Interview Bryan Grey

A: Well the first few months were difficult because we only operated two aeroplanes, and obviously two aeroplanes were never going to carry the overheads that you have to build up to get the operation going, but with the introduction of the third and fourth aeroplanes there has been a decided improvement.

Q: In hindsight, would you have done anything different?

A: Not really, because we didn’t really have control of the situation. No one knew that the economy was going to turn down so quickly the way it did. In fact, I think if we had left the start-up any later it would have only been inviting other potential start-ups to get in under your guard.

I think there was always only enough room for one airline who was going to be able to raise the necessary funds, so to say you would have preferred to have commenced operations when the economy was better is something that you have little control over. Then again, if you establish yourself well during this downturn you’re going to be that much stronger when you really get the operation going.

Q: What about aircraft size. Would you have been happier with an aircraft of about 200 seats?

A: No We are quite happy with theA300-600R. The one class configuration, the low unit per seat kilometre costs, etc. We’ve operated numerous flights at 100% load factor and up around the ninety, ninety-five mark. I’m not too sure what an A310 would have given you as far as capacity is concerned in a one class configuration. I guess you would have been looking at about 220/240 seats; now we’ve got some fifty to sixty seats more than that and when you fill those you really generate a lot of extra revenue, as the lease cost of an A300-600R is not all that much greater than the A310 or 767-200. Certainly you’ve got some fuel cost savings but as far as aircrew costs, flight attendants, that sort of thing, while your engineering base would cost the same, you wouldn’t save anything on that either, so no I’m quite comfortable with the size of the aeroplane we have.

Q: Your share issue was overwhelmingly supported. If you had appreciated the level of support in the overall community would you have targeted for more, and how much?

A: Ah yes, for sure, for sure (laughs). It’s so easy though to be wise with hindsight. From the assessments we made at the time we struck a figure which we though was capable of achievement. It was obviously no good going any higher than what we actually went to the market for. Our target was $50m with a right to overrun that by $15m to take us up to $65m. I’d put in $5m myself that brought it up to $10m and our calculation was right.

After the massive response there was quite a large sum of money that had to be returned because it was over-subscribed. It would have been nice to have been able to keep that money and expand the share issue, but you know it doesn’t hurt to have a discipline like that to make you operate within the constraints of the funds you have. However, it is not a very low capital base for an airline that is going to have $600m worth of equipment because we have no investment in the actual equipment.

Q: Is much of that pool of money still in the banking community and is it earning you interest?

A: Well yes it’s certainly earning interest, one of the requirements of course when you go into long term leases is that you have security deposits which must be deposited by agreement with the lessors. We also have investments in ratable spares, engines, etc; these are investments which we didn’t necessarily plan to have because we were planning within our prospectus to have those spare parts and engines leased again on a finance basis, and we haven’t bothered to finance them at this stage although we are currently looking into doing that.

Q: How much did the attractions of the ‘Compass Club’ have in attracting investors? : Well, no one will ever know. I think it did have some attraction.

I don’t think though that you can over emphasise the amount of that attraction because when you look at it, the top 25 shareholders represent 45% of the total capital while the remaining 55% is owned by 12,000 shareholders. Now if you work 55% of $70 million you’re down to $38 million held by 12,000 shareholders, which therefore means that your average is around $3,000. Now that means that your 10% credit is $300, so when you look at it from a practical point of view you have to accept that a lot of people are in there with less than the average, so that the credit they get for that travel is not so great. You are talking about $100 to $200 per annum so really they will be paying extra for their travel to top that up, which is additional positive cashflow for us.

I have no doubt though that it did influence a number of people. It’s getting interesting as we get closer to July 1 when -the first lot of credits become exercisable, and certainly we’re getting quite a few calls from our shareholders now and I think the fact that even though this wasn’t the intent of it, the very fact that the credit exists will probably help underpin the share price. We’re still projecting very handsome profits because we have targeted the six major airports and we only have a staff strength which is capable of handling those six, we’re also getting 750 hours a year out of our aircrew and have eight flight attendants, one for each emergency exit, on the A300s. Also, as we have each aircraft channelling through Brisbane, which is our maintenance base, we don’t have one occasion where we have to dead head crew from point to point. This is a very economical operation.

We also calculate that our available seat kilometre (ASK) cost, because of the sheer size of the aircraft, is about 7. Sc as against 14. 2c for our competitors. Now that doesn’t mean anything unless you get viable load factors. Load factors have to build up over a period of time. You can’t come in on day one and expect to get 80%, but we’re now getting very satisfactory load factors and it’s improving every day.

Our competitors are proving to be our best marketing people because the more that they come up with copycat deals, people say, “Well what the hell is going on here?” For them to say that they couldn’t previously do it because of the Independent Air Fare Committee is nonsense. There was never an occasion when either Ansett or Australian went to the IAFC with a proposal to reduce the fare that wasn’t approved that day, so they’re just trying to pull the wool over peoples eyes and even though they said that they started to introduce these fares last October, there is no doubt they only did it because of the competition that was going to come in, but that’s to be expected, you can’t be critical of that. What we are critical of, is where they are selectively competitive. In other words they will reduce a fare Brisbane/Sydney parallel with our service but on the counteracting Sydney/Brisbane at the same time, because we don’t have a service, they don’t reduce it. Now, what will happen is that as we get a better spread of services with more aircraft we will be operating at strategic times whether it be Sydney/Brisbane or Melbourne/Sydney which are the two major centres, and it becomes very much more difficult for them to just be selectively competitive as many people are now realising what they are doing and we’re getting a lot of support as a result of that.

Q: As somebody who has actually floated an airline, what advice would you give those entrusted with selling Australian and Qantas?

A: Quite honestly I don’t give a damn about it, as far as Ansett, Australian and Qantas are concerned.

First of all I don’t believe that they should be considering an investment by other international carriers. I think that is all right if you’re looking for the cash and let’s face it I also made approaches to international carriers, not because I thought an international carrier was particularly going to do anything spectacular for me. I don’t think the on-carriage, for instance, from Singapore Airlines onto Australian would be all that significant because most of that on-carriage comes from travel agents, not necessarily from the airline itself.

I believe that from the size of the Australian and Qantas share issues, and because of the traditional impact they have had within the community, they should restrict their shareholding to Australians. I don’t see any need for foreign investment in these airlines. I don’t think that an international carrier coming into their shareholding structure will sit very kindly with the management of either Australian or Qantas. They guard very jealously their right to make decisions for their networks and so they could cause themselves a lot of headaches for little real gain.

Q: Very large planes, an extremely bad recession, the Gulf War and higher than envisaged fuel costs plus incredible discounting – how has this affected your projected yield?

A: Well, the yield was certainly down in the first two or three months though it’s now picking up consistently.

We always said that our standard fares would be 20% lower than Ansett or Australian and 50% less on the curfew routes, and its just a matter of getting the right spread of passengers in proportion to what you want as your high yield traffic and your discounted traffic. We are probably a fraction under the yield which we would prefer but then we could probably be getting better load factors in the shorter term than we would have expected so yield is important, but if volume offsets the lower yield then you’re just as well off.

Q: Any truth to the rumours of Compass moving into smaller twinjets to service the secondary port market?

A: No! That’s one of the real problems that we face. The lounges that we are operating from in Adelaide, Melbourne and Sydney [are restrictive], and there is no way in the foreseeable future to move out of them because the land is not there. It’s okay for the FAC to say they could have the land available in Sydney, but if they haven’t got it in Melbourne there’s not much use in having it in Sydney and until such time as we can become truly independent its not practical to operate smaller aircraft.

In any event where would you operate from? You would probably want to operate into Canberra and I don’t think that the 737 is the right aircraft for Canberra/Sydney. You would want to extend it through to Melbourne. It’s okay on that route but then you’d have to have equipment to cover the secondary market from north Queensland right down to Tasmania. I would personally prefer, and I don’t know where they would operate from, I’d personally like to see another start-up come in who we could work with and also I would prefer, even better still, to enter into an arrangement with Australian for the carriage we are generating for them. I’d prefer to probably feed into the Australian Airlines route structure, and if they had any sense they’d be encouraging that but at this stage they are adopting an Ansett and Australian versus Compass attitude. I think this is silly.

Q: Do you think that might change?

A: I think it will have to under new management and ownership. That’s one area where I think we would benefit from the change in Australian being privatised. It will become a lot more commercial under new management as long as they change their board because their current board is political and union orientated, and I would imagine under new management and new shareholders that that board would not last for long and therefore they’d become more commercial and therefore we would get a better commercial arrangement with them.

Q: This is probably looking one to three years away though isn’t it?

A: I would say so.

Q: Are there clear cut profiles of your customers yet. For instance, how many are first time flyers, how many are regular business flyers, etc?

A: Well its varied from time to time. Before Christmas we were estimating that anything up to 35-40% of our passengers were first time flyers, particulary on the Melbourne/ Perth route. As we’ve introduced the third and fourth aeroplanes we can provide a much better level of frequency for the corporate client. We are also finding that there are more business people now flowing to us and they are taking advantage of our lower fares so the profile is changing.

Q: On terminals, Compass is always complaining that it doesn’t have adequate facilities at Sydney and Melbourne in particular. Why don’t you do what Ansett and Australian have been doing for decades and put your own money into building your own terminals?

A: Well, its the land. You show me where the land is and we will obviously go there, but there’s just simply none.

Ansett and Australian got the terminals and incidently, Ansett and Australian haven’t for years been putting their own money into their terminals. At Tullamarine it is an FAC terminal built by the government. Brisbane was a government funded one. Perth was a government one, Adelaide was a government one, Canberra was a government one, so that’s a lot of nonsense. The point is that we would like to do it, but where?

The whole thing is that at the time of the deregulation announcement the Federal Government said a lot of things were going to happen to ensure new airlines a fair go and they didn’t happen, but one of the main things was that they immediately entered into these long term leases with Ansett and Australian. I have no objection with the long term leases in respect of the terminals, what I object to strenuously is that they gave them all the expansion capability so that we effectively could not build our own terminals.

If we had to build our own terminals we would have probably gone for propert y development people as w e had plenty of applications from property developers wishing to do it if we didn’t want to invest in it ourselves, or alternatively we could have raised additional money to build our own terminals. The point is that the facilities simply aren’t there.

Q: Could you for instance build a terminal at the new apron area at Kingsford Smith?

A: Well that’s what it’s intended for but it’s not much good having it there if you’re going to operate from the Australian terminal in Melbourne. You then have to change your passengers onto another area in Sydney and for us to get into the Australian terminal we have had to enter into leases of a certain time for them to justify us going in there. Now there is no guarantee they would release us from those leases if we even wanted to move tomorrow. But when we entered into those leases the FAC was still very uncertain as to how long that terminal expansion would be available.

Q: If you leave the Australian terminal, you also lock yourself out of the capability of having an on-carriage agreement later on.

A: Well that’s right, but then again you will probably find that if you moved into a more independent terminal that’s when you would then develop other feeder services via an independent terminal, whereas you can’t do it at the moment.

Q: Are you entirely happy with your relationship with Australian as a tenant in their key terminals. I understand that there are currently disagreements relating to sundry costs and rental levels between yourself and Australian?

A: Yes, when we first went in there we protested the method and rate which they were charging because we considered that it wasn’t in accordance with the head lease as the head lease is very explicit as to what they can and can’t charge for. So to get access to the terminals we took them for a certain term and we said “Right, we protest these charges, but we are willing to pay you the rent you’re demanding”, which we are paying, but we do not believe that these rents are proper. We believe they are exorbitant. We therefore went to arbitration around February and when a result is known we will abide by the umpire’s decision as to what the arbitrators say.

Q: When do you expect the result of that?

A: That’s up to the arbitrators. We don’t have any control over that, in the meantime we continue to pay the rents which Australian demands but we expect to get a hell of a big refund back.

Q: What about freight? The A300 has an enormous cargo capability, how is it being utilised and what do you see in the future for this side of the operation?

A: Wehadn’t been able to get a freight operation going till March due to the FAC not giving us full access to the necessary airside facilities that we could rapidly transfer our containers. There have been tremendous arguments and negotiation on this subject with the FAC claiming that under the terms of the leases there was provision made to provide space by the landlord airline, and this is one of the criticisms I have about ministers’ statements as there was nothing allowed for freight. We didn’t have access to freight terminals. We didn’t have access to land for freight and we just couldn’t get going, but as from March we have now been handling our own containers through the various Qantas terminals and so now are able to move freight and we’re now moving a lot of freight. But certainly, that inhibited our revenue for the first three or four months of operation.

In our budget we only allowed for about 4% of overall revenues being derived from freight. I believe that with Ansett and Australian, anything up to 15-20% of their total operating revenue is from freight, so yes, there is a lot of upside there which we have not really calculated into our figures.

Q: International links. How many are to be established with inbound carriers and what of the future in this area?

A: We are waiting to see what happens in respect with Ansett and Australian. One of the things that Australian would have to face up to if they got Singapore Airlines, for instance, as a shareholder would be that they would begin to drive away oncarriage from other carriers. Australian presently has very good oncarriage from some of the biggest operators including BA, Air New Zealand, JAL, United and American. In fact since Ansett teamed so exclusively with Qantas a few years ago they pretty well have the field to themselves. The addition of a major foreign partner to their ownership would have to inevitably change that. Can you imagine how the other internationals are going to take that? We would pick up the crumbs and they know bloody well what the crumbs would be.

The crumbs could be the majority because if Singapore or JAL, for instance, brought into Australian it would change the whole relationship. Ansett has got a market agreement with Qantas, though this is under review and so it may or may not continue. We know that Ansett has just entered into an arrangement with All Nippon Airways so on the Japanese route you’ve got ANA, JAL and Qantas. Australian have traditionally had an association with JAL, they are also looking for that airline to be a major shareholder. If JAL was a shareholder, ANA, as it now has an association with Ansett, would. leave Qantas out on a limb. That’s not a bad position for us to be in and so when you go across the Pacific you’ve got American, United, Qantas, Continental and ANZ plus that airline also saying they want a relationship with Australian while you’ve got a shareholding between Air New Zealand and Qantas.

It will be interesting to see how that goes, now where does that leave British Airways and Singapore Airlines? There are just so many unknowns. I cant see that any of that really worries us though we could ultimately win from a lot of what will inevitably happen.

Q: You feel that you can only win in the end.

A: I don’t think its going to particularly affect us and I don’t necessarily believe the oncarriage as a result of an association with the international carriers is as important as having a good relationship with the tour wholesalers and various travel agency groups. That’s more important than your relationship with the airlines. For instance, in the United States, travel agents basically dictate the method of travel on what the CRS offers them. Unless the customer has a steadfast request for a certain airline he or she will be booked on the best time/fare combination. The travel agent will put them on the best price on offer that is also the most convenient connection.

Q: A decade ago you attempted to launch an international charter venture using a single 747 to bring holidaymakers from a large number of individual cities within the USA to Australia. At the time it was obviously a little too progressive for the bureaucracy to understand and you never attained the rights to offer this service. Times have now changed, would the 1990s Bryan Grey ever look at a similar venture again?

A: No, not with Compass. We have to get Compass well established and really build up our market share. We want to get our load factor strong, we budgeted on 65%, we want to get an actual load factor up around 70-75%. I believe when we get to that level we will be pretty well saturated because to get a 75% average means you’re operating sometimes at 85-90% and other times probably 60-65%. ·If we got our six aeroplanes operating at that level of load factor we would be making ahell of a lot of money. I’m not getting any younger, by the time we really get that well established it will be time for me to go back to the farm.

Q: Where do you think Compass will be five years from now?

A: Well it will really be five years before we will get access to uninhibited terminal space so for about five years we will be tied in with the Australian Airlines terminals. We would hope that it might become available to us earlier but you have Melbourne and Sydney both to consider, you’ve got Adelaide and Perth to consider, so for up to five years I would see us being limited to our six aeroplanes and that’s one of the advantages of having a big aircraft such as the A300 1n as much as we can grow into that level of revenue, though we obviously have to contain our costs so that we’re always competitive on a price basis.

Once we get to that saturation point and Ansett and Australian can see that what they do is not going to impact upon us, and we’re almost at that point now and their getting the growth of the available traffic, there’s not going to be the same incentive for them togo around with these crazy prices that they try to attack us with at every moment. They will learn that we’re there to stay because we’re getting a lot of support and I believe that in five years we will still be at the six aeroplane limit due to lack of terminal space.

Ansett and Australian will have their current fleet for about another two years, probably to 1993/94 and because its going to take them that long after we’ve saturated ourselves for them to pick up the excess. If you look at their utilisation, productivity, the size of the aeroplanes, the point I make is that each one of our aeroplanes is equivalent to three and a half 737s, even if you say three, that’s 18 737s. Now they’ve continued to expand, they didn’t believe that deregulation was going to happen so they’ve both burdened themselves with excess capacity. In two years time we’ll be saturated and they will then start to pick up the growth and the compound effect of that growth or stimulation will be very rapid if they pick up the excess capacity that they have, and then they’ll continue to put more capacity in so that in five years time I would suggest that they will just about be twice the size they are today, and we will be just about to move into further competition because we willhave bur own terminals and in five years time I will have been retired for about 12 months.