Airline Affairs

Cairns recorded a domestic passenger traffic increase of 2. 9% for the whole of 1992 and a jump of no less than 62% the previous year, that increase being attributed largely to the original Compass operating there for nine months of the year.

Remembering the Queensland government’s involvement in Compass II, it’s interesting to note recent remarks by the deputy leader of the Queensland opposition, who has stated: “It’s a great pity the government didn’t make sure that it gave at least a fair share of the $30m public servants spend on air travel to Compass”. In reality, very few State public servants flew the new carrier despite assurances from Premier Goss earlier in 1992 that they would.

The Compass collapse has gravely affected the airline’s employees including 120 flight attendants who may have little chance of finding other airline jobs. Then there were the ten pilots attending a training course in Sweden who were ordered home, the two pilots who arrived in the USA to collect Compass’ sixth MD-80 only to find their airline had gone out of business and the 17 flight attendants who had completed their courses at the Compass training centre at Tullamarine whose graduation ceremony was cancelled. . .

 Qantas Consolidates:

Following the formalisation of its association with British Airways, its merger with Australian Airlines and its forthcoming public float, the Qantas Group (Qantas and Australian combined) is now entering a period of consolidation during which it aims to reinforce its position in the top echelon of international airlines.

The airline will continue to focus on customer service but as a result of the recent Coopers and Lybrand Merger Review it will pay increasing attention achieving better yields and lower costs, the latter including a reduction in staff of some 1835 and a lower- ing of non labour costs by $63m annually. The proposed staff reductions will save $95m each year while other savings should amount to $158m. Part of those is the sale of the groups Airbus A300 aircraft.

The group’s marketing plans include the aim to increase its current market share of 40% outboundand41% inbound of the C&L recommendations should see it among the world’s top ten airlines in terms of staff productivity per available tonne kilometres, available seat kilometres and revenue passenger kilome tres. However, in order to maintain this position, Qantas feels it will have to improve productivity by 5% per annum.

 Klm/Northwest Codeshare:

Northwest Airlines and KLM Royal Dutch Airlines (which owns 20% of the US carrier) have expanded their codesharing services to 32 Northwest destinations in North America and 33 KLM destinations in Europe, the Middle East and Africa.

These are in addition to the two carriers’ jointly operated flights between their hubs at Amsterdam, Detroit, Minneapolis/St Paul and Boston and existing codeshare services to Europe from Minneapolis, Dallas, New Orleans, Denver and Seattle.

The new arrangement covers most US/ Europe/Middle East and African possibilities, offering obvious advantages to travellers including flexibility and the convenience of buying a single ticket to cover a given Journey. The deal has resulted in effectively the world’s third largest airline system serving 380 cities in 81 countries and Northwest describes it as being the first ‘global airline’ alliance.

Is Business Improving?:

Data from the DoTC’s Top 20 route charts (printed in AA each issue) reveals that both January and February, traditionally soft months, have turned the trend of the past half year and returned Australian aviation to growth.

Both months recorded improvements in the total number of RPKs logged whilst load factor was just one percentage point below that of the average for all of 1992 at 75. 9%.

Traffic had been in decline on a month on month basis since last July. A disturbing trend to say the least when considered that it is only in the past three months that both Australian and Ansett have gained some level of day to day profitability. This has largely been brought about by an increase, albeit small, in full fare business traffic, better yield management and scheduling and the effect of previously taken decisions to reduce staffing and introduce various levels of workplace reforms aimed at enhancing productivity.

For the period ahead things should hopefully improve. The disruption of a federal election is now behind us and irrespective of who won it was generally felt by most financial analysts that Australia (and US/ Europe) was beginning to emerge from the recession of the past three years.

Both Ansett and Australian will also benefit from the demise of Compass. The fledgling airline provided around 14% of total capacity on the routes it flew for a market share of between 6 and 9% depending upon sector. This will now be spread fairly evenly between the two majors which should end up providing them with increases of around 4 to 5% each in traffic on the sectors previously served by Compass.

In retrospect, it that Compass should have initiated services at a rare time when the domestic airline industry was actually in decline. It is worth noting that the drivers behind Southern Cross were initially ready to move back in 1988/89 to initiate services from late 1991 (as did Bryan Grey), however held off till the economy improved. The opportunity to acquire the bones of Compass I of course accelerated their own carefully thought out plan to launch Southern Cross Airlines and the rest is history.

A year later, more money in the cashbox and perhaps a little more control (an understatement?) of where the money went might have seen the airline survive to fly on to better times.

 Qantas to Vietnam:

Qantas is planning to start a weekly scheduled service to Vietnam’s Ho Chi Minh City from October this year, complementing its existing charter flights.

The flights will also go to Bangkok and the airline expects to increase fight frequency on the Thailand/Vietnam route within three years if the anticipated traffic levels are achieved. Qantas is still investigating whether or not it will fly to Cambodia and Laos.

Threat to Travel Agents:

Travel agents could be threatened if frequent flyer schemes take off in Australia, according to the managing director of Concorde International, Les Cassar.

Speaking to a travel agents’ conference, Mr Cassar pointed out the American experience where free and tradable airline tickets earned through frequent flyer programmes were advertised for sale in large numbers in the daily newspapers at around 25% of the normal price. He said the ads constitute direct competition to travel agents on point to point sales and hopes the airlines will prevent this situation developing in Australia. At the moment, US airlines’ free tickets cannot be resold in Australia but can be in their home country, a court ruling they may be traded.

The airlines oppose this as it makes the tickets more of a contingent liability as well as eroding the concept of customer loyalty, the idea behind introducing frequent flyer schemes in the first place.

 More Passengers Needed:

Even though the world’s airlines recorded an 11% increase in passenger numbers in January this year, that kind of growth needs to be sustained or even improved upon in order to return operators to profitability.

Figures released by the International Air Transport Association (IATA) show that even with that substantial increase in passengers came an equivalent increase in available capacity, the latter cancelling out the positive aspects of the former. According to IATA, it is not possible for airlines to increase yields and restore profitability un- less growth outstrips capacity for a sustained period.

Meanwhile, America’s Air Transport Association claims that an increase of just $A20 in the price of an average US domestic ticket would see the airlines back in the black. This is similar to the situation experienced in Australia during 1991/92 where the extra revenue required per passenger on a Sydney/Melbourne type sector was said to be in the region of $20. Fortunately, increasing yield, reduced costs and sustained load factors in the mid seventies are slowly returning our airlines to profitability.

Glossing Over the Facts:

Evidence that consumers are making travel decisions on the basis of cheap one page advertising flyers rather than expensive glossy brochures has resulted in Ansett halving its mainstream range of brochures from 18 to nine and Australian Airlines reviewing its own situation with effect from next year.

Australian’s chief executive, John Schaap, has said the flyers associated with the airline’s Getaway Deals promotions generate considerably more business than the glossies and the airlines apparently object to ‘abuse’ of these brochures, tens of thousands of which are cut up each year for school assignments. The printing industry might, however, feel the glossies have an important place in the overall scheme of things!

Qantas/BA Formalise Partnership:

Qantas and British Airways became formal partners on March 10 this year with the presentation of a cheque for $665m from BA to the Australian government for a 25% interest in the “Flying Kangaroo”.

At the ceremony, BA’s chairman, Sir Colin Marshall, said the completion of the sale agreement with the Australian government marked the beginning of a strong relationship between the two airlines. He went onto say that BA would now work with the government and Qantas to achieve a successful float of the remaining 75% of the airline and emphasised that although BA’s 25% investment was a sizeable one, it was not controlling and the intention was to strengthen Qantas, not dominate it.

Three British Airways representatives will sit on the board of 12 directors under new chairman Gary Pemberton. John Ward was reappointed chief executive after the deal was concluded. All board decisions must be passed by a two thirds majority and BA does not have the right to nominate a chief executive or finance director, although it has the right of approval of the chairman, who must be an Australian.

Ansett/United Local Link:

The recently established alliance betweenAnsett and United Airlines may develop further if investigations into the local carrier flying a limited domestic network on behalf of the US airline bear fruit.

United is looking at leasing Ansett aircraft and crews to operate a shuttle link between international airports on the east coast of Australia, linking up with United flights from overseas. These Ansett flights would be exclusively for United passengers and the proposed arrangement is markedly different from the existing codesharing deal where United buys blocks of seats on regu lar Ansett services.

Airlines Examine Tax Situation:

Following the Australian Tax Office’s decision to tax frequent flyer benefits earned by individuals and fringe benefit tax when employers pay for scheme membership, Australia’s airlines are examining ways of reducing this tax exposure.

Ansett’s investigations centre around the transferable element of its own frequent flyer scheme and has discovered it may be possible to avoid tax penalties if benefits are neither cashable nor transferable. The ATO ruled that while the schemes’ benefits were not cashable they were transferable and were therefore assessable for tax “at the lowest cash price the taxpayer would normally have been charged by an arm’s length supplier”.

Another tax situation, that of the ATO wanting to impose fringe benefits tax on airline employees’ car parking at airports, has sparked some controversy. Described as “impossibly complicated” and “an administrative nightmare” by the Building Owners and Managers Association and others, the ATO has refuted claims by that organisation that the airlines will face a bill of at least $5m each year if the tax comes into force. The BOMA says that the total cost to all airport employers would be $30mper annum. A ruling on the matter is imminent.

Ansett Joins Singapore:

Ansett has added Singapore Airlines (SIA) to its growing list of international alliances following the signing of a major commercial agreement with the airline.

SIA will join Ansett’s frequent flyer programme which already has Cathay Pacific, United Airlines and All Nippon Airways participation. Other areas of cooperation will also be investigated including the sharing of catering and ground facilities plus business lounges and retail sales outlets.

SIA was at one stage considered to be a potential investor in Ansett but this is now considered unlikely.

 American Plans for Profit:

American Airlines’ parent company, AMR Corp, will introduce a new corporate plan designed to help the airline achieve profitability once again, covering aircraft operations, route structures and non airline businesses.

The basis of the plan is to make the airline better and stronger by withdrawing from unprofitable routes, rationalising the fleet and reducing costs. An attempt last year by American to push the US airline industry to a simpler fare structure failed, but there were some side benefits for the airline including gains in cost control, 10% better employee productivity and 4% greater aircraft utilisation. It is expected that American’s costs will be $US300m lower in 1993 than last year.

Capital spending to the value of $US8. 5bn has been cut or deferred (including fleet acquisitions), retirement of the labour in- tensive DC-10 fleet will be accelerated, the return of 25 A300s to Airbus is being considered and leases on about 65 Boeing 727s will not be renewed.

Operationally, American will work to achieve better yields from its fare structure, add services to its hubs at Dallas/Fort Worth, Miami and San Juan, develop services to the Caribbean, Europe and Central America as well as either cutting unprofitable routes or substituting American Eagle commuter services on them for the existing jet services.

American’s profitable non airline businesses – data processing, information, network management and consulting-will be expanded while underutilised capacity at some of its training facilities may be sold to outside interests.

BA/Usair Begin Codesharing:

British Airways will launch codesharing flights with USAir from this month following US Department of Transportation approval of the arrangement.

Flights from three US cities – Cleveland, Syracuse and Rochester-will be involved in the first phase of the arrangement, offering passengers through services to London via Philadelphia. Other cities could be added later. Designated US domestic flights will carry both BA and USAir codes and while these flights will be operated by US Air they will be presented in travel agent and airline reservation systems as British Airways flights.

After some initial problems had been sorted out, BA purchased a 24. 6% stake in USAir in January this year for $US300m with options to further increase its interest.

Air Pacific Expands:

Fiji’s Air Pacific plans to begin services on new international routes in 1994 following delivery of a Boeing 767-300ER in September of that year. A second example will follow in 1996 The airline intends operating from Fiji to Taiwan, Hong Kong, Los Angeles and Osaka while at the shorter range end of its operations, the introduction of the Boeing 737-500 on inter island routes has allowed the re-introduction of a Suva/Auckland service and a new Nadi/Christchurch sector. Air Pacific currently operates a 767-200ER, a 747-200 leased from Qantas and a 737-500.

 All nippon scraps first:

Japan’s All Nippon Airways has decided to remove first class from aircraft used on services to Australia.

The move is seen as a response to Japan’s recession, a situation which has prompted a discount battle among Japanese travel agents in an attempt to stimulate flagging sales. The airline has also reduced its daily services from Tokyo to Sydney to five per week and says there simply hasn’t been enough first class business to justify its retention. The Japanese recession is worrying for Australia’s tourist industry as Japan provides its single biggest source market.

Airlines ‘Glimmer of Hope’:

The US Air Transport Association has noted a ‘glimmer of hope’ for some airline recovery in 1993 following the release of January’s traffic figures.

Total revenue passenger kilometres (RPKS) were up by 6. 1% compared with the same month of 1992 and incorporates a 4. 1% increase in domestic RPKs and 11. 2% on international RPKs. Boardings increased by 2. 6% overall (most of it from international flights) and the average load factor grew marginally from 56% to 57%, mainly as a result of available capacity more closely matching traffic growth.

Grafton Gets Two Airlines:

Two airlines are now serving the NSW Clarence River town of Grafton, Oxley Airlines joining Eastern Australian.

Port Macquarie-based Oxley Airlines is flying daily services in and out of Grafton to several destinations. Two flights will fly to the Gold Coast and Brisbane, one to Port Macquarie and Newcastle and two to Armidale and Tamworth. In addition, there are daily flights to Lord Howe Island and two each day to Coffs Harbour and Lismore.

 Chinese Air Travel Demand up:

Since the massive reorganisation of airline services in China, when CAAC was dismantled and private carriers allowed to commence operations, the industry has seen rapid growth-too rapid in the eyes of some. In 1986, some 15 million revenue passenger kilometres (RPKS) were flown in China, a figure which had more than doubled by 1991 and which is increasing steadily. By late 1992 China had seven airlines which were previously components of CAAC and a further 17 which were not necessarily connected in any way with CAAC or its successors. It has been reported that another 10 started up at the end of the year.

The rapid growth has brought with it certain problems relating to safety, air traffic control, airports, facilities and general infrastructure. While these issues are all being addressed, a lack of aviation expertise is evident while experience is built up.

One success story has been Shanghai Airlines, a completely independent operation established in 1985 and 74% owned by the Shanghai municipal government and 20% by a local consortium. Shanghai began operations with three Boeing 707s and lost money for its first five years. It now operates three new Boeing 757s and in 1991 recorded a profit of $US2. 1m. Shanghai Airlines has expansion ambitions which include a fleet comprising eight 757s and 10 767s by the turn of the century.

Qantas Faces Debt Problem:

Terms and conditions associated with the Qantas float in October could leave the airline with the need to repay $1. 3bn in debt 30- 90 days later unless a refinancing package can be secured with its bankers.

The airline is confident this will be arranged, particularly if it can gain a strong long term credit rating from the international ratings agencies such as Moody’s. The airline will make submissions to Moody’s and S&P Australian ratings in an attempt to gain investment grade long and short term ratings.

The decision to list Qantas on US secondary sharemarkets later this year also means North American investors could buy up to 5% of the airline, while British, German, New Zealand and Asian interests will also be targeted by the underwriters to purchase a combined 5% shareholding. A similar percentage will be offered to Qantas staff and Australia’s major institutional investors and the public will be offered the remaining 60% of the airline.

Brisbane Freight Centre Cre- Ates Interest:

Seven major international transport and freight groups have expressed an interest in Brisbane Airport’s proposed Air Cargo Centre.

The Federal Airports Corporation (FAC) has received 32 registrations of interest from local and international companies for the Air Cargo Centre which will include express parcel and mail handling, valuable cargo, dangerous goods and a licenced warehouse among its facilities. The idea is to establish a self sufficient ‘cargo community’ within the airport offering a wide range of specialist cargo facilities.

Virgin/BA Battle Continues:

The battle between Virgin Atlantic and British Airways in the wake of the ‘dirty tricks” litigation continues, Virgin’s Richard Branson calling for UK aviation authorities to strip BA of rights to fly on one of its trans Atlantic routes.

Branson is attempting to gain a foothold on the lucrative London Heathrow/San Francisco route, all part of a general assault on BA as the two airlines attempt to negotiate an agreement which will finally settle the recent acrimony. Virgin objects to a ‘gagging’ clause in the draft agreement which says that should BA do “anything illegal to *Virgin again in the future, then Virgin cannot refer to any past evidence in future proceedings”. Virgin is ready to issue writs against BA and to start antitrust proceedings in the USA if agreement cannot be reached.

The London/San Francisco issue has some official blessing as Virgin has been given the go ahead by the British Civil Aviation Authority to challenge BA’s monopoly on that route. A hearing is set down for June, where Virgin will apply to replace BA on some of the San Francisco flights.

BA (which is naturally painted as the ‘bad boy’ in this issue by Virgin’s very astute publicity department) will “vigorously oppose” Virgin’s application. For its part, Virgin’s international expansion ambitions are being well served by the publicity generated by the battle with BA, and it might be suggested that keeping the issue in the headlines is to Virgin’s advantage.

Train Versus Plane:

Japan Airlines (JAL) and Japan Air System (JAS) are feeling the pinch in the form of competition from high speed Shinkansen bullet trains and have cut their scheduled services between Tokyo and Osaka as a result.

JAL has reduced its daily services between the two cities from seven to six, while JAS has halved its number of trips to just one. The train takes 2. 5 hours to travel between central Tokyo and central Osakacompared with more than three hours by plane. Hourly bullet train services have started, and Japan’s oldest air service (which has been profitable since 1923) is, if not under direct threat at the moment, at least on notice that alternatives such as the bullet train offer a viable alternative to flying.

Australian’s Sydney Expansion:

Australian Airlines has opened its $10m Sydney Airport domestic terminal extension which is designed to improve the flow of aircraft and passengers through the facility and to cope with expected growth.

The extension increases the number of aircraft gates available from eight to ten, six of which are capable of accepting widebody airliners. Aircraft regularly using the terminal range in size from BAe Jetstreams to Airbus A300s, while the alliance with Qantas is also seeing Boeing 767s being used on domestic routes.

Australian will also be able to reacquire the two gates vacated by defunct Compass. Currently, some 80,000 passengers use Australian’s Sydney terminal each week.

New Hong Kong Airport Delayed Again:

Hong Kong’s proposed new $US22bn Chep Lap Kok airport has suffered a third delay to one of its key components, the reclamation of 20 hectares (49 acres) of island on which the airport will be sited.

The delay has been partly caused by the various political disputes between Britain and China plus the fact that the latter is saying the airport and its associated railway and highway is too expensive.

The financing of the reclamation work is still to be sorted out and the awarding of tenders for the job has been delayed three times so far.

Pilots Volunteer Pay Cuts:

Delta Airlines has recently gift from its pilots in the form of a voluntary pay cut of 5%, sufficient to save the airline $US60m per annum.

The offer came from a large proportion of Delta’s pilots who volunteered to take the cut even as their union was touring facilities and conducting a survey on pilot attitudes towards a reduction.