Interview with James Strong

A: Well, I would say that the job has proven to be one of tremendous interest. The challenge is certainly there, both for TAA as an airline and I think for the Australian aviation industry general. It has proven to be a very interesting job with a lot of stimulation and some very big issues to be dealt with.

Q: You come in at a time when change is approaching fast and the pace of change is increasing. TAA made a number of innovative suggestions to the May enquiry such as freeing up capacity controls. An interchange of State rights and international rights for domestic airlines. Do you still hold to those views or have you developed them further?

A: In broad terms I do hold to the views that have been put forward previously by TAA. I certainly think they require some detailed working up and that is underway at the moment.

The principal behind the matter, I think, is the sort of evolution that the general public is looking for in the Australian aviation industry. The sort of change we are proposing will not cause wide-scale disruption either in employment or investment in the industry and yet it will bring about some evolutionary change which will be to the benefit to the travelling public. So, we are continuing to work in that direction.

Q: Do you feel unduly constricted by the current rules on the management of airlines in Australia.

Possibilities for cheaper fares for night flights have been raised by some people within TAA by operating cargo flights at night with the A300s and selling the seats for a very marginal rate. I gather this is done successfully by some American airlines.

A: Well certainly the curfew remains a problem for the airline industry generally. It imposes artificial restraints on flexibility and productivity and those are probably the two most important questions facing the whole aviation industry in Australia.

In terms of what particular measures you could propose such as night flights and so on, I am not sure that anyone really has a test of the market – just how great the market would be, but it is one of the very interesting possibilities.

I think the industry itself is moving towards exploring, there is a feeling of being more innovative in the industry and trying out things that have previously not been attempted in the industry, I think that people are trying to _ learn from overseas experience.

So it is one area among other rules in the industry that will be considered in the May enquiry which restrict productivity and efficiency in the industry. I think within the airlines themselves, that everybody is going to have to look at both of those questions, productivity and efficiency because they are two of the areas in which you can make the greatest improvement at a time when I think that cost pressures are going to continue to be very great.

Q: There has been considerable pressure from TAA to be allowed to operate intrastate routes principally in NSW and Western Australia. How hard are you pressing that area at the moment?

A: Well, I suppose you could say that our main area of activity has been NSW and that has simply been because there has been an enquiry into air services in NSW. I think we have demonstrated by our conduct that our intentions are very firm in NSW. We put a lot of time and effort into the enquiry to show that we do want to gain entry and we are prepared to mount the best services possible within NSW.

The irony is that that is the market which has been the springboard for East West Airlines and it is a market in which they have had a monopoly over a large area.

It has provided them with a great revenue source for their other activities in which they are operating in a monopolistic manner in terms of fares.

I think that the general public does not understand that question of the difference between East West’s what I would call ‘Robin Hood’ activities in other States where they are coming in with very low fares and being seen as the innovator, whereas in their home base their fare structure is much higher than what they are offering on the new routes and they are operating in a monopoly.

We certainly want to gain entry into that market, so that if the fight is going to be conducted – the commercial fight – we want to conduct it in all areas on an even basis.

So it is a big issue for TAA and one we are going to continue to push.

Q: East-West argue that the same discounts which they make available on their interstate routes with the intermediate stops are in fact available on their intrastate network. Does that work out in practice?

A: Yes, in fact if you are comparing with East West again, I would say that there is a . very low level of awareness of the comparability of discounts offered by TAA and East West and in fact Ansett.

The East-West method of discounting has got very favourable publicity but if you compare fares with fares and conditions with conditions, the East West offers are nowhere near as good as they look.

At least comparable or better fares are available from the two major airlines (refer Reece, p4 this issue, Ed. ), but, in terms of the public perception of it, East West are doing very well because there is certainly a public belief that they are the only ones offering good discounts.

In reality, those discounts are very short-term and specific and no better than those offered by the major airlines – and that is a challenge for the major airlines to tackle to reverse that perception.

Q: In fact East West used to be TAA’s State feeder operation for trunk routes and now of course it is attempting to feed its own interstate operation. Is what you are doing aimed more at replacing that feeder network on a State-by-state basis or is it part of a broader strategy?

A: Well I would say it is a little bit of both. We certainly are interested in being in NSW in our own right, there are no two ways about that, for the reasons I mentioned before. If there is going to be true commercial competition then people should be allowed to compete in all areas.

It is part of a strategy, I think that the airline business in Australia is emerging into an extremely competitive one and I think that means that we have to be in a position to compete in all areas, on all aspects such as marketing, linkages into intrastate markets and so on.

There is a broad strategy of wanting TAA to get access to the areas it has been denied before.

I think in the sort of climate we have been facing up to, it is going to be very important to have access and not to be selectively denied large sectors of the Australian market.

Q: Can this be adequately achieved by State Governments referring their powers to control intrastate air routes to the Commonwealth or do you think there should be a total Australia-wide opening up of intrastate as well as interstate air routes.

What I am getting at is, that the possibility would appear to remain open, even if an individual State Government did choose to open up or ‘deregulate’ its air routes for it to close them down again or re-regulate its own State routes quite separately from the national picture?

A: What you raised there is just a terribly complex position because you are talking about federalism and State rights and I think we all know whatever a State Government does, even if it refers powers, it can readily undo that approach by its own action and obviously that flows from them being sovereign governments.

I think that you have to be realistic about what States are prepared to do and that has to be approached on a State-by-state basis because this really is a question of the political situation in each State at a particular time.

The only general statement you could make is that we feel that there should be no denial of access to an airline such as TAA with the services it can provide in large sectors of the Australian market.

NSW and Western Australia are obviously the ones that come readily to mind from a realistic point of view and we would just be working toward better access in every State in Australia.

Q: You must have mixed feelings about the situation in Queensland where TAA having made certain commitments to maintain remote services obviously at a loss, then finds the State Government allowing another airline, East West, on to more profitable routes within the State. Do you feel that TAA has been badly treated by the Queensland Government in this way?

A: I don’t know that it is a question of whether you are badly treated or not – it is just that the Queensland Government obviously intends to change the rules. I think if you make decisions on certain rules and those rules are changed, you then need to re-evaluate where you stand and I think we have made it quite plain in discussions that we have had with the Queensland Government, which are continuing, that we are re-evaluating our position in Queensland. Obviously, assumptions that may have been made before have to be re-tested to ensure that you are not disadvantaged by the treatment that someone else has got.

To be more specific about that, obviously, it is open to TAA to take exactly the sort of approach that East-West have and that is merely to move in and seek access to the best markets and not to worry about other areas which are not so remunerative.

On the other hand, obviously, TAA has had a long presence in Queensland – it has a big commitment to Queensland as a State. I must say, I have spent a lot of time in Queensland since I started in TAA and I am really very pleased with the amount of support and friendship that TAA has throughout Queensland. We are considering everything that we do in Queensland very seriously. It is an important State and one which we would like to act with carefully and with responsibility.

Q: You have raised some interesting possibilities there. You have ordered in your own right as TAA some BAe Jetstreams to replace F27s on remote routes and of course, TAA has also become involved in ownership of Air Queensland where you are also re-equipping with the ATR42.

So do your comments suggest that you may be withdrawing from certain planned developments or modifying certain developments in either of those areas?

A: No. I stress that whilst we had to reevaluate the situation the strategy that we are following at the moment is still unchanged from that which applied earlier this year.

We are certainly looking at the best way of operating throughout Queensland and taking into account the present position of Air Queensland, which is a very difficult situation. They are not only affected by the economic downturn in the areas they service – such as the sugar and mining industries, which are not having a very happy time at the moment – in addition, there is now this threat of loss of traffic from East West entry which affects Air Queensland to some degree as well as TAA.

But as well, the aircraft that they are buying, have almost doubled in price because of the fall in the Australian dollar.

The position of Air Queensland is receiving a lot of attention at the moment, but I am not signalling that we are moving away from either Western Queensland or the Air Queensland operations.

We are certainly looking at making them more efficient and what we are saying is that we are re-evaluating our whole position in Queensland so that at the end of the day we feel that our investments in Queensland are worthwhile in terms of the business that TAA gets.

We certainly cannot operate on the basis of simply being prepared to sustain losses in Queensland if we aren’t getting the appropriate benefits from a commercial point of view.

Q: That raises a lot of interesting possibilities. Is there for instance, a possibility that you might not introduce some of the new equipment in Queensland as originally planned?

A: No. All our planning at the moment is that the aircraft that are presently on order are going ahead for their introduction. The way in which they will be introduced though is certainly being re-examined closely.

We will have to look very carefully at the capacity which is required in Queensland and it may be that, particularly in the case of Air Queensland, we will look at whether the full capacity of the new aircraft is required.

But that would be part of what I would call a reappraisal of our operations throughout Queensland. It is not a question of saying that the new aircraft for Air Queensland or TAA are not going to be persevered with – they are.

Q: There is another matter too – the acquisition of the aircraft and various rights to on-carriage and servicing which Ansett retained after TAA purchased Air Queensland.

Do you have any plans to challenge the rights involved there? I gather there is a finite term on them, there seems to be some argument on just what the duration of those terms was.

A: Well, certainly as you say, there was a finite term. Just how finite is a matter which is the subject of what I might call meaningful discussions with TAA and Ansett.

Obviously it is a very big issue arid we are trying to review the whole position in Queensland and come up with a strategy for TAA over the next few years and the commercial agreement between Air Queensland and Ansett is an important ingredient in that.

Q: Turning to the equipment question, there is some suggestion that TAA may retain some of its DC-9 aircraft after you have re-equipped with Boeing 737-300s and Airbus A320s. How do you see the TAA fleet developing over the next few years as you re-equip between now and the end of the decade?

A: Well, primarily we are moving into a two-stage major fleet re-equipment programme. The DC-9s will be replaced over the coming financial year by Boeing 737-300 aircraft.

There will be on present planning a few DC-9s not fully replaced and those will be available either within present capacity or if capacity controls were liberalised obviously that would allow a different approach to the DC-9s. But we would certainly have several of those planes still available. (refer p16, Mar AA)

The second phase of the re-equipment is, of course, the Airbus A320 which will commence delivery in April 1989 and that will replace basically the Boeing 727 aircraft.

So going into the 1990s we would see our fleet consisting of primarily 737-300s and the A320 to give us that right mixture of the smaller aircraft but with great flexibility in range and payload and the medium size of 140 seats for those high density routes at peak periods. We feel that, that would be a very good fleet mixture.

Q: Do you intend to stay with the wide body A300 aircraft, one of which is currently on lease?

A: One is currently on lease in New Guinea and we have four others. Our present planning is that we would probably reduce that by one, but we would still need the larger wide-bodied aircraft to fill a particular segment in the market, on the high density routes at peak time.

That does give you a very important ability to lift passenger numbers at lower seat cost.

Q: When you say reduced by one are you talking about disposal or an extended lease of the Air Niugini A300 aircraft?

A: Either of those – it is just that in looking at what we predict to be our requirements in the years ahead and looking at the introduction of 737s and the A320s, we think that the right fleet mixture can be brought back to having one less A300 operating in Australia. How we would dispose of or otherwise employ the other Airbuses is something we are looking at at the moment.

Q: So you are in fact shifting the emphasis in your fleet away from large wide wide-bodied aircraft which were the flavour of the month a few years ago when people thought they would bring cheap fares with them.

Airlines are now in fact moving away from that as part of US deregulation to smaller aircraft with greater frequencies.

A: Yes, I suppose there is a trend in that direction, but I think it is important not to portray that as being a wholesale shift. We would still have considerable capacity with the wide bodied aircraft on that major trunk routes. It is more a question of a slight adjustment in the other direction rather than a wholesale change, there definitely is a role on those major trunk routes for a wide-bodied aircraft. You have to have flexibility with the other size of aircraft. I don’t know if you could portray it as being a complete shift in strategy in Australia – it is more of a slight adjustment to it.

Q: The A300 aircraft are in fact, in terms of aircraft development relatively old and dated aircraft, the first twin engine, wide body. In fact the version you have is now no longer being manufactured.

How competitive are they in operating cost with say, the A320 on a seat/mile basis and what is the general attraction of that wider-body aircraft. How do you see its role in the future of the airline and is there, shall we say, a medium-term prospect of an updating or a replacement of the A300?

A: Well, whilst they were certainly a forerunner in the twin-engine wide bodied aircraft, they are still very competitive aircraft in that field. We would see no reason to contemplate changing the A300 right through into the next decade. Their operating costs are good, their reliability is very pleasing and we have felt that as an aircraft the A300 has been a big success. The priority obviously as demonstrated by our buying campaign has been to replace the medium and smaller aircraft – both because of the time they have been in service but also in terms of the new technology available in those areas.

I would not see any need or desire to change the A300s for quite some years yet. They are operating well and we are very happy with them as an aircraft, both cost-wise and in performance and reliability.

Q: You have inherited, as you come to TAA, a fairly aged aircraft fleet by Australian standards. I think moves to update the fleet were underway before your arrival and I suspect you nudged them along enthusiastically as soon as you arrived.

With moderating fuel prices but steeply rising capital costs on new aircraft, airline management today faces something of a conundrum – does it buy fuel-efficient new aircraft and save money on fuel but pay huge amounts to the bankers or vice versa? On the decision to retain a few DC-9s and have some well-written down aircraft on strength, can you expand a little on the philosophy that is involved there and just how you plan to do it?

This must be considered against an apparent move to less regulation of airlines in Australia although we do not have the flexibility in labour costs as the United States airlines have where some of the major savings with deregulation have been made.

A: Well, if I could perhaps even link that back to the A300 – one of the big advantages of the A300 of course is in terms of the capital costs. They are now a very attractive proposition because of the time when they were purchased and the very favourable price and the rapid fall in the Australian dollar since then and that is a very big factor in favour of the A300 aircraft as it is with the DC-9.

Q: Coming back then to the question of the competition with fares and selling, TAA did suggest to the May enquiry the floating of capacity and I gather you approve of that.

How do you see an airline such as TAA competing in this area? You would obviously like more freedom to move capacity into different types of services and to apply variations in price.

Where would all this go? Do you in fact think that an airline such as yourself should be more aggressively marketing cheaper fares? We hear frequent complaints – and I think they are justified – that both yourself and Ansett do not highlight your own cheap fares enough, that you tend to market more towards the higher yield end of the business. Perhaps this is one of the reasons East West has been such a great marketing success.

A: Yes, well I certainly am aware of the fact that there is a feeling that discount fares, as I tend to call them, are not marketed as aggressively as some people would like.

There is a need in the new climate for the airlines to review the discounting of airfares but I think that it has to be realised that in doing so it must be carefully managed so that the right sort of yield remains for the airlines because we are talking about massive amounts of capital tied up in these new aircraft.

The airline industry is like most other industries in Australia – there are certain levels of cost that are very difficult to change. Costs such as fuel and labour are not able to be under current circumstances in a major way and I wish more business people tried to look at aviation in comparison to their own industries rather than acting as if aviation was something entirely different where suddenly people could run out and halve their income by slashing fares and still operate on a profitable basis. We have the same sort of costs that everyone else in Australia has.

I think that there is certainly a case for better presentation of specialised fares to the Australian public particularly by the two major airlines. Both of us are looking at that in our own separate ways and I think again that is a question of just looking at what the consumer is seeking and reacting to that and making sure that you present it in the most advantageous light. So it is a big subject on our agenda.

Q: So we might expect something of a change in that area – a few innovations. You have been working on a new advertising campaign because you now have the new name and the presentation of the airline to promote.

A: Yes, the question of the presentation of the new airline to the Australian public is a very big agenda item for us at the moment and I think it is important to understand that what we will be presenting to the Australian public, is TAA emerging into a new airline which will be very commercial, very aggressive, very enthusiastic about its business.

It will be seen as an exciting new development for aviation in Australia and in amongst all that has to be what we are offering the public and airfares and service and so on.

Q: You also suggested in the submis· sion to the May enquiry that the domestic airlines ought to have a certain share of international routes in their own right. Do you still maintain that?

A: Yes. I think that there are segments in the international market that we can service very efficiently.

If there is going to be any loss of traffic then either there has to be a realisation that that will mean a cut back in capacity and ability to mount services by the domestic airlines or they have to be given equivalent rights to compete in other areas. I think it is clearly demonstrable that there are segments in the market that the domestic carriers could take up quite well, without causing major disruption.

I think that some of the areas in the Pacific present possibilities and obviously Ansett has been very active in that area. I think it is where the routes are which are of the right sort of capacity and the right sort of frequency for smaller operators than say for instance Qantas where you have very large capacity aircraft and therefore restrictions on the services that they can maintain.

Q: Qantas has actually moved to smaller equipment – 767 aircraft, many would say as a means of heading off your and Ansett’s ambitions.

A: I would not say that they did that to head off our ambitions. I think that Qantas found that there were markets for that type of aircraft and again everything is relative – 767s are smaller than a 747, but it is certainly quite a large aircraft by Australian and regional standards.

So again I am talking about a segment in the market where I emphasise there are possibilities without major disruption – in fact in many cases they could be on a cooperative basis.

Q: Not necessarily just on a Qantas flight number?

A: No, not at all and I think it is just a question of carefully looking at it and talking it over with people because it is a question of seeing what opportunities are available and I stress possibly on a very cooperative basis.

Q: TAA recently received a fairly major capital injection from the government and writing off of various other liabilities. Are you satisfied that it is now able to operate in a fully commercial manner as it has been noticeable over the years, that Ansett has always made a fairly good return on the capital invested while TAA’s position has often been a little peculiar in that area. Do you feel you are in a position now to compete on a fully commercially equal basis in this area?

A: Well actually the performance of TAA in terms of return on capital except for the last few years has been quite a reasonable one. I do not think there is a proper perception of that out in the public.

TAA’s profitability last year in terms of return and capital was quite healthy and it will be again this year and I can assure you that in all our forward planning and all our financial planning one of the underlying assumptions is that there must be a reason able return on capital. I think that is an absolutely valid requirement from the Government and I think that is the most suitable yardstick for any airline to operate whether it is owned by the Government or anyone else and I think that in fact that view is very strongly held by the present Minister, Mr Morris and his Cabinet colleagues.

We have absolutely no problem with that at all. It is a very suitable yardstick for measuring everything you do within the airline industry.

Of course, TAA had some very difficult times in the early 1980s and has in fact been given some opportunity to build up capital a little bit more in the last two years by profit retention.

To go back to your basic question, yes, it has been a step in the right direction in terms of giving a profitable capital base and it certainly is our intention that we will operate according to proper commercial criteria in the future.

Q: There is still some concern in many corners that you are still unduly open to Government influence in, for instance, the level of dividends you are expected to pay and one or two other areas. Do you see that as a genuine cause for concern?

A: Well I really cannot see how anyone could claim that being required by the Government to pay a reasonable dividend is any way interference or unreasonable.

Q: I think the suggestion is that sometimes it can be more than a broad requirement, it can mean dictating by Government of the day as to what level of dividends will be paid and this in the past has meant TAA has not been able to build up reserves.

A: Well it is difficult for me to comment as a recent arrival. All I can speak about is the atmosphere that exists at the moment based on the attitude of the present Minister and the present Government and I could only describe that as being commercially realistic and I feel quite comfortable with it.

I think that that attitude is advantageous for the management of the airline to say to people we are going to operate according to normal commercial criteria and that must underly every strategy and every plan for the future.

Q: Finally then, your new livery/logotype and uniforms, I think most people agree and I suspect most people within TAA agree that the current aircraft livery was not, shall we say, the world’s greatest success.

It appears you are also going to make some changes to the uniform – I am not sure whether there is to be a new uniform involved there – and also of course a change of name. The best thing I can say is, why?

A: Well as for the basic question of why, I think it is best to indicate the change of name is seen as being a signalling of the emergence of a new airline. It is meant to be dramatic as a statement both to our own people within the airline and to the general public that TAA is already changing and is going to change more and in going to emerge as the new Australian airline.

Part of that is to convey to people the excitement and motivation and morale that comes with it.

I think it is the sort of decision that will emerge over the next six months as being very logical. It really will be a demonstration of the way TAA his becoming a totally new airline and I think in terms of the marketing postion, the feeling that Australians have about this airline, it will look very natural within a year or so and will prove to be a very good strategy in terms of presenting the airline.

I think it is also important to understand that it does signal a new sense of excitement and change in commitment within the airline for ourselves and for the general public.

In doing that we obviously meant to do it dramatically and I think that it will emerge as being the most major thing to have occurred to the airline in its 40 years of history and it will provide Australian Airlines with a tremendous base with which to launch into the 1990s.