Interview – Bill Meeke & Dennis Howe

Q: You have had some time to digest EastWest. What can you say about your long-term plans?

Meeke: We do not have any indigestion. The long term plans for East-West are very much in the nature of Australia’s third airline. Certainly we see the company as being poised, if not already occupying that position, flying slightly different services, equipment and routes – but nonetheless fulfilling the role of a third airline.

The future role will in the first instance be determined by the review the Federal Government is conducting which has been brought forward. That action in itself recognises the readiness of East-West Airlines to adopt a different and more important role.

Initially, the Government will determine how it sees East-West fitting into the overall scene. It is then up to us to satisfy ourselves that that role is the one that we want – and if not then we might have to go back on the pioneering path.

There are still opportunities available within the framework of the two airline policy for us to extend ourselves – some of these we might exercise in the short term, others we might leave until we have seen the nature of the review.

Q: What do you mean by the pioneering path?

Meeke: The path embarked on by Bryan Grey. There is no doubt he took East-West from being a reasonably comfortable little regional airline to the position it now occupies – and full credit to him for doing that.

One of the things that attracted us to the company was its potential. That initial pioneering, together with our purchase of East-West Airlines, were the two ingredients that brought forward the review by two years.

Q: So if the review does not work out to your satisfaction you have no qualms about renewing the work Bryan Grey started.

Meeke: We indicated when we withdrew the High Court challenge that it was an option that remained open to us. There are other options which had not yet been exercised by Bryan Grey and would not at this stage be exercised by the present management of East-West Airlines.

It is only fair to say that the Government recognises the need to have another look at the policy and we should afford them the courtesy of letting them do that. We will be a very meaningful part of that review process. We intend to be quite vocal and quite constructive.

Q: According to what Mr Beazley has been saying, it will be 1986 or 1987 before any changes can be notified and they cannot take effect at the earliest by 1990. How do you see the timing of the review and your part in it, and the government’s reaction and your reaction?

Meeke: People tend to be a bit myopic when they look at the two airlines policy. They tend to think it either exists or does not exist and that we either have regulation or deregulation. I believe there is scope within the various Acts that constitute the two-engineer policy for some considerable modification and overhaul of it before it self-destruct. I do not see it being removed. I see it being replaced by another policy because there is no way in my mind that I can conceive total deregulation in this country.

When you have 15 million people scattered around 20,000 kilometres of coastline there is no way in the world you can support a good level of air services under total deregulation The two major airlines have equipped themselves very much for the role of inter capital city high density transport. That leaves a tremendous number of opportunities open to another operator. At the moment- and I believe recent history has proved this – we have the better sized equipment. At this stage Ansett and TAA are over-equipped in terms of capacity and size of aircraft. We are not in that position – if anything we have a shortage of capacity in terms of numbers of aircraft, but the ideal size of aircraft.

Q: But not for the long haul though.

Meeke: But maybe not for the long haul. We have all bought this equipment on the basis of a fairly long period of utilisation and service life. The very circumstance in which we find ourselves could be the key ingredient in determining the different roles between those two airlines and ourselves.

Q: Mr Beazley floated the idea at one stage of having deregulation on the very heavy routes in the eastern States and some form of deregulation, or possibly even monopoly, on the thinner routes to the west and north. You mentioned other options if you do not get what you want out of this review. Could you see yourself fitting into that type of operation? Do you have a particular segment you are looking at?

Meeke: Well, let’s divide the country up into two halves. In the west we can see an emerging role for ourselves because of the State Government’s policy, so it i§. fairly clear what will happen here. We will initially set those Pilbara routes then ultimately there is the Kimbdeys and then there are thinner routes within the network which may or may not be deregulated.

I believe some of them should not be, in the interests of the small communities, certainly at this stage.

So WA you can forget about for the time being. You can view the centre of the country in a slightly different light and we have already staked a claim on a service through Alice Springs.

We have an approved service that is not yet operating – Melbourne-YularaBrisbane – and it is being reviewed in terms of available capacity to begin that service.

In the eastern States it is a different operation altogether because you have high density population, high-frequency travel and low distance routes. That was the area where Bryan Grey exercised his ingenuity with the top-up type fares. I think there are still opportunities open to us in that area.

The other area BryanGrey pursued was specialised services and even within the framework of an unchanged two-airline policy there is more scope for specialised services.

I believe what will happen is that the principal roles of all the airlines will be defined in this review. If that happens there will be some routes which will be better suited to operation by East-West Airlines, probably still in competition with the majors, who would need to position equipment anyway, with the majors concentrating their large aircraft on the intercapital city routes.

Q: When do you see that sort of definition of roles emerging?

Meeke: As I see it it could happen within the framework of the policy so it need not wait until 1989. I think next year myself – 1985 is the year.

There has been a crunch coming and East-West was pushing that crunch ahead. The Australian travelling public was also putting pressure on and the Government recognised that pressure and decided it would look at the position.

Howe: Tourism will have a big role too. While the Federal Government is determined to see an improvement in that area by offering services around the country to encourage people to tour around, that must offer advantages for our airlines.

The domestics, the way they have structured their timetables, are more geared to look after the frequent business travellers and the tourists have to fit in with that.

Surely there will be some avenues open to East-West to start additional services which will go more directly to these tourist places. YuIara is a good example but there have to be a stack more that we can open up. We intend to look at services coming more directly out of the east, say through the hub of Alice Springs and flying not necessarily into the Pilbara but direct to Cockatoo Island for instance. Then we could come back to the Pilbara and have services going the other way and so on.

At the moment the tourist has to go halfway round the world to get where is going.

Meeke: There is a tendency in this country to view opportunities in the manner in which the two airline policy points you. You tend to look at point-to-point travel.

What we would prefer to do is look at methodology adopted elsewhere in the world. Although the population distribution is different, but I believe some of the hubbing techniques adopted in the US can be adopted here in Australia, particularly in the eastern States. But they are not suited to the equipment operated by the major airlines. You could not run a hub system with that equipment but you could with our equipment – such as Jetstream 31 equipment feeding into hubs served by the F28. Ansett is doing this but it views it on a state-by-state basis with a hub in each State which is the capital city serviced by its regional airline and it then pumps traffic into the inter-capital services.

I believe in NSW you could find more than one natural hub. In Western Australia, there is no reason why we should not hub at Kalgoorlie.

Howe: Esperance, Learmonth, and Norseman all could be rubbed into Kalgoorlie to join services to Adelaide or Alice Springs. This means traffic is not necessarily being generated out of the capital city back in Perth but out of the centres that surround that area.

Meeke: At the moment, anyone in Esperance or Kalgoorlie has to fly west to east at tremendous cost and efficiency as far as they are concerned. There is a helluva emotional reaction to that. Even the motorist hates doing that.

Obviously we have to talk to the Federal Government about this because it is going to mean upgrading a lot of airports, particularly in the east, to take our sized equipment. That has to be top of the list so we start taking the heat off the primary airports. Sydney is reaching saturation point but in the US they alleviate that problem by having more jetports around the country to create more hubs which you can run successfully with smaller jets, but not the larger equipment operated by Ansett and TAA.

Q: So you see, for instance, Bathurst becoming a commuter hub.

Meeke: That is an interesting possibility. There are a great host of possibilities. We have been looking at it pretty closely lately. It is quite amazing what you can find when you get your map of Australia out and start looking at densely populated areas, particularly if you take off the TM and Ansett • routes. They confuse things. If you take off the blinkers and view Australia there are a lot of opportunities that fit into that type of methodology. .

Q: But the population distribution of Australia does not lend itself to rubbing as readily as that of the US.

Meeke: No, but your hub does not necessarily have to be a densely populated town in its own right.

A classic opportunity, although admittedly· it is related more· to freight than passengers, is Federal Express using Memphis which does not generate a lot of freight in or out in its own right. There is nothing spectacular about Memphis but it is the natural hub for that system which is the most effective freight transfer system in the world that I am aware of.

We do not need a dense population for a hub but if you were Ansett or TA A you would have to insist on it because of your capacity.

Q: Given the review for cost recovery has taken seven months to get underway and earlier you were talking about 1985 you would like to see things done; if the Government is going to take six months to get all this done your whole time schedule starts slipping.

Meeke: If we carry on developing our strategy and at the end of the day it is a sound strategy, there is no reason why we cannot start acting on it now. If we come up with a strategy that does not offend the two airline agreements, then why can’t we start tomorrow? We have a business to run in the meantime and we will run it to the best possible advantage pending the review.

But we should not be too critical of the Government at this stage. We took over the company on December 16 and they announced the new date for the review on December 24 so they moved pretty quickly.

We have tremendous confidence in Kim Beazley’s approach to the aviation scene.

I believe he will tackle it aggressively and will not let too much ground his or the committee’s feet. We can be having a very meaningful input within the framework of the existing policy in the meantime.

Q: For East-West to be a truly legitimate third airline you will have to operate on this side (WA) of the country and that brings in Skywest. What sort of plans are there for gradual assimilation or fusing of the two airlines?

Meeke: That cannot occur until East-West is operating services within Western Australia between the Pilbara and Perth. That will occur in September-October this year.

Then we have the opportunity in the tourism and VFR (Visiting Friends and Relatives) market where there is a tremendous workforce in the Pilbara which at the moment in large part spend their holidays in the Pilbara although their employers have paid for them to be paid an air fare as part of their employment terms. We would like to tap into that and we see it as an existing source of funding.

We have some tremendous holiday destinations in the Skywest network so we can be moving people between the Pilbara and Perth on East-West and shipping them, down to Esperance, Albany, Sunbury,· Rottnest, you name it – on Skywest. That is an immediately emerging role as soon as we connect services.

Similarly, we can be putting people out of Esperance into Alice Springs by the same manner, or into the Kimberleys, or Cockatoo Island.

Howe: I think Alice Springs is a natural hub. If we are running services from east and west into Alice Springs and you start looking at the destinations you can go to from there which are not currently serviced by any airline in a direct manner, that creates tremendous savings for us.

Sure, we would be starting off with low frequencies initially but we are talking about what will happen between now and the year 2000. We will start with maybe a couple of services a week then build up as the traffic goes with it. That is really a pioneering situation and the way we see East-West going.

Meeke: What you need is a third airline system. It is the system that is important, not the colours on the aeroplane. I do not see the fact that we intend to operate the two companies in continuing separate identities as any problem at all.

If you try to get from here to Townsville on any day when there is not a direct Perth, Alice Springs, Mount Isa, or Townsville service, without changing aircraft or aircraft type – you cannot do it. I have done the trip and it is a gruelling exercise.

Townsville is an international port and it seems to me crazy that there is not a more direct service on a higher frequency from this side of the country. There have to be transfers between types of equipment in any hubbing system and I believe it can be done with less objection than some of the existing systems.

It is the system that is important, rather than the identity operating it. It is a bit like Airlines of WA feeding into Ansett. It is all part of the Ansett system.

At the moment if you want to get from Port Hedland to Melbourne you can go East-West through Alice Springs to Sydney then indirectly with us via Albury to Melbourne, or you can come down AWA to Perth and change to Ansett for the eastern States.

Howe: Once last-West is operating in and out of every capital city that will be the start. Once we get to the Pilbara we come down to Perth. The only other link required is to connect Perth with Adelaide and we go Adelaide-Melbourne now.

Once we have that round-Australia ring, we can start the mish-mash of operations.

Q: When will that happen?

Howe: In September this year we have the connection from the east through Alice to the Pilbara then down to Perth. That only leaves that one link from Perth to Adelaide via Kalgoorlie. A starting date depends on the delivery of the fifth F28 jet. We would like to think that will be early next year. It is all part of the feasibility and strategy we are putting together and it is a bit early to commit ourselves to a date. But that is our plan.

Meeke: We could not do it without a fifth F28 because the two that are coming in here are going to be fully utilised and the two already in the eastern States are already heavily utilised and committed to other jet ports like Tamworth, Maroochydore and Norfolk Island.

Q: When you bring in the F28 on the Perth Port Hedland-Karratha run, effectively doubling capacity on that route, what will be your main competitive point against Airlines of WA?

Meeke: We have a number of points. One will be a wider range of air fares. The main objective is going to be to increase traffic because to some extent there is going to be a doubling of capacity on the routes.

The first thing it will do is offer a better level of service. It is not easy to get seats on peak days. At the moment you generally have to book two weeks ahead to be assured of a seat on Tuesday or a Thursday, depending on which way you are going.

Better service will generate a better spontaneous traffic.

There is also a tremendous VFR market in the Pilbara which I do not believe has been fully exploited. The business content on those routes at the moment is about83 per cent and we believe there is an opportunity to bring a better balance into it.

Initially, we will be able to offer direct services because we are limited to the ports we can call at. Every service from Karratha will be direct, whether it is a Hedland service coming back through Karratha and the majority of services out of Port Hedland will be direct. We believe we can offer a better timetable.

Howe: We will be originating some services out of the Pilbara in the morning. One of the gripes they have had for years is that Perth people can go up and back in a day to do their business, but going the other way they have to spend a night in Perth. For a full day’s business in Perth they face two nights accommodation in Perth, whereas we will be able to offer day return travel and a full day’s work in Perth.

In our contract with Mount Newman Mining, we have a Citationjet on charter to them purely because the timetable operated by AWA was unsatisfactory for their requirements.

Q: What will you do with the Falcon 50?

Howe: That is purely for executive use – outside of Skywest. It is a huge group Rick Stowe has got with Griffin and Carpenter and other companies.

It will not be available for charter and is for corporate use over the Pacific route as a result of the acquisition of the Carpenter group with businesses in PNG, Tonga, New Zealand, Fiji and Hawaii.

The 50 is not crewed by Skywest.

Executive Air West do that on contract. We handle the aircraft and help with operational planning. The registered owner though, is Skywest.

Q: Is East-West making money?

Howe: Yes, but we are not happy with the level of profitability. If you start looking at our plans down the track and the sort of investment we are going to have to come up with to service that, wehave to be more profitable than we are now. We have that task in front of us for the rest of 1984 – to convert a small marginal profit into one which is acceptable and will generate funds within the Skywest/East-West organisation. Those funds will be ploughed back in to help with our expansion.

How we bring that about we cannot say yet but we are working on it. Certainly expansion into Western Australia will help. We are not doing that as a marginal operation. It is going to make a profit come hell or high water and that will help service already-existing fixed costs within the EastWest framework.

We are going to be looking for better returns out of openings like Maroochydore, Tamworth and Armidale and other ports. As they are upgraded to take F28s we see us improving our traffic levels tremendously. We have already seen a case of Tasmania where the figures blow your mind on traffic growth patterns once you put an F28 on versus an F27. People just come out of the woodwork. That is evidence that the traveller today is discerning and wants the best equipment available.

There are still the reluctant flyers who are not happy unless they get into something like the F28 as a minimum and the aeroplane will help turn what is a marginal operation now into a very successful profitable organisation.

Q: What do you consider an acceptable return on investment?

Howe: That is difficult to answer because we have not finalised our asset base situation. We still have to look at how aeroplanes are being financed at the moment versus how we would like to see them financed.

Until we finalise our asset base it is difficult to give a figure for return on shareholders’ funds or return on investment. It will be July-August before we can establish what those figures should be.

At the moment it is obvious that what we are earning is insufficient. But at least it is profitable and has its nose in front. We have not bought a disastrous situation.

Q: How will you offer attractive fares – particularly when you are up against things like 45 per cent discount fares on Ansett and TAA?

Howe: Well, our plan has to be to get in there first and get them cranked up. Larger aircraft will have to wait to see what falls out of the review.

We are not looking at tremendous frequencies but at least establishing the links and getting them in place. Like anything you start new, with an air service you have to start with a small aircraft first.

F28s are the ideal aeroplane to pioneer new jet routes, then prepare them for the longer haul.

In the meantime all, we can hope to do is see them break even or see them contribute. We will not make a fortune.

Q: Obviously F28s are not really suited to longer haul routes.

Howe: Yes, but any utilisation we can get out of our current fleet which we would otherwise not be doing makes sense. Chargean air fare which means we will not go down the gurgler and arrange fares so you will get as many types of different traveller in the aeroplane as possible, then away you go.

If we got permission to come in on a major trunk route overnight then straight away we would launch in with a bigger aeroplane. But when you are cranking up new services you do it gradually.

Q: What about the fare basis? We have nothing in Australia like the so-called charter operators in Europe who sell a whole aeroplane to a popular destination once a week or so.

Howe: We are doing that now. We have a series of seven round-Australia tours this year using F27-F28 type aeroplanes, selling the whole aeroplane. I think there is a big market for that going east to west and back again.

Q: What do you think the openings are for Jetstreams in the east? If a route is not supporting an F27 you cannot make it a commuter route without it going up for grabs. But you could put the Jetstream in as a complete airline aircraft.

Howe: It has a terrific future there. Rather than continue to look at F27s progressing into F28s and into large aircraft we also have to look at routes where we can bring a Jetstream in and develop it, then launch into the F27. We can develop both ends of the market. We do not see ourselves getting out of F27s. I would like to get moreof them. If you get back to the hub, which we believe is the key to it all, you can bring people in on a Jetstream and they connect with an F27 or F28. We would be covering our back door while developing both ends of the market.

That is our plan.

Meeke: In the airline area we are trying to rationalise and Skywest on its routes will end up with three Jetstreams and a Bandeirante because certain airports, such as Sunbury and Rottnest, will not take the Jetstream at the moment, which precludes total rationalisation.

TheJetstreams will be flying about 3000 hours per year each and the Bandeirante about 2000 hours.

A Bandeirante operating to Esperance while capable of carrying 17 passengers with two crew is down to about a 13-passenger aeroplane.

A good example is East Coast airlines, of which we own 26 per cent. They had a fleet of Titans operating at one pilot plus 11 passengers and now they are down to one plus nine. They have had to put their fares up to counteract that, but we will not be faced with that same problem. Even the Bandeirante that is left on short hauls to Rottnest and Sunbury, because they are short hauls, will be able to get 17 in, where before we were restricted to 15 on longer routes.

Q: Does that mean your associated company, East Coast Airlines, could be a potential Jetstream operator?

Howe: Let’s not single out East Coast. Every commuter operator in Australia is facing a re-equipment program, whether they operate Titans or King Airs which have had to go back to one plus nine.

There is no way that aircraft of that cost can make a profit in a one plus nine situation.

Meeke: In very simple arithmetic, a King Air that goes out the door at over $2 million today with one crew nine passengers. On the Jetstream you have two crew and up to 19 passengers but your capital cost is about $3 million. This means significant reductions in cost and you are not burning any more fuel.

These new standards were a hell of a shock to the industry and it will take it a few years to sort itself out. Those operators with Metro type aircraft are stuck with it for a few more years to come. They have to undergo the sort of feasibility studies we have been through and when you start looking at what products are available there is really only the Jetstream.

Beyond that you are getting into Dash8s and Saab Fairchilds. Their cost and size is far greater than many commuter routes can support. We have looked at those and you would end up with are reduced frequency of service. It is very difficult in Western Australia to run twice daily services on 30/36-seater aeroplanes because your load factor would be dreadful.

Howe: WA also has a peculiar situation in that a lot of commuter routes are longer haul as opposed to the eastern States where there are a lot of shorter-haul routes. In the east you could probably get away with Metro or Bandeirante-type aeroplanes for a few years to come because you can get 15 to 17 passengers with two crew over shorter hauls. There is no way we could do that here – you are back to operating aeroplanes capable of carrying 17 passengers with 12-13 passengers.

Q: The fact that you are competing against a jet with the Jetstream which is a bit slower, though not enough to worry about over medium hauls, and has no hostess, you do not see as a serious problem?

Howe: No, because we are not running at parallel times. People have an option. You are bound to get a certain share of the market because that service is more convenient to some people and we are a bit cheaper as well. Five per cent saved adds up over a year for a regular traveller. Also there are APEX and budget fares which already account for a big percentage of our travellers from Esperance and Albany.

We do not put a limit on the number of those fares where other airlines block out a certain number of seats at cheaper airfares. With an aircraft our size we take all comers and once people learn how cheap they can travel I am sure we will get them in.

Q: So to compete with airlines on the short routes and in the longer term on longer routes, what sort of discounts are you looking at on normal economy fares?

Howe: The highest discount we have is about 35 per cent off our fares. With someone buying an excursion fare you are about 40 per cent under the airlines.

Q: What would be the earliest you could conceivably look at larger aircraft?

Howe: That is the 64-dollar question