Airline Affairs

The decision comes after a sometimes bitter battle between Southern Cross Holdings and Sydney businessman Duke Minks’ investment company, Austin. Minks’ bid was backed by the Nauru govemment and was a cash offer rather than Southern Cross’s public float and debt-for- equity proposal. The Ausfin proposal was backed by former Compass boss, Bryan Grey.

Southern Cross has predicted a $7. 5m loss in the new Compass’s first year of operations but says it will record a $12. 2m profit in its second year and a $16. 7m profit in its third. Initially, Compass will operate five MD-83 aircraft between Cairns, Townsville, Brisbane, Sydney, Melbourne and Adelaide. Compass estimates that during its first year alone lease costs on its 142 seat MD-83s will be $16. 5m less than they were with the old Compass. On an annualised basis with seven aircraft the saving increases to $40m.

The new airline will offer two classes, business (called Executive) and economy (Compass Class). Business class will fea- ture four abreast seating at a 36in pitch and economy will be five abreast (342) at 32in. A major benefit of the MD-80 design is that with a five abreast configuration the aircraft has to be at an 80% load factor for a centre seat to be sold. The aircraft is also more space efficient when configured with a four abreast (2+2) arrangement than the rival narrow bodies.

Fares will be set at 40% below the current standard unrestricted business class tariffs of Ansett and Australian while economy will be set at a similar discount. There will also be special off peak discounts and seven and 14 day advance purchase economy class discounts. An example of the new fares for peak time travel in Executive Class, Sydney/Melb- ourne one way is $159 against Ansett and Australian’s four abreast equivalent (First & Premier Classes) of $293 and the Ansett four abreast business class and Australian six abreast Club at $234 each.

The proposed off peak Executive and economy fares on this route would be $139 and $109 respectively while the 14 day advance purchase economy ticket would be $79 for peak and $50 for off peak travel. This compares with the present lowest advance purchase one way economy fare of $99 offered by Ansett, Eastwest and Australian.

Surprisingly the airline is basing its projections on a load factor of just 62% in the first year, 66% in year two and 67% in the third year. Year to date average load factors industry wide currently stand at nearly 80% whilst the 5. 7% market share that Compass is aiming for is considered as being of little significance to the existing carriers as growth in the past year alone has been almost 35% in RPK terms.

Staff numbers in the first year are projected at 570 with five aircraft and 678 with seven aircraft, a ratio of 114 and 97 employees per aircraft respectively. Most of these will be former Compass employees whilst holders of unused Compass tickets will be able to fly an equivalent sector on the new airline at no cost. The new Compass will also guarantee the value of prepaid tickets either via a trust fund or by insurance to ensure that passengers are at all times fully protected against the air- line’s failure. ”

The formal share offer opened on May 15 and was due to close on May 29. On offer are 100 million 50c shares with an over-subscription capability of a further 20 million. Thus potentially the float could raise a maximum of $60m though if it doesn’t meet expectations then the Queensland government has agreed to: underwrite the final $10m providing the offer has raised $40m in its own right. The new Compass plans to commence operations this July/August.

 Union of Unions:

Australia’s two flight attendants’ unions have decided to merge, creating the country’s largest single aviation union.

Members of the Australian Flight Attendants’ Association and the Australian International Cabin Crew Association voted by a margin of four to one to join forces to create the Flight Attendants’ Association of Australia. The new union will have some 7,000 members from Qantas, the major domestic airlines and regional operators.

 Australian Looks at Asia:

Australian Airlines is examining opportunities in the Asian market following the announcement of the government’s more liberal aviation policy.

The airline is looking at flying to places such as Thailand, Hong Kong, Singapore, Japan, Bali and Fiji and says that this might be achieved not by substantially expanding its fleet but by entering into cooperative agreements with existing carriers and sharing their aircraft and terminal space.

Australian is also reported to be examining the Tasman market although when the new aviation policy was announced, the airline’s managing director warned of the dangers of moving into the international marketplace.

Ansett Just in Front:

Ansett has maintained its lead in the domestic passenger market but Australian Airlines is closing, according to figures released by the Department of Transport and Communications.

In the March 1992 quarter, the Ansett Group carried 48. 6% of all passengers and Australian Airlines and its affiliates 45. 5%. A year ago, Ansett held a 7% lead in this area. The Ansett figure excludes East-west, which carried 5. 9% of passengers.

For the year ending March 31 1992, Ansett earned 46. 3% of the market, Australian 41. 0%, the now defunct Compass 7. 0% and Eastwest 5. 7%. Due to the influence of Compass in the 1991-92 year to March, Ansett, Australian and Eastwest all dropped market share while in the March 1992 quarter Ansett improved slightly, Eastwest dropped slightly and Australian gained 4. 6% compared to the same quarter in 1991.

Load factors meanwhile continue at incredibly high levels by world standards. For the March quarter Ansett Australia recorded 78. 9%, Australian a massive 84. 4%, Eastwest 66. 2%, Ansett Express 70%, Ansett WA 68. 7% and Australian Airlink 68. 2%. Obviously Express, EWA and Airlink all need to better balance capacity against uplift to enhance their long term bottom line.

For the year ended March 31 the average was; Ansett 77. 4%, Australian 80. 8%, Airlink 69. 7%, EWA 68. 7%, Express 66. 4%, Ansett WA 70% while Compass recorded 69. 8%. The industry average for the year ended March 31 was a very healthy 76. 9% against 71. 3% for the previous year. For the record, these figures are 10 to 15% higher than those experienced overseas.

The Right Stuff:

Kurt Herwald, the chairman of Stevens Aviation (a chain of aircraft service organisations in the southern USA) had a problem.

Herb Kelleher, the boss of Southwest Airlines, had in his opinion, pinched Stevens’ advertising slogan “Plane Smart” and slightly modified it to “Just Plane Smart”. Litigation loomed, and the lawyers eagerly began rubbing their hands in anticipation of an estimated $US500,000 boost in fees.

But Kelleher is known for his unconven- tional ways and his intense disliking for the American legal system and the way everyone loses except the lawyers. So he suggested a best of three arm wrestling bout to settle the issue. Herwald agreed and what became an increasingly good natured affair was on.

A wrestling ring in Dallas was used for the contest in late March (dubbed “Malice in Dallas”) which generated huge amounts of publicity in the weeks leading up to the event. On the big day there were cheerleaders, 1,500 Southwest employees and all sections of the media in attendance. Both men used ring-ins for the first two contests, which left the score one-all. For the third arm wrestle, Kelleher and Herwald faced each other. Kelleher appeared to have won but the referee disallowed his somewhat underhand tactics and ordered a replay. This time Herwald and Stevens Aviation emerged victorious.

The whole affair generated much good-will between the men (Stevens Aviation has subsequently allowed Southwest Airlines to continue using the slogan), both organisations gained an enormous amount of publicity, money was raised for charity, and best of all, the lawyers didn’t make a red cent. There is a lesson here for us all.

Thai Cuts in Australia:

Thai International has closed its Adelaide office and retrenched senior staff in Sydney and Brisbane in an attempt to restore its Australian operations to profitability after losses last year and more of the same expected in 1992.

Thai’s routes to the USA are also losing money and staff have recently been cut from there, although overall, the airline has reported its 27th consecutive annual profit and is in a strong financial position as it goes to the marketplace in preparation for privatisation.

Mtisaatc Not viable:

The continuation of air traffic control tower services at Mount Isa will cease if the recommendations of a preliminary draft report are accepted by the CAA. The report concludes that the cost of maintaining an ATC tower at Mount Isa is not economically justified, based on a cost and safety assessment. Instead, alternate arrangements involving the mandatory carriage and use of a radio are likely to be introduced. The CAA says that similar arrangements are already successfully operating at other airports which have greater traffic than Mount Isa

Caa House Sale:

The Civil Aviation Authority is to sell some 300 houses it owns around Australia. The houses are estimated to be worth about $25m. The homes have been used for staff accommodation and were mostly built before and during World War II. With its reorganisation and staff reductions, the CAA no longer needs the houses which are considered to be below the standard required anyway. Some have already been purchased by CAA staff who were given first option on the properties. Where staff accommodation is still required, newer homes will be leased.

 American Tidies up Fares Structure:

American Airlines has introduced a radical overhaul of the fare structure on its North American routes designed to simplify and introduce some discipline into what is generally a very messy system.

Special deals with corporations and the military have been scrubbed and the numerous possible fare permutations have been reduced to just four-first class, economy class (which has now been discounted by a straight 38%) and two discount fares which require purchase of tickets either seven or 21 days in advance of travel. American says its normal listing of some 500,000 individual fares for its network will be reduced to just 70,000 under the new scheme and $US25m will be saved annually.

Singapore Airlines to NYC:

After years of trying, Singapore Airlines (SIA) will begin services to New York next month using Boeing 747-400s.

The airline will operate six services per week to John F Kennedy International Airport, three flying from Singapore via Frankfurt and the remainder via Brussels. The new service is particularly important to the airline due to its decision to suspend services to Toronto next month following objections to its continuation from the Canadian Government.

Canada served notice of the termination of the Canada-Singapore Air Services Agreement in August last year, effectively denying SIA access to the transatlantic market following Air Canada’s decision to withdraw its service to Singapore.

AAA Action Delayed:

Wind-up proceedings against aspiring domestic airline entrant AAA Airlines have been adjourned until later this month in the NSW Supreme Court pending the negotiation of a financial deal aimed at getting the company going and giving creditors – who are owed about $4m-a chance to recover some of their losses. AAA was placed in provisional liquidation in March following an application from director and shareholder Marc de Stoop.

Qantas to Tassie?:

Qantas is considering resuming flights to Tasmania as a result of the government’s new aviation policy. A working party has been established to examine the feasibility of the idea, which is enthusiastically supported by the Tasmanian government.

Continental Keeps Air Micronesia:

Continental Airlines has reversed an earlier decision to sell its 30% stake in Marianas based Air Micronesia after an interested consortium requested a lowering of the $US290m asking price.

Operating under Chapter 11 bankruptcy protection, Continental’s planned sale of the Pacific airline was intended to raise much needed cash, but it will now use its holding as collateral for loans. Under its planned reorganisation, Continental is offering a ‘shares for debt’ deal with unsecured creditors which would see SUS4. 1bn of the airline’s $US5. 8bn debt eliminated.

Another bankrupt US carrier, America West, is proposing a similar reorganisation in its attempt to recover in combination with new investment.

Tourism Up:

Australian tourism received a useful boost in February this year when 238,000 short term visitors came to our shores, a 25% increase on the same month in 1991.

Of those, 62% were on holidays, 21% were on business and 17% were visiting relatives. Much of the increase came as a result of direct flights between Taiwan and Australia (more than doubled) whilst the number of visitors from Korea and Hong Kong has also substantially increased. Visitors from the traditional markets. (Japan, Britain and the USA) also increased by 48%, 16% and 15%, respectively.

It is also thought that the recent violence in the USA, particularly in the near to Asia markets such as California will greatly assist Australia in attracting more tourists as many perceive the US as too violent a destination.

Southern Australia Airlines has received its second Dash 8 airliner, which has been put into service on the Melbourne to Mildura route, replacing the Shorts 360. The second Dash 8 complements the first, which is largely operated between Melbourne and Tasmania, Southern Australia having taken over these routes from Eastern. (Rob Finlayson)

Garuda Rationalises:

McDonnell Douglas has suffered from Garuda Indonesia’s fleet rationalisation plans.

The airline’s planned purchase of six MD-11s has been cancelled and other types have also had their orders reduced. By 1998 the airline will be equipped with eight Airbus A330s (one less than originally announced), 16 A300-600s, 12 Boeing 737-300s (20 was the original figure) and nine Boeing 747-400s. The latter is the only type to have its numbers increased, six being the earlier number.

Ski Slopes Express:

New Zealand’s Mount Cook Line is offering Australian skiers a new service this winter, enabling them same day flights from Australia to Queenstown in the South Island. Until now, passengers arriving at Christ-church late at night have had to overnight there before departing for the ski fields the next day. The airline is installing advanced lighting and navigation equipment at the airport which is set amongst hills, valleys and very tall mountains, making approaches under some circumstances difficult if not impossible, particularly at night or in marginal weather conditions.

Ana Sets Targets:

Japan’s All Nippon Airways has set itself some stiff targets following the release of its new five year business plan.

Among its aims are an annual 20% increase in international traffic, annual growth (in seat kilometres) of about 6% on its domestic routes and expansion of its fleet to 122 aircraft by 1995. ANA recently obtained a 13. 5% stake in the Abacus Asian airlines computerised reservations system and its charter subsidiary, World Air Network, will this month begin flights from some smaller Japanese cities to destinations in the Asia-Pacific market, including Cairns.

 Freddie’s Back!:

Sir Freddie Laker, the pioneer of cheap air fares and former head of the long defunct Laker Airways, is back in the airline business.

His new company, Laker Airways (Bahamas) Ltd, has stitched up a deal with “Tiny” Rowland’s Lonrho Group to fly half a million passengers a year to the Princess Hotel and casino resort in the Bahamas. The contract is worth $A21m.

Thai Govt Keeps Control:

Thai Airways International is to be partially privatised this month with shares being sold on the Bangkok stock exchange, but the airline will remain firmly under government control.

Previously owned entirely by the Thai government, the initial shares issue covers only 7. 6% of the total stock and further issues over the next year will probably see about 30% of the airline’s ownership going into private hands. The new situation is not expected to result in any significant management or structural changes.

The initial offer of 40 million shares was heavily oversubscribed and allocation will now be carried out by computer selection.

 Us Airlines’ Fiscal Mess:

A review of the financial situation of the major US airlines has shown a mass of debt and overall losses (of all US operators) amounting to a staggering SUS60bn over the past 15 months. These losses cancel out all the profits generated during the 67 year history of US scheduled airline. services.

The debt to equity ratio of the six airlines surveyed (American, Continental, Delta, Northwest, United and USAir) is a telling statistic. As of September 1991, these airlines between them had $US18. 5bn in long term debt (including aircraft leases) and capital losses as opposed to just $ÚS8. 6bn in shareholders’ equity, an average debt/equity ratio of 2. 14 to 1. In 1987 the same airlines had an almost identical shareholders’ equity figure but a debt of only $US8. 2bn, leaving a debt/equity ratio of 0. 95 to 1. Continental and Northwest between them account for most of the slip. In 1987 Continental’s debt/equity ratio was 5. 7 to 1 but since then its debt has increased by 54% to $US3. 5bn and its shareholders’ equity has declined to a negative figure (-$US2. 07m). Northwest’s debt/equity ratio stood at 29 to l last year compared withjust 0. 38 in 1987. Since then, its debt has increased fold to $US3. 7bn while its shareholders’ equity has declined from $US1. 99bn to just $US130m. American Airlines, too, has had its debt/equity ratio worsen since 1987. Then it was 1. 07 to 1 ($US2. 42bn/ $US2. 25bn) andin 1991 it had increased to 1 . 4 to 1 based on debt of $US5. 5bn and equity of $US3. 9bn. The other three have a debt/equity ratio better than 1 to 1 , but in the case of Delta and United, only just. In United’s case there has been an improvement from 1. 17 to 0. 98 to 1 while Delta’s ratio declined from 0. 52 in 1987 to 0. 97 last year. USAir has the best ratio (0. 65 to 1 ) although even this is double the 1987 figure.

Qantas Privatisation Moves Ahead:

The partial privatisation of Qantas is now moving ahead rapidly andit is possible that the airline’s shares maybe listed on the Sydney Stock Exchange as early as October this year, according to CEO John Ward. Qantas staff around the world should have the opportunity to purchase shares by the end of the year and the plan which will enable them to do so is now being finalised. Mr Ward has also signalled Qantas’ intention to buy a “significant shareholding” in one of the major Australian domestic airlines [Australian Airlines] to give it the domestic feed itneeds, although he has warned that the decision to allow the domestics to operate internationally could be a problem if they are allowed to “take a disproportionate share of the growth opportunities on the more profitable routes”. For Australian Aviation’s view on matters concerning the privatisation of Qantas, see Reece on page 4 of this issue.