NICHOLAS IONIDES MELBOURNE
Ansett's chief executive has made a running start at turning the airline's finances around and inserting it into a global alliance. But there is still plenty of work to do."When I arrived at Ansett we had what I have described as a Noah's Ark fleet - two of every aircraft ever made."
By nature a blunt talker, Rod Eddington, executive chairman of Australia's Ansett, is still an "Ozzie" after spending more than 20 years abroad. The comment is not intended as a joke, however, as he makes abruptly clear by his tone: the challenges facing him upon arrival in January 1997 from Hong Kong's Cathay Pacific Airways were immense.
Ansett, say industry analysts, has been a mess for much of the 1980s and throughout the 1990s. Its entry into the international market in 1993 has cost it dearly; its mixed fleet and lack of focus on core operations has been driving it into the ground. All this has happened as home-based rival Qantas Airways has become more efficient in a no longer regulated domestic market. Media giant News Corporation, which shares ownership of Ansett Holdings (Ansett is two airlines: Ansett Australia and Ansett International) with Air New Zealand (ANZ), had grown impatient with its investment by the mid-1990s. Perth, Western Australia-born Eddington, one of the industry's more respected veterans with a jacket-off, "call me Rod" style, was a clear choice to help turn the airline around and prepare it for sale.
It was a lengthy period of negotiation for Eddington to be poached from Cathay, where he had been managing director for five years. When he was finally named the new head of Australia's second airline late in 1996, he was given a seat on the board of News Limited (News Corp's Australian arm), which many took as a sign that he was hedging his bets for the future. Many said that, after a sell-off, he would make a smooth hop over to the parent company. That speculation has been fuelled since his arrival, as last year Eddington was named deputy chairman of News Ltd and is essentially acting as mentor to 27-year-old Lachlan Murdoch, chairman Rupert's son and heir-apparent to the mammoth News group's throne. The younger Murdoch is News Ltd's chairman and chief executive.
But, whatever his future plans may be, Eddington's value to Ansett is well established. This was highlighted earlier in the year when Singapore Airlines (SIA) announced its intention to purchase News Corp's 50% holding. The deal would ultimately fall apart, but an important part of the interim agreement was an SIA condition that Eddington remain at the helm for at least two years. Although Eddington is described by Ansett as "a News Limited employee", he says News Corp responsibilities always come second to his work at Ansett, and he diplomatically brushes aside suggestions that he is only in place for the short term.
"My major challenge is to ensure that Ansett continues the journey of recovery. That's my major commitment - that's what News brought me in to do," he says, pacing around his office. "Lachlan Murdoch has made it clear to me a couple of times that that's the major priority and I've committed to do it. I've been here now two and a half years and I'm absolutely committed to being part of the Ansett team."
Eddington is not just blunt by nature, he is also energetic and highly animated. The speed of the changes he has carried out since his arrival at Ansett is the proof. Within six months of his taking the helm, a tripartite alliance was announced with ANZ and SIA that took effect late last year. In mid-1998, ANZ and Ansett simultaneously announced they would join the Star Alliance, and they did so in March this year.
The Great Business Plan
At the same time, a major internal restructuring was being embarked upon. Early last year, Eddington publicly described the carrier as a "great airline but a poor business". The phrase stuck, and he put it to further use last September when his so-called "Great Business Plan" was laid out. Under this plan, the airline has started out as that "Great Airline, Poor Business". By June this year, it became a "Great Airline, Better Business" and, by June 2001, would be transformed into a "Great Airline, Great Business".
Eddington says the carrier is well on target so far, and he is ready to describe Ansett as that "Great Airline, Better Business". Its profit margin is up, revenue per employee has increased, its debt-to-equity ratio has fallen and employee numbers are down. But not all is finished. "We are a much better business now than we were two years ago, but it's very important that our people stay focused on the fact that the job is not finished. If you start from a position of weakness and things improve, particularly as that improvement is a function of a lot of hard work of a lot of people within the company, then there's a temptation for some to say we've got there. We've got a way to go," he says.
"I'm saying to the staff that, through the change process - and this first run at the change process is a three-year programme and we're about half way through it - we've done really well, thank you. You've all done well, but, by definition, the things we still have to do are by and large harder than the things we've achieved. So there is no room for complacency."
Alliance boast
The Star Alliance has been a big help, particularly in boosting Ansett's international presence. Eddington expects a 10% improvement to the carrier's bottom line "over time", based on the experience of leading members Lufthansa and United Airlines. The affiliation to Star has also helped in terms of codesharing, as Ansett has been able to offer its first service to the USA via a United link. All Nippon Airways has dropped its Osaka-Australia flights and is codesharing on Ansett's services, adding revenue to Ansett International, which today operates only its own aircraft to five Asia-Pacific destinations.
"Star is adding some revenue," Eddington says. "The other issue about being part of Star is ultimately what it can do for us in terms of helping us reduce our operating costs. My experience has been that it takes much longer to deliver the benefits that come from working together on the operating side than it does to get the revenue benefits. The benefits that come from sharing facilities, from buying jointly, take much longer to deliver."
Joining Star may be a positive development, but hard decisions have been taken along the way at Ansett since early last year, with a management re-organisation, job cuts, a suspension of services to four international destinations, the paring back of the international aircraft fleet and the sale of non-core assets, such as the Hayman Island luxury resort in Queensland.
Eddington says these changes are key, because Ansett had for too long been run without a commercial mindset. Millions of dollars had been poured into improving Hayman, for example, when it would have proved impossible to recoup the investment costs.
"Ansett has been a commercial entity that for a long time had been part of a highly regulated two-airline policy regime. And that meant it didn't have the disciplines that purely commercial businesses have," he says. "There had been a high degree of diversification within the Ansett group through the 1970s and 1980s, in particular substantial investment in things like Hayman Island, which wasn't core, and where a huge amount of capital was ultimately wasted. Diversification was the vogue in the 1970s and 1980s, and Ansett pursued that particular path with great vigour. That distracted capital, that distracted management. So one of the things we've done over the last 18 months is to sell most of those businesses. We've put the capital back into our business, improved the balance sheet and ensured that the management team stayed focused.
"The old Ansett structure was very 'siloed' - engineering, flight operations, marketing, selling, finance, human resources, communications - there was no cross-function. A lot of the challenges airlines face require people from half a dozen departments - or at least three or four - to sit around the table to find the collective answer. So we've spent quite a bit of time thinking about the organisation structure. We've also recognised that, because we've been investing in things like Hayman, we haven't invested enough in our core business. Now you're beginning to see some tangible demonstrations of investment in our business - Sydney airport terminal is probably the strongest of those. We've spent something like A$170 million [$110 million] upgrading Sydney and we're looking at other terminals around the country and the investment we need to make there," Eddington says.
One of his main targets since his arrival has been to achieve a profit margin of 10%. The margin for 1997 was zero and last year it was still less than 1%. The target for the year ended 30 June, 1999, was 3%, but this was surpassed with a better than expected 4.6%. (As Eddington points out, with obvious envy, rival Qantas has seen its margin improve over the same period to 6%, from 4%). He acknowledges that it will be difficult to achieve the ultimate double-figure target, because of Australia's high wage costs, relatively small population and the country's enormous size. However, he makes no apologies for setting tough targets.
"We've set ourselves a long-term goal of 10%, because that's the best of the breed," Eddington says. "It's important, too, to have realistic milestones along the way. But it doesn't do yourself any harm to remind yourself what the best people in the industry do."
Fleet rationalisation
Central to achieving higher profits is fleet rationalisation. Eddington has eliminated the Boeing 727s from Ansett Australia and, while some British Aerospace 146-300s remain, they are to be phased out next year. Ansett's domestic fleet renewal programme will be revealed late this year or early next, and many expect the carrier to opt for an all-narrowbody operation based around up to 35 Airbus A320s, leading to the phasing out of Boeing 737s and 767s.
"In what is already a complex business, it just adds complexity to complexity," says Eddington, frustrated with the carrier's highly mixed fleet. He adds that, ideally, he would like to have just one, or a maximum of two, types on domestic routes rather than many different types within a network. "You're often much better off rationally misusing the aircraft you have. If they're a bit big or a bit small, you use them in the market anyway. The rational misuse of aircraft is something that a lot of airlines - including Cathay - have done over the years. It is usually a much smarter strategy than increasing fleet diversity," he says.
Fleet issues are not the only ones keeping Ansett in the news headlines. Not only has it won publicity from its place in the Star Alliance and its impending fleet changes, it has also been the subject of a fierce take-over battle that Qantas chief executive James Strong has dubbed "the best poker game in many years".
News Corp agreed earlier this year to sell its 50% share in Ansett Holdings to SIA, but the tentative deal fell apart because ANZ refused first to withdraw its pre-emptive right to match any formal offer. News Corp, rather than allow ANZ to be in a position to take full control, opted to withdraw its stake from sale. While many believe the poker game is far from over, Eddington plays his cards close to his chest, saying he will not comment as "that's for the shareholders" to work out. In the meantime, he says, the head of News Corp's Australian arm, his boss Lachlan Murdoch of News Ltd, is saying publicly that "he is in no rush to sell the business". In Eddington's view, the restructuring efforts will put the carrier in a strong position for a listing in the coming years. While stressing that no talks have been held over a listing on the Australian Stock Exchange or elsewhere, he says he personally would like to see the airline floated.
"I believe it's a good thing if airlines are in the public domain with as broad a based shareholding as possible. I felt that very much in my last life at Cathay [it went public in 1986] and I believe that's true for Ansett. I would like to think that the airline is well under way to being floatable, if I can use that term. Personally, I've always thought it was a good thing. And I've always felt that, if we're going to float the business, it would be nice to provide opportunities for staff to become shareholders as well."
While talking of News Corp's "real commitment to fix the business", Eddington says ANZ is a "critical player in this part of the world", adding that, to "compete with Qantas and to continue to compete with Qantas, then being aligned with ANZ is a big help in that regard".
Eddington is no newcomer to take-over battles and, in comparison to at least one such challenge he has faced in the past, the Ansett tussle may seem minor. In Hong Kong, Cathay became the subject in early 1995 of a tense fight with China over the future of the then-colony's aviation industry after Beijing's mid-1997 take-over from the UK. The fight began when a powerful Chinese company - a subsidiary of the regulatory CAAC known as CNAC - applied to set up a new airline in Hong Kong in a clear challenge to Cathay and sister carrier Dragonair. It was more than a year before the battle ended, and only then because CNAC dropped plans to set up shop in Hong Kong in return for a major stake and effective control of highly profitable Dragonair at what many called a "bargain price".
It appears that this battle helped Eddington before his arrival at Ansett. That, as well as a great amount of soul-searching, meant there were few surprises on touchdown in Melbourne at the end of 1996.
"Before I came down, Ken Cowley - who was chairman of News Limited and who was executive chairman of Ansett - gave me a very thorough briefing on Ansett. Ken Cowley's not an airline man, but he was absolutely spot on. I found some things I hadn't expected, but broadly it was what I expected. I hadn't lived in Australia for 23 years, and I love being back. The family loves being here, and so I'm really comfortable staying here," Eddington says.
Just how comfortable depends on the progress of Ansett's turnaround programme and how profits multiply over the next few years. Only then will we know whether Eddington can himself be described as a Noah who has successfully fulfilled his mission.
Aussie ascent:
Roderick Ian Eddington, Executive Chairman, Ansett Australia
Eddington was born in 1950 in Perth, Western Australia. He graduated from the University of Western Australia in 1972 with a 1st Class Honours in Engineering and secured a Masters in Engineering Science a year later. He taught as research lecturer at Pembroke College, Oxford University, in 1978/9, following the completion of a Doctorate at Oxford's Department of Engineering Science. Joining the Hong Kong based Swire Group in 1979, he worked with Cathay Pacific Airways in Hong Kong, South Korea and Japan, in a variety of roles, before being appointed managing director of Cathay Pacific in early 1992. News Limited appointed Eddington executive chairman of Ansett Australia in January 1997. Eddington enjoys cricket, Australian rules, rugby and bridge.Source: Airline Business
