Air New Zealand Coy on Australian Plans

Buying a stake in Ansett has often been mooted as a likely means for it to enter the Australian market. That would reduce local competitors from two to one, and put Air New Zealand on a more even footing with Qantas.

Analysts have advanced a range of sensible reasons why Air New Zealand might make this move. It would solve the problem of how to gain equal access to Australia’s domestic terminals. It would eliminate the need for Air New Zealand craft suitable for Australian domestic routes. It would turn airline has stemmed its losses and returned to profit. Ken Cowley, Ansett’s executive chairman, now claims, “there’s no pressure on us to do anything. ” Ansett has reportedly ruled out taking on new investors for at least 12 months, if ever now that profitability has returned.

Aside from buying an Ansett stake, another Air New Zealand option is to do nothing. It can simply ignore November and not exercise its new Australian rights. McCrea even hints at this possibility. “We’re interested in Australia, but want to be sure it would have satisfactory returns,” he says. He notes that point-to-point traffic is “pretty well served today,” and that the main reason Air New Zealand would enter Australia would be to “reinforce our position for inbound business. ” In other words, McCrea has little interest in carrying local passengers between Sydney and Brisbane. But he is very keen to fly a Sydney passenger to Brisbane to connect with an Air New Zealand flight to Asia, or to carry an Adelaide passenger to Sydney for a flight continuing to Auckland. In short, Air New Zealand wants to tap the Australian market to feed its international flights.

To be sure, if Air New Zealand flew these internal routes, it would compete with the local airlines for point-to-point traffic, perhaps even having to offer lower fares to do so. to acquire a whole fleet of air-

It just means we have to get out of bed earlier in the morning, work harder, be ahead of the market, and continue to keep our costs right.

Ansett from a formidable rival into an ally within Australia, end the possibility of competition from Ansett, and rid Air New Zealand of its pesky Ansett New Zealand rival, which has cost it millions on New Zealand routes.

James McCrea discounts most of these reasons for buying into Ansett. On the question of doing it to gain access to Australia’s terminals, he concedes, “That’s always a possibility, but not necessarily the only solution. ” Common user terminals, McCrea says, “could be fixed for the price of one aeroplane. That’s a pretty cheap option compared to making a huge investment in another airline. ” Whether Air New Zealand is prepared on its own to “fix” the access to Australia’s terminals is another matter, but it is clear that McCrea does not view a stake in Ansett as the way to do it.

McCrea is even more cool to the idea of buying an Ansett stake to dispense with Ansett New Zealand. “Why make a huge investment [in Ansett] to make a small improvement in New Zealand?” he asks. “You wouldn’t make that investment just to solve New Zealand. ” Whether Air New Zealand would make that investment for that reason combined with the others already mentioned is unclear. Indeed, McCrea’s suggestions about what he is not likely to do shed scant light on what he will do. The only point he clarifies is that Air New Zealand will not necessarily do what makes operational sense, but instead will take a hard look at the financial costs and benefits of every option. Buying control of Ansett may not even be an option anymore. Two years ago its parents, News Corporation and TNT, were anxious to find a third equity partner. But the “The cost of air travel within Australia is very high today,” McCrea notes. “The only thing that’s stopped competition in Australia is the entry barriers,” he says, referring to the former “dual airline policy backed by the restricted terminal situation. ” But doing nothing poses special risks for Air New Zealand. Qantas is on the way to becoming a more formidable rival. Once the transitions are complete, its takeover of Australian Airlines and equity alliance with British Airways will start making a difference. “I’ve given more than casual thought to the implications of British Airways-Qantas,” McCrea admits. Unless Air New Zealand undertakes major initiatives to assert itself, warns Robert Cain, policy and planning director at BDW Aviation Services, Air New Zealand could end up as a feeder airline for the Qantas-British Airways-Australian consortium.

Recognising such risks, Air New Zealand will probably reject the Do-Nothing choice. If it decides not to buy a stake in Ansett, or Ansett refuses to sell one, it could choose to enter the Australian market on its own.

That would confront the terminals issue head on. Repeat- edly, McCrea has stressed that Air New Zealand will not enter Australia unless it has “nondiscriminatory access” to Australia’s airport terminals. As he recently told Flight International, “In Australia, there’s a closed shop; if you can’t get the terminals, forget about the market. ” In its latest Federal budget, with the demise of Compass II Canberra shelved plans to spend $100 million on common user domestic terminals in Sydney, Melbourne, and Coolangatta. McCrea cites this as another example of Australia’s lack of commitment to the Single Aviation Market, a problem he sees as stemming from the difficulties at Qantas in completing privatisation. If Canberra is unwilling to open terminal access, presumably by buying back some of the interests it leased to Australia’s carriers, McCrea admits this “makes it a bit more difficult, but there are still ways of dealing with it. ” One way would be for Air New Zealand to negotiate directly with either Ansett or Qantas for airport gates. Their leases supposedly require them to make gates available to newcomers. But Air New Zealand clearly will not settle for the gates previously offered to Compass I and II, which means it may have to pay for better access. This is probably what McCrea had in mind when he estimated the cost of “fixing” this problem as the price of one aircraft.

Obviously, McCrea would rather see Canberra spend this money. If Wellington fails to convince Canberra to do that, the compromise might be for Air New Zealand to buy the gates initially with Canberra reimbursing it later.

Terminal access is only half the problem with domestic flights. The other half is aircraft. A credible presence will require Air New Zealand to operate a substantial fleet within Australia, even if its main goal is to feed international routes. Between them, Ansett and Qantas operate some 100 domestic jets. Air New Zealand would need several dozen to be a serious rival.

Yet, it currently has no spare aircraft. It subleased aircraft in the past several years, but has ended all those subleases except for one 747-200 committed to Air Pacific until July 1996. Air New Zealand’s fleet planning is tight, based on a conservative growth philosophy. “I’m willing to be caught short of aeroplanes rather than having too many,” McCrea says. “The prudent airlines of the world are the ones who grow carefully. It’s a mistake if you underestimate your needs in capacity, but it’s a major mistake if you even marginally overestimate those needs. The capital exposure will kill you. ” Air New Zealand’s fleet plans do not contemplate extra aircraft for Australian domestic routes. In view of the care the airline has taken in matching new aircraft deliveries to coincide with the end of leases, it is hard to imagine how it could turn these plans on their head and suddenly order 30 to 40 new aircraft. That would at least double the airline’s current fleet, and make a complete hash of its plans to acquire only ten aircraft over the next four years.

Theoretically, Air New Zealand could simply lease 30 aircraft. The airline has shown a willingness to make up other capacity shortfalls with short term operating leases, and the leasing market is in such distress that an airline with Air New Zealand’s strong balance sheet could negotiate favourable rates. Among the world’s top 50 airlines last year, Air New Zealand was one of only seven reporting a profit without reliance on aircraft sales. ANZ declared a net profit of $NZ88m for the first six months of 93/94, up by 44% on the same period last year. But it earned that profit through caution, not the kind of boldness – some might even say recklessness – required to lease 30 to 50 aircraft for purposes of launching overseas competition against two entrenched incumbents in their own country.

If Air New Zealand dared to make that move, it would start a blood bath that would make the Compass sagas look like picnics. Australia could not support a 30 to 50% surge in capacity. The inevitable fare wars would cause the eventual collapse of one of the three airlines unless Air New Zealand had second thoughts and withdrew. More likely, McCrea and his advisers have thought through this scenario and already rejected the option of entering Australia as a new domestic carrier.

That is also the view of Rodger Robertson, corporate planning director for Qantas, who predicts: “They won’t buy a big bag of aeroplanes to compete in a market where they’ve already seen two airlines fail. ” Thus, the only remaining choice is a marriage of convenience a significant commercial alliance between Ansett and Air New Zealand. It would bypass the expense of either an equity stake or a new fleet of aircraft flying around Australia, and it would avoid the inevitable fireworks over terminal access and fare wars.

Ansett and Air New Zealand would offer joint fares between any point served by Ansett in Australia and any point served by Air New Zealand overseas. They would agree on prorating those fares, and coordinate schedules so that passengers transferring from one airline to the other would have easy connections. Because Air New Zealand would have the right to operate the Australian sectors, Ansett’s flights might also be designated as Air New Zealand flights. The two could also code share on those overseas routes Ansett had authority to fly, such as Brisbane/Osaka and the trans Tasman. Whether Ansett New Zealand retired as part of such a pact might rest on the opinions of trade practice lawyers.

Such an alliance would satisfy Air New Zealand’s interest without most of the headaches in tapping the Australian market. “That could solve the problem,” McCrea says of a possible non-equity partnership with Ansett. In fact, the two airlines already have a commercial relationship. They interline passengers and baggage, and McCrea sees this arrangement growing. Indeed, he thinks closer ties with Ansett are “a natural move in the market” following the takeover of Australian Airlines by Qantas despite the latter’s 19. 9% ownership of Air New Zealand.

Alliances are uncharacteristic for Air New Zealand. “Our priority is less on alliances and more on developing a strong core to our regional operations,” McCrea insists. “Air New Zealand’s objective is to be one of the robust regional carriers who survive amidst half a dozen global airlines. It just means we have to get out of bed earlier in the morning. work harder, be ahead of the market, and continue to keep our costs right. ” In Australia, however, it also helps to have a mate.