Airline Affairs

At the beginning of December it was believed that the Ansett group had nearly 300 of the 500 pilots it ultimately requires signed up with the new IRC approved pilot contracts. However the number actually rejoining Ansett was believed to be in the region of 50 to 70 with the remainder being either new recruits from Australia or from overseas. It is also believed a number of expatriates flying overseas have now. returned as the individual contracts allow them a far better career path than what was formerly available under strict AFAP sen- iority guidelines.

Meanwhile the RAAF ceased it civilian uplift duties effective mid December. The DoD had flown an estimated total of 180,000 passengers during the five month period using a fleet of eight aircraft comprising a lone 707, five C-130s and four HS7488, three from the RAAF and one from the Navy. The government will now reimburse the DoD for the cost of providing services during the period whilst additional flight time absorbed by individual crew members while flying the airlift will not reflect on their available flying hours in the second half of the fiscal year. Meanwhile, the domestic uplift provided by the international airlines was also expected to end at the beginning of January though naturally Qantas would continue with its normal interline services.

Meanwhile, by the beginning of December the Ansett group had a varying fleet of up to a dozen aircraft of its own operational at any one time. Australian was a little more limited but had a larger fleet of imports flying to fill the gap. Both airlines though will have to have their in house capacity fully sorted out by March as that is the time when the wet leased aircraft will be returning to fulfil their northern summer peak travel obligations.

At early December Ansett had two Amer- ica West 737-300s and two Air 2000 757-200s in operation (which are actually owned by AWAS) while Australian had a total of 11 aircraft comprising one Aeromaritime, two Inter European, two Britannia, two Trans European Airways and one Lauda Air 737-300 plus two Monarch 757s and a single Dan Air 727 (refer Traffic).

Meanwhile the dispute has taken its toll in equipment terms. Ansett will now most certainly self off a number of surplus Fokker 50 propjets while East-West has disposed of its entire fleet of six F27-500s. Ansett has also sold two F28s, one to Air Niugini and one to Seattle based Horizon Air. Horizon, a big US F28 third level operator is also looking to buy- ing two additional Ansett F28s as soon as they become available later in the year. The airline now no longer requires the level of pre dispute capacity that it had and is also rationalising its fleet as additional BAe 146 aircraft come in to the Ansett and EWA fleets from mid year.

The money raised from the sale of such aircraft will go a long way to reducing the ‘cash- flow’ losses of recent months which are conservatively put at $A1. 5m a day for Ansett alone. In a similar vein Australian has received payments on five DC-9s and a single 727-200 in the year greatly offsetting its own not-inconsiderable loss following its best year ever where it logged a very healthy $108m operating profit.

Tasman Togetherness:

In a deal which will provide for five jointly ticketed return services between Australia and New Zealand per week, Qantas and Air New Zea- land have signed an agreement which will create new options for the transtasman traveller. The deal creates two new passenger services, the first between Adelaide and Auck- land and the second between Perth and Auckland. Air New Zealand will operate two joint services between Perth and Auckland and one service between Auckland and Adelaide, Christchurch and Perth and Wellington and Brisbane each week. Qantas’ contribution will be flights between Cairns and Christchurch, Cairns, Townsville and Auckland, Sydney and Auckland, Sydney and Wellington and Melbourne Wellington.

The services will be jointly marketed by the two airlines. Qantas has a 19. 9% stake in Air New Zealand following the latter’s privatisation and the two operators are planning further cooperation including joint flights and shared maintenance.

 Pilots’ Dispute Puts Pressure on Caa and Fac Cash Flow:

While at presstime it had not been decided as to how the government would specifically compensate its two aviation authorities, the CAA and FAC, it had become clear that both would find it difficult to achieve a profit this year due to the effects of the dispute.

A CAA spokesman stated that it was likely that the government would simply forego its dividend in the 1989/90 year from both the CAA and FAC as a form of reinvestment in their operational futures. As outlined elsewhere in Airline Affairs, the FAC has just reported a profit of $43. 7m on revenue of $248m for a dividend of $12. 8m while figures for the CAA are expected as we close for press.

Fortunately, almost one third of CAA revenue is derived from the international airlines for which there has been no downturn, while 13% is directly funded under contract from the government for various regulatory and safety related services. The big deficit will come in the loss of income from domestic RPT aircraft. Despite an overall increase in aircraft movements of 20% during the period, the absence of heavy jet traffic is what is really affecting the CAA’s cashflow. Military aircraft also do not pay either the FAC or CAA for their use of civilian assets such as airports and airways infrastructure, etc.

The bottom line for industry though will be to ensure that once things settle down that the industry itself, and in particular, General Aviation, aren’t charged for the losses made during the dispute by either government entity.

 More Airline Cooperation:

Joint ventures between hitherto competing airlines are certainly all the rage at the moment (see other items this issue), another being the establishment of a joint and independent computer reservation system by US carriers Delta, Northwest and TWA.

Ownership split of the operation will be Delta 40%, Northwest 34% and TWA 26%, proportions which actually reflect the part- ners’ relative sizes in the industry. No single carrier will control the company and significant issues will be decided by mutual consent. The venture will be based in Atlanta, Georgia, and the three airlines involved are hoping other carriers will join the partnership.

Qantas Now Serving Southern Japan:

Qantas commenced services to the southern Japanese city of Fukuoka on October 30. The joint Qantas/JAL services operates twice each week, linking Sydney and Brisbane with Fukuoka on the island of Kyushu.

Fukuoka is the third Japanese city served by Qantas, after Tokyo and Nagoya. It is the largest city on Kyushu with a population similar to Brisbane. Flights depart Sydney on Mondays and Fridays at 12. 30pm for Fukuoka and return via Brisbane the same evening, arriving in Brisbane and Sydney on Tuesday and Saturday mornings. The route meets the needs of Japanese tourists who want to enter Australia through Brisbane and leave through Sydney and will provide Australian business travellers with easier access to the important region of southern Japan and Osaka.

Qantas will use Boeing 747 aircraft on the route and JAL will share passenger and cargo capacity on each flight. Fukuoka was the largest generator of Japanese tourist traffic to Australia after Tokyo, Nagoya and Osaka and the new services give Qantas access to an important area in Japan.

Australian Announces Record Profit:

The Chairman of Australian Airlines, Mr Ted Harris, announced during November a group operating profit before tax and extraordinary items of $108. 49m for the year ended 30 June 1989. This compares with $66. 56m in 1987/88, an increase of 63%.

Income tax attributable to the operating profit rose from $29. 87m to $42. 36m while operating profit after tax and extraordinary items of $70. 38m increased by 50% from $46. 83m in 1987/88. Turnover increased to $1. 4 billion. The Board has recommended a final dividend of $10m, making a total of $19. 8m for the year, which is 30% of the operating profit after tax and before extraordinary items.

Mr Harris said there was a significant downturn in passenger demand in the first half of 1989. The Airline carried approximately 600,000 less passengers between January and June 1989. This decrease mainly reflected a downturn in the number of inbound and domestic leisure travellers. Mr Harris said that “It was a clear indication of the problems facing the Australian tourist industry, both from a domestic and international perspective. ”

Profit after tax in the second half of the 1988/89 year was $24. 66m compared with the first half profit of $45. 72m. The downturn reflected the strong traffic growth associated with the Bicentennial and Expo 88 in the first half of the financial year.

Total passenger kilometers increased by 9. 2% over the previous year whilst total sales revenue for the airline increased by 15. 7%. Total number of passengers carried during the year was a record 6. 4 million, an increase over the previous year of 6. 9%. The strong growth in the business sector of the airline’s operations also saw Flight Deck membership increase from 36,300 members to 46,900 members.

Airfares in the year increased by only 5. 7% at a time when the general level of inflation increased by 7. 6%. Thus a significant part of the increased efficiency of the Airline was passed on to the public through a reduction in the level of airfares in real terms. “We will also be taking delivery of the first of our new 737-400 aircraft in early 1990 and the delivery schedule for the remaining eight will be maintained,” Mr Harris said. “Obviously the losses we are currently sustaining are substantial and will have a major impact on the financial results for the year ended 30 June 1990,” he said.

Mr Harris said the Board was confident Australian Airlines would emerge from the pilots’ dispute in a healthy position because the airline has the people, the infrastructure and the determination to recover fully.

 Dispute Bad News for Airline Employees:

While the majority of the 1,647 AFAP pilots who resigned on August 24 are still unemployed (at presstime), the financial effects on most of their 21,000 co- workers is not much better.

One of the worst sectors hit is that of the Flight Attendants. FA’s normally double their base pay through flight allowances, penalty rates and overtime payments. In fact, their total gross pay is largely built around these features to compensate for the shift work. nature of their profession. With FA’s having to exist on their base pay alone with very little flying available from late August till early. December it is an understatement to say that times have been tough. Quite a few have chosen to leave the profession while others are working part time as waitresses, etc till things get back to normal. Hardest hit have been those where both married partners are FA’s and existing on basically half their pre dispute income.

Engineers and virtually every other airport and airline worker have been in the same situation with quite a few having to sell their homes as they are unable to meet the mortgage repayments. Either way, it will be a long time before the air transport sector returns to anything like its pre dispute nature.

 Ipec Withdraw Argosy Freigh- Ters in Favour of DC-9s:

IPEC Aviation have decided to replace their three Argosy propjets with a second DC-9-30.

The ex-KLM jet was expected in Australia prior to Christmas and will replace IPEC’s lone Series 100 Argosy and two Series 200 Argosy’s on the primary capital city routes. The other DC-9 will continue serving the Essendon/Launceston air bridge. Primary reason for dropping the Argosy was its slow 200kt cruise speed, extensive maintenance requirement and low overall level of productivity. A DC-9 freighter can uplift 17 tonnes of cargo compared with only 12 tonnes for the Argosy which also has block times around two and a half times that of the twinjet.

IPEC will hushkit both DC-9s when the Val- san/Pratt & Whitney JTB kit is certificated for Airborne in 1991 bringing the aircraft into compliance with ICAO Stage 3 requirements. Meanwhile IPEC Aviation will restructure their aviation division with only 17 pilots rather than the 34 that they formerly required.

Government Approves Tourism Funding Boost:

As outlined during September, the federal government is to initiate a $31. 5m advertising and promotions campaign to assist the ailing Australian tourist industry.

Tourism last year was our largest industry with a total 1988/89 turnover of $22bn, $5. 7bn of which was in foreign exchange. Tourism overall employed some 440,000 people, 120,000 of these as a direct result of inbound tourism. A major benefit of tourism is that it traditionally is a strong source of employment for the young and generally not highly trained, providing an excellent environment in which relatively unskilled people can get jobs and begin worthwhile careers that otherwise may not have been available to them. Inbound tourism was already trending downward prior to the pilots’ dispute (refer Sept 89 Recce) though the fear now is that the decline will accelerate rapidly through 1990 due to the bad publicity (and total lack of believable airline schedules) received internationally in recent months.

The $31. 5m will be split up with $18. 5m being allocated for international use while $13m will be spent locally to encourage Australians to visit Australia first. In recent months tens of thousands of Australians have flown to overseas holiday destinations due to the hassles involved with flying domestically. Hardest hit have thus been the more remote centres such as the Northern Territory, north west of WA, Perth and Adelaide, the Gold Coast and all of northern Queensland along with outposts such as Tasmania and Norfolk Island. As most tourism investments, whether they be a modest coffee shop or a large resort, work on overall profit margins of often less than 10% then a downturn in traffic of between 25 and 50% (as occurred from late August through till November) can spell fiscal disaster.

One winner from the dispute are the holiday and tourism centres that are located within a few hundred kilometers of the major capitals. These areas have seen an upsurge in tourism due to most people now simply loading up the car and looking at an alternative to taking that special interstate airline package. In recent months it has largely been business people who have flown domestically while the majority of trips that representatives of this magazine have made in recent months have been by car including a Canberra/Adelaide return. The airlines themselves are even planning for a projected downturn of around 20% in demand once the system returns to ‘normal’ around the middle of the year. The new publicity programme will also be backed up by the airline and travel industry itself in an effort to get visitor arrivals back to the halcyon 1988 levels.

Ba-Jal Link:

In yet another example of airline cooperation, British Airways and Japan Airlines have established a new joint service from Japan to Europe.

Under the agreement, JAL will fly passengers from Tokyo to London in Boeing 747s and BA will take them from there to Rome, Zurich and Madrid in 757s. The service is due to start in April and will give JAL greater access to the European market and BA more passengers from Japan.

By Train to Ksa:

The NSW State Government is studying a plan that would see Sydney’s Kingsford Smith Airport connected by rail with Central station in the CBD.

The proposed service would operate out of a new rail and coach terminal being built on the south western perimeter of Central station. It would then travel on existing lines which skirt the western edge of the airport boundary near St Peters before becoming the dedicated goods line that flanks the northern perimeter of KSA before ending at Port Botany.

The new line would feature underground terminals at both the domestic and international terminals and in addition to offering passengers a fast transit to the city would interface via Central with both suburban and country train and coach services. The new line would also ease personal transportation for the 14,000 plus people who actually work at KSA and if continued onto Botany would open up rail connections to tens of thousands of potential rail commuters.

 Aircruising Takes Off:

Charter Cruise Air, the corporate owner of Aircruising Australia and Spirit Air and Australia’s only publicly listed airline, has reported record sales in its third year.

In 1988/89 CCA generated revenue of nearly $6m and an operating profit of $140,000. A large part of the 117% increase in sales came from overseas as the com- pany’s efforts to boost international business took effect. Total sales in 1985, by comparison, were a mere $427,000, in 1986 $1. 4m, in 1987 $1. 9m and in 1988 $2. 9m. Turnover this year could well exceed $10m as the group has been extremely busy during the pilots’ dispute with the addition of up to four leased F27s operating over previous airline routes.

lines Aircruising has for several years now been pursuing a route licence and is presently flying as Spirit Air on the former Australian Air- Cairns/Weipa/Thursday Island/ Bamaga route (refer Traffic this issue). However, the duration of the licence is unclear with Australia probably gearing up to promote its own regional affiliates on the route once it has sufficient capacity.

On the international front, the group’s plans to fly a VIP configured 70 passenger Boeing 727 on its first luxury world aircruise is set to take off on June 13. Though certainly not in the budget class of leisure travel, if successful, this venture will extend to aviation what the upmarket luxury cruise liners have been doing so successfully for several decades now.

 Braniff Broke Again:

Just five years after it was first bailed out of bankruptcy, Braniff has again filed for Chapter 11 protection from its creditors following heavy losses.

Too rapid expansion is one reason suggested as contributing to the airline’s troubles, illustrated by the order placed for up to 100 Airbus A320s early last year as part of an ambitious plan to triple its fleet and take on the majors head to head.

Braniff’s situation is also causing problems for IAE, whose V2500 engine was to power the airline’s A320s. The Braniff order was worth a potential $US1bn to IAE, or two thirds of the order book for an engine which has been struggling to gain customers. For Airbus the problem of re-allocating the A320s if Braniff goes under is not so great.

By October last year the airline had taken delivery of five A320s funded by Guiness Peat Aviation (GPA) with ten more scheduled for delivery by the end of 1989. By that stage Braniff had not been able to meet all its pay- ments to GPA.

 Another One Bites the Dust:

Yet another post-deregulation US airline has filed for Chapter 11 bankruptcy, Washington based feederline Presidential Airways.

The airline which operates eight BA 146-200s, seven Jetstreams and two Beech 1900s-has assets of $US30m and liabilities of $US74. 4m. British Aerospace is one of its major creditors. Perhaps there’s a lesson here for deregulated Australia: of the dozens of new airlines formed after deregulation in the USA only two survive intact – Midway and America West. The rest have either gone bankrupt or been taken over by larger competitors.

 Afap Looking At Establishing Its Own Airline:

In what is largely seen as a tactical move, the AFAP has floated the idea of its members forming a domestic airline of their own with the introduction of deregulation on November 1.

Basis of the concept would be the pooled superannuation reserves of up to 400 AFAP members. It is conservatively estimated that this would amount to something in the order of $150m in immediate cash reserves, more than enough to launch a viable airline using leased aircraft. In this way the AFAP would not only guarantee jobs for its investing members but would also savour attacking its previous employers in the marketplace. The AFAP is also believed to be talking with several international carriers about their buying shareholdings in the new carrier. However, federal regulations prohibit any foreign carrier having more than 15% equity in an Australian domestic carrier without FIRB approval.

AA Comment: While it is easy to discuss the possibility of starting a new domestic carrier, the translation to fact is a little more difficult. For starters, the pilot shareholders who would donate their entire superannuation cheques to the AFAP would in turn not be receiving any interest on those investments for many years, if ever. Airlines even at the best of times work on yields that make a school tuck shop look rich, three to five percent nett is considered optimistic and if all goes to plan Australia two years from now could have up to six major domestic airlines. Whether Australia can support this level of activity is a moot point, certainly overseas experience would indicate that in time it will probably not be able to.

The bottom line of the AFAP proposal thus is that its members would forego much of the short term fiscal benefits of their not-inconsiderable superannuation payouts. As many would now be living off this interest income (as many have forsaken jobs paying huge salaries of one to two thousand dollars a week and thus have naturally built up lifestyles to match), then it is difficult to see how they would survive the long haul to the time when the airline would actually require them to fly aircraft. Conversely, if the new airline pays its pilots a wage from the time they become shareholders, they will saddle the carrier with a level of non productive debt that will make the carrier’s long-term survival difficult.

Perhaps the AFAP’s best option is to address the above mentioned problems and purchase a majority shareholding of one of the three new airlines planning for start up in the coming eighteen months. On the other hand, if Ansett, Australian and EWA are successful in their $10m damages claim against the AFAP (writs against individual pilots were withdrawn in October), then the once omnipotent Federation will have more down to earth matters to deal with than the possibility of it flying its own jetliners.

 Cfm-56 Ad:

The US FAA has issued an airworthiness directive requiring repetitive inspections of bearings in CFM56-2, -3 and -5 engines following some 25 inflight shut-downs caused by bearing failures. The AD effects some 1,800 engines including 1,700 CFM56-25 and -3s (as used on Boeing 737-300s and -400s) and 100 CFM56-55 (Airbus A320).

 Record 12 Months’ Profit for Qantas:

Qantas has announced an unaudited profit from the group’s operations of $177. 2m for the year ended June 30, 1989.

The result is the highest in the company’s 69-year history. It compares with $155. 4m for the 15 months to June 30, 1988. Qantas last year changed its balance date from 31 March to 30 June to bring its financial year into line with that used by most Australian companies. This gives a 15 month financial period from 1 April 1987 to 30 June 1988 to compare with the latest financial year to 30 June 1989.

The operating profit after tax and abnormal items in 1988/89 was $176. 8m for the 15 month period in 1987/88. Abnormal items, principally from the sale of aircraft, totalled $49. 1m, while $49. 5m was provided for income tax. In the previous 15 months, abnormal items totalled $116. 9m and $99. 5m was provided for tax. Qantas has thus paid the Government nearly $150m in tax in the last two years alone yet is critically short of cash owing to the Government’s inability to either inject funds into it or alternatively privatise the airline to improve its debt to equity ratio. Total revenue was $3,272. 6m in 1988/89 including $2,235. 5m earned in foreign currencies.

Although airline profitability increased in 1988/89, the result fell short of plan. Inbound tourism to Australia after the Bicentennial and Expo 88 celebrations was less than pre-divided, particularly from Japan and New Zealand. The decline was partially offset by an increase in the number of Australians travelling abroad. The strength of the Australian dollar throughout the year had also adversely affected profitability. Qantas carried 4,001,365 passengers in the latest 12 months, giving a passenger seat factor of 70. 2%.

Fac Reports a Profitable First Year of Operation:

The Federal Airports Corporation (FAC) has announced an operating profit of $43. 7m for its first full financial year ending March 31, 1989.

The FAC owns and operates 23 airports around Australia. It commenced trading in January 1988 with 17 of Australia’s major airports. Six additional airports were acquired by the FAC on April 1, 1989. Operating revenue for 1988/89 was $248. 2m. Approximately 62% ($154. 5m) of this revenue was generated by commercial activities at airports, such as tenant and business leases, with the remaining 38% ($93. 7m) sourced from aeronautical charges, such as landing fees. The FAC’s profit represents a real rate of return in excess of 7% on assets, before taxes, approaching the long-term target of 7. 5% set by the Federal Government.

The FAC’s overall profit would have been considerably higher had there not been a $15. 3m loss registered by the Corporation’s general aviation airports. “We expect to significantly reduce this general aviation loss in 1989/90 with the introduction in April of a new charging system and further development of non-aeronautical activities at GA airports,” Mr David Sullivan, Chairman of the FAC, said.

The Federal Government received a $12. 8m dividend, as sole shareholder, and interest repayments of $46m. Under the Federal Airports Corporation Act, 1986 the Corporation is not liable to pay income tax. Mr Sullivan said that while all airports improved their performance, only four were actually profitable (Sydney, Melbourne, Bris- bane and Coolangatta). “One of our objectives for the years ahead is to make all our airports profitable. Due to the pilots’ dispute and the effect it has had on revenue, it is unlikely that the Corporation is going to be able to match the performance of last year,” Mr Sullivan said. While the FAC has in fact been paid airline FAC charges (in lieu of standowns, etc) by the government, the overall level of activity was so low during the late August till December period that the real time loss would be significant compared with the same period a year earlier.

 Fiji Government Hoping to Repurchase Air Pacific:

Following a strong recovery by the tourist industry in Fiji, the 19. 57% stake in Air Pacific owned by Qantas has been subject to repurchasing attempts by the Fiji Government.

Qantas’ association with Air Pacific goes back to the pre-Rabuka days of 1984 when it was selected to manage the airline and ultimately acquired its shareholding for a bargain $A5. 4m just after the first Fijian military coup in 1987 and at a time when the coun- try’s economy was in serious trouble. Since then, the regrowth of tourism in Fiji has been reflected in Air Pacific’s results with the airline recording a record net profit in 1988/89 of more than $ABm and maintaining its performance in the current year as inbound traffic into Fiji has increased greatly owing to the difficulties of Australians booking domestic airline holiday packages during recent months in Australia as a result of the pilots’ dispute.

Before Qantas’ involvement (and the managerial expertise which went with it) Air Pacific was losing heavily. Talks between the Fiji Government and Qantas are continuing, but industry sources say the Australian airline would now be reluctant to give up its share in Air Pacific.

The issue is complicated by overtures recently made to Qantas by Japanese investor EIE International to purchase its share of Air Pacific. EIE has indicated that the deal was just about signed, sealed and delivered, something denied by Qantas who say they are talking only with the Fiji Government. EIE has large investments in Fij and is considered a ‘good friend’ by the country’s auto-cratic and non-elected Government.

Compass Signs for Airbus:

Bryan Grey’s Compass Airlines, one of the new operators to emerge with the coming of airline deregulation in Australia, has finalised the lease arrangements of its operating fleet, five Airbus A300-600Rs.

The A300-600Rs a more advanced, longer ranging and slightly higher capacity development of the A300B4-200s already in service with Australian Airlines – will be con- figured to seat 288 passengers and are projected to begin operations on primary inter capital trunk routes in November 1990. The aircraft will be obtained on a ten year lease from the San Francisco based Polaris Aircraft Leasing Corporation.

Initially, Compass will operate single class services to Melbourne, Adelaide, Perth, Sydney and Brisbane, thus taking on the major domestic airlines on these potentially lucrative routes. Cairns and Coolangatta will be added as the fleet builds up but Canberra, Darwin, Alice Springs and Hobart will only be added to the network if the Cairns route does not justify a year round service.

The airline will have about 700 staff when it becomes operational, including around 70 pilots. Maintenance will be performed by Hawker Pacific at the airline’s new Brisbane base.

 New Tassie Service:

Tasmanian operator Par Avion has begun operating regular scheduled Melbourne (Essendon) to Launceston flights using a fleet of four ex- Lloyd Nord 298 Mohawk aircraft in 25 passenger configuration.

Services began in early November, a year earlier than originally planned as a result of the domestic pilots’ dispute. Par Avion is offering the lowest fare of any airline on the route $145 one way.