Issue 74: March 1992

Made even worse for the potential new entrants (refer our special Compass analysis commencing on p. 23), is the spectre of both Qantas and Australian coming onto the share market later this year. Why would any investor put hard earned money into an unknown new entrant when they can invest in two of the world’s best managed airlines? And this is without even going into the prospect of Qantas, and possibly Air New Zealand, having full domestic rights before the passing of two more summers.

The other loser is credibility. Compass was seen by the average Australian as the great white hope of the deregulated aviation market. Compass was their white knight with wings. It was Compass which reduced the trunk route air fares to the point where ordinary Australians could actually, for the first time ever, seriously contemplate using air travel when next they visited aunty Flo or planned an annual vacation to parts of Australia they had only ever dreamt of seeing. Their hero was the archetypal battler, Bryan Grey, giving the majors a roasting at every opportunity and telling politicians and bureaucrats to ‘go jump’ with a degree of enthusiasm that won hearts near and far.

And all this time the hero airline was unfortunately following a flight path to oblivion. It is now clear that Compass was losing. money virtually from day one. That it was already behind in its payments to the CAA within three months of its first service and in its final half year was losing more than a million dollars a week. That management did little to correct this incredible state of affairs is surely something that will come under more detailed scrutiny by the relevant authorities in the coming months.

What caused this destiny with disaster is now so obvious that it hurts to relate it. Many aspects of the airline’s mode of operation had been queried by serious aviation observers long before Compass took to the air on December 1 1990. In our Sept 89 ed tion, we queried the wisdom of choosing such large aircraft when deep discount fares would become the order of the day once the airline began to challenge the established majors. Others had queried the meagre capital base and the grossly optimistic prospectus whilst one well known aviation writer bluntly stated “Why on earth would you start an airline without terminals?” Compass certainly did not target the lucrative freight market nor did it seriously pursue the business traveller, seating ‘suits amongst backpackers and screaming kids and then blaming business not taking them seriously on the terminals.

Compass died for all these reasons. Aircraft too large only meant that in the end it was forced to fire sale its capacity just to get cashflow. Compass’ capital base was soon eroded as uplit was soft in the opening months due to a totally inadequate phone reservations system that meant that many flights left with only a fraction of their intended passengers. Late delivery of aircraft was also a major problem but should have been appreciated by the Compass management team as a likely scenario, as was indeed the situation with the terminals.

As we close for press there are now four different bodies preparing reports on the Compass collapse. The Australian Stock Exchange, the Trade Practices Commission, the Australian Securities Commission and the Dept of Transport & Communication, reports that should all make enlightening reading. Interestingly, the latter is based largely around the contentious issue of terminal access and was to be in the Minister’s hands by the second week of February.

The lessons for new entrants are many and obvious. Figure out your capital requirements, then double it. Figure out how low you can go on a worse case breakeven load factor, then drop that load factor a further 10%. Figure out your revenue for the first year then deduct a third while increasing debits by 50%. Sounds severe? Sure is, and it is the type of business plan used by the survivors in any endeavour whether it be a corner store or a major undertaking such as an airline.

If any of our new entrants think we are off track then they want to look at the lessons of history, look at the list of US airlines say. five and ten years ago, look at one of our own Regional Airline Directories of the early to mid eighties and see the plethora of names that no longer exist. Failed for all of the above reasons.

If lan Ferrier is successful in reviving the airline he must also ensure that Compass II is recapitalised to the tune of at least $100m. If the accrued debts are to be fully paid (as they quite rightly should be) then the amount a Compass saviour would have to invest would be closer to $250m. And that still doesn’t overcome some of the physical problems affecting the carrier including a stigma now where few travel agents or individual travellers would wish to risk booking on anything other than an established carrier. You can’t blame them.

Affordable air fares boosted the domestic travel market by more than a third despite a terrible recession. It would certainly not have been as great as that without Compass. It is to be hoped now that discount air fares will remain, though will be set at levels that by and large reflect the true cost of the service involved. Australian, Ansett and Eastwest should now head into profit and quite frankly with load factors at world record levels and the elimination of a major competitor, if they aren’t then their collective managements should suffer the same fate as those of Compass.

Only time will tell.