MacAir fails as resources industry slides

In January 2008 it was announced that the Queensland government had renewed its route subsidy contract for a further five years. Under the contracts, MacAir operated six subsidised ‘milk run’ routes under the QConnect banner through Far North and Western Queensland and the Gulf linking a number of remote communities to Cairns, Brisbane, Townsville and Mount Isa.

At the time, the airline even made the point that it would progressively upgrade its equipment on the QConnect routes to the 34 seat Saab 340Bs instead of the 19 seat Fairchild Metro 23s which had been used for a number of years, as it phased out this aircraft from its fleet.

In April, it was announced that the airline had been acquired by Townsville based businessman Terry Byrt, who owned fishing interests and various mining tenements through Ansett Resources. An ardent admirer of Sir Reginald Ansett, Byrt announced plans to expand MacAir to provide more flights across Queensland and even into Darwin.

Interestingly, Byrt also announced in plans to acquire four ex-SAS Bombardier DHC-8-Q400s. This was despite the airline already operating the competing 50 seat ATR 42 on both RPT and charter services.

However, the shine came off MacAir in the second half of 2008, with an increasing number of complaints about the airline’s on time performance and cancellation rates. BITRE figures show that during July 2008 the carrier cancelled one in ten flights on its main RPT route, the Townsville-Mt Isa service.

Further bad new emerged in November when QantasLink announced that it would start services on the Townsville-Mt Isa route from March 2009. While the airline would collapse before the competition on the route, MacAir had already been forced to discount fares and make other adjustments for the looming competition with QantasLink.

Competition also emerged in the key mining charter industry, particularly with Alliance Airlines announcing in June 2008 that it would base a 50 seat Fokker 50 turboprop in MacAir’s home of Townsville to serve a contract. “As a result of changes around Australia, Alliance moved assets back into Queensland and were certainly competing with MacAir for some of the smaller contracts.” said Simon Wild, CEO of Cairns based Skytrans.

At the same time, as with every other airline, MacAir was feeling the pressure of high fuel prices, especially at some regional ports. And when the fuel price did start to decline, the airline saw a number of other costs such as aircraft lease payments increase due to the weakness in the Australian dollar.

Ironically, it would appear that the strategy of establishing long-term resource and government contracts may have backfired on MacAir. With its main revenues tied up in long term contracts, the airline could not simply raise fares on the QConnect or mining charter contracts to deal with the increased costs in its operations.

In order to keep flying, it is understood that the carrier took on more debt, which would eventually cripple its cashflow. It is understood that the airline owed $14 million in debts when it entered administration.

That position became clearer in January when Byrt requested a $7 million ex-gratia payment from the Queensland government to allow it to deal with long term debts and continue flying. But the government only willing to offer a $4.7 million increase in the payments for its subsidised flying, MacAir was left short of cash, and Byrt to place the company into voluntary administration on January 29.

The administrator immediately grounded the MacAir fleet for two days, before the airline resumed limited charter services. This forced the Queensland government to charter aircraft from operators including Skytrans, West Wing Aviation and QantasLink in order to cover the QConnect routes.

One day after appointing the administrator, major creditor Suncorp Metway appointed Justin Walsh from Ernst & Young as receiver. Initial signs for the airline were positive, with Walsh telling the Courier Mail, “We have already had some good interest this morning from another aviation group.” However, one week later Walsh announced that the airline would be wound up and its assets sold.

To cover the QConnect services, the Queensland government awarded emergency contracts to Skytrans, QantasLink and West Wing for a period of six months, during which the six routes would be re-tendered.

“We’re fortunate that we had two surplus aircraft to step into the void created by the collapse of MacAir,” said Wild. He also said that Skytrans was keen to pursue some of the five year contracts which will be re-tendered by the government “so long as it’s a sustainable contract.”

Regional Express has also entered the fray, with its Pel-Air subsidiary establishing a Townsville base with two Saab 340s to service a former MacAir mining contract, and had also expressed interest in some RPT services. Rex CEO Jim Davis told Australian Aviation: “Rex will be looking at the tender for routes licensed by Queensland Transport that is coming out later this year. There are no immediate plans for RPT operations in Queensland.”

All mined out?

While it may only have played a small part in the demise of MacAir, the change in fortunes of the mining industry are starting to have an affect on operators which previously relied on the lucrative charter contracts in Queensland, the Northern Territory and Western Australia.

As the global financial crisis started to take hold, a number of resources companies have announced plans to slow production, cut jobs and in some cases mothball mines which are not economic due to falls in the prices of a number of commodities. In particular, those mines producing nickel and copper were hardest hit as the prices of these metals fell sharply.

This has seen BHP Billiton announce the closure of its Ravensthorpe nickel mine, as well as job cuts at its Mount Keith mine in Western Australia, which will force National Jet Systems and Alliance Airlines to reduce their services to these sites.

Similarly, those airlines serving smaller mines which have been mothballed or have seen major cutbacks have also had to adjust. Skytrans’ Wild told Australian Aviation that the carrier was able to take on former MacAir routes as it had recently closed its Mackay operations, which supported clients in the Bowen Basin.

However, airlines servicing other mines, or those which have been producing for a considerable time, have not been as badly affected. “We have been lucky in that the mines we’re servicing are well established core production mines, and I think the ones which have been most vulnerable are new projects and also some of the smaller mines,” Skywest Airlines’ managing director Hugh Davin told Australian Aviation.

Skywest last year acquired a number of major contracts with Rio Tinto’s Hamersley Iron, Fortescue Metals Group and Newcrest Mining for FIFO services, mostly for its fleet of Fokker 100 jets. It has also recently secured a ‘hybrid RPT’ contract on the Perth-Karratha route for CITIC Pacific, whereby it operates the service on an RPT service but is underwritten by the customer.

But despite its strong link with the resources sector, Davin says that Skywest has seen very little fallout with only a reduction of two F100 services a week on the Perth-Argyle route.

While a number of RPT operators had over the years sought to benefit from the mining boom, those such as Skytrans and Skywest who have split their business between the two sectors appear to have gained the most. “It’s great to have the RPT at a time when the mining activity has contracted significantly,” said Wild.

And while he says that Skywest has been fortunate not to have lost a majority of its flying, it too benefits from having strength in both charter and RPT. “We are a little bit unusual in that we service almost on a 50-50 basis the regional airline network and contract charter sectors so we do have the ability to adjust our operations depending on the strength of the two respective sectors,” said Davin.

However, as some operators in Queensland and WA are left with additional capacity from cutting down frequencies, Davin predicts that there will be increasing competition for quality contracts. “It will become more competitive and more price driven. It’s just the reality,” he said.

Alliance Airlines CEO Scott McMillan agreed, telling The Australian newspaper in early February, “We’ve been undercut substantially in a number of contracts but I can sit here now and look at some of my competitors and know that they’re losing money every time they fly now.”

Longer term, it appears that there may be more cuts on the way, which will have an affect on the various FIFO operators. “No one really knows how bad things are going to get, and I think things are going to get worse before they get better, and it will depend on where you’re standing when news comes in of a mine closure,” said Davin.

Nevertheless, Davin said that some mining companies were already looking at the opportunities which had been made available, which could provide some light at the end of the tunnel. “In January the phone was very quiet. In February, there’s been a notable increase in enquiries from resource companies,” he said.