Deregulation Countdown – The New Zealand Experience

Should the embryo airline surmount these hurdles,it was usually skittled by objections from established airlines. The Air Licensing Authority’s hearings were in public, the proceedings adversarial, and very few made it. Ironically, deregulation was not introduced by the present Labour Government which has been hell-bent on freeing market forces, but by the conservative,and tightly regulatory, government of Sir Robert Muldoon.

Nevertheless, the arrival of the Labour Government gave six years full rein to the system, and a degree of freedom which probably went beyond the bounds contemplated by Sir Robert’s architects. The right to launch an airline – scheduled, nonscheduled and charter – is sacrosanct providing the authority is satisfied about safety and reliability, insurance, operational conditions and ‘repute’.

So what has happened in the industry over the six years?

In 1986 when we last examined the domestic scene, two years of deregulation had seen a lot of ferment. The number of bodies holding air transport and aerial work licences (a figure breakdown for each was not available) had gone from 84 in 1984 to more than 260. The active operators among those holding ATLs however was only 36, of whom about 20 provided scheduled services.

Four years on,the number of licences has increased slightly to 287, of which 182 provide the right to carry fare paying passengers. However, the number of scheduled carriers among the smaller fry remains almost static – “Maybe it fluctuates slightly, 21 or even 22 at one time,” says Nigel Mouat, the Air Transport Division’s Controller of Domestic Air Services. The rush to grab new licences has shaded to a dribble – about 10 a year, which is only slightly ahead of the number revoked through company failures or simple non usage.

What has happened is not so dissimilar to the American experience. First there was the initial enthusiasm which saw many new operators enter the business, a large proportion of them under-capitalised and with old or unsuitable aircraft.

This was followed by a period of failures which took out not only many of the newcomers but two out of the three major third level airlines, both experienced and well-tried companies. The failures are still coming, though at a much reduced rate.

The third stage of the process can best be described as the period of aggregation and niche finding.

Four years ago there were three airlines operating the larger types of (Category A, unlimited weight) aircraft: Air New Zealand’s domestic services; Air New Zealand’s wholly owned freight subsidiary, Safe Air; and Mount Cook, a tourist-orientated airline, part of the Mount Cook Group, formerly independent but recently brought under the control of Air New Zealand (which upped its stake from 33% to just over 80%). Waiting in the wings, but more of a future threat, was a bouncy upstart, Newmans Air, aiming at the Mount Cook business. Newmans Air had been started by the big tour and charter coach company, Newmans, which in turn was a subsidiary of TNL.

But Newmans Air needed partners to survive, so a consortium was established comprising Newmans (22. 5% of the shares), Brierley Investments (27. 5%) and Ansett Transport Industries from Australia (50%). The airline was renamed Ansett New Zealand.

It set about acquiring four Boeing 737-100s to compete on the main trunk route, Auckland, Wellington and Christchurch, and switched its biggest calibre guns from Mount Cook to Air New Zealand.

Many New Zealanders were surprised that an overseas airline company should be allowed to obtain a half share in a domestic carrier; even more so in February 1988 when Brierley and Newmans bailed out after heavy losses, allowing the Australian company to assume 100% control.

No doubt the chink for Ansett’s participation was opened up by deregulation. But its rare good fortune in finding itself the sole owner of an overseas based domestic (not to mention future prospects of using this airline as a springboard to international services) owes everything to the Labour Government seizing a chance to force Air New Zealand into a situation of intense competition. The Government saw it as the best means of upgrading domestic aviation.

Ansett New Zealand began its 737 services in July 1987. It is from this date that new tack in the deregulation process evolved.

For some years, Air New Zealand had been signalling its financial pain in maintaining frequent F27 propjet services into many provincial centres, especially in the North Island. The public demanded these links, but too often off peak flights flew less than a third full.

Small airlines with aircraft more suited to such services also had their grouches. In 1987, one of the props of the third level business, Nationwide, based at New Plymouth, simply closed shop and sold its sizeable fleet. Charles Haywood, the founder of the still profitable airline, said he had simply had enough.

In the fight with Air New Zealand over the vr;3ry limited New Plymouth/Auckland market, he claimed the larger airline was tightening the garret by matching his timetables: He was tired of coping with a recurring shortage of pilots, most of whom defected to the big competitor after gaining third level experience. To cap it all, the steadily rising costs-fuel taxes, navigation and airport fees, local body dues, etc-were rising to some 30% of total earnings.

Haywood’s complaints were echoed by other strugglers, Mr Malcolm Campbell of Hamilton based Eagle Air predicting a “massive squeeze” by Air New Zealand and (the then) Newmans to force out third level competitors. His prediction resolved itself in a sensible way. In mid 1988,Air New Zealand bought a 50% holding in Eagle Air, and in a vigorous South Island company,Air Nelson. The idea was to work in partnership with the two small airlines who would take over many of Air New Zealand’s less profitable Friendship routes – but not necessarily causing the total withdrawal of the F27s from these provincial centres.

The move appears to have been an unmitigated success.

Ansett made a similar move soon after,but instead of buying into smaller airlines it formed what it loosely describes as “commercial arrangements”, including the matching where possible of schedules. Ansett, for instance, has links with Transair of Wellington, Associated Air of Paraparumu, Northern Commuter Airlines and Bell Air of Whakatane.

Less formal shades of association have also shown up, such as the cordiality existing between Air New Zealand and the small Invercargill airline, Southern Air (Southern Air swaps chilled salmon for the 24 hour delivery to Tokyo for tourists who wish to explore the cold, remoteness of Stewart Island). There’s little doubt the process of alignment with one of the two blocs, Air New Zealand and Ansett New Zealand, has aroused discreet wheeler dealings and bargaining among the groupings.

Bell Air, a solidly independent airline which flies Aero Commanders and a Beech 99 between Auckland and the wealthy Bay of Plenty town of Whakatane was, for many years, a staunch commercial ally of Air New Zealand’s. Quite suddenly this year, Bell switched to Ansett. According to Air New Zealand, it and Eagle had discussions with Bell shortly before the switch, and offers were made, but were rejected by Bell. Bell, incidentally,was a buoyant survivor from the ‘knock down era’ of three years ago when airlines like Nationwide and Air Albatross were disappearing. Founder and managing director, Graham Bell, attributes the buoyancy to its refusal to be tempted into becoming overly adventurous. The point is echoed by other survivors.

Air New Zealand’shalf purchase of Eagleand Air Nelson prompted growth and probably a new sense of professionalism. Eagle’s fleet has grown from four to six Bandeirantes while Air Nelson has gone from a small fleet of Piper Chieftains to six pressurised turboprop Metros.

Eagle covers a wide sweep of North Island provincial _ centres linking Auckland with Whangarei, Kaitaia, Tauranga, G1sborne, Whakatane, Taupo and Napier. Air Nelson, basically formed to fly the extremely competitive Cook Strait link between Wellington and the northern South Island,has also extended up the spine of both islands. Its links go as far south as Oamaru, and north through Wellington to Wanga·nui and Auckland (thus removing a ludicrously embarrassing dog’s leg for Wanganui passengers who sought to get to Auckland on F27 services).

Bob Wallace Air New Zealand’s domestic route manager, says the partnerships are enabling the airline to sell off five old F27-100s and cut the heavy costs of separate crewing for the 100s and the larger fleet of F27-500s.

“We’ve been extremely pleased with the service of the two airlines,” says Mr Wallace. ” They are very well organised, have high operational standards and good maintenance. Both have computerised maintenance systems, and Air Nelson recently opened a much larger maintenance facility. ”

Ansett’s involvement with smaller airlines is less binding and aimed more at providing a catchment for its trunk services. Transair flies Bandeirantes up to ten times a day across the Cook Strait between Wellington and Nelson, while Northern Air Commuter flies between Auckland and the northern city of Whangarei.

If the mood for liaison has netted many of the bigger (and certainly the geographically well placed) third level operators, the niche finders have also been successful. Skyferry meets the demand for up to 30 services a day across the Cook Strait,flying a Cessna Caravan, a Britten Norman Islander twin and two Trislanders. Additionally, the call for freight shipment is as strong as that for passengers. General manager, Barry Aplin, points out that Skyferry had to build its own airfield at Picton for the link with Wellington. Picton is the main South Island terminal for sea ferries. Aplin’s airline has no competition from other airlines, but it is giving the Railways-run sea ferry service an awful drubbing.

Great Barrier Airlines, launched about eight years ago as a husband and wife venture using a refurbished ex RNZAF Devon, now runs a sizable service out of Auckland, using a modern fleet of aircraft, to a number of islands in the eastern gulf and to the Bay of Islands to the north. It is also picking off the odd provincial centre,such as Dargaville, which has hitherto been bypassed.

But the flagship of deregulation is Ansett New Zealand. Three years after the Australian name arrived in the country, and two years after theairline became wholly owned by Ansett,the company has yet to make a profit. Its investment has exceeded $NZ600m but its annual losses have approached $NZ30m.

For all that, Ansett NZ’s arrival revolutionised domestic travel (as even its antagonistic competitor, Air New Zealand, admits). The company’s only inheritance were two DHC Dash 5-seat propjets (later to be replaced by 38 seat Dash 8s) and a rudimentary scatter of small airport facilities. It had to begin almost _ fr?m scratch assembling and training some 800 employees, building

its own terminals at Wellington, Auckland and Christchurch, and acquiring a fleet of Boeing 737s. It was a remarkable underta­king in a very short time – the more so considering the flair brought to the business: for the first time domestic travellers were to get aerobridges, full inflight meals, frequent traveller lounges and a new level of terminal comfort and attractiveness.

Air New Zealand was obliged to match the effort, warning at the same time that travellers would eventually have to pay. In fairness to Air New Zealand, it had made previous overtures about upgrading terminals, but these had been re-issued by local airport authorities. Deregulation had forced the issue. It was at this point that Ansett made a costly mistake. The four Boeing 737s it obtained to launch its first trunk services were among the first off the Seattle line- they included Nos 2 and 4. . Soon after, a series of incidents involving aged aircraft – including the famous roof blow-out on an Aloha Airlines 737 over Hawaii- markedly raised public concern about old airliners. The present chief executive, Mr Keenan (now heading the Newmans organisation) agreed 1t was a mistake, and there was certainly a pervasive reluctance in the community because of this to change airlines.

This and the October 1987 share market crash got the company off to a bad start. The lingering effects of the sharemarket crash have persisted much longer in New Zealand than in most other countries and the salvation eagerly awaited by both airlines- an upsurge in inbound tourism – is still to come.

Nevertheless, Ansett New Zealand continues to plan for future growth, and signs are promising. Over the past year it has metamorphosed into an all BAe 146 airline (apart from the two Dash 8s which fly the provincial tourist routes). The airline has eight 146 ‘whisper jets’: two of them 75 seat 200 models, five 90 seat 300 models and one a 76 seat 200 QC model.

. . On May 6, 199?,_the airline emerged as a fully fledged competitive force when It introduced a new timetable on the main trunk routes almost matching Air New Zealand’s in frequencies. At the same time it also announced an 8% fare increase, thus ending a cut throat price war which was crippling both airlines. Air New Zealand matched the fare increase immediately.

Publication of Ansett New Zealand’s financial performance is delayed (the bottom line loss for the year ended June 1988 was $NZ 27. 46 million) but Gary Smith states there has been a significant improvement after ‘the nasty years’. He cites a 23% passenger increase over the past 12 months, generated not so much by market growth but through substantial brand switching. Ansett now claims to be flying about 20,000 passengers a week. Since the domestic market is about 4 million a year, that suggests Ansett is picking up about 25% of passengers, or closer to 30% on the trunk routes.

The propaganda war is understandably acute between the two domestics, and passenger figures are hotly argued over. However, Air New Zealand’s Bob Wallace concedes that Ansett could be approaching a million a year (similar to the annual uplift of Australia’s East-West) and that Air New Zealand’s total of 2. 9 million during each of the first two years of competition has slipped slightly.

He points out that this could be sheeted home to the progressive phasing out of some provincial services now being flown by Eagle and others.

Another point of dispute is Ansett’s choice of the BAe 146, an aircraft, critics claim, which must be marginally less economical because of its design around a S TOL and ‘hot and high’ parameter using four engines. Gary Smith says the airline is more than ever convinced that the 146 is ideally suited to New Zealand services, perhaps more so than the 737. He points out that the airline already had on order 737-500s when it decided- because of

The Players

AIR NEW ZEALAND: Founded in 1939 as Tasman Empire Airways Ltd (TEAL) as a joint UK/Australia/New Zealand partnership owned 20:30:50 and established to operate services between Australia and New Zealand. Britain withdrew in 1954 with the NZ government taking full control in 1961 with the name Air New Zealand being adopted as the corporate title in 1965. Air New Zealand, previously an international airline only, was merged with the National Airways Corporation (NAC) in 1978 to form the one airline we know today. Air New Zealand was privatised in 1988 with ownership split between Brierley Investments (35%), Qantas (19. 9%), American and JAL each holding 7. 5%, with the remaining 30% being held by individual New Zealand citizens. For the year ending March 31 1990, ANZ carried 2,914,688 domestic and 1,689,997 international passengers for a total of 4,604,685, an increase of 2. 8% on the previous year. Total RPK was 10. 6bn and the airline employes 8,620 people. ANZ serves 26 international and 24 domestic ports and operates a fleet of 747-200, 767-200, 737-200 and F27 aircraft and introduces 747-400 services later this year. ANZ owns 50% of Jetset Travel, 100% of Safe Air and a little over 80% of Mount Cook Airlines. Feeders are Eagle Air, Air Nelson and of course Mount Cook.

ANSETT NEW ZEALAND: Ansett New Zealand was formed from the defunct Newmans Air in February 1985. Shareholding then stood at Ansett (50%), Newmans (22. 5%) and Brierley Investments (27. 5%). In February 1988, both Brierley’s and Newmans sold their shareholdings to Ansett taking the Australian airline’s ownership to 100%. Ansett New Zealand operate to eight ports with six additional ports being served by feeders Northern Commuter, Bell Air, Rex Aviation, Air Wanganui and Waterwings. Initially operating early model 737s, the airline now flies a fleet of new BAe 146 and propjet Dash 8 equipment. Employing around 850 people, the airline has required an investment of over $NZ600m and consequently has been a consistent loser though is expected to break even by 1991/92. Long term ambition is for the airline to be able to gain international rights including trans-Tasman routes where the joint bulk of a combined Australasian market will ultimately bring profitability.

MOUNT COOK AIRLINES: Mount Cook Airlines is part of the massive Mount Cook Group which is owned 80%+ by Air New Zealand. The airline division generates 40% of total group revenue and was formed in 1961, nowadays operating BAe 748, Twin Otter, Chieftain, Pilatus PC-6 and various small Cessnas on a tourism-oriented network designed to complement the activities of its parent. In 1989/90 Mt Cook carried 394,000 passengers for 230m RPKs, for a gross revenue of $NZ134m and a profit of $NZ8. 6m before tax.

experience gained with two 146s- to cancel the Boeing order. The decision was made by veteran Ansett troubleshooter John Buchanan, who headed the airline for 18 months between the Keenan and Smith leaderships.

Smith points out that the capital cost of the 146s (about $NZ40m for the -300 models) is substantially lower than the larger Boeings. The modular construction of the engines makes nonsense the suggestion that the costs of servicing four engines as against two is burdensome.

So where to now for the two domestics? If Ansett ever had the opportunity to cut losses and retire gracefully, it was in April, 1989-the time Sir Peter Abeles issued an ultimatum that the airline would close in ten days time unless the Government made concessions to offset the feared effect of selling Air New Zealand to a consortium, of which the two main parties were Brierley and Qantas.

He claimed the sale would lead to Ansett New Zealand losing inbound tourists channelled to it by Qantas and by two smaller partners in the consortium, Japan Air Lines and American Airlines.

Qantas undertook to continue cooperating, and it still represents the company as world sales agents. Ansett meanwhile has formed a commercial alliance over inbound traffic with Continental.

There’s no doubt that until the anticipated upsurge in inbound tourism arrives, the two airlines between them provide a huge over capacity. Air New Zealand’s chief executive, Mr Jim Scott, has pointed out that his company’s domestic fleet could, alone, easily accommodate the present travellers.

A note of special bitterness between the two airlines is Air New Zealand’s refusal to interline with Ansett. Bob Wallace says it is not the only airline with which it won’t interline, and in any case it would not be a competitive undertaking. Gary Smith responds that this goes against common IATA practice. “If you look hard, you might find someone like Air Botswana not cooperating this way. ”

At the moment it seems the struggle must intensify as both airlines weigh their commitments and the potential of their investments. Ansett, still sparsely represented among the provincial centres (Palmerston North, Rotorua, Invercargill and Queenstown) is likely to push soon to expand the secondary network, taking on Air New Zealand and its satellite companies in the country heartland. Gary Smith says Sir Peter Abeles has indicated two more aircraft would be available should a market opportunity show up.

As this story was being written, a meeting was about to start to discuss ways of coordinating the engineering resources of the whole Ansett group to achieve better economies. In line with a pledge given when Ansett Australia took full ownership, Ansett New Zealand is moving to expand its engineering base at Christchurch. Land has been secured, drawings done and consultants

commissioned to look at the practicalities of servicing aircraft up to Boeing 767 size.

Gary Smith says there are very obvious attractions in parcelling out types of work for the 146 to various bases. Christchurch, for example, might be the engine or avionics centre, while Western Australia and East-West’s upgraded base at Tamworth would also undertake specialist roles.

Ansett’s resolve to stay must also owe much to another pledge, this one given by former Prime Minister, David Lange, to Sir Peter, when the latter was threatening to pull out. Lange said Ansett could compete with Air New Zealand for rights for international services from New Zealand. A stipulation was that the international airline would have to be 65% owned by New Zealand shareholders. In short, Ansett New Zealand can compete for new rights plus places where the country already has rights which are yet to be taken up by the national carrier. These include Thailand, Argentina and Indonesia.

Mr Smith says prospects are already being examined by two people in the airline. “We are looking at a number of Asian ports and places in North and South America where we have associations with a number of airlines. ”

He sees the airline probably making a move at the end of 1991. Whether or not this is the airline’s raison d’etre, as some argue, its effect on domestic services has been major. It took the business out of the utility age, adding flair and a degree of luxury.

Indirectly, competition between the two big airlines opened up chinks for some of the smaller airlines- those with the necessary degree of sharpness and flexibility.

Whether it reduced fares is less clear. It certainly kept some fares low for the initial skirmishing, but the climb has inevitably begun. o

STOP PRESS . . .

Since this feature was written Air New Zealand has taken the decision to close its Fokker F27 Friendship base and also the airline operation of Safe Air.