Interview – Graeme McMahon

Q: Graeme, as another financial year slips into history how do you feel ATI has fared, will 93/94 be more profitable than the previous year and what do you see for the year ahead?

A: Yes, 93/94 could certainly be put down as a successful year for the Ansett Group. We had improved our performance in this financial period over the previous financial year and we are currently trading with a strong market share with several opinion polls confirming us as being the foremost airline in the country. Obviously that’s very encouraging and from the non-aviation operations we have been able to successfully consolidate their business this year. Consequently there has been a lot of effort aimed at our various companies such as Hayman Island and so forth to make sure they are improving. So the result for ATI this year could be marked down as being quite a successful one.

Q: Given that two years ago you had excellent uplift but were losing money and today you make money on basically the same load factors, how much has the full fare business market improved over the past twelve months?

A: Well, I think the first thing that should be said is that going back a couple of years ago we still had the madness of the original Compass and the flow on from it. Anyone who knows anything about aviation will recall some of the stupidity that went on with people offering buy one and get two free and those sorts of things. It took a while to get fare structures back into what we consider to be a sensible order. I say that by world aviation standards not just Ansett’s or Australia’s standards. The fare structures that have been put in place over time were put in place in order to try to ensure that the very deep discounts that have come about as a result of the Federal Government’s aviation policy will continue to be available to the general public. That took some time to do and today we have a fare structure which ranges down from the quality of first class, business class and so forth to discounts at the back of the cabin that are as deep today as they were in the middle of the Compass era. We think today’s structure is the most sensible one we have ever had in place. Our ability to get our overall revenue up was the target not for just this year and we consequently have worked hard to maximise our overall revenue. We now fly our aircraft much more and we have taken the opportunity to fill our seats even if discounts are not immediately taken and its the performance of our total revenues that has really allowed the company to be more successful than what it previously was. If you measure actual yields, our yields are still well down on what they were back in the regulated era but our total revenues are significantly up.

Q: What proportion of your traffic is now split between full fare and deep discount?

A: Well, we don’t publish that as a detailed figure but let me say that there has been a comeback in the full fare business market and we are seeing today a resurgence of that type of traffic as a result of the economy of the country starting to improve and I think that it is really only just beginning.

Q: What proportion of your total traffic is now inbound tourism related, ie: non-Australian nationals and how much has this increased over the past few years?

A: Well the amount of traffic our airline carries has changed quite considerably as a result of the polarisation that has occurred in the international market. As you are aware we have previously had a close association with Qantas while Australian Airlines at the time had a close association with a whole range of international carriers. As a result of a change in Government policy and the acquisition by Qantas of Australian, all the major international carriers have sort of realigned themselves very much with us on one side and Qantas and Australian on the other, and so the figures cannot be compared on an apples to apples basis from previous years to today. But certainly the amount of inbound traffic we are getting today is considerably more than what we had in the days of our association with Qantas and we are grateful for that.

Q: There’s been a trend upwards recently in the cost of a premium fare ticket, would Ansett ever lead a business class discount initiative aimed perhaps at your large frequent flyer membership?

A: Well the frequent flyers are of course already able to get discounts in the various cabins in the aircraft. Secondly, we do from time to time have special promotions for frequent flyers which enables people to get bonus points if they travel at a particular time on a particular route. So we are already using the availability of that sort of thinking to promote our forward cabins. The amount of people in the front of the aeroplanes is growing, albeit slowly. There has certainly been a change over the years in the number of first class passengers, there’s no doubt about that. Part of that was the economy I believe, part of it though was also the fact that the business class product that we provide is so exceptional by world standards that a lot of people have offered to travel in business class instead of first class. If you look at the type of business class that Australian Airlines had launched years ago when it first came out, it was six abreast with a limited amount of additional leg room. When you go to Europe, business class is six across. Ansett introduced its business class as four abreast which is now standard in Australia with pretty exceptional catering standards and so forth. We think this has probably done our own first class some harm.

Q: Next month the airline realises its long cherished dream of long haul international operations. Your use of depreciated 747-300s against new and ultra expensive -400s of identical capacity and relatively similar performance is a smart move. How much will you save each month by taking this course of action?

A: Clearly it was economically beneficial for us to take the 747-300 aircraft than to go and acquire brand new Boeing 747-400s. The deal that we cut with Singapore Airlines to use these aircraft is not public information and therefore I am not in a position to put figures on the table. But it is certainly financially beneficial to us and consequently the product that we can produce by using these aircraft will be ideally the best available on the routes that we are flying.

Q: If I was flying to Hong Kong or Japan, with all the PR hype stripped away, just why would I want to fly with Ansett rather than the competition?

A: Well firstly I think we are today seen as the best airline domestically in this country and in fact we have just won another award as the best airline. I think this shows clearly the recognition that 11,000 people have been working very hard to try to provide that product. We want to now transpose the success of that product domestically onto the international arena. We know its a different ballgame, we know very much that its a different style of service, that its a multi-hour journey where the flight attendants and staff have to pay attention to a whole range of other things that aren’t necessarily emphasised domestically. We’ve spent a lot of time researching the market, we’ve spent a lot of time devising the product we are going to offer and I am comfortable that once they can experience that product they will enjoy it and want to travel with us again. We don’t intend to be price leaders, we will be price competitors, but certainly as far as the product is concerned we plan to stand out for all the right reasons.

Q: Will your next overseas port of call be Seoul?

A: We haven’t made that decision at this point in time. We have certain traffic rights which we have been able to obtain through the IASC (International Air Services Commission), there are also other traffic rights coming up from time to time and we are looking at each and every one of those as they arise. We do not want to bite off more than we can chew, we don’t want to step too deeply into the water and then find that we have fumbled, and as a result we will not make a call on the next route we are going to fly until such time as we are truly happy with that final destination. However, we have determined that Hong Kong and Japan are the ones we should initiate full 747 style international services on. We are determined to make a success of that and all of our efforts will be going to achieve that.

Q: Is Bali working?

A: Yes. Bali is a route which we are very pleased with for several reasons. Firstly, it enabled us to hone the skills that are necessary to become an international airline, albeit in that case operating on the back of our domestic fleet. However, it certainly did enable us to retrain our cabin crews and pilots and so forth in the various skills that have to be applied in the international arena that are not applied domestically. That set us up very well to go onto the routes that we are about to launch. The second thing about Bali has been the actual success of the product we are offering. Again, we went carefully into budgets and we suited those budgets to the number of passengers we can carry on all four routes and as you would be aware some of those routes we actually put extra flights on. Instead of weekly flights we are now offering twice weekly services and certainly during the holiday peaks we are forced to put additional flights on from the main capital cities, and so forth in order to carry the demand, which is great.

Q: What about China? Australia desperately needs a daily non-stop direct feed into Beijing. Will Ansett challenge Qantas in this long term potentially lucrative market or will you use your capacity to Hong Kong with feed into the PRC via Dragonair or similar as your entree to the potentially huge China market?

A: We very clearly had previously abstained from China for a number of reasons. That application to the IASC was made by the parties involved and awarded and so forth, and it’s now pretty much history as to what happened there. If the China bilateral is reopened for application then our people would be looking very carefully at that time, but I guess I should refer to my previous answer as regards to the decision to emphasise Japan and Hong Kong as being the two prime routes that we want to succeed on.

Kansai

Q: Kansai. There seems to be an open revolt amongst operators regarding the incredibly high landing charges being applied to that port. What are Ansett’s views on this?

A: It’s pure fact that to build that airport was a very expensive proposition and very clearly there is a need for the people who have invested their money to recover that expense over a period of time. There has been some discussion between the airline operators and the airport operators and that has been directed by the Japan based Board of Airline Representatives (BOAR) on behalf of the various airlines and of course we are one of those airlines. At the end of the day you have to cut your costs to the conditions that prevail and if you want to fly there you have to end up paying whatever that landing fee is finally determined to be. It is no use getting excited about it, if we don’t like it we needn’t fly in there, so whilst we would provide a service and get the BOAR to get the charges down to the best rates that might be available, at the end of the day it’s our call as to whether we pay them or don’t. Right now we are proceeding down the track that we will fly there.

Q: Closer to home. Ansett operates eight different aircraft types (including the 747) in an environment that could be catered for adequately with half this number. Are there any long term plans to streamline the fleet to reduce engineering, maintenance and crewing costs of the overall fleet? Some knowledgeable observers have stated that this must be costing you upwards of an extra $100-$150m per year in unnecessary overheads?

A: You need to look at the makeup of the Ansett route structure and appreciate the view that the F28s and BAe 146s were acquired for specific regional routes which were so thin they couldn’t support the bigger jets. You also need to review the position of history that they were placed with companies which in those days were quite separate and distinct entities from Ansett Australia. You then get to a point where Ansett Australia, the prime trunk route operator, is flying 767s, 737s, A320s and 727s. Of these the 727s are earmarked to go in the near future, so we would be down to three aircraft types as our prime domestic fleet in Australia. Qantas says it has rationalised to just two types (737 & 767) though it has now decided to keep its four A300s and if you include the smaller aircraft, Dash 8s, Jetstreams, 146s and even Cessnas, in its regionals then they are no better off than we are and for all the same reasons. If we had the chance to start from scratch and build a fleet from nothing, then clearly we wouldn’t have the number of aircraft types we have today, but we haven’t been able to do that for historical reasons. The spares are here, the simulators are here, pilots and engineers are all trained on the aircraft and the additional cost of carrying that range of aircraft types is nowhere near as bad as what people will have you believe.

Q: Your A320s give you an excellent payload/range capability on the Tasman, primarily linking the unserviced ports such as Canberra, Coolangatta, Cairns, Hamilton Island and even Hobart and Adelaide with New Zealand. I know you seem uninspired by this market and certainly Qantas won’t bother doing anything till somebody else does but what will be your reaction if Air New Zealand ups the ante later this year with a broad range of primary and secondary port services into Australia?

A: I have not seen anything or read anything that would indicate to me that they were going to commence services from New Zealand to a whole range of additional ports in Australia. If they do, then good luck to them. We are very much concentrating on our own business, not on what anybody else is doing. In our case our prime aim is to continue to operate the domestic airline as successfully as we have been trying to do in the past, and to continue to build and grow. Our second aim is to start international services as I already said, and New Zealand is an area that at the moment we have put behind us. We are not at the moment planning to mix up the launch to Hong Kong and Japan just for the same reasons as we didn’t rush into China. We will obviously be continuing to look at the New Zealand options but right now we have been concentrating on Hong Kong and Japan. If Air New Zealand entered the local market we would obviously have to see what we might or might not do, but since we aren’t operating there at the present time, it’s not going to hurt us. Qantas is the one that will be exposed.

Q: There have been whispers within the industry for a long time of the possibility of a closer relationship forming between Ansett and Air New Zealand. Despite massive synergies here, nothing seems to really happen. Is in fact all this long term speculation just that or are you both merely bashful suitors?

A: Well, over a period of time I have seen speculation in the press that conversations between Ansett and a whole range of airlines ranging from Cathay, All Nippon, British Airways, United, even Royal Brunei and so forth have taken place. The fact of life is that we have got commercial arrangements in place with a wide range of carriers. We do have some commercial agreements in place with Air New Zealand today and those arrangements will continue to operate which are beneficial to both parties. As far as any closer liaison between the two organisations is concerned, particularly in relation to shareholding, that’s really something for the owners of the company to be involved in and at this point in time I am not aware of any negotiations that might be underway in that regard.

Q: Ansett New Zealand has never turned a profit yet continues to be supported. How long can this continue or is a profitable future possible for the carrier in such a small domestic market even without a trans-Tasman feed from its big brother?

A: People have conjectured for some time that the trans-Tasman link would be the miracle cure to fix Ansett NZ, but let me tell you it isn’t. Ansett New Zealand is an airline that was put in place in NZ at the request of the New Zealanders. We were asked to go to NZ, we didn’t volunteer to go there. We were put in there to try to save the jobs of nearly a thousand people who were being tipped out and that’s our answer to the problem in the first place of bailing out the small Newman airline. The airline has now been there for some years. It has improved its performance year on year since the day it first started and in the last twelve months we have seen significant improvement again, and we are looking forward to a fairly healthy 1994/95 year and whilst its been a long day, there is no doubt right now the airline is heading in the right direction. It still has some way to go but all the signs are there that it will succeed.

Q: Almost all your regional feeders are now wearing your corporate colours, would there ever be a situation where you would choose to buy outright any operator that might consider defecting to your competitor?

A: No, we have a family of airlines right now which comprise some that are wholly owned and some that fly with us on purely a commercial basis. Those airlines that are not wholly owned have come to us because they have seen some merit in affiliation with Ansett, and I would hope that the relationships that are established will be so strong as to ensure that there is no thought on their part to go somewhere else. Certainly we have no desire to go into smaller aircraft than those we operate today.

Q: The frequent flyer plans have certainly become significantly powerful marketing tools and from our perspective been successful at harnessing flyer loyalty. Has the scheme performed as well as you first thought it would and is it a profitable long term exercise for those involved?

A: The frequent flyer schemes are now a fact of life. They started in the United States and they’ve spread to other parts of the world and Europe, even through Asia and it was inevitable that sooner or later they were going to come to Australia. They came here at a time when there was a battle for market share going on at the time between three carriers as it turns out, and we moved to put a frequent flyer scheme in place because we felt at the time that it was advantageous for us to reward the loyalty between our customers and the airline. We did it at a time when we had a majority market share and for us it made sense. Very quickly, Australian Airlines followed suit and those trends continue to prevail today. The plans have been successful as far as we are concerned and not only are they successful in the domestic arena but they are certainly proving to be absolutely essential in the relationships that exist between Ansett and the various international carriers who are our partners in the scheme. In order for each of those airlines to be truly competitive with the major carriers carrying the powers of the Qantas organisation, then clearly the affiliation between us and those international carriers is really very strong and we look forward to continuing to enhance the scheme.

Q: It’s 2004. Sounds a long way off but of course it isn’t. Where do you see Ansett being at that time?

A: I don’t know about Ansett, but I will be retired, I can tell you that! I would hope that we will still see Ansett continuing as a very, very strong operator in the domestic market. I would hope that we would continue to hold the market share that we have today and continue to be seen as the premier airline in this country. I would also like to believe that the international route structures which we would have embarked upon through that ten year period would have seen us succeed. I think there is a probability that other carriers will emerge on the domestic market over the period. I don’t think you will see another player coming and trying to do what Compass did but I do think there will be an emergence of the carriers from the bottom end of the range. On aircraft types, we will of course be getting additional A320s though the final five of our present order could be any Airbus product later this decade. The 737 will be with us for a long time and of course the 727s would be long gone, as would the F28s by that stage.

Competition

I think there is a probability that other carriers will emerge on the domestic market over the period. I don’t think you will see another player coming and trying to do what Compass did but I do think there will be an emergence of the carriers from the bottom end of the range. As they increase the size of their fleets, suddenly they will find themselves with aircraft capable of competitively flying over the trunk routes. They will start to grow and provide additional competition but other than that, I think that essentially you will see more of the same. I think you will see continuing growth domestically. Australia is a market which is still not really achieving near its full potential with the number of passengers who are available to travel. Look at the amount of travel per capita that is recorded in North America, Australia is only just catching up in that area. With the Olympics coming I think there will be continuing growth in the domestic arena. I think you will see Australia continuing to emerge as a wonderful international destination, you will see more and more international tourists coming to this country and tourism generally has the potential to become one of the great export industries of this country.

Q: Finally, you started with this company back in the fifties as a mailboy. You must feel proud to have risen to the position you now hold in what is truly one of the world’s great airlines. In all those years, what was the single greatest, and worst, thing that happened to the airline?

A: The greatest thing that happened to the aviation industry in this country was the advent of jet aircraft. Looking back, that was undoubtedly the real trigger to the masses starting to travel. It cut travel time down to such a small amount that people realised that distance was no longer such an insurmountable thing in this country. The arrival of the Boeing 727-100 back in the sixties is probably a milestone in my view. Other than that, aircraft got faster by only a small margin or bigger by a dozen or so seats, but there was that single step up to jet aircraft that I think was absolutely marvellous. Obviously deregulation sits in there somewhere too, because that was a huge milestone and now allows us to operate with an operational and marketing flexibility undreamt of just a few years ago. The single worst thing? Without doubt the pilots’ dispute.