Airways Liberalisation to Replace Two Airline Policy

So from October 1990, Australia’s air transportation system will be operated under a totally different system than that which has ruled the airways for more than a third of a century. The original TAP was established back in 1952, principally to ensure stable air services on major interstate routes and as a source of protection to ANA and Ansett against the rapidly expanding government-owned TAA. It grew over the years into a legal device that ensured a good profit for the then Ansett-ANA and TAA and kept them secure for over three decades in a system that to some extent offered little reward for innovative marketing, pioneering route initiatives and the need to keep manpower costs within economic bounds.

This, and much more, of course was all neatly categorised and spelt out in the May Report (refer p30 Mar AA) earlier this year where it was established that the only advocates for the TAP were the two domestics and their unions! As one industry observer noted, “It was like asking a child to give up chocolate on a voluntary basis!”

So what does it all mean?

Firstly, controls over the importation of aircraft will be removed. In the past this has been the government’s single greatest weapon in keeping the TAP intact. It simply denied access to new trunk operators by not permitting them to import the required aircraft. Readers of this magazine will know just how effective this single clause is by the sheer weight of energy East-West expended over two years to gain import certificates for a single 737-200 and some additional F28s – that is now all gone.

Secondly, the detailed determination of the amount of capacity that may be provided by each trunk operator is now freed. Previously (and up till October 1990) Australia and Ansett had to essentially provide the same seat capacity between two ports over a given period. In this way each carrier had a 50% traffic share which is why the airline that gained a 1% market advantage in uplift over its competitor stood to make a killing. That is how fine the margins were under the TAP and you and I were the ones who financed this illusion of competition.

What this effectively did was to eliminate the need for an airline to actively pursue the low cost leisure market and to concentrate on the high-yield full-fare business traveller. The reason for this state of events was simple. If Airline X, for instance, decided to promote heavily a package of discount leisure fares on a sector (or throughout the marketplace for that matter) then it would obviously also have to invest considerable time and money into promoting that initiative. If airline Y did not pioneer the concept but wisely decided to advertise competing fares on a low-profile basis with only a token number of seats available, then it would in effect end up gaining half the market that the other airline had financed. Thus in this environment who is to blame either carrier for not wishing to actively promote the discount fares market at all when they stand to immediately lose half their potential trade to their competitor. Thus, like most elements of the TAP, capacity controls were highly non-competitive from the consumer’s point of view.

Thirdly, the Independent Air Fares Committee is to be disbanded with the Commonwealth withdrawing from all fares determinations. To ensure that predatory fares (an Ansett specialty against East-West for many years) are kept under control the Trade Practices Act will be strengthened, if necessary, in relation to Section 50 which deals precisely with such areas of competition. The Prices Surveillance Authority will also be overseeing any possible breach of fair trading in relation to carriers padding fares on one sector to deeply discount another to simply restrict access of a smaller competitor. As you can imagine the various consumer watchdog organisations will be raring to go in an effort to nab the first offender – we wish them well!

Finally, the existing restraints on the entry of new operators will be removed. In other words, any new entrepreneur can now enter the heavy metal arena of civil aviation. However, in reality there may be little enthusiasm from the likes of the Holmes a Court’s, Bond’s and Bruce Judge’s to invest hundreds of millions of dollars in an industry that even in boom times generates a lower percentage return than the average school tuck shop. There might well be a situation though where a combining of similar corporate interests could emerge to develop a specialist new entrant. In this regard, it is worth noting that there still exists (as documented in the 862-page May Report) many opportunities for a new entrant to serve the many non-stop smaller city markets within Australia. Before all the anti-deregulation (and please let us state now that this magazine has always had an open mind on the pros and cons of deregulation) buffs begin shouting that it will mean the end of country services, let it be documented that in 1968 Ansett and Australian served some 150 ports against less than half that figure nowadays!

What has occurred is a massive shift to a de facto hub and spoke system that means that most flights have to pass through either Sydney or Melbourne. If you live in those two cities you probably don’t notice it but if you live anywhere else, then it becomes ops normal procedure to have to change planes to eventually get to your destination. In this regard there exists a massive opportunity for an aspiring entrant to begin specialised services between the ten key regional ports that are still not realistically served with non stop flights. With anticipated domestic growth through to the early nineties (aided by the tourism boom plus the anticipated increase in domestic uplift through the availability of uncomplicated discount fares) then it is not surprising that the airlines are beginning to hang their mantles on such small to medium sized aircraft as the737 family.

So how will deregulation affect the principal players?

Australian Airlines naturally has taken centre stage as the odd man out. It was the only airline that in the end did not advocate all out deregulation and of course it is still government-owned.

The government, or at least its Right Wing, wish to privatise Australian so that they won’t have to capitalise it from within the budget at a time of economic stringency. This won’t be fully settled though, one way or the other, until the Federal ALP Conference in June of next year. In the meantime, and to set the stage for a possible sale of Australian shares, the Government has wisely put in place a five man Advisory Group to develop ways and means of making the airline more commercially viable. The Group is headed by new Australian Airlines chairman, Mr Ted Harris and includes fellow TN board member Mr Colin Carter in addition to Bill Kelty of the ACTU and Dr Peter Wilenski, who is already working within Senator Evans’ aviation division. It is anticipated that the Advisory Group will report in full before next April.

In the meantime, the Government has initiated a number of long overdue changes to Australia’s day to day operating environment. Firstly, Australian has been corporately reconfigured as a Company on the same basis as Qantas. This effectively takes it out of the stifling world of petty public service bureaucratic controls. Employees of TN will appreciate first hand just what this means in their daily battle against the very lean and aggressively managed Ansett Mega Air. Australian will now also be exempt from the need to comply with Loan Council borrowing restraints, though this may be of little real value given the carrier’s already woeful debt/equity ratio. What TN needs is more equity not more debt, for whatever reason. And that of course is the very crux of the matter, it must have at least $300m injected into it to be in any sort of viable stance for the commercial onslaught that the post-TAP world will inaugurate. As we mentioned in our last issue, when in 1983 the government injected $115m into TN, it effectively reduced its next year interest payments by a sizeable $17. 5m – straight off the bottom line.

Properly restructured, Australian might surprise many with just how much it could be worth on the open marketplace as characteristically all the government airlines that have been offered to the share market have met with an almost embarrassing response in terms of being oversubscribed. So bad was the turmoil when shares were offered in Cathay Pacific in 1986 that the HK Stock Exchange had to stop trading for two days to halt the shift in capital from existing share portfolios over to the airline! Australian could fetch more than $500m given the present vibrant state of the share market in Australia. If this capital was in turn funnelled back into the carrier, then TN would be a highly competitive airline able to face any challenge and hold its own within a deregulated marketplace.

Needless to say, TN share ownership would be restricted to companies and individuals not in any way associated with an existing airline or similar transport venture.

Ansett on the other hand is already primed for deregulation.

One of the bad effects of US deregulation is that many smaller second-level carriers were literally gobbled up by the majors. The situation now is that there are around eight major carriers in the US and it appears that for a number of reasons the takeover frenzy of 1985/86 has run its course. In Australia though there were originally only two major carriers with a battalion of smaller regionals providing the all-important on carriage. Nowadays though Ansett Transport Industries (ATI) literally owns major shareholdings in everything other than Australian Airlines. In the past eight months it has moved to acquire controlling interests in Kendells, Lloyds and East-West Airlines – once its principal foe. On the other hand, Australian has lost East-West carriage out of Sydney, Lloyds carriage out of Adelaide and its dismally performing Air Queensland has been laid to rest giving it little access to the expanding Queensland feeder market. Australian has also now diminished its presence in the West, it has methodically been contracting activities at a time when ATI has literally been on the afterburner.

Ansett has in Ansett Airlines an excellent business travel airline of world class standards. Ansett will no doubt concentrate on this high yield market with some extra capacity being offered on select discount tourist markets as it sees fit. Ansett will now hopefully gear up East-West into a full sized carrier and allow it to be the dedicated low cost no frills specialist that this country so desperately needs. Not everybody is a high-powered executive and can afford the full fares that are presently on offer. Provision of discounted no-frills services on a national basis, unfettered by government traffic restrictions, would open up a new and vast leisure travel market, particularly in the expanding and wealthy 45 plus age category. Deregulation of the long haul coach and car rental industries are obvious examples of what can be done given the chance for new markets to be adequately serviced.

On the situation of feeders, Ansett will no doubt provide all the corporate backing that its new acquisitions require in order to obtain the appropriate aircraft and engineering facilities to provide a complete network of interlocking regional services for its major trunk jet routes. It is expected that many new commuter aircraft will be sold as a result of deregulation over the coming decade while additionally, the expansion will also offer hundreds of new aircrew opportunities as against a continuation of the present regulatory environment.

Qantas is also a winner since it has in one fell swoop recovered its interline rights. Qantas summarily lost these in 1979 without even a reason being given and it is an unfortunate situation that they weren’t restored years ago. Qantas thus is the only international carrier in the entire world that did not enjoy interline rights within its homeland, a truly shocking situation that has over the years only served to pad the domestics and to restrict our vital inbound tourist market. With these rights restored as from July next year (which effectively now allows QF to carry international passengers from other carriers aboard QF flights on sectors within Australia) Qantas will be able to fill many of the 19,000 empty seats that it flies each week around Australia.

On the other hand, it might just well provide it with an embarrassing excess of riches as due to the rapid and sustained growth in inbound tourism, it is anticipated that in order to service all of this new market, Qantas would have to offer much more interline capacity than it presently has! While the domestics are rightly complaining that QF should now pay the same fuel excises and import duties as they do domestically, it is apparent that there will still be a significant inbound travel market left intact for the domestics.

Another interesting point is that Qantas will also be able to offer additional dedicated wide body domestic charters, something that could fit in well with marketing large-scale international tour packages.

Conversely, the domestics will be able to offer international freight charters that the government anticipates might offer bright trade prospects in relation to providing point-to-point high season agricultural freight uplifts that are often difficult for the dedicated freight carriers to satisfy.

Meanwhile, an airline that did not gain anything from the October 7 announcement was Air New Zealand. The war between ATI and ANZ is hot to say the least with ANZ feeling particularly peeved that an Australian domestic carrier can invade its sacred turf and thus throw its corporate plan into a spin. ANZ thus hoped to be able to gain full domestic access as a counter to the activities of Ansett New Zealand. Naturally no such capability was granted and to further rub salt into the wounds, the Government has restricted foreign airline shareholdings in Australian carriers to a very minimal 15%. Obviously Air New Zealand is not going to buy shares in any local carrier on this basis, though it will continue to sell its cause via the Australia/ New Zealand CEA (Closer Economic Relationship) agreement. We wish them luck!

Also in the announcement was the long awaited appraisal of the future of what was previously known as the Civil Aviation Corporation that has now been renamed as the Civil Aviation Authority. The CAC was originally destined to replace much of the day to day function of the present aviation division within the Dept of Transport and Communications. The new CAA is anticipated to become operational during 1988/89 and to closely emulate the British CAA. The CAA in Australia will have the responsibility of day to day safety standards, airways operations and ATC responsibilities. Thus; the FAC and the CAA will effectively put to death the old empire-like structure of what was previously known as the Department of Aviation and which has had more name changes than Elizabeth Taylor this past deca. de!

The Bureau of Air Safety (BASI) though will remain as a separate entity within the present Dept of Transport & Communications and be directly responsible to the Minister. Additionally, a review cit the legislative framework of aviation within Australia is shortly to be inaugurated which will streamline many of the existing complex and incongruous ANOs and ANRs that have traditionally fuelled much of the friction experienced between the civil sector and the Department.

Also being established is a Regulatory Review Panel which will be tasked at maintaining the regulatory system in a form that is appropriate to those who use it. This has been established to -produce an environment of closer association between the overseer of the regulatory system and those who use it in order to overcome much of the ill will that has been generated by successive bureaucracies becoming increasingly removed from the economic realities of the vast and complex industry they were tasked to administer.

Deregulation in the USA has generated both negative and positive aspects and it is worth noting that if the other two elements of the air transport triad (airways and airports) had also been deregulated (instead of over $A10bn of their funding being squirrelled into consolidated revenue to make the overall US deficit look lower than it really is) then many of the overcrowding and loose ATC situations reported spectacularly in the lay press may not have occurred.

It is hoped that our own political masters in the decades ahead remember well this salutary lesson. Deregulate the commercial airline environment by all means, in modern Australia it is generally considered long overdue, but most importantly allow provision for the required development funding for the advanced airways and airport infrastructure that the airlines require in order to make deregulation work. Let’s hope somebody out there is listening!