Reece

So, why did our political masters begin to create this mythical antipodean mega carrier in the first place? The reasons are complex in the extreme, though principally the Federal Government, Qantas and Air New Zealand presently share a fear that if they don’t rapidly grow much bigger then they will inevitably be overwhelmed by the brute force of the US mega carriers. This type of thinking is illustrated by the fact that United presently achieves less than 5% of its revenue from the Australasia/US network as against nearly a third for Qantas, As far as Qantas (and ANZ) see it, if United sneezes they catch the cold. But are both United and Continental more akin to paper tigers rather than the much feared 900 pound gorillas that most media reports stylise? Let us have a look at the facts. What airlines like Qantas and ANZ are principally afraid of is the ability of these two massive carriers to subsidise massive fare cutting on the long haul Pacific routes through revenue eat on their vast domestic US networks. However, to be able to stay in business, any business. you must have yield, you must have a margin and you must make a profit. It is this crucial point which is consistently overlooked when debating the threat potential of the US megá carriers.

So are Continental and United profitable? Generally they are not. For instance, on page 12 of the May issue, our new ‘Bottom Line’ finance monitor reports that the Texas Air Group (the parent of Continental, itself just recently emerged from three years of Chapter 11 ‘survivable bankruptcy’ and a mix of some of the most debt plagued airlines in the western world including the failed People Express, Frontier, Britt, PBA and an ailing Eastern) recorded a loss in the final quarter of 1987 of $US266m for a total year loss of an amazing $US466m. Furthermore, 1987 was one of the most buoyant years ever recorded in the annals of air transport so if you can’t make money in today’s environment of booming traffic and stabilised labour and fuel costs then what will happen when an inevitable recession strikes. The Texas Air group has been such a dismal economic performer that Congress and the FAA moved in May to investigate the group’s fiscal Credibility! United fares a little better but not much as this normally well managed airline has just emerged from three years of infernal infighting and industrial disruption that will take many years to overcome. United lost $US80m in the final quarter for an Overall loss of $US4m for 1987 though 1988 looks to be a winner for the Chicago based carrier, Mind you, it would need to be, as United has been posting consistent losses now for several years and needs additional revenue just to fund its massive re-equipment programme.

And this is another quandary that both these much feare mega carriers must come to grips with in the next few years. Bol have sizeable portions of their vast fleets that will need to t replaced by the middle of the next decade at the very latest. A an example, consider that around 213 of United’s 360 aircra fleet is older than 20 years. And while United did place an order 1985 for some 110 737-300s and 15 747-400s, most of thes new aircraft are being targeted for growth rather than being use to replace the vast numbers of aged jets the carrier currently operates. Of the 600 plus jets in the Texas Air fleet, more tha half will also have to be phased out of service within the next fiv or six years.

Fatigue, as graphically illustrated by the recent Aloha Airline 737 accident, is becoming a major consideration while the imminent threat of a ban on all Stage 2 jetliners within the US i something that would ground more than half these carrier capacity at major airports within a very short period. Without steady cash flow and strong yield then where will the mone come from to finance replacements for these old, tired, low valu planes? And where indeed will the managements of both United and Continental then get the enthusiasm to grossly discount fares in competition with Qantas and ANZ just to supposedly rur them off the airways? You don’t need to be an economic genius to know the answer! The other threat that our carriers perceive is the degree of beyond rights that United in particular inherited from its 1985 purchase of PanAm. Even in its heyday PanAm did not operate all the routes that it could have in and out of Australia. If United decided to launch wholesale into this market it could offer a plethora of new tourist routes that it has to date wisely ignored. Indeed, times are changing and more and more airlines, and passengers, are moving away from the old milk-run multi-stop routes that even PanAm itself tended to drop in the sixties and seventies. It is therefore unlikely they will ever be taken up as there is simply not the equipment or marketing clout available to make them winners.

So much for the much feared US mega carriers. They must make a consistent and substantial profit before they can truly be feared locally and in the highly competitive world they operate in, and with the massive fleet replacement programmes that both will have to soon undertake, it is simply unlikely that they will have sufficient economic resources to be able to discount their Pacific routes any further than they already have.

The saner approach of internationals like Qantas and ANZ should be to form wide reaching marketing agreements similar to that presently in existence between British Airways and United. Like people, airlines don’t have to be married to sleep together and thus the aims and objectives of one carrier may well be aided and abetted by a joining with a rival in an effort to achieve the same objective.

This glen need not lessen the degree of competition in the marketplace, as usually both carriers tend to serve differing geo- graphic markets. With its marketing marriage with United, BA now has entrée to the vast US market in a way formerly impossible, the same applies to United’s European potential. A similar agreement between ANZ and Qantas is both logical, potentially highly productive and will go a long way to ensuring that both carriers continue to be profitable in the years to come.