Deregulation- the First Year

My friend of course was right and such is the natural beauty of the Barrier Reef region that I felt saddened and somewhat infuriated by our cosseted airline system that for decades did almost nothing to provide an incentive for Australians to fly within their own country at affordable and realistic prices.

Today, as we well know, all that has well and truly changed.

The vehicle for change was the cessation of the Two Airline Policy, an anti competitive decree that in retrospect should have been abandoned at least a decade ago. Replacing the dreaded TAP was outright deregulation and in one fell stroke Australia’s domestic jetways became competitive. Well almost.

What actually transpired on the morning of October 31 (the TAP having time expired the previous midnight) was really little different to that which had occurred each morning prior to deregulation. Some gimmicky limited availability discounts and showbiz razzmatazz for the nation’s media but by and large more of the same. Cynics, of which unfortunately through many years of ‘having seen it all before’, I am orie, tend to feel that real deregulation did not come into effect till Saturday 1 December when Compass’ YM331 took to the skies to mark the new airline’s inaugural Brisbane/Sydney service. From that moment on Australian and Ansett finally had a real competitor – something that for more than a third of a century they had not experienced.

Compass not only provided an immediate source of direct head to head competition on the primary trunk routes but it also made both the established carriers pick up their game and take deregulation seriously. The result of real competition has meant that the traveller can now choose between different fare levels and even where the fares parallel (as they mostly do) the discretionary fares are such good value that the passenger is the winner hands down.

The figures speak for themselves on whether or not deregulating Australia’s interstate routes has been a good move. During the September quarter (refer Stop Press last issue for full data tables) the airlines carried 4. 7 million passengers, an all time record. Year to date figures indicated a record 15. 4m passengers had flown, far in excess of the previous record in 1988 at the height of Australia’s Bicentennial celebrations and Brisbane’s Expo. September quarter passenger traffic was up 38% on the same period last year, the final quarter before deregulation and long enough after the pilots’ dispute to not be overly influence by capacity constraints brought on by that conflict.

The strength of the current market is also evidenced by the load factors being produced. The September quarter average was nearly 80% as against an already healthy 74. 6% for the same period last year. And this hasn’t come through the airlines stifling capacity as a yield enhancer as one might at first suspect. In fact the airlines have been throwing capacity at the marketplace like it was going out of style. Available Seat Kilometres ( ASKs), the industry benchmark for capacity available, increased from 4. 7m seat kilometres to 6. 3m for the latest quarter. The system is currently working so hard that there could soon be a lack of aircraft and crews to man them if this growth should be sustained at anything like its current momentum.

Revenue Passenger Kilometres (RPKs) were also up an incredible 45% indicating that more people were flying farther than they traditionally did. In short, the good citizens of Perth are now flying to the pleasure spots of the eastern seaboard, and vice versa, for affordable fares and often on direct services that did not exist prior to deregulation. Bravo!

When you consider that throughout the world, almost every other country is weathering negative traffic growth (I ATA members down 8% Jan-Aug) and Australia is enduring its worst recession since the thirties, then this level of performance is nothing short of amazing. Furthermore, it is expected that no less than 16 million people (based on individual trips) will fly our airways this financial year, a figure that could grow to 20 million by 1993/94, or almost double the uplift of a decade earlier.

So, what has motivated this incredible surge in traffic when every other sector of Australia’s economy is on the ropes?

The answer of course is simple. Fares are now at such ridiculously low levels that anyone travelling on leisure would be mad to not seriously consult their travel agent (or airline) as to what is available between point A and B. There are now, as a consequence, people who have never flown before, flying by jet to places that they have never before visited in this great country. From personal experience this writer has made no less than five flights in the past year that would not have been made prior to deregulation because I, like most others, simply could not have afforded them. In two cases I would have driven, in the other three I wouldn’t have gone at all. When you consider how many people that have reacted that way then you begin to appreciate the ripple effect this has on the Australian tourism industry as goods and services are paid for by people who previously would have simply stayed at home, perhaps saving to holiday overseas and spend their dollars elsewhere.

At time of writing you could fly between Sydney and Melbourne for a ridiculous $79. Between Brisbane and Perth for just $229 (previously you could fly to the US for less than the standard predereg fare), Cairns/Sydney $149, Coolangatta/Perth $242 and Adelaide/Sydney for just $99. That these fares are affordable by all and generally available in a practical sense is what has driven the motor of deregulation in Australia.

But it hasn’t just been an orgy of lower fares which is the primary benefit of deregulation. As a result of competition, both Ansett and Australian have upgraded their premium classes to better compete against each other and of course with Compass, which has to date lured away almost 9% of the business market. Indeed, this is the root of the problem behind each airline’s relatively poor economic performance despite record passenger uplift and load factors that are the envy of North America and Europe.

Normally, a multi class airline tends to make most of its profit from the high yield business traffic that it carries. In Ansett’s and Australian’s case this was the backbone of their operations up till last November. Previously, any discounts could be weighed against otherwise empty economy seats while the business traveller almost never was able to avail himself or herself to any form of discount. And with air fares pretty much aligned with increases in the CPI throughout the eighties then the money spinner this was doesn’t need to be explained further. Today, a recent industry conference was told that business traffic is down by an estimated50% in first and 30% in business while economy has picked up by50% though probably as little as 20% in overall revenue terms.

These figures spell trouble for Ansett and Australian as they look to support their extremely low yield economy class discounts with yield from their premium fares. That is simply not happening in a recession beleaguered Australia and is something that may well not improve greatly till well into the latter stages of 1992.

Thus, to further improve their business traffic both carriers launched significant revamps of their business cabins earlier this year. Australian retained its six across economy seats and simply folded down the centre seat backrest to form a table (something that smart travellers often do in economy if they have a vacant seat next to them) while Ansett went all the way and replaced its economy seats in business class with what were previously first class seats. Ansett also instituted a major first class upgrade which without doubt, has given it the best domestic premium class cabins in the world.

Despite this, according to Roy Morgan Research, Australian is winning the premium fare traffic war with a September quarter share of 43% of the business travel market as against 33% for Ansett and nearly 9% for Compass. How Australian is doing this is obviously of great concern to Ansett while newcomer Compass’s eating into both their traditional markets in a rapidly increasing fashion is becoming a considerable headache for both majors.

One theory is that Compass has secured more defections from Ansett (perhaps via its clever Golden Wing promo earlier this year) than from its reluctant landlord. Either way, Compass has upset the traditional balance between the two established carriers much more in this regard than it has in the leisure market. If anything, Compass has served as a marketing gem for Ansett and Australian as it has been most successful in exciting the average Australian to actually consider aviation as a viable form of transport. That the ‘heavenly twins’ should also ride the pax uplift on this wave of publicity is all the better for them.

An example of this theory in action was when Compass became operational last December. Such was the mass of support for the airline’s fares and the degree of underestimation by Compass management in how many phone lines were required in their then small reservation section that the airline spent much of the first month of operation with near permanently jammed phones. This writer knows of quite a few newly enthused travellers who finally gave up dialling Compass and went to either Australian, Ansett or Eastwest to get the fare they wanted. Bryan Grey certainly earned a Christmas cheerio card from John Schaap and Sir Peter for this unexpected windfall though we don’t know if he actually got one!

The other major gain for the business traveller was the recent introduction of frequent flyer programs. That the launch, like their business class upgrade announcement six months earlier, should occur on the same day is perhaps fitting in view of the long track record of our ‘heavenly twins’.

Neither carrier wanted a frequent flyer program, indeed they are justifiably considered a scourge on the entire industry from an airline management’s point of view though at least in Australia the plans have been designed in such a way as to eliminate most of the problems that have bedevilled them in the USA.

The primary US problem of course is that of contingent liability. Many travellers have built up so many points over the years that when they retire they can literally fly that airline for free for years to come. The other nightmare (for the airline, not the consumer) is that premium class seats are regularly taken by economy fare travellers exercising their upgrade rights. This is a problem that may well come home to roost through 1992as both the bulk of Australian’s and Ansett’s frequent flyers opt for travel upgrades rather than the now legendary free toaster.

By and large though, the local schemes are sensibly thought out and administered with a joining fee to cover establishment and admin costs and a proviso that all accrued points have a life of just one year. This should eliminate the bulk of the US contingent liability problems though it is unknown of course at this stage if the existence of such plans actually enhances market share for either carrier. In reality, it might well drive some suits off Compass flights but whether Ansett will, for instance, fare any better than its key rival is a moot point.

The other problem with frequent flyer plans is that in many cases the flyer cannot avail his or herself to their bounty. Put simply, the company or government department paying the fare takes the rewards and not the traveller. Legal decisions regarding this contentious issue for government employees were due to be handed down at presstime as was a decision on their status regarding the Fringe Benefits Tax.

So how did the individual airlines fare in their first year of a deregulated market?

Ansett of course is just emerging from a two year nightmare that, like Australian, commenced with the pilots’ dispute in 1989. Prior to that Ansett Transport Industries (ATI) had to be considered one of the golden boys of international aviation. Owned 50:50 by two of the corporate world’s most respected magnates, TN T’s Sir Peter Abeles and News Ltd’s Rupert Murdoch, ATI could do no wrong. It’s airlines made money and it ruled the roost in terms of uplift and image despite a challenge from a revitalised Australian Airlines that from late 1988 was, in retrospect, something of a forewarning of the stormy seas ahead.

Today, as we all know, things have radically changed. News Ltd up till recently was a fiscal basket case though its recently successful debt restructuring efforts now appear to make its future secure. Up to this time there was a very real threat that News would have to sell off its 50% share in ATI as it had long been considered by the US courts a non core asset amongst the group’s corporate activities and therefore ripe for selling. That may now not be the case and it appears that a sale of its ATI holding has gone on the back burner.

Ansett’s other key shareholder, TNT, is also in little better shape than is News. Rampant expansion through the late eighties and early nineties have left its mark in such a way that now TNT is saddled with a debt burden not easily financed by what were once its aviation cash cows – Ansett and AWAS. Low profile, though highly interesting share raids against TN T by a cashedup Kerry Packer have not gone unnoticed by Australia’s investment community and it may well come to pass that within the next few years there may come a time when what we know as Ansett today will have ACP, All Nippon, or even a cashed up and privatised Qantas as primary shareholders. Stranger things have happened.

That aside, all was not negative despite ATI losing around $50m (unfortunately precise fiscal data is not published by ATI) during the 1990/91 year. Ansett is now, according to all reports, in the modest profit and indeed it should be with an 80% load factor for the September quarter, though surprisingly TN T supremo Sir Peter Abeles did say recently that the airline could still return a loss this year. That the airline is now getting a better yield balance via its sophisticated computer reservations system (CRS) is something that will greatly aid it, and its competitors, in the years ahead. Airline seats are about as long lived as ripe tomatoes and the ability to use a CRS system which can sell what would have otherwise been empty seats, even at ridiculously low fares, is the modern day backbone of the profitable airline.

To ensure its long term survival amidst a deregulated environment ATI has also made a number of key changes to its structure. First was the closing down of Ansett N T and Ansett New South Wales. The latter was a little NSW intrastate Fokker operator which had been made virtually superfluous following the pilots’ dispute (refer p. 24 Mar 91 AA) and indeed its future looked bleak as the economic and political situation within the State continued to work against it. The decision was thus made to replace the old airline with Ansett Express, a dedicated hub buster flying niche routes too small or specialised for Ansett’s mainline Boeings. That E xpress enjoyed a 94% increase in RPKs during the September quarter over the same period last year as Ansett NSW is testimony to the new energy within the little Ansett feeder.

Ansett’s other problem child was Eastwest. The airline has always been shy when its comes to turning a profit and last year was no exception with a loss of $23m. It was thus of little surprise that during September ATI announced that a third of its workforce would go and its long time links with Tamworth would cease. Eastwest’s new image as an all leisure airline would be enhanced further with increased capacity into its key markets of Tasmania and Queensland. With its new BAe 146 fleet beginning to settle into service and the prospect of even larger jets on the horizon, (refer Airline Affairs) Eastwest looks a better bet than at any time in the past. It’s increase in overall market share grew from 4. 6% to 5. 0% in the September quarter while for the year ended 30 September RPKs had increased by 77% from 464,939 to 826,546. The airline, for the first time ever, should also exceed one million pax carried in the current financial year.

Meanwhile, a stones throw from the ATI tower lies Australian’s headquarters in Franklin Street, Melbourne. Something that has always privately amused this writer is that you can see into the other airline’s offices from their respective buildings. Whilst this may well have been unnecessary during the halcyon days of the Two Airline Policy one tends to feel that nowadays the curtains are at last well and truly closed.

Australian is in an understandably upbeat mood. The government carrier turned a small but encouraging operating profit of $6. 39m which in turn reflected a considerable turnaround from the 1989/90 loss of $79. 85m. Chairman Ted Harris stated that the airline should also be in a position to record an operating profit of $100m for this current year, largely through increased efficiencies and the vibrant increase in traffic. Harris stated that the airline required a capital injection of around $350m to get its current 80:20 debt to equity ratio into a more realistic regime. With this in place and a profit in the region of $100m he valued the airline at around $1bn for its mid to late 1992 privatisation.

Record traffic growth (84. 4% load factor in Sept qtr) has even led management to reconsider various aspects of their far reaching retrenchment scheme with the word that the airline is even now looking to selectively rehire additional cabin crew, amongst others. The airline also has a young fleet of largely one type of aircraft, the Boeing 737, something that it estimates saves it around $100m annually via operational compatibility. One also suspects that a key reason for its current leadership in the high yield market was the airline’s deliberate move to concentrate largely upon this market with its fleet of generally smaller jets than that operated by Ansett Australia. This is why Australian is currently flying more passengers than Ansett though the latter is recording more RPKs. In other words, Ansett is flying fewer passenger further reflecting the greater number of long haul leisure flyers that the airline has attracted.

Like Ansett, Australian also introduced many changes through its first deregulated year. A new, and entirely turnkey operated subsidiary, Australian Airlink, commenced services in August with three BAe 146-100s to serve the growing niche market throughout the more remote regions of Australia. Airlink draws upon a small Australian Airlines management team head by Jackie Cook (who next to Aircruising’s Nancy Knudsen is now the second female airline CEO in Australia) and uses aircraft, crews and maintenance supplied by Warren Seymour’s National Jet Systems in Adelaide. (Refer p. 18 Nov 91 AA)

During the year Australian also guaranteed its all important feed by purchasing outright the assets of Eastern Australia Airlines and both Sunstate operations. New Dash 8 propjets will boost the capabilities of all three operators as they are deployed in the years ahead to better serve their new parent. Another Franklin Street coup was the long rumoured link between the airline and Australia Post in the establishment of a dedicated air express and courier operation. The new grouping gives Australian a tremendous boost in this area where it has always played second fiddle to a much stronger Ansett Air Freight and augers well for the future of the soon to be privatised carrier. And so to Compass. That the fledgling airline recorded a loss ($10. 3m) rather than a profit during its first year is hardly surprising, despite what it’s somewhat starry-eyed prospectus optimistically claimed. The cold reality of real world economics is that no matter how well you do your initial fiscal planning your true cost structure is always going to be more than was initially calculated.

Added to this is the fact that air transport at the best of times is a highly volatile industry that can be gravely affected by events far beyond the control of those involved. Saddam Hussein’s pursuit of his 19th province was something that, like almost all conflicts, was not foreseen prior to its occurrence. The resultant effect upon air transport was dramatic though thanks to the sheer energy of deregulation about the worst effect it had on Compass was in blowing out the airline’s fuel budget.

Other problems Compass suffered were the previously mentioned lack of ability to take anything like the number of reservations that it was receiving through its first five to seven weeks. Compass management had greatly underestimated the level of CRS capability they would require, an oversight that cost them dearly at a time when naturally they were most anxious to gain immediate cashflow not to mention market share. Just as damaging was a lack of capacity due to the airline’s fourth A300 being damaged in Europe whilst being prepared for delivery. The decreased capacity meant a restructuring of the airlines expansion program at a time when it was beginning to enjoy particularly strong growth on its key routes. By the time these words are read Compass will be over its capacity problems and will be operating a fleet of six Airbus widebody jets.

Compass, as has been mentioned before, has been the real driver of deregulation in Australia. You don’t have to be a cynic to believe this, you simply only have to look at the fares (and traffic) on routes prior to the new entrant’s arrival and once its first jet has landed to see the effect. Whilst recently addressing the National Press Club in Canberra, Bryan Grey joked that rumours about his airline looking to serve Canberra were enough to reduce fares into the capital overnight! In reality though, Adelaide is a classic example. Compass introduced fares to this route as much as 68% less than what was being charged prior to the new airline’s first service. Naturally the competition followed suit and now traffic into Adelaide is booming like never before.

Booming even more is Perth and Cairns where Compass has made a profound difference to the traffic patterns of the two cities. Traffic into Per th during August was up 70% on the same month last year whilst accommodation in Cairns is nowadays fully booked whereas a year ago you could have booked an entire hotel. Again, cheaper air fares have got Australia into the air, out of the family car, coach and train, and for the first time ever are now allowing ordinary people to at last see and enjoy their own great land.

However, Despite its considerable growth and strong market position (Sept quarter DoTC data shows Compass having 12. 3% of the total market and 24. 6% on its competitive routes) Compass is hamstrung due to its lack of terminal space at both Sydney and Melbourne. The airline is limited to two gates at each port in the Australian Airlines terminal, something that was originally a driver in its selection of very large A300 jets instead of smaller aircraft in the 200 seat class. If additional terminal space could be gained there is no doubt that Compass would begin looking seriously at operations with an additional type, something in the A320/737 class, for services to secondary ports and the tourism centres of Tasmania, Queensland, Darwin and Alice Springs. For now though the airline will be building to its ultimate fleet of six of its own (via Polaris Leasing) A300-600Rs and as traffic continues to increase so will its yields as it will progressively be incapable of offering large sectors of space for ultra deep discount fares. This current year should thus be one of consolidation for Compass with hopefully its first ever profit. Certainly if the carrier isn’t profitable this financial year then its future would look bleak indeed, particularly as its aircraft are each flying around 4,300 hours per annum with seat kilometre costs about half that of Ansett or Australian.

So much for the airlines and the travelling public, but how has deregulation affected other areas of the industry?

Casualties have obviously been the surface forms of transport on routes linking the major cities. Interstate point to point coach services have suffered as have traditional long haul rail services though in the case of the latter this varies to some extent upon the quality of equipment used.

Where the modern XPT is operated, as it is on the Sydney/ Brisbane route, patronage has dropped off only slightly whereas on the Sydney/Melbourne service where older trains are used, traffichas dropped by as much as 50% and forced the cancellation of some services. Consequently XPT trains with sleeper facilities are being introduced on this key route during 1992. The Sydney/Perth IndianPacific service is suffering a drop intrafficin the region of 50% whilst other capital city point to point services have also seen huge defections to the airlines.

The problem for rail is that the majority of people travelling are on concession tickets (either pensioners or unemployed, etc), thus they already operate from a low yield base. Erode this further and they have no option but to discontinue services or lose further revenue. Rail to some extent will have to begin to work with the airlines as does the successful tourism orientated Ghan linking Adelaide with Alice Springs. Many similar niche services offering high quality standards are possible and it is to be hoped that those in control see the light and work with the airlines to feed their tourism orientated trains. We live in hope.

Meanwhile, the entire tourism infrastructure at the primary tourism destinations served by the deregulated airlines has benefited greatly. In Cairns for instance, it is now difficult to get accommodation while car hire firms from Launceston and Per th to Coolangatta now find it difficult just to cope with demand Demand that most certainly was not there a year and a half ago when ironically the economy was in better shape than it has been through most of 1991.

The big loser though has most definitely been travel agents and regional overseas tourism. Travel agents have lost because they now make so little revenue on each ticket sold yet have to mostly put a lot more effort into obtain a booking than they did previously when a set fare regime was in place. The other factor is that there has been a massive swing towards Australians travelling in Australia rather than flying off to enjoy a week in Bali, Fiji or Hawaii. Obviously the commission on a five night package to the Gold Coast is a lot less than a week in Phuket. This has been endorsed by BSP figures which, for instance, show that there were almost 90% more ticket transactions this August than the same month last year though revenue increased by only 25%. DoTC data also reveals that in the year ended 31 July, of Australia’s 11 international gateways, nine suffered traffic downturns in international movements as against the previous year. The only exceptions were Cairns and Adelaide where a number of new services from Asia boosted their passenger totals beyond that of 1990.

And so to the year ahead.

Predictions are not our forte though a few obvious pointers to the future are already apparent. Yield will hopefully increase as less ultra low discount fares are available due to constant load factors in the high seventies and low eighties precluding such activity. This is not all bad news for consumers though as there will always be a plentiful supply of discount seats available for those who can book ahead and do not need to travel at peak times. Costs per available seat kilometre will drop further due to the many cost trimming exercises that have already seen around 2,000 people leave the domestic airline industry in the past year.

Probably the most profound change though will be an overdue battle to win business traffic via discounted fares. If, for instance, Compass were to introduce a business class in zone A of its A300s (an ideal location with up to two dozen first class type seats) at fares typically a third less than its competitors then stand back and watch the sparks fly. Compass could do this almost overnight with hardly any effort yet the long term effect on Ansett and Australian would be devastating, not to mention the plethora of new entrants that are specifically targeting this audience. Watch this space!

And a whole squadron of hopefuls are poised for takeoff during 1992 though how many will make the runway is anyone’s guess. Transcontinental is planning a 737 operation targeting primarily the business market. Southern Cross is hoping to launch something more akin to America’s highly successful Southwest using MD-80 twinjets whilst AAA is opting for used DC-9s on its low cost eastern seaboard shuttle. In the west, Australia Northwest is planning to fly Fokker 100s in direct competition with Ansett WA, something that could see the WA scene enlivened if Australian Airlines does in fact give the new entrant its nod of approval as a designated feeder with all the credibility that that entails.

Either way, 1992 will be as far reaching in its overall effect upon the future of Australian aviation as was the year just past. For the airlines it is a time of unprecedented growth, challenge and excitement. For we consumers, well we have never had so good. D

Readers requiring more data on Australia’s Airlines are reminded that our annual Major Airline Directory, listing all the first level operators, was published in our May edition whilst the annual Regional Airline Directory, covering the commuters appears elsewhere in this edition.