Interview with Dennis Howe

DH: We finished up with a small profit for the year ending 30 June 1985, so we managed to keep our heads above water and we are budgeting to make a profit for 85/86.

Sure, the lean months of June and July, which are seasonably affected, probably are worse than normal, but given that June and July were poor months for us, we still finished up making a profit last year and we’re still online to make a profit for 1985.

I suppose that it is a question now of what other competitive pressures could be put on us during the rest of the year to affect that forecast. It is hard to think what else they could do to us, but I guess there is always something else that they could dream up.

JS: How serious an- effect is the competition so far, with Ansett matching you on most of your interstate routes and TAA also stepping up the competition and apparently looking at other avenues for competition, such as interstate operations?

DH: I don’t believe that we’ve seen any effect to date of Ansett matching our flights. I’m still seeing healthy numbers there. The reports I’m getting back from the field indicate that ‘they’ve got very poor loadings.

I think that’s still true on most of those flights and they have cancelled many flights. Particularly, on the Canberra run. I think that already the Sydney/Perth via Yulara has come back to be just a Perth/ Yulara and they’ve dropped the Sydney leg.

I don’t see that that has really had an impact on us. Bass Strait though, the loadings are certainly down on forecast there. I tend to blame the introduction of the ‘Abel Tasman more than the introduction of these additional flights from Ansett because the ship came on before Ansett put the extra capacity on and we saw an immediate impact. The ship has made a big difference down there and with Ansett’s extra capacity and the jet flights, particularly between Devonport and Melbourne coming on, it has no doubt aggravated the situation for us, so that our loadings down there aren’t as good as we’d like to see. Yet, it’s not a disaster, so obviously there is still a good following down there. I think that there is definitely a lot of support for East-West in Tasmania. People are sticking with us which is great. There is some impact there, but I think we’re still feeling the impact of cost pressures that TAA hit us with back in April/May and we know that they are horrendous costs.

JS: I know of increasing the cost of your reservation services from $60,000 a year to $1,000,000. What other items can you quote?

DH: There are other fees. There are handling fees at airports, and engineering fees, which all went up, and there was some additional costs there, all in the order of $2 million a year. That takes a lot of absorbing for an airline that is going through ‘growing pains’. We’re obviously, reluctant to pass on these sorts of extraneous costs to the public, because we are mindful of how critical it is to keep the airfares at a competitive level.

We are inclined to look internally first, to see if there are ways and means of further streamlining the organisation. We are already fairly lean and hungry, so every time that we have a look in there there’s not too much to get a hold of to improve on. We’ve been in there so many times that there’s not much left in the ‘grab-bag’.

But we still go there first. I think that is a responsible attitude to take, and having seen what sort of cost savings we can make, we then look at ways and means of improving our volume.

Hence, we came out with that ‘EarlyBirds’ deal and one of the main reasons for that was to stimulate extra revenue. The ‘Early-Birds’ was the fare that was a 50 per cent discount and you had to ring in first thing in the morning and you could fly anywhere.

What we were doing really was auctioning off or wholesaling seats that were unsold on the date of travel and it was tremendously popular and we sold 15,000 tickets. The whole idea being, that that was supposed to stimulate revenue, that perhaps we would not have got and it was to offset these costs in the short term and gave us a chance to look at what impact it would have.

JS: Are you still running that?

DH: No, that stopped in mid-August. It ran for two and a half months.

JS: Did you notice any dilution about that at all?

DH: In the end we did. But initially no and therefore, overall, it was a great success. It was popular on some routes more than on others, particularly, interstate routes. Once people really got to know how to use it then you see dilution. But, overall, that gave us a breathing space and now we are looking at other ways and means of getting round the costs.

But when they hit us with the reservations increase on top of that, then that was a real tough one. Immediately, like we always do, we don’t take things lying down, we said look, let’s go out and find out what our options are. We looked at being hosted by other international airlines, in particular, and found that they weren’t really able to give us what we wanted and so we managed to find the SITA-Gabrielle’s system and that’s probably going to cost us a half a million a year, but it is certainly far less than a million and, of course, TAA was saying in eighteen months time, that million was likely to become one and a half million and go up from there.

So it wasn’t as if the million was going to be the ceiling, because what they were indicating was that as our airline grew, and the volume of reservations increased in the Tarzan system they would have to put on more hardware that ordinarily they wouldn’t be up for, and that East-West would have to pay for that extra hardware.

JS: I suppose that is a compliment in some ways. You were having more growth than they were.

DH: I thought that was quite good. We made the decision and I’m glad we have. Again what’s happening is that TAA and Ansett are forcing us to become independent far quicker than what we had planned. The whole thing has just been rushed ahead now, like engineering at Sydney Airport.

I found we just had to really move into that ourselves because there is no way that another airline or another aviation company is going to give you the same service as you would give yourself. We could see that our number of flights was putting pressure on the TAA engineering establishment. So we said look, this is not good enough you know, we have got to be in command of our own destiny and so we therefore found a hangar and in November we opened our own maintenance facility at Sydney Airport.

We’re finding too, in the case of porters and baggage handlers and other things, that obviously, the TAA staff haven’t got their heart in it completely. It’s not their aircraft and I think that it is only natural. I’m not knocking them, but I am saying that it is only natural the staff would perhaps not give the same amount of dedication to another airline. Particularly if they know that the airline is in indirect competition with the airline that they work for.

So, obviously, we are looking at bringing forward our plans to become independent in the area of handling our own aircraft and turning our own aircraft around at the airports.

Then reservations was a real interesting one, because we’ve always said that we needed to have confidentiality. We didn’t want to see other airlines having access to our inventory. This is great now because it has brought forward our plans, probably by about, I’d say, two or three years. I’m glad we’ve made the decision.

Of course, when you are looking at $60,000 and you know that if you are going to go your own way it is going to cost you about a million or more anyway, you say I can’t tolerate that additional cost at this point in time, so you put that decision off and you say, I’ll stick with TAA knowing that that is not the best thing to do, but not wanting the extra cost at this point. But when you’re given no choice, then you say okay, let’s go do it.

JS: It’s remarkable what you come up with.

DH: Yes, I think it is and I think that the other one was the Canberra instance, when we were sitting around in the boardroom and news came through that we were going to be kicked out of Canberra. Straight away you put your fighting gear on and you’re saying –

1. There is no way we are going to stop operating out of Canberra, that’s obvious, and having that sort of decision on the table;

2. How are we going to stay there and how are we going to operate?

We looked at all the options and they said, “There’s nothing there for you. Go back to the Aero Club or something”. Our reply was that that’s not the way to go. Why should we be kicked out of the terminal? Once we made the decision that there was no way they were going to kick us out of the terminal, we had as much right to be there as anyone else, that’s when we came up with a ‘kerb-sider’. We saw it as a temporary measure. We didn’t know how long it was going to be. Six months, two years or whatever, because ultimately it was not what we wanted to do and we still would rather be operating in the traditional way inside the terminal. We came up with an idea and it kept us going. As a matter of fact, I think that it has worked for us. I think we got a lot of mileage out of it.

People said, there’s poor old EastWest getting kicked in the guts again.

JS: Probably every time something like that happened you get a little more business?

DH: Yes, I think so. And even this sort of thing here, as we were saying, we’re disappointed, but that’s the bloody system. So people read it and say, there it is, it’s that two airlines system again, poor old East-West, so you get a tremendous amount of sympathy.

JS: They of course would argue – TAA in particular – that they have been providing these services at marginal costs, in recognition of East-West’s role as a feeder airline to them.

I think the unions would agree with them that once you are required to provide all the services and all the facilities yourself, you become a complete airline; that your costs will rise to comparable levels to theirs, and that you’ve only been able to offer cheap fares to date, according to their argument, because of these marginally costed services they provide. Do you see any merit in that argument?

DH: I think that you can gauge from what I’ve been saying that we’ve certainly felt the pinch and we’re finding it tough going to absorb the costs and still offer cheap fares.

As long as we never lose sight of the fact that it is the consumer that keeps us going, it is the consumer up there that is looking for a better deal, then I think that we are still going to be able to make the grade. By that, I mean that we’ve still got to come up with cheap fares. Maybe in certain instances, we may have to charge a little more, than what we would like to, but basically, we’ll always be cheaper. Maybe at the end of the day our profit may not be as great as what we would like to see it, but then the main aim as far as I am concerned is to make some sort of profit, even if it is a small profit, during the years that we’re battling against the two airline policy.

Whilst we’re there, the whole idea is to survive while that’s in place and if we can make a small profit as well, then I think that it is something short of remarkable. We’re still managing to hang in there and do that, but I don’t know what else is in store for us. I’m not inviting the other two to hit us on the chin again, but if they do, then of course it is going to get increasingly difficult.

One area that hasn’t come under tremendous fire at this stage, is the airfares themselves. The only airline that has tried it on us is TAA, in the case of Sydney/Hobart and Sydney/Coolangatta. They bought their Apex fares down and we came in under them and then they matched us. That was an exercise in futility. Whilst that hurt us, no doubt it hurt them a lot more.

Those airfares are in place until about April next year. We’ve got to hang in there with those cheap fares and they’ve got to do the same, but what happens after that? Who knows? Or is that the start of other discount wars?

Maybe they’re going to try it on other services as well. Maybe Ansett will get in on the act? I don’t think so, but if they do, then we’ve got to be prepared for it and go with it.

The beauty of all that is once again the consumer wins. That is what some form of deregulation is about. It’s what deregulation will ultimately do for the consumer. You’ve got to be prepared for it, you can’t stick your head in the sand and say that it will never happen. It will. It is all part of the change.

JS: If, for some reason, a major fares war did arise, as you say, if you have deregulation, then you really can’t complain about ‘predatory pricing’, undercutting and that type of thing. If it came to the point where this airline, being the smallest of the three, was being driven into an extremely unprofitable situation, do you have an inkling of the feeling of your principals or your owners as to how far they are likely to stick their necks out to keep East West going? It strikes me that, whilst in one way, with an era of change coming up in the two airline policy, East West is in one of the strongest positions, it also is the weakest of the big three with most to lose if things don’t pan out for it. There are a lot of other people that are not quite at your stage of development that would love to step into your shoes.

DH: There is now a very large investment in East-West, where we’ve got assets in the order of $140 million. Obviously, there is a lot of exposure there to the principals of East West Airlines, but all the more reason why they would hang in there to protect that investment. So that in some sort of price war, I believe we would have to just hang in there and fight and sure it would hurt, but the thing to remember is that at the end of the day there will be a change.

There will be more than two airlines. There will be three and eventually, there will be more than three. so that with that objective and that goal in mind, you wouldn’t want to just pick up your tent and run at the first sign of predatory pricing. It’s like what we’re having to live through now, with extra costs and competition from Ansett, a price war would be no different.

The funds would have to be found by the group. Fortunately, East West Airlines is now part of a very large, substantial group. The funds would have to be found to ensure that the airline survives through the price war, because at the end of the day the rewards are obvious – that we become or continue to have our rightful place in there as the third airline.

But what we are really doing of course is pioneering. There is no question about us, I mean we’re the only player in the game where if it wasn’t for us maybe there would never have even been a two-airline review.

Who else would be putting pressure on? Sure, some of the consumer groups and so on. But, I don’t see that that would be sufficient to even warrant a review. so we are the key to the whole thing. We realise that and the public realises that. Even in the case of a price war, I know that the public is certainly going to be looking to go with the best deal.

But, what we’re finding out there too is that the volume of traffic that is available is greater than what Ansett and TAA can handle and that, even if we were slightly more expensive than the other two in a price war, I’m sure we’d still get a fair amount of business out of it. I don’t think that I am being naive when I say that.

There is a fair amount of business there that they couldn’t handle even if they wanted to. Plus I want us to remember too that they’re conscious of their survival, they’ve got shareholders to answer to. And if they’re going to destroy their profits, at a time when they’re committed to more aircraft and huge capital commitments, then they would have a lot of answering to do too.

In the case of Ansett, it is obvious to their shareholders, but in the case of TAA, I mean the present government have made a decision that they are going to hang on to TAA and they’re keen to see it make a profit. As soon as it runs into a loss there is going to be a hue and cry from the public, “There goes our money again being thrown to the four winds, just to put poor, little, old East West out of business”. I’m sure the public wouldn’t like that very much.

JS: I think Ansett does have both more money and more spare cash, shall we say, and more flexibility in the way it operates and if we did have total deregulation the field is wide open for Ansett or anyone to do what they wish. Ansett is probably the player with the most flexibility.

DH: But if I was Ansett, I’d be looking at sensible change, managed change as we call it, to the regulations, They’ve got to know that there is going to be a change at some stage, that after 33 years they can’t keep saying we’re just going to go for another 33 years.

It is going to change, isn’t it better that a respectable opponent like East West be allowed to gradually, slowly but surely, expand its operations within Australia rather than the other alternative, if East West wasn’t there, which would be for total deregulation with all these new entrants coming in and really screwing up the system, in the meantime, taking Ansett and TAA to the cleaners.

If I was Ansett I would be saying, let’s respect what East West wants. Let’s listen to what they want, let’s hear them out. Obviously, they are not in a position to take on the world over night, which we’re not. Where are our terminals, where are all our Boeings, where is our manpower, our tooling, our equipment? It’s a huge job and we would rather grow into that and develop the airline in a sensible fashion without necessarily destroying the system, but above all, providing competition in a sensible way. If I was Ansett I’d sit up and listen to that.

JS: Before we talk a little more about that political background in longer-term development, I’d like to try to get some picture of where you’re at now. Largely in operational terms. The sort of utilisation that you are getting out of your fleet, the philosophy behind your schedule changes and your network changes, the sort of productivity that you get out of your staff compared to the other airlines, that general area.

DH: The summer schedule that we introduced in November 1984, which we all know was the turning point, gave us for the first time what I would call 1 00 per cent productivity of both equipment and employees. The aircraft, the jets, are flying ten hours a day, which is regarded in airline circles as being about the maximum and certainly the optimum.

JS: How does that compare to Ansett and TAA?

DH: I haven’t got their figures, I know that in the case of their similar size aircraft, the F28s, in the case of Ansett, the last figures I saw indicated that they were down around 7 hours a day, that is, I am going on the Western Australia experience. There are actually statistics around, that are old, that give you some sort of idea.

With our F27s we’re running at an average of about nine hours a day, which would be regarded as above industry standard. That is a very high rate of utilisation. With our employees, the last figures I saw we were ranked eighth in the IATA rankings in the world. I say IATA because it was only those airlines that were members of IATA that were surveyed and we ranked eighth in the world when you look at productivity on an employee basis, and that was done both on hours flown and passengers carried.

I suppose that if one could do a quick sum, to look at Ansett and TAA, 7800 employees each for a million passengers. With all of this of course, it brings problems. Our pilots – we’re getting excellent utilisation there with 700 hours a year which is certainly well above Ansett and TAA. I think that they are running at a 400-500 bracket. So where we are really managing to survive, is in our productivity.

The problems that come from that are that we really have no backup and that it would be really nice to have some gaps in our schedules, so that should we have a breakdown we can provide backup much more quickly than we can do at the moment.

That concerns me, I think that again it’s all part of an airline that’s trying to survive in the face of the two-airline system. We’re going to have to live with that. I don’t know how much inconvenience our passengers can tolerate whilst we’re going through this stage.

We could justify the importation of another jet, just to provide more flexibility in our timetables, for example. We obviously can’t afford that luxury. If you talk to airlines around the world, they all have at least one aircraft of an older vintage that sits to one side, which is used to support the fleet in case of breakdown. We just haven’t got that luxury, and so, obviously, we do get problems. Weather problems, such as, fog as we’ve experienced this last winter which was really bad in Canberra and Albury, for example. Then you’ve got the falling deck of cards problem for the rest of the day. So, that is all part of the growing syndrome and we’re just going to have to do our best to overcome weather problems and maintenance problems and whatever else we strike. What it is doing of course, it’s really fine-tuning the airline.

We keep the pressure on the operational division to overcome delays and to continue to fine-tune the operation. I think that all goes well for the future because as we expand, if we can continue to promote that feeling of urgency within the troops, then it’s going to make for a great airline, there’s no question about that.

JS: The fifth F28 you’ve applied for and also the Boeing 737-200, where do they fit into your planning, presumably they involve expanding the network.

DH: The fifth F28, we’ve explained to the government, is required just to cover expansion on our existing network. In the case of Coolangatta, for example, we’re running at average seat load factors in the order of 90 per cent and everyone knows that when an airline has seat load factors like that on a route, you’ve got to offer more capacity. It is generally recognised that when you reach 80 per cent you reach total saturation point and more capacity is required. So, Coolangatta is one area that we’d like to address.

We certainly see some of our rural routes requiring upgrading from F27 to F28 standards. Tamworth is a good example. Armidale, if that airport can be upgraded, it would justify F28 services.

With Boeing, obviously, we have made up our mind, it’s the 737 aircraft that we see as being the aircraft of the future for East West. We have told the government to hold fire on that application, to put it on ice and get the F28 through first and then we’ll come back to them with the 737 application. We didn’t think for a moment that when we gave them that information that it was going to take as long as it has to get the F28 approval. It’s been more than six months now and we still haven’t got it. That means that our plans for November and December were affected. We will not have sufficient capacity to meet the demand this Christmas, which is going to cost us dearly. That is the concern and what it is doing. It is certainly putting back our plans to go into the 737.

With the 737 programme, what we’re looking at first of all, of course, is the Yulara hub situation. We’re still convinced that that will be a goer. That will be connecting, in particular, in addition to Perth and Sydney, Cairns and Coolangatta – Brisbane, though we’re not quite sure which one will be the best one there, and at a later date bringing in Darwin and maybe even Adelaide and Melbourne.

That would give us a lot to look forward to in areas of expansion, whilst we’re still fighting the two airline policy. It will give us a chance to get our house in order for the larger aircraft and obviously to get into that size of aircraft you’re looking at a tremendous amount of pilot training, engineering training, all the tooling and so on, that is required for an aircraft of that type.

We are in a position where that part of our fleet is growing into a fleet of five or six 737s, in the next four or five years. If the demand is there even sooner. You have to start somewhere and we thought that we could get underway now by bringing one in and operating it around the Yulara dubbing system. What it also enables us to do is to start connecting ports, like we’re doing now with Perth and Sydney. We’ll be connecting Perth with Cairns and Perth with Brisbane or Coolangatta, and that would also lead us into this managed change that we talk about.

Certainly we are aware that for the access that you’ve got to have some sector traffic, but in talking to the international airlines we’re confident that the international tourist will be looking for that connection to Ayers Rock when he arrives, particularly the Japanese tourist.