John Spiers Interviews Don Kendell

DK: As in the US, deregulation means consolidations, mergers and takeovers. As we move towards deregulation, a lot of these sort of things will happen, much like the American experience. American deregulation is by no means an out and out success. My wife recently travelled on Eastern from Miami to London and also on Continental and found the service was terrible.

The aeroplanes were dirty and people who used to be service oriented and polite are no longer so basically because of the pressures on them.

Eastern and Texas Air (Continental) are now getting together so you are not seeing more competition-you are seeing less.

You are not seeing cheaper fares on thinner routes- fares are higher there. On routes where there is a battle you see cheaper fares but if you look at the service you wonder whether you should go back to paying the dearer fares of ten years ago and getting decent service.

JS: How have your routes in rural areas been affected. Are passengers down or static?

DK: Put it this way – Wagga/ Melbourne passengers are at the same level as in 1975. They have gone up in the interim and come down again.

We have survived on developing new routes. Since 1979 we have gone into a lot of ex-F27 routes and on that basis we have been able to survive. We would not have survived on our route structure of 1979 and we would find it very difficult to survive on our route structure of 1985.

Expansion gives us greater utilisation and economies of scale- although we have probably used all those up by now. When you have a fairly static market in the depths of depression the fare increases necessary to cover your increased costs due to devaluation just knock your loadings back further and further.

You must then look for every efficiency whether it is economies of scale, such as moving into a route which is moving down in size, where a Friendship has been operating twice a day. Putting in say 80% of that capacity with higher frequency with a Metro will usually hold loads and where a Friendship might have been getting a 50% load factor it will give us 65%.

JS: There is always a bit of emotional reaction when a town finds itself dropping below F27 airline level of operations. It is a bit like losing their local railway line. Do you find there is usually a drop, either temporary or permanent in the number of people travelling in smaller aeroplanes, even though the frequency may be stepped up.

DK: I think we have become fairly experienced politically in that area since we first went into King Island, where you would have thought they were pulling out the plug and sinking the island when Ansett left. We had a very hard political battle there because both our competitors and the islanders thought they were being downgraded and they felt badly off.

There were letters in the press and to the Minister and even the Prime Minister. We had a battle to win there politically and it did not do us any harm because we knew we had to perform. Anything we said we were going to do we had to do to try to keep up a reliable service.

King Island was a bit of a litmus test because there is no other way of getting to the mainland. After that, whenever we have gone into a new route we know the political pitfalls and dangers and we have been able to field them fairly well.

Mt Gambier would be a case in point. We took over where Ansett operated six or seven F27 services a week and we are operating twelve services. We almost doubled the passengers between Mt Gambier and Melbourne because of that increase in frequency.

JS: It always intrigues me that people always say that they want airline deregulation and yet when the market forces operate – as when these small regional areas are downgraded, people scream and yell and write to the Prime Minister.

DK: When you want to buy a car you want a bargain and when you want to sell you want a good price. We want a deregulated market to buy in and a regulated market to sell in.

JS: Why are you leading Australia into the 340s?

DK: Cash flow is one of the horrors of a new aircraft when you buy into new technology.

We had the same problem with the Metros when we went from an aircraft worth say $200,000 to one worth about $1. 2 million. You have to look ahead about three years before that new aircraft is going to take its place as a profit- eaming operation. As long as you have enough of the other aircraft, or economics change in some other fashion to get you profitable on the new aircraft quicker, you are really punting on a long-term basis of utilising old and new depreciated and non-depreciated aircraft, so you ultimately end up ahead.

Why we went for the Saab is quite frankly, the competitive edge.

If we are serving Portland, Mt Gambier, Whyalla, Port Lincoln, Albury. Wagga, Merimbula with this sort of equipment, nobody, even a doctor or pathologist, is going to say ‘let’s get into this act because I reckon I can buy X aircraft and get in there and kill Kendell on this. ” I know he cannot- not with a new aircraft. No-one in their right mind would go and buy a fleet of new 340s, Brasilias or Dash 8s and go out and compete with us.

The set up costs alone would be $30- 40 million and these are costs which we have largely overcome with our maintenance practices over the years. That, quite frankly, keeps us competitive.

That might sound as though I do not like competition but you have to have the edge when you are competing. If you have not got the edge the difference is money.

In other words – in a straight competitive situation – it is the people who have the most money who will win in the end. A person who could afford to lose $20 million could put us out of business tomorrow. I work on the basis that nobody can afford to lose $20 million – not even Rick Slowe who owns East West.

The competitive edge is very important. Three years down the line if the economy improves and there is expansion some people may say “Kendell has got soft and lazy, we can get in there and make a quid”.

But by that time we will have aircraft which are half-depreciated, at the mid-term of their life, making money, while newcomers are going to pay another 40 or 50 per cent more to buy the same sort of equipment and technology and have all the problems with it that we are now solving. They will not be able to do that and beat us on fares-not rationally.

The Saab itself did not make any money for us in 1985-86, purely because of its high initial cost, its relatively low utilisation rate and crew training commitments.

But in three years it will be making good money for us. We budgeted for it to make money this year, but not as much per seat as the Metros will. Any new technology for a small badly capitalised company like ourselves is only effective from half life on. The other point is that I reckon in three years time Metros and Friendships will be worth zilch and the Saab will have a value. That sums it up.

JS: Much the same applies to Ansett and TAA – they are getting new aircraft now?

DK: That’s right. If they are caught with old technology their jets are worth two or three million instead of $25-30 million.

JS: I think TAA has been getting dangerously close to that until recently. Why in particular the Saab 340 and not a Brasilia, Dash 8 or ATR42?

DK: Three reasons. Firstly, the regulations in Australia allow 36 seats in our field before we need a full airline license. If you are allowed 36 seats you want to get as close to that number as possible because of your labour costs. While 30 seats may be more efficient, labour costs will be higher per seat. The second thing is that it has to be pressurised in Australia and it has to be a turbine. That is why we went for the Metro against a lot of advice seven years ago in preference to the Bandeirante, which is half the price in monthly payments.

Another reason is technology. In efficiency when you look at weight per seat, the Saab for a pressurised aircraft comes out best of all. We did not look at larger aircraft such as the ATR42 because you cannot operate them without an airline lic- ence.

The Brasilia failed to my mind on the per seat labour cost, the Dash 8 on weight. For two more seats it is 6000 pounds heavier. It has some attractions- it has bigger luggage space and a bit more headroom. It is a nice well-built aircraft which would certainly have good airframe longevity.

Both types had a very new engine that had not been driven at all – although that probably fades into insignificance since we have operated the CT-7 with the problems of the airframe-engine match which have come up. But at the time we chose it, that was not evident. GE are very professional. They promised to back the engine and they have kept their promise.

JS: How many of the problems encountered by overseas operators have you experienced here. Obviously you would have had a lot of service bulletins?

DK: Hundreds we have just done about 50 in the last two weeks. Though we have not bent turbine blades with ice and things like that, nor have we had flameouts. We do not have the conditions for a lot of the unusual problems that they have had overseas. We have a more stable and less harsh environment in which to operate our aircraft.

JS: Are there any other areas where an operation like yours can step in and take over from major airlines?

DK: None that we are interested in. It really depends on where Australia goes economically and on the dollar. In the next two years I do not hold a lot of hope. It depends on whether our miners and farmers will be able to compete – they are the only large producers in the world who are not subsidised and there does not appear to be a good answer for that. It could happen in any other State but it depends on how our rural producers also end up in two years time.

JS: On cost recovery. On one end we have people who say it is fair enough to have cost recovery and on the other there are people who scream at everything. Do you have any handle on the sort of costs you are paying here compared to people with similar costs overseas?

DK: We pay very little compared to operators in Europe – but they get higher fares. We probably do not pay as much as the ones in America because their local costs are all locally charged, along with some of their outside costs. A lot of things you have to do yourself in America which are covered here. I never objected to paying a rational amount in costs. This Government and the present Minister – without giving any orchids-have taken a very rational attitude to both the costs of the department and the costs that are passed on to the community.

Mr Morris in particular and the government have no intention of making airports a political cargo cult. They have cut out a lot of this garbage about building million dollar terminals in places that do not justify it.

They say that if they are going to charge us for the costs – and they seem to have taken the bit between their teeth- they are going to make sure thay do not give us something that we do not need and do not want.

JS: And yet there is a brand new multi-million dollar control tower just outside your facilities here at Wagga?

DK: I fought that- and of course that was all organised before this government came to power. They could not change it on safety grounds.

If you put a jet in you have to have a tower-even for only 20,000 movements a year.

The jet was nothing to do with us – we did not incur the costs of putting a jet in but we have to pay $2. 30 per thousand kilos every time we come in here because we are buying a terminal service.

JS: Is that just that you are being forced to pay for the facilities required by a jet service which you do not operate and yet with which, you are in competition?

DK: When it comes down to cost attribution, I think the whole thing is wrong. In the many years I have been involved in the industry I have always fought any sort of improvements that some said were needed which in my mind were not. I was instrumental in the fire service leaving Wagga. We do not have fire services here because we were told we would end up paying for it.

JS: But the good local burghers would see you downgrading their local airport?

DK: That is right. If you are going to get a tower here that is another seven staff each getting $50,000 per year. They have to have commonwealth-provided houses and God knows what. Of course all that is good for the town.

But that is shortsighted and it may not be good for air movements.

There is no way in the world that operating a control zone here costs less than $600,000 per year. The amortisation on the tower and upgrading of the airport, staff wages and so on.

There are 600 movements per year by the jets – that is $1000 for every landing and $1000 for every takeoff, the way I work it out.

But the facts of life are that it is not an unfair system that we should pay. If you look at the new charges they result in an international passenger paying about $10, a domestic trunk router about $8, a regional airline about $6 and the commuters paying about $2 (next year without subsidy we will pay about $4). When you compare distances and fares, that is probably about right.

I believe Ansett’s average fare is about $200 and Qantas would be about $700. Our average fare is $70. In reality we are not too badly off.

But we objected to it coming in with a bang in one fell swoop with our charges for the new operation from the end of June going from $126,000 in air navigation charges to $980,000.

JS: The Government claims it is whittling down the cost of the Department of Aviation.

DK: They are and it needed it. You have some fairly entrenched people and a fairly entrenched decision-making set up. It is the lack of productivity in Government departments which is more frightening than the number of people – the time it takes to get a decision or any action – simple things like sending a letter – you know it will take three weeks to get from their front door to the bloke who has to look at it. If they wrote you a letter yesterday you will get it in a month’s time. Decision making is very slow – on things like towers. We pointed out to them that in America they are taking towers out, while here in Australia the department is putting them in.

JS: In America, in this type of airport (Wagga) they are closing down towers and going back to uncontrolled airports?

DK: Yes. They give the town or city that operates the airport the opportunity to decide whether it will operate a tower itself. If the city thinks a tower is needed then it hires a licenced controller and puts him in the tower.

JS: And the city, when suddenly faced with the cost . . .

DK: They may decide to look at whether they really need it or want it. There are hundreds of airports in the US with an ILS but no tower.

In the US they also require operators to do their own flight monitoring. Pilots cannot expect to be able to talk to that centre or this centre. If they disappear out of one and do not report in the next there is not the overall sort of flight following in the US that there is here.

If you are an airline you have a HF system with your staff taking responsibility for the aircraft the whole time. You can go in airways the whole way much the same as Australia – but that does not relieve the airline from the responsibility of following the aircraft.

JS: Like· our operational control – and yet whenever this is brought up the department tends to say people want it to do the operational control, rather than doing it themselves.

DK: Perhaps in Australia it is cheaper that way. My arguments are with the outdated parts of their regulations and their inability to be rational and really look at something new.

We are still the only country in the world where every hundred hours or less, we have to do a radio check.

We pay $70 or $80 for someone to come from AWA for a few minutes and check that the radios work and the ILS, the HF and ADF works. And yet we have pilots checking that very same thing 1 O times per day. They are flying the aircraft and they have two of everything and check one against the other.

The department insists on purely departmental examinations for qualifications for engineers. We send a bloke to a tech, he knows nothing after three years, according to the department. If he does the same thing in America he is an A and P licenced engineer. He can change radios, work on electrical things is no separate set up. Here we end up with about four different streams of engineers- each one jealously guarding his patch.

In South Australia at least, they are starting to tie up the tech with the department so a bloke can go to a tech, do a course and come out with a licence.

JS: But still only in one area.

DK: Yes. We have never moved into the modern era with better learning systems and methods of training people. The technology has changed.

The requirement for 100-hourly checks on radios goes back to my early days. When you had a radio you had to tune the transmitter then tune the receiver, then wind out the bloody aerial. It was stuff that might or might not work. Now a pilot switches it on and in many cases the frequencies are all in there and self-select. You just push a button and up they come. If it does not work he will write it up to be fixed.

We pay a lot of money every year to have someone drive over to Tullamarine to put his black box in and check all these things which have already been checked 10 times by us that day- and say they are serviceable.

And usually when he says that something is unserviceable, we find out that it is his equipment that is at fault. But they insist on that still. After a lot of argument, instead of doing it every 100 hours in the Saab we have got it down to 200 hours.

JS: These places where they are closing towers in the US. Does that include jet operations.

DK: Yes. It depends on the frequency. I am not saying we should take up the American system but the department should be more aware of what goes on in the rest of the world and be a bit more open minded on it.

JS: And yet here we are moving to the local ownership plan but the Commonwealth still pays half the costs of maintaining the airport, in addition to all the costs of manning the tower and other services.

DK: Albury is a perfect example of a locally owned airport. In Wagga we pay $4 per 100 kilos plus $2. 30 for the tower. In Albury, we pay $2 because it is a locally owned airport and we also pay another $2 to the local council per passenger. Plus the $2. 30. (According to the Bosch Report into cost recovery (refer Reece] aerodromes transferring from DofA control to local ownership achieved per annum cost savings averaging 71% in the first year. Ed).

The cost is averaged out for people who get into an aeroplane without a tower. They get in the aeroplane out at Streaky Bay without even a terminal. All those costs are averaged out for them, though they do not get the same safety as with a tower.