ managing director Jim McCrea know that neither has the size or strength to build a global network by themselves. 'If we work together we can do much better than we would do individually, but we jointly need to work with others,' says Eddington.
'It is about getting our house in order and presenting a global travel solution to people, which Qantas and British Airways can at the moment,' he adds. 'It's a big ask, but that's what we are going to do if we want to survive. It's about building a strong second aviation force in this part of the world.'
This is now beginning to take shape. In December Air NZ announced a partnership with United, which lies at the heart of the Star Alliance group. The two have announced 130 codeshare flights across the Pacific, in the US, and between New Zealand and Australia.
'After developing a stronger regional base through our investment in Ansett Australia, our logical next step was to seek a commercial partnership with United Airlines,' said McCrea.
The link creates 'a strong foundation for further steps by Air New Zealand to develop other compatible international partnerships to cover markets where we have either limited access, or no coverage at all,' he added.
United already codeshares on Ansett's domestic routes, and Ansett officials have been shuttling between Melbourne and Chicago discussing stronger ties. A full-scale partnership is expected.
In the opposite direction, a commercial deal between the Australasian alliance and Singapore Airlines has been announced, although a definitive agreement has yet to be signed. If regulators permit, the deal will include codeshare flights, for example on SIA flights into cities throughout Europe.
This deal represents a major power shift on the Australia-Asia-Europe route. Air NZ currently flies to London and Frankfurt but only via Los Angeles, while Ansett's network is confined to Asia. Access to SIA's network allows them to open up a wide marketing door into Europe and compete more effectively with the Qantas-BA alliance.
The pact with SIA also raises intriguing questions about the future shape of existing alliances. The Singapore carrier is an alliance partner of Swissair and Delta and there are suggestions that it may abandon the link and join Ansett and Air NZ in the United camp.
The group may also benefit from developments on the bilateral front. In May, New Zealand reached an open skies agreement with the US, thereby opening up network possibilities and allowing Air NZ to access far more US cities through codeshare arrangements with United.
Washington is now pushing Australia, which currently opposes Open Skies, to follow suit. If it succeeds, as it probably will eventually, the way will be clear for an extension of joint operations by Air NZ, Ansett and United. Together, they will present tough competition to Qantas, which operates codeshare flights across the Pacific and within the US with American Airlines, and to Europe with BA.
Linking with United in the same way - and with SIA in the opposite direction to Europe - will give Ansett and Air NZ a powerful marketing tool and access to a truly global network.
Meshing all of this with internal reform will be a challenge, particularly for Ansett. Eddington says the days of vertical diversification have gone. 'It was the fashion of the time so Ansett invested in a whole range of businesses like resorts, which drew capital away from the core business and distracted management's attention from the key operation.
'Ansett needs to think of itself as a business as well as an airline. It now needs to simplify its fleet, simplify its processes, simplify its business, and focus on its customers. It needs to make sure it focuses its capital on the core business, and its management time, effort and energies and the energies of its people. But of course that's always easier said than done.'
Mid Tasman brand
Ansett and Air NZ will remain separate brands. 'One is a strong Australian brand and one is a strong New Zealand brand. Both have strong loyal supporter bases in their own countries.
'If you were to create a mid Tasman brand in the short term then you would be in my view walking away from the strengths of each. Who knows what it will look like in the long term, but in the short term you have to keep the brands separate. You have to try and splice the back office functions together.
'It's about focusing on unit costs. It's about focusing on customer service standards and, it's about maximising your revenue streams,' explains Eddington. 'I've said we start today, right now, and we run flat out from now.'
If the various pieces of the jigsaw come together the Australasian duo could be looking at a bright future as part of the Star Alliance group. But Ansett still has a long way to go to achieve sustained profitability.
Source: Airline Business
