Issue 110: September 1995

Though that’s a well known industry joke, you would be surprised at the number of otherwise intelligent people who simply do not get it. The truth is that nowadays the odds are dramatically stacked against any new entrant, certainly substantially more so than they were back in 1990 when the first Compass Airbus took to the air. Quite a lot has changed in the Australian aviation environment in those five years. Consider the following.

With two airlines having failed in a very public and emotive fashion it is most unlikely that any sane investor would rush to embrace the opportunity to do it all again. Surely, the local and international investment community must have enough brains to realise there is greater yield in a zillion other industries than airlines which characteristically ride on wafer thin margins and are subject to a mass of negative influences beyond their control and even well removed from their region of operation. The effect upon traffic everywhere during the Gulf War period, the numerous fuel shocks of the past quarter century and the effects of recession, high interest and inflation rates plus currency fluctuations and terrorism all are a burden that every airline, large and small, domestic and international must endure in its day to day fight for survival. In Australia, even Qantas found it difficult to attract the level of grassroots support from the general investment community that it would have back in say, 1988. It wasn’t Qantas investors were reticent about, it was the airline industry in which it trades that was the problem. Truth is, there is simply more yield in making sandwiches.

A Compass A300 on climbout. Getting an airline into the air is the easy part. The hard part comes in making it live a long and fruitful existence, something that sadly few achieve. The best way to achieve this is to begin operations with significant capital backing. Certainly an eight unit widebody fleet would realistically require a minimum of $400m to achieve this end. (Jim Thorn) Just consider recent history. Over the past few years IATA airlines have between them lost more than $30 billion. Australia’s airlines large and small have probably seen between $600m and $800m disappear since the beginning of the Pilots’ Dispute in 1989. It is only now that the international airline community, or at least some of it, is beginning to enjoy a little fiscal sunshine. Is it any wonder that airlines don’t make money, when they seem to continually spend much more time discounting themselves and their competitors out of existence rather than enhancing their yields and concentrating their efforts on developing profitable niche markets.

Between them, Ansett and Qantas nowadays have the local market sewn up. They both have an excellent range of discounted fares to attract the leisure and visiting friends and relatives (VFR) market whilst providing high standards of frequency and service to the full fare market, albeit at a price that obviously subsidises those at the back of the bus.

For the reasons mentioned in the previous paragraph, we don’t see how too many consumers will again trust their hard earned savings with advance purchase tickets with a new entrant. Travellers want to get to and from their destination economically, safely and in reasonable comfort, they don’t want to end up on the 6.30 news. Thousands of ordinary people ended up with worthless advance purchase air tickets on both Compass I and II while shareholders in both cases lost everything. The vast bulk of the Australian community would nowadays simply not trust their hard earned cash with anything other than a well known and long established airline. Like putting your savings in the bank, at least they know that their advance purchase ticket will get them the holiday they booked rather than it becoming just a worthless piece of paper as ultimately happened with the first two new entrants. People won’t forget that, and indeed the rapid change in consumer sentiment in the months leading up to the launch of Compass II in August 1992 put paid to its fate almost before it began. People were simply not willing to risk their dollars with a start up carrier when they could book a similar priced fare (or cheaper) with either Qantas or Ansett. If anything, that sentiment has only strengthened in recent years.

Most business travellers, the people who really keep an airline alive financially, are in one or the other’s frequent flyer schemes. This was barely an issue in the early nineties but nowadays no frequent traveller would ever dream of forsaking valuable points just to travel with a new entrant. Whilst some new entrants might suggest this loyalty factor is overrated, that most corporations disallow the points anyway, the truth is that the majority of full fare travellers do keep and use their points. The other consideration is that Qantas and Ansett, under no way, would ever let even one of their major corporate customers defect to a new entrant. They have, in terms of prestige alone, simply too much to lose by letting a new entrant poach their major accounts.

The travel agent industry has changed radically since the late eighties. Nowadays Qantas and Ansett hold sway over the bulk of agents in Australia either through the sheer volume of tickets they sell or through direct ownership. Ansett nowadays owns or has considerable influence in Traveland, Flight Centres, Coles Myer Ansett Travel, ANZ Travel and Jetset in addition to having a large number of its own retail outlets. Qantas has Westpac Travel, QH Tours, Jetabout, Viva, Thomas Cook, Concorde International, Hogg Robinson and Jetset in addition to its own chain of high visibility prime site retail outlets. Agencies sold Compass I tickets largely because their clients demanded it. Such was the amount of grass roots enthusiasm amongst the general community for the original Compass through 1990/91. Part of the ‘support the underdog’ mentality that existed then but most definitely doesn’t now. Agents mostly were cool on selling Compass II as they had all had enough of being held accountable by angry and frustrated clients who had been let down by the airline’s predecessor. Indeed, in the wash up of the Compass II failure it was revealed that 80% of that airline’s non direct bookings came from just 6% of travel agents. In other words, the bulk of agents pretended the airline didn’t exist. Today, this situation would be even more polarised towards the established operators. To believe that a travel agent in 1995, or ’96 or whatever would feel any different is pie in the sky. They will book you with who they can trust to remain in operation and who has the most influence over them either through ownership, affiliation or via commission overrides as a result of an increased volume of traffic to that particular airline. All fair play, all legal and all a part of the real world.

Terminal access. If you don’t have terminals you don’t realistically have an airline – simple as that. A new entrant must either negotiate a watertight deal with its unfortunate and unwilling host (not an ideal commercial arrangement to begin with) or it must build its own terminals. The FAC, via the One Nation campaign was looking at this but the idea died with the demise of Compass II and with airport privatisation on the agenda it is unlikely to be resurrected. True, Ansett and Qantas are obliged to provide two gates at certain ports to a bona fide new entrant though we honestly wonder if the long term credibility of the requirement is worth the paper it is printed on. More likely it is just another vehicle to inspire a feeding frenzy of lawyers, which sadly nowadays seems a hallmark of what our society has become. Of all the things an airline needs, terminal access is often the most difficult and yet it is the very linchpin of the airline’s entire operation. Since the early eighties Ansett and Qantas have invested more than $700m in upgrading their crucial Sydney domestic hubs, which is just one reason neither is enthused about the prospect of hosting a potentially competitive tenant. (Julian Green)

The Big One – Money

If Compass had had $200m it would have probably still gone broke. If its successor had as much and different management it just might have made it. To run an eight unit widebody twinjet operation to seven ports, perform your own maintenance, crew training, catering (as Aussie Air intends) and a zillion other things would require a minimum, and we repeat minimum of $400m. This is of course if you want the airline to make it to its third birthday. It’s easy to say it can be done on a fraction of that, as all of our intrepid Biggles have always claimed, but in the end it is the difference between failure and success and there aren’t too many success stories in this race, are there? We as much as anyone wish any potential new entrant well, but sincerely ask anybody contemplating becoming involved with them not to lose sight of the simple fact that airlines are about consuming money more than they are about moving people from point A to point B. And if you can’t see that then like so many times before a large number of people will pay the piper and lose their shirt. And that’s what really saddens us.