DAVID KNIBB SYDNEY
Air New Zealand's new chief executive knows his airline's future is linked to its Australian subsidiary
It is a sign of the times that Gary Toomey, the new chief executive at Air New Zealand (ANZ), is not receiving visitors at the carrier's Auckland head office, but at the Sydney branch office of Ansett Airlines. Wholly owned Ansett is bigger than its parent, and its problems are even bigger still. So, to address them, Toomey spends more than half his time on the Australian side of the Tasman Sea. In his first job as head of an airline, the 45 year old Australian has taken on the sizeable task of filling two vacancies rolled into one - the general manager positions formerly held by Jim McCrea at ANZ and Rod Eddington at Ansett.
Even for a man the size of Toomey, who resembles a fresh-faced bear, those are big shoes to fill. And the challenge has grown bigger since Toomey took charge in January. Empty bookshelves in his Sydney office testify to the fact that this is a man on a mission, moving from one urgent meeting to another, hardly aware that he even has an office, much less the time to furnish it. Leaderless for six months, ANZ and Ansett have drifted during a crucial period when they should have been integrating. Consolidated net profit at midyear plunged to just NZ$3.8 million ($1.64 million), against NZ$127.2 million a year earlier, and the company now expects a "substantial operating loss" for its full year ending 30 June. Toomey can hardly be blamed for the problems he inherited, but the responsibility to turn things around now rests firmly on his shoulders.
In assessing ANZ's poor performance, it is important to remember that certain macro conditions affected every airline in the region. Those include: higher fuel and airport costs; a strong US dollar; an Australian domestic traffic fall during the Sydney Olympics that erased overseas gains; and competition from Australia's erstwhile startups Virgin Blue and Impulse Airlines. Indeed, these same conditions caused a 22% midyear profit plunge at rival Qantas Airways.
However, ANZ chairman Sir Selwyn Cushing minces no words about the role Ansett Australia played in exacerbating ANZ's nosedive. Further, he admits that ANZ probably paid too much for Ansett last year. The purchase was finalised at a time when the carrier had just emerged from a drawn-out bidding war with Singapore Airlines that only ended with ANZ's purchase of Ansett's remaining half of the airline for A$580 million ($290 million), so that it could own all of Ansett Australia and 49% of Ansett International.
Ansett International has performed as best it can with a small route network, and contributed NZ$7.2 million to the group's midyear result. The problem has been the domestic arm - Ansett Australia - which some analysts say lost A$119 million in the first half, compared with a preceding year profit of A$144 million.
The Ansett question
Just how much Ansett is dragging ANZ down is unclear, as group reports do not break down Ansett's results and Toomey is unwilling to quantify them. Furthermore, ANZ's board admits that poor internal reporting makes it hard to gauge Ansett's true financial position. But while the magnitude of Ansett's losses is open to question, there is no doubt that the carrier is dragging ANZ down. And it is because ANZ has become a captive parent to its loss-making subsidiary that Toomey, who sold his Sydney home to move to Auckland, still spends half his time in Australia.
Aside from the price paid, however, no one at ANZ questions the merits of the Ansett acquisition. With ANZ primarily being an international airline with a small domestic market and Ansett a large domestic airline with a small international market, the fit is obvious. The liberalised, open-border aviation regime between the two countries should make the partnership a business mix full of synergy.
"We just have to capitalise on our real strengths," says Toomey in his confident Australian accent. "Those are our high quality international service, the tremendous market share advantage we have in New Zealand already, and the great brand, good will and good people we have here in Australia."
The first step in that process is already in place - restructuring the two airlines along functional lines rather than operating units. "The business units were doing a good job of focusing on the costs. But people are looking to this group to be an Australasian airline. They don't care if Ansett domestic is being run by one fellow and New Zealand domestic by another. They want seamless service. They want a consistently high quality product,"he says. "The business units didn't deliver that. If you wanted to change a customer service item, you had to go to six people because we had six different operating units. I don't think that works. Regional airlines were exempted because of their unique cultures. But everything else is integrated."
Does this effectively merge Ansett and ANZ? "I think it does in many respects," Toomey admits. "The Ansett and ANZ brands won't be merged. Geographic differences exist in that - legally - you have to have separate [labour] awards. But if they contain the same sort of approach, we could have a flight attendant getting off an ANZ plane and going on an Ansett one. That's a long way down the track, but we're going to have the ability to be flexible."
Toomey would like to take this concept farther. He speaks of the need for an over-reaching brand. "We have different frequent flier programs. We have over 60 sub-brands, including some wholesale companies that I've never heard of before," he complains.
Integration challenges
The ANZ and Ansett brands are untouchable, but Toomey insists that more must be done to integrate the products and services they offer. "Until then," he says, "we're not optimising the scale of our business."
Beyond these marketing concerns lie the substantive issues that still face the airline group. By July, Toomey hopes to present to the ANZ board an ambitious business plan addressing strategic goals and the steps needed to reach them. He is coy about specifics, but forthright about objectives.
The first is for Ansett International to expand its overseas route network at least to Los Angeles, Tokyo and London. Toomey sees this as part of the battle for Ansett Australia to regain lost ground within Australia. In the Australian market, the group has not got an international offering, other than Hong Kong, Osaka and two leisure destination, so corporate customers cannot make that seamless transfer from domestic to international flights on the same system, says Toomey. Alliances membership has helped but is not a substitute. "The Star Alliance has been superior to our competitors, but that's not the same thing as Qantas having its own system."
Toomey concedes that Ansett International, in which ANZ holds only a 49% stake, will supplant and may even replace Australian flights which ANZ now flies. That will mean giving up some revenue which ANZ could earn, but he believes that switchover is necessary. "The Ansett brand in Australia is very powerful. We've lost a lot of customers who I think will come back. Part of our vision is to fly ANZ out of New Zealand and, except for the Tasman, Ansett out of Australia."
However, Toomey says Ansett will not fly between Australia and New Zealand. "At the moment ANZ is flying the Tasman with a very fine product. I can't see any advantage in changing that," he says.
Toomey's next strategic objective is to work more closely with Singapore Airlines (SIA) and the other Star Alliance partners. As part of that, ANZ and United Airlines recently gained antitrust immunity from the US Department of Transportation. Ansett may seek to come under that umbrella after it launches its own flights to the USA.
Toomey is long on platitudes and short on specifics about closer ties with SIA. "They have a 25% stake in us, but it's a relationship we haven't really exploited," he says. Beyond the possibility of Ansett leasing more SIA aircraft, Toomey talks only about blending service standards and schedules where routes intersect. The overall impression he leaves is that he wants closer SIA ties, but he is hoping someone else will take care of them because he has more urgent concerns.
Regaining Australian share
Those concerns centre around his last and biggest strategic objective - regaining market share within Australia. It is also his most dangerous.
Back in the days when Ansett and Qantas - or its domestic predecessor, Australian Airlines - enjoyed an Australian duopoly, the two usually fought each other to a 50-50 draw.
Then Qantas used a successful public float to fund a capacity boost while Ansett became the pawn in an ownership battle between ANZ and SIA. With an unsettled future, ageing fleet and no one investing in it, Ansett's market share started to slide. Today, by most accounts, it has fallen to an all-time low of 41%. Startups Virgin and Impulse have grown the market by a quarter, but still claim less than 5% of it on an annualised basis. Qantas controls the rest and is now in the process of rescuing a struggling Impulse as the low-cost movement comes close to collapse.
Worse than raw numbers is the loss of Ansett's high-yield business traffic. Once Australia's preferred carrier, Ansett has seen Qantas take away a string of key corporate customers. Alarmed by these defections, Toomey has reacted quickly. "In my first day on the job, I met with one of our largest corporate customers. We'd had some difficulties [grounded Boeing 767s due to missed maintenance] and had to assure them that was not systemic, and we were going to invest in the business."
In his first six weeks on the job, Toomey met with 72 of Ansett's corporate clients, something he continues to do. "I think the customers appreciated it, because, by and large, they've stayed with us," he says.
But the dangerous part of this game is Toomey's plan to retake market share by boosting capacity. "Domestically, we've allowed capacity to drop, which is obviously contributing to our lesser market share," he explains. "So that we can build that capacity back up again, we'll be bringing in four 767-300s from July."
Ansett will put these jets on the busy Sydney-Melbourne-Brisbane triangle, which also happens to be where the startups are making their biggest mark. But Toomey is not worried by such low-cost competition. "Anything we do in market share is not related to the new entrants," he says. "It's related to growing our business." In short, Ansett is not chasing the discount leisure traveller. It wants business passengers back.
Ominously, Qantas is also boosting domestic capacity by 11%, following a decision to redeploy 767s from suspended overseas routes. "Qantas has not said as much, but those aircraft also seem destined for the Sydney triangle. We're seeing a good old watershed of times past with the major airlines trying to consolidate their positions," says Peter Harbison, managing director for the Sydney-based Centre for Asia Pacific Aviation.
Fleeting thoughts
"The new entrants are the catalyst for this," says Harbison, "but it really involves a decision by Qantas to be as aggressive as possible. The capacity boost by Qantas makes it harder for SIA and ANZ to do what they need to do to boost Ansett." Does Toomey think his former employer is out to thwart Ansett's comeback? "That's entirely possible," he says in a typical matter-of-fact reply.
Ansett's growth is tied to a major aircraft order slated for the second half of this year. Ansett especially needs to replace its ten ageing 767-200s, which have been grounded twice in the past five months during the busy Christmas and Easter holidays, bringing Ansett a flood of bad publicity. To reassure safety officials, Toomey has promised to accelerate this refleeting.
Toomey admits an order is imminent, but he will not be drawn on specifics about aircraft size, number of units, growth versus replacement, lease versus purchase and so forth. It is clear, however, that any order will emerge from deliberations that include route analyses, consultations with SIA over possible leases, and extensive talks with manufacturers and financiers over terms.
Toomey also concedes that, while working capital is no worry - "we have a billion [New Zealand] dollars in the bank" - the group will need much more to fund a major fleet order.
In view of the historic reluctance of ANZ's major shareholder, Brierley Investments, to inject capital into the airline, some have speculated that, in lieu of a capital call, ANZ might sell a minority stake in Ansett directly to SIA to raise funds. SIA certainly has the cash, but that would be ironic after ANZ blocked SIA from buying into Ansett last year and manoeuvred SIA into taking an ANZ stake instead.
Toomey dismisses the idea. "ANZ's purchase of Ansett was a very important acquisition because it gave us a scale we could not otherwise achieve. To turn around and sell off part of it now would see that strategy go out the door." The answer, he says, is for ANZ to find funding through such debt-equity hybrids as convertible preference shares or straight debt.
However financed, a fleet order is critical to Ansett's replacement needs. But that does not address the ultimate question of whether or how ANZ/Ansett should boost capacity for it to regain domestic market share.
Toomey seems to see more market share as a goal in its own right. "When your competitor's got, say, 55% of the market, each incremental unit of capacity they put on is reflected in one more unit of market share. At the other end, you have just the opposite effect. So that's why we can't allow our capacity share to slip any further. It's a market share game for us."
Others are not so sure, with one industry player talking of Ansett and Qantas "trying to bludgeon each other into submission". Consultant Harbison comes closer to explaining the rationale behind this struggle: "It's a big strategic call," he says. "Can Ansett survive with reduced market share? It's also an image issue, both with Ansett's staff and customers. It's one thing to cut salaries and also shrink the airline, and quite another to cut salaries and increase the airline. The first is unacceptable; the second is easier to sell."
Struggle for dominance
On the issue of profits, Harbison says: "Traditionally, Ansett was the business traveller's airline. In recent years Qantas has stolen a lot of that. Ansett needs to broaden its corporate base." He adds: "There's a tacit decision here by both major airlines that they will bleed for at least a year. This is a real struggle for dominance."
How ANZ's future came to be tied to a struggle for domestic dominance between two Australian carriers is a case study in consolidation of airlines across national borders. New Zealand and Australia are simply ahead of most of the world in relaxing ownership barriers between them so that such a saga could happen. But Toomey has little time to consider the cross-border implications. He is on a two-nation mission with a sense of absolute urgency.
"Our biggest challenge is to take these different organisations with different products and markets, to make decisions quickly, and to push those decisions through. Everyone, including the institutional markets, think this is the right way to go. Now we just have to deliver," he says.
An Aussie for ANZ
Gary Toomey hails from a working class neighbourhood in Melbourne better known for its tough football team than for grooming chief executives. Fresh out of the University of Melbourne in 1976 with a degree in commerce, Toomey joined the accounting firm Peat Marwick Mitchell. Five years later he took the first of many company secretary posts that led him in 1987 to Australian Airlines. Later, however, he moved back out of aviation.
When James Strong took the helm at Qantas Airways in 1993, he asked Toomey to become chief financial officer. Toomey took the job and quickly introduced new foreign exchange and hedging methods that saved the company millions. His blue collar background also helped him smooth the way with union leaders to cut costs. In June 1996, Global Finance magazine named him one of the top 25 chief financial officers in the world. Toomey's biggest challenge at Qantas was to integrate Australian Airlines, exclusively a domestic airline, into Qantas, which was then exclusively an overseas carrier. He did it, and that experience uniquely qualified him to become chief executive of Air New Zealand (ANZ), where his biggest challenge today is to integrate Ansett into ANZ.
Besides running ANZ, Toomey is a member of the Star Alliance chief executive board and a governor of the International Air Transport Association.
Source: Airline Business
