Airline Affairs

The on-carriage from Air Queensland is estimated to be worth up to $20m a year and no doubt TAA will test the validity of the agreement in court as they cannot afford to lose the valuable on-carriage and simultaneously be seen to be buying Ansett Fokkers in addition to eventually having those aircraft serviced by Ansett at Tullamarine.

Perhaps this explains why Ansett dropped out of the race to acquire the majority shareholding so early in the ‘share battle earlier this year and why Ansett senior executives have consistently shown little concern over losing the Queensland regional carrier!

The Deregulation Battle Takes Off:

The first hearings have already taken place in the DotA-sponsored Independent Review of Economic Regulation in Australia which is chaired by Mr Tom May. Public hearings were heard in Melbourne on October 9th and 10th, Sydney on the 16th and 17th while additional venues were to be Adelaide 29th Oct, Perth 31st Oct, Brisbane 14th Nov, Darwin 12th Nov, Canberra 26th Nov, Hobart 2nd Dec and Launceston on the 4th December.

At press time, Ansett had stated publicly that i wanted to see true fare competition from East West, claiming that EWA charged significantly higher fares on its non-competitive routes and indicated a fear of total deregulation in an environment where there still existed a government-owned airline. Ansett felt that it could never compete with TAA in a truly open environment if the government carrier was assured of never having to make an operating profit or going bankrupt. Ansett feels that for full deregulation to be enacted then as a priority TAA must be sold.

Across the street at TAA the mood, particularly in view of the recently posted $76m net profit by TNT, was more along the lines that ultimately Ansett would gain control of TAA if it was divested from government ownership. TAA (and most industry observers) obviously feel that this would create a monopoly of gigantic proportions and destabilise the entire Australian airline environment.

East West naturally wants access to whatever routes it wishes to serve and at whichever fares it chooses. Qantas feel that since the Federal government took away its rights to carry domestically international passengers arriving on foreign carriers (which they claim was arbitrarily done without consultation in 1979) they have been unable to offer the same range of ‘See Australia’ type fares that are commonly available in other countries from their host carrier.

Qantas also point to the domestic lack of interest in discussing pro-rated fares as a major impediment to attracting more overseas tourists to Australia. Though an American, Japanese or European tourist can fly here relatively cheaply, once they are in Australia it is often both difficult and costly for them to visit what by any standards is a vast country. To overcome this Qantas is even looking at the option of utilising its own fleet of smaller aircraft with which to service its international passengers on a domestic basis.

If that weren’t enough, the British Minister for Aviation, Mr Spicer, shocked local aviation officials in September when he openly suggested that the Australian/UK market should be totally deregulated with no fare or traffic controls whatsoever. Mr Spicer pointed out that this would eliminate much of the discounting practised by lower-cost Asian operators and would greatly increase the levels of tourism between the two nations.

The deregulation enquiry is tasked with offering its submission to the Minister for Aviation, Peter Morris, by mid-1986. The Federal government is then bound by the Two Airline Policy Act to give three years’ notice of termination no later than January, 1987.

 Taa Announces $29. 9 Million Profit:

TAA has announced a net profit of $29. 9 million for TAA for the year ended June 30, 1985. This result, subject to audit and final adjustments, compares with a profit of $3. 9 million for the previous year.

The improvement in profitability was due to increased revenue from the carriage of passengers, cargo and mail plus a big jump in earnings from other activities.

The other activities included provision of engineering, flight training, ground handling and catering services for other airlines, the charter of A300s to Condor and Air Niugini, the investment of surplus funds and commissions on the sales of travel for other carriers.

The net profit is after tax and abnormal items. Abnormal items in 1984/85 saw income from sales of surplus aircraft and the Airlie Beach property Wanderers Paradise almost balanced losses due to exchange rate variations and an increased provision for long service leave.

Although the bottom line profit was the highest in TAA’s history, it should be viewed as a normal commercial result having regard to its much larger capital base of $130 million. It was very much in line with TAA’s budgeted expectations for the year.

 Ansett Opt for Three Crew A320s:

Ansett Airlines have verified that they will definitely operate their Airbus A320 aircraft with a Flight Engineer.

The A320 was specifically designed from the outset as the first aircraft of its size to not require an FE. This will make Ansett the only operator in the world of this aircraft (and the Boeing 767) to use a three-man crew.

The background of the decision dates back to late November last year when both Ansett and TAA Flight Engineers went on strike in support of establishing their future employment status with both carriers. Both airlines carry FEs on their larger old-generation, aircraft in accordance with normal operational procedures. However, the new generation of jetliners including the 767, 757, A320, A310 and A300-600 are two man crew. The FE is being replaced by a series of computers monitoring essentially a re-arrangement of systems so as to display vital flight operation data to the pilots as and when required. A US Congressional Enquiry three years ago verified that two man crews were safe, a decision that was already endorsed by the US Federal Aviation Agency and its international equivalents.

In Australia though the FEs are hanging in there. Ansett’s joint Managing Director, Sir Peter Abeles has gone public on several occasions to state that he personally prefers the extra man up front and that is why Ansett will continue to have Flight Engineers on its larger aircraft. With this in mind it came as no surprise when in the first hours of the late ’84 FE strike, Sir Peter personally sent a letter to each Ansett FE stating that they would always be employed on any Ansett aircraft of more than 120 seats. This caught TAA off guard as the government-owned airline was determined to tough it out against an industrial dispute which by this time won strong condemnation from the ACTU, the government, the airlines and every public consumer body involved. The TAA FEs were on their own, though with ‘sympathy’ from the flight attendants and pilots while the Ansett group flew on as if nothing had happened.

The effects of the strike on TAA were disastrous. Though it has not been enough to stop the carrier from declaring a record 84/85 profit, TAA was reported to have foregone more than $20m in revenue in the weeks that the strike lasted. How dearly it cost TAA is mirrored in the DotA airline performance data analysis which indicated that in the December 84 quarter, TAA actually saw a loss of -1. 9% in Total Tonne Kilometres as against the same quarter a year previous. The March 1985 figure was a growth of only 5. 0% while by June things had improved to record 6. 1% growth. By comparison, the Ansett figures were a stunning 12. 8% growth, 8. 4% growth and finally 7. 4% growth for the June 1985 quarter.

It was obvious that Ansett had probably made enough net profit during those busy pre-Christmas weeks to pay its FEs for years to come. TAA on the other hand were not about to give in to the militant Australasian Airline Flight Engineer’s Association (AAFEA) over what they saw as an issue totally unrelated to safety. To further clarify this it is worth noting that Australia will be the only country in the world to operate the A320 and the Boeing 767 with three crew. A senior airline source also pointed out to Australian Aviation that while the soon-to-be-introduced Boeing 737-300s are two man crewed, this aircraft, though operated in Australia with around 112 seats, is used generally with between 125 and 148 seats, thereby highlighting the technical folly of the 120 seat rule in the first place. Needless to say the spokesman was not from Ansett! From the Flight Engineer’s perspective, they have won a great battle. Throughout the world the FE is today becoming what the wireless operator and navigator were in the fifties – unnecessary. Ansett FEs on the 767 claim that they can better monitor the systems and fuel flow aboard the aircraft than can computers. We don’t discount this but when asked for any supporting data we were told by an AAFEÁ representative that “we don’t have that information available”. On the A320 however it is doubtful if the forward-facing FE can even reach much of the fully automated overhead panel that he is destined to monitor.

Ansett no doubt will have industrial harmony amongst the FEs for some time to come though in the long term they could pay dearly for this luxury. Boeing have recently publicly stated that the third crewmember costs a carrier in the region of $500,000 per aircraft annually. This is not unreasonable to assume considering most Ansett and TAA FEs fly around 350hrs per annum and each aircraft would be logging in the region of 3,000hrs annually. When downtime, leave, superannuation and inevitable redundancy payments are taken into account this could well be a realistic figure. To put it another way Ansett could be carrying a significant financial burden in a future deregulated airline environment by flying a 140-seat aircraft with three crew members where only two are required.

To some extent this is analogous with the situation in Western Australia where Ansett have recently won a 6. 8% fare increase partly on the need to cover costs incurred with the introduction of the BAe 146-200. The overall standard of Ansett WA services aboard these aircraft is extremely high as is instanced in them being in a 75-seat configuration whereas standard maximum 146-200 configuration is for 109. In 1985 the public and the IAFC can sanction that sort of policy but five years from now, in a deregulated environment, it might not be so capable of gaining a fare increase to basically cover a more luxurious standard of service. When deregulation comes, as it in one form or another most surely will, it will be the lean and hungry operator that will triumph over one that has come up in the past years of Australia’s traditionally luxurious industrial climate.

 Australian Tour Specialist to Import Own Aircraft:

Sydney Express, a specialist tour operator and major travel agency, has won approval from the DotA to im- port a Fokker F27-200 for use in support of a growing range of special interest tours. The Fokker will arrive in Sydney early next year. in time for the commencement of services in April.

Sydney Express operate tours on behalf of the Sydney Stock Exchange to the mining regions in addition to incentive tours for large corporations. They also operate the successful Explore Australia tours hosted by Bill Peach. In the past, Sydney Express has used largely Ansett aircraft though this has been limited to operations during the winter owing to the general non-availability of charter capacity from the major carriers during the summer peak. To overcome this and to further expand on their already growing specialist tour market, Sydney Express decided that they really needed their own aircraft though an additional aircraft will still be chartered if additional uplift is required.

Taa Takes up the No-Frills Canberra/Melbourne Service to Thwart East West:

TAA was set to commence during October a discount $75 one way no-frills service between Canberra and Melbourne. The service was prompted by the need for at least one of the majors to take up the service earlier this year. Under the existing terms of the Two Airline Policy, the Minister for Aviation, has to offer Ansett and TAA the opportunity to provide such a service. If they decline then the third carrier, in this case EWA, can then proceed.

What has happened is that Ansett has decided to take on EWA on their established Sydney/Canberra run with three Air Coach F27 services daily while TAA will do likewise on the longer Canberra/Melbourne run. TAA will bring its reserve F27 down from Queensland to operate the new service. While this denies EWA a new, and potentially lucrative route, some observers feel that TAA will not profit from the move as Ansett will retain its high-yield traffic at the expense of TAA which must allocate its available seating on the route now between ‘regular fare’ jet services and the discounted Fokker services.

 Record Levels of Activity for Domestic Airlines:

The performance of domestic airlines has continued to rise, with record levels of activity set in the year to June 1985. Growth in the two major activity indicators – passenger kilometres and total tonne-kilometres – reached new heights in 1984/85.

Passenger kilometres grew by 9. 2 per cent, compared with the June Quarter last year, to 2,647 million, while total tonne-kilometres showed an increase of 8. 8 per cent to 278 million.

Other indicators of total industry perform- ance also showed significant growth compared with the 1984 June quarter the number of passengers uplifted rose by 9. 4 per cent to 2. 9 million; and freight tonne kilometres by 6. 6 per cent to 35 million.

While growth rates varied considerably within the regional airlines, the overall performance in 1984/85 showed the industry had re-covered the ground lost in 1982/83.

 East West Concerned by Lack of Response From Minister on Aircraft Approvals:

East West Airlines is concerned by the lack of response, positive or negative, that it has had from the Federal Government concerning its application to import a fifth F28 and a single Boeing 737 jet.

The application was originally launched in March and as we closed for press there had still been no word from the DotA regarding approval or disapproval. In view of the long time it took to gain a positive ‘no’ response on EWA’s important Canberra/Melbourne F27 and the extra long time granted to the majors in making their decisions on this route, EWA is feeling that both the majors and the Government are working together to keep it in check so as not to embarrass the Government over the perceived shortcomings in the present two airline policy.

EWA’s performance over the past two years has been nothing short of astounding. According to DofA figures, EWA recorded a growth over the 84/85 financial year of 44% in total tonne-kilometres performed which was only topped by an 87% growth for the June, 1985 quarter. Growth like this is as a result of entering new markets with new fares structured to attract a new level of clientele. EWA points out however that its spectacular growth of the past year will settle down through next year as a result of the end of the first year of the new scheduling arrangements which were introduced in late 1984 by Ric Stowe and more materially by a sheer lack of capacity owing to an in-ability to introduce new aircraft into the fleet. The fifth F28 Fellowship and the lone 737 are urgently required if EWA is to satisfactorily service its expanding Australia-wide operations in the year ahead.

In its submission to the Government’s Independent Review of Economic Regulation of Domestic Aviation, East West states that for true deregulation to take place, TAA will have to be sold, airline terminals will have to be redesigned to accommodate more than two major carriers, fare and route entry will have to be liberalised and there be no limitations on the importation of airline equipment.

East West felt that total deregulation was basically inappropriate to Australia as our population and geography simply did not allow the US total deregulation’ experience to be duplicated successfully here. It did however, consider that there was significant room for positive change in the system to allow a better spread of innovative, low-cost fares coupled with new levels of competition.

In even a partially deregulated environment a carrier has to be fully self sufficient of its competitors and EWA is presently doing just this. During October it launched its new US-based reservations system, which feeds via satellite to a database in Atlanta after TAA increased its EWA portion of its reservations rental system from $60,000 to $1m a year. EWA, in November, also opened its new maintenance facility at Sydney’s Kingsford Smith Airport which was a job previously undertaken by TAA.

 Lloyd Aviation Takes on the South Australian Airline Market:

Lloyd Aviation are planning to take on Ansett Airlines of South Australia in what might well be a prelude to wider aspirations come the eventual cessation of the Two Airline Policy. Lloyd took delivery of a Fokker F28-4000 jet in June to operate specialist services in support of the Moomba gas project and have more recently brought two additional Bandeirantes from Aeromil (in addition to selling their Cessna Citations) to augment their potential SA commuter fleet. The Bandeirantes (VH-PGS & KIP) are ex-Wings aircraft and have been fully refurbished and overhauled by Aeromil at Bankstown.

Lloyd have also placed deposits on a number of new commuter aircraft including two Embraer Brasilia and hope to have such an aircraft type in their inventory by the end of next year.

Taa Still Interested in the Boeing 757:

During June, Australian Aviation spoke with a number of senior TAA executives. While it was an extremely informal discussion held via a chance meeting in an airline terminal one thing did become clear was that TAA was still very keen on the Boeing 757.

TAA is now in an interesting position. The airline has decided to retain at least four of its 90-seat DC-9s to compete against any discount fare strategy introduced by a competitor, has 150-seat Boeing 727-200s and four 234 seat Airbus A300s. Most of the DC-9s and possibly some of the 727s will be replaced from next June with 112 seat Boeing 737-300s which have the low operating costs of the DC-9s and the payload/range flexibility of the much larger 727. Overall the new 737s will introduce a level of fuel efficiency and route flexibility to both carriers that they have never enjoyed before. TAA has publicly stated its desire to purchase a stretched version of the Airbus A320, which in its present standard fuselage configuration would allow TAA only around 134 seats. Airbus, while keen to produce a stretched version, has not as yet committed itself to the development cost that this would entail so early in the programme. Essentially this is a move that Airbus would prefer to make once the basic aircraft is at least flying so that the maximum number of design improvements can be incorporated in the stretched version. For TAA this would mean not having the A320, even if it was launched as early as next year, till 1990 or even later.

With their new fleet TAA will have essentially 90, 112, 150 and 234 seat aircraft. If the exist- ing 727-200s were replaced with standard fuselage A320s it would mean a fleet of 90, 112, 134 and 234 seat aircraft. Obviously, TAA would have a large gap in capacity that would not be satisfied by the small Airbus. On the other hand the 757 would offer TAA a 170 seat aircraft in three classes plus a viable freight capacity obviously not matched in the smaller designs. Boeing have been speaking to TAA in recent months and we believe that the deal offered by Seattle is in the “too good to refuse class owing to the relatively slow sales of the 757 in the past year or so and the fact that Boe- ing have now som 757 ‘white tails’ that were destined for Indian Airlines prior to that carrier recently cancelling its 757 order. Boeing have already lost out to Airbus in Australia on two occasions and they don’t want to make it third time lucky for the European consortium.

The 757 has earnt a high level of regard from those carriers using it to date. Most report an improvement in per-seat fuel efficiency of up to 50% compared to Boeing 727-200 and 737- 200 aircraft they replaced. Additionally, by being a two crew aircraft Boeing point to a further saving of upwards of $500,000 per annum per aircraft as a Flight Engineer is not required. It is this last point that is the thorny issue for TAA and an impediment to a possible TAA A320 sale. As Ansett have again set a precedent in accepting a three crew A320 (the only ones so ordered) it would be perhaps naive to expect TAA to be able to introduce the same aircraft locally with its designed-for two crew. TAA of course would have to face this issue to some extent with a possible 757 order though basically it would stand more chance of being accepted without a massive strike if it was the sole local operator of the type.

When TAA agreed to its redundancy payments last December to FEs displaced in the future by technology, it also agreed to an independent inquiry between the Federation of Air Pilots, (who support the FEs) the Australasian Flight Engineers Association and TAA. The inquiry will be chaired by an independent person agreeable to all parties. This chairperson has yet to be found and no date has been set for the commencement of hearings though it is expected that this will take place before the end of next year. What is interesting is that TAA has stated that it is not bound to necessarily accept the outcome of the inquiry, which also means that if it opts for an endorsement of two crew aircraft then the pilots and FEs will most probably do likewise.

Whatever the result, the events of recent months must surely be a boost for Boeing at the expense of Airbus. On the other hand, Airbus could launch their stretched A320 earlier than expected, TAA could stand firm against the three crew issue and be destined to have their second Airbus Industrie type in inventory. Only time will tell the outcome!

Ansett Introduce a Selective Business Class:

Ansett have commenced operation on the Sydney/Melbourne trunk route (known as the jugular’ in airline parlance owing to its massive traffic density and profit potential) with a special morning and evening peak 727/737 configured in a business class/ economy layout.

These additional flights (departing Sydney 8. 10am and 6. 30pm and Melbourne 8. 10am and 5. 30pm) will have the new business class in the forward section using standard economy six-abreast seating. Seat pitch however will be increased from the economy 32″ to the first class standard of 36″ and all food and beverage services will be to full first class standards. The fare will be 20% more than regular economy and 20% less than first class.

Ansett hope to attract some of TAAs high yield first and business traffic with these special services and will be able to flexibly configure their aircraft to meet demand at short notice. In practical terms, Ansett would ideally like to reach a point of time when virtually the entire aircraft was configured in a business class arrangement.

Air New Zealand Aircraft Sale:

Air New Zealand will dispose of eight aircraft to a major United States commercial jet-owning and leasing company.

Air New Zealand’s Managing Director, Mr Norman Geary, announced recently the sale of six Boeing 737s and two DC10-30s to the International Lease Finance Corporation, based in Beverly Hills, California. Air New Zea- land would receive just under NZ$200 million for the aircraft.

Air New Zealand is taking delivery of one new 737 in January, three in February, and two in March. During September it received its first new 767 and will take delivery of its second next March and its third next September. The company also has on order another 747.

 Takeover Time:

Takeovers certainly seen to be the mood of the moment.

As we closed for press it appeared that giant US military aerospace and ship-building specialist, General Dynamics was about to take over Cessna. GD and Cessna have been close for several years now since the two signed a technology transfer agreement in 1982. GD would benefit from Cessna owner-ship in that it would be able to lessen its overall reliance on military contracts while at the same time strengthening existing Cessna relationships with the Pentagon. It is no secret also that the US DoD has asked Cessna to urgently resubmit definitive proposals for upgrading the USAF T-37 trainer fleet in light of the Fairchild T-46 possibly being axed due to budget constraints. GD’s timing, if this comes off, could be very beneficial to the Fort Worth based company.

Further north, both Canadair and deHavilland Canada, which are both owned by the government-controlled Canada Development Corporation, were the subject of much interest. Gulfstream, which itself has only recently been taken over by Chrysler, was said to be bidding for rival Canadair while DHC has attracted interest from a number of companies including Boeing, Fokker, McDonnell Douglas, MBB, British Aerospace and Mr Justus Dornier who is also looking at Canadair and is fully cashed- up following his sale of shares in Dornier to Daimler Benz earlier this year.

On the airline front, final acquisition of TWA by Texas Air has been stymied by Carl Icahn who has to all intents and purposes gained control of the giant international carrier while Resorts International is now casting its eyes on PanAm. Resorts, who own and operate extensive gambling and leisure facilities on the US eastern seaboard, have been active in PanAm stock since 1968 though their recent acquisition of over ten million shares fuels speculation that Resorts is ready to invest an additional $US500m in acquiring a controlling interest in the perenially fragile carrier.

Is There a Capacity Shortage Coming?

Over a year ago in Newsdesk we predicted a significant capacity shortage in the world’s airline system that would emerge during 1986 if present growth trends continued. In that time virtually all major airlines have recorded record growth and ever-strengthening load factors.

The Australian scene has been well documented in these pages while in the US, load factors are now reaching levels never before seen. This in itself is cause for jubilation by the aircraft manufacturers, big and small, though of more immediate relevance is the overall age of the US transport fleet. Today in North America alone there are over one thousand jet transports that will need replacing during the next five years.

According to Avmark, the average age of the PanAm fleet is 12. 0yrs, TWA 11. 8, Continental 12. 7, United 13. 0, People Express 12. 6, Ozark 15. 1 and Republic 13. 5yrs. American is re-equipping with up to 200 MD-80s, though due to rapid growth has over the past two years retained most of the early build 727s that the MD-80s were going to replace. A large order is expected from United in the near future for eventual replacement of more than 150 7278 and 75 737s, the vast majority of which are more than 12 years old.

Rapid growth throughout the world airline system, after the stagnation of 1981 through 1983, has resulted in the used market being particularly dry. Most wide-bodied aircraft are gone, with few staying long on the secondhand market while the few surplus late model medium jets (DC-9, 737, 727) are sold usually before they even enter the marketplace. If US sources are correct then the price Ansett received for their 12 five year old 737-200s was more than (discounting inflation) what they paid for them in US dollars back in 1980/81.

To respond to the surge in orders both MDC and Boeing are increasing production accordingly. Boeing have already added more than 9,000 people to the workforce this year (for a total of 99,000, still down from the peak of 148,000 in 1968) and are planning to increase 737 production to 14 a month by early 1986. Airbus are having an excellent year for orders while Fokker had notched up more than 100 orders and options by September 1. Across the Channel, BAe is also looking good on the civil side though the European manufacturers have problems in being able to vary monthly production rates as their American rivals do. This is due to the more complex labour rulings existing in Europe where labour cannot be hired and fired” as easily as it can across the Atlantic. Fokker is now in a position to greatly increase planned F50, F100 and even F28 production though may not be able to do so to the extent it wishes due to difficulties in shedding excess labour when, inevitably, the next recession strikes.

Aviation never has been an easy industry to plan for and ironically it is the airlines themselves, who traditionally order in the good times and have their new fleets delivered in the lean times, who ultimately bear the brunt of an ever see-sawing market for their services.

 Singapore Airlines Moves To- Wards Privatisation Amidst Report of Increased Profit:

According to SIA Chairman, JY M Pillay, Singapore Airlines is now well on the way to achieving privatisation during 1986. The carrier has recorded a very strong trading year with an operating profit of $A61m on airline operations, an increase of 18% over the previous year. Mr Pillay said that SIA was, in effect, already a public company. because a share incentive scheme, launched ten years ago had given 10,500 staff members of the SIA Group just under a quarter of issued capital. , Passenger numbers increased by 6. 3% during 1985 to a record 4. 9 million while SIA was able to self-finance some 72% of the $A700m it invested in fleet replacement which now comprises a fleet with an average age of just over 24 months. As for the future the company foresaw the Asia-Pacific region as being poised to take a bigger share of the world air traffic market than the 26% it achieved in 1984.

Laker Settlement Clears the Way for British Airways Privatisation:

A definitive settlement of $USBm against eight airlines including British Airways has been accepted on behalf of Sir Freddie Laker. The settlement ends two years of negotiations involving alleged anti-trust activities by a number of established carriers against Skytrain. Settlement of the case though now makes it possible for BA to progress with its long stalled privatisation, an aim it hopes to achieve before the first half of next year.

In an official statement, BA Chief Executive, Colin Marshall, stated that the settlement bore no admission of guilt on behalf of British Airways or other defendants to drive Laker out of business or breach US anti-trust laws. The other defendants in the case were McDonnell Douglas Corp, PanAm, Sabena, UTA, TWA, KLM, SAS, BCal, Swissair and Lufthansa.