Southern Cross’ Bold Compass Rescue Plan

Secondly, Southern Cross can use the existing Compass Air Operators Certificate (AOC) to speed up its own application down from around eight to just two or three months. Thirdly, despite its failure, the name Compass is a sure fire winner amongst the Australian travelling public engendering an almost folklore level of grass roots support that should be worth a bonus 10% to any projected load factor.

However, the new Compass would not duplicate the obvious mistakes of its former namesake (refer major analysis Mar 91 AA). It would, for instance, fleet of second-hand MD-83 twinjets in a two class 142 seat configuration rather than single classA300s with upwards of 280 seats. A fleet of seven would by year end provide a viable level of high frequency services between the major cities of Melbourne, Sydney, Brisbane, Adelaide, Cairns and Townsville. Night flights would link Perth with the east coast with initially most transiting via Adelaide.

Citing the primary differences between the two airlines, it is worth mentioning that the per month lease costs of the Compass A300s was in the region of $800,000 each versus barely a quarter of thisfigure for the depreciated MD-83s which overall reduces per seat acquisition costs by around 50% in one fell stroke. The smaller aircraft will also allow the airline to more effectively price its product without having to resort to the ridiculous situation of literally giving away seats just to fill capacity. This then serves to increase overall yield, something that will be managed on a daily basis via the AMR Sabre CRS yield management system, a tool that the old Compass had but unfortunately did not begin to utilise till well into the twilight of its existence.

It is anticipated that a staff to plane ratio of about 100 should suffice which would see around half of the original Compass workforce getting back their jobs in the short term. At presstime it was still undecided exactly where the primary base would be though it is expected that the fully equipped Compass HQ in Brisbane would be an obvious choice as it is virtually in the same fully operational configuration as it was the day Compass ceased operations. Despite this, both the Victorian and South Australian governments are fighting hard to ensure that at least the Compass maintenance base is established at either Adelaide or Tullamarine. The latter is considered the front runner for obvious reasons with the presently underutilised Hawker de Havilland hangar at Tullamarine being eyed as a possible maintenance facility along with the nearby Melbourne Jet Base.

Compass however would only perform routine day to day checks and leave all heavy maintenance to specialist centres such as ASTA or similar. This is considered a better option than what the original Compass endured where it leased space in an Australian hangar at Brisbane airport, a situation which was often described as being far from ideal. The proposed airline would also use existing Compass infrastructure within Australian’s terminals and certainly welcomes the construction of new common user facilities at Sydney and Melbourne.

If all goes to plan, and a rival last minute counter bid from the still active Bryan Grey led consortium doesn’t eventuate (refer Stop Press?), the Southern Cross led Compass should be ready to float by May and if successful be able to commence operations around July/August. Existing Compass shareholders and creditors will be offered 25% of the new company under a scheme of arrangement being put in place for acceptance by the Federal Court. Whilst this is obviously not ideal it is better than the alternative for most which is a zero return on their initial investment. It is noteworthy that both the CAA and FAG have already discharged their combined debts of around $18m. However, this is essentially where the good news ends and the cold reality of the marketplace takes over. Analysts still don’t know what long term effect the original Compass collapse had on investor sentiment while the recession has deepened dramatically since the initial Compass launch in mid 1990. Southern Cross are going to the marketplace with 120 million 50c shares which with over-subscriptions would give them a float capability of a maximum of $?Om. Many analysts would rather see this figure atsomethingcloser to $100m though an important point here is that in inheriting the assets of the old Compass, Southern Cross actually saves itself a substantial investment in both time and physical resources in establishing the operational elements of the airline. AMR (American Airlines) are providing full ground handling support, the staff are already fully equipped with uniforms, etc and except for endorsements on type are fully trained whilst even the CRS system (Sabre) and its complex infrastructure is already in place and simply waiting tobe powered up tobe accepting bookings.

The other point is that from day one the new Compass should be attracting very high load factors due to the fact that it is now virtually an Australian legend, would launch with five aircraft nearly simultaneously (unlike the original Compass) and would need just half the passenger loads of the former airline’s A300s. Theoretically, this should translate to a positive cashflow situation from the first quarter that should continue providing the new Compass doesn’t undersell its own product via impossible to maintain discounts. It is now known that of the $65m that Compass originally raised, as little as a tenth of this was left in liquid funds when the first services began in December 1990 of the original float, at presstime around $35m is still tied up in spares and rotables, terminal assets, fixtures and fittings and various miscellaneous items.

However, the success of the merger is wholly dependant upon the share float being endorsed by the Australian investment community. Something that won’t really be known till the prospectus is issued and listed . Contributing to the confusion is the looming spectre of the Australian and Qantas floats and indeed the newfound ability of the latter (and ANZ) to eventually service domestic routes.

Doug Reid, the deputy chairman of Southern Cross, reports that investor sentiment has shifted in recent weeks from the negative to the positive compared to what it was in late December when new entrant airline stock not surprisingly had the stench of death about it. Reid was confident of success as most people now fully appreciated precisely the substantial differences between the new and old Compass’s and how the new airline was planning to carry over with the best from the old, concentrating instead on yield and profit rather than purely·chasing market share at the expense of everything else.

Heading the new Compass is Sam Coats, a man with US aviation experience via Braniff, Muse Air and the very successful Southwest. The chairman is Sir Leo Hielscher whilst deputy chairman is Doug Reid, who is also one of the major financial supporters of Southern Cross Holdings. Existing creditors and shareholders in the original Compass would hold 25% of the new airline under a scheme (at presstime) to be approved by the Federal Court. There is also a possibility that the new Compass would honour the otherwise useless tickets (valued at $28m) of its former namesake on a space available basis though this has yet to be verified. The new Compass would also take out insurance against an individual’s tickets becoming worthless in the event of the airline failing. Something that should allay fears from both consumers and travel agents when giving preference to the new entrant over established carriers.

Either way, if the share float is successful, enabling the resurrection of Compass it will be the best chance that the original shareholders and staff have of making the best of what was truly a bad situation.

We wish them well.