Issue 265: Strategy Play

Brisbane headquartered Strategic has so far taken delivery of a single Airbus A330‑200 and two Airbus A320s, has launched a French subsidiary to operate charter services in Europe, and has bought the assets of the defunct OzJet, picking up staff, the OzJet AOC (air operator’s certificate) and OzJet’s Perth-Derby RPT route. The airline planned to have a formal launch at the end of September once its new Australian AOC had been approved, but began A320 operations in mid August when it commenced flying A320 services three times a week from Brisbane to Honiara under contract to Solomon Airlines (using its French AOC). It’s an impressive expansion at a time when most airlines and operators are contracting.

“We do find scepticism (of our plans) and certainly the industry is probably surprised by our approach at the moment,” Strategic Airlines CEO David Blake told Australian Aviation in a recent interview.

But the one-time airline pilot and still current licence holder says Strategic’s plans were well in place before the downturn hit, and that world recession has in fact brought its own opportunities.

“The fact that we’re in recession doesn’t phase us at all,” Blake said. “We’re well by Gerard Frawley, photos by Paul Sadler funded and we’re on a fairly developed plan moving forward and the fact that the industry is in a downturn is actually probably going to benefit us as we’re enjoying much better rates to acquire aircraft than we thought we would. ” The Strategic Aviation Group is privately owned by directors Michael James and Shaun Aisen, who are funding the company’s expansion. James once worked for Ansett and has a strong background in aircraft charter brokerage, while Aisen has an air freight background. They appointed Blake to the CEO role about 12 months ago to oversee the creation and expansion of the Strategic Airlines division.

“Aviation is in our blood,” Blake said of Strategic. Operating aircraft in its own right allows Strategic “to become masters of our own destiny” and not “reliant on using other operators – clearly the control you have with other operators is limited. ” Another driver was to have a “mix of business . . . by having a mix you don’t have all your eggs in one basket and you should be able to survive aviation’s fluctuations. ” British born Blake is an industry veteran.

He flew as a line pilot for Dan-Air beforethat airline was taken over by British Airways in the early 1990s, and then spent some time as a contract pilot for the British military. He then joined Australian Paul Stoddart’s European Aviation charter operation as a line captain, progressing to become a training captain, deputy chief pilot, chief pilot, operations director and then a board member. From there he joined the original incarnation of OzJet, which Stoddart launched in 2003 to fly all-business Australian domestic RPT services using secondhand 737-200s transferred across from European Aviation.

During OzJet’s RPT phase Blake was the airline’s chief operating officer as well as a director and board member. Then when OzJet switched to charter operations, he became CEO, until Stoddart sold OzJet to HeavyLift in 2008.

“The problem with OzJet was fairly well documented,” Blake said, “but there wasn’t the investment in the business, and the business was always going to end up the way it did because of the lack of investment in equipment. ” That situation, Blake said, is “diametrically” opposite to that at Strategic, with its investment in relatively young A320s and the A330 and its committed financial backers.

Blake came to know the Strategic team after Strategic originally looked to buy OzJet when Paul Stoddart had put his Australian operation up for sale. When OzJet was eventually sold to HeavyLift, Blake was initially offered a flying position on the Hi Fly A330 (all cabin crew and most of the Hi Fly A330’s pilots are Australian), but given his charter experience with European Aviation and OzJet, and his experience in dealing with Australian and European regulatory authorities, soon found himself appointed CEO of Strategic Airlines. Coincidentally, not all that long after taking the reins at Strategic Airlines, Blake found himself involved in Strategic’s eventual acquisition of OzJet assets, after that airline entered administration in May this year. That deal was announced on June 29.

“We didn’t really buy OzJet as such,” Blake explained, “the unfortunate situation was when OzJet went into administration, there was a fairly big hole in the funding.

What we were able to do was to take over a number of the staff, probably around 50 per cent, including all of the cabin crew. ” With OzJet based in Melbourne and Strategic in Brisbane, not all the OzJet staff wanted to make the move interstate, but Strategic funded employee entitlements to the administrator.

OzJet “hasn’t brought much in terms of resources,” said Blake. “OzJet was a fairly depressed business, and it had contracted quite seriously and was effectively doing one route which was Derby, and I guess if it had any value to the market that was the route that perhaps did. ” OzJet’s 30 year old 737-200s weren’t part of the Strategic deal, and instead Strategic has contracted Alliance Airlines to operate Fokker 100s on the route until it can begin A320 operations on the service in its own right. “It’s only one service a day for three days of the week, so it’s not exactly a Sydney- Melbourne route that brings a lot of revenue in, but it was a fairly good route. ” As well as staff and the Perth-Derby route, with the acquisition came OzJet’s AOC, which Strategic has decided to use as the basis for its Australian AOC. With work already well underway on its own AOC, Blake said it “was a real toss of the coin” over whether to proceed with that process or build on the OzJet AOC. “The real value of taking the AOC over became limited – the reason we’ve decided to keep the OzJet AOC and rebuild that is there was an awful lot of other things that OzJet did, and ports that they had on their AOC, so it meant that we could add the two types and we would also have a few more ports to have a bigger overall network and capability. ” Timing was a factor too. “The original plan we had before the acquisition of OzJet was to be operational (with the A330) before the end of September and then bring in an A320 in around March next year, so the other thing the OzJet acquisition has given us is the opportunity to bring the A320 in a little sooner. We were going to come in with one type, now we’re bringing two on, pretty much in parallel. ” Strategic had planned to initially wetlease another operator’s aircraft to operate the Brisbane-Honiara services until its own aircraft and AOC were in place.

But finding a suitable operator and equipment was more problematic than originally expected. So in the interim, Strategic began operating the run in mid August with an A320 on its French subsidiary’s newly awarded AOC. This aircraft will then be placed on the VH register and operated under Strategic’s forthcoming Australian AOC.

Buying OzJet in part to get quicker access to an Australian AOC has not been without critics who claim companies shouldn’t be able to ‘buy’ an AOC, but Blake said CASA has not had issues with Strategic’s plans. “My discussions with the regulator have been very, very cordial and they’re very supportive of what we’re trying to do,” Blake said. “They’ve never influenced us in any particular way . . . they’ve been very supportive and have been more than helpful in trying to aid us in restructuring the business. ” With the AOC approved, Strategic will be able to take on its three initial operations – the Solomon Airlines contract and the Perth-Derby RPT run with two A320s, and the A330-200 taking over from the Hi Fly A330-300 on the ADF contract.

That significant contract with the ADF “is a renewable tender and it varies as the requirements of the Australian military overseas changes,” Blake explained,“we have to change the operation as our customer wants. ” At this point it’s not clear if the ADF ‘customer’s’ requirements will change once the RAAF’s KC-30 tanker transports enter service, raising the possibility that the KC-30s will take on the Middle East run (given the KC-30 is based on the A330-200). “That’s certainly an option and is certainly a possibility, we don’t have a lot of visibility on that, (but) it seems logical,” Blake said. “But that (the ADF flying) is only one element of our business and our plans are over the next four or five years to reduce the importance of that contract within our business. ” So the A330 will be available for ad hoc charter such as providing lift for international airlines who have passengers stranded due to an unserviceable aircraft, or flying initial services on behalf of start-up airlines.

That ability to find other flying for the Strategic fleet seems critical to the airline’s success, whether it’s for the A330 or the A320s allocated to the Brisbane-Honiara and Perth-Derby runs, which on current schedules will have availability for other flying three or four days a week.

“Any of these modern aircraft need to have a volume of flying to make them cost effective, of course they do,” the Strategic CEO said. “There’s not the margins in it, you can’t operate an aeroplane for 1000 hours a year because the maintenance becomes prohibitive and the costs of the aircraft are so high. ” Certainly aircraft lease rates at the moment are down perhaps 20-25 per cent on their peaks pre the global financial crisis, so an A320 like Strategic’s 15 year old examples would likely cost in the order of US$150,000 per month to lease, the nine year old A330 perhaps US$400,000. They will need to be kept flying, but Blake is confident that that will be the case.

“We don’t see a problem in getting the volume we need to manage the aircraft efficiently, in fact it’s probably the other way around, the volume of the enquiries we’re getting and the work we’re looking at, I’m comfortable and confident we will see a steady growth of one or two aircraft being added every year. ” Blake says Strategic’s business plan allows for new services and work to be added gradually. “We’re not in a hurry, we’ve built our business on a very sound financial basis, and we’ve got a mix of our operating lease and power-by-the-hour arrangements to keep our overheads as low as we can. ” WA represents one big area of opportunity.

“We’re targeting a number of other services,” Blake said. In the “enormous commercial” fly-in/fly-out WA market he says only aircraft up to the 100-seat class have typically been available, “and we do believe there is a need for the bigger aeroplane with more capabilities. ” And then there is the French operation.

Its first aircraft is now flying the Solomon Airlines contract after its French AOC was awarded on August 13. The second A320 came on line two weeks later, based in France for ACMI (aircraft, crew, maintenance and insurance) and charter flying.

“The opportunities in Europe are very, very strong,” Blake said. “We’ve been talking to a number of carriers about long term commitments, we’re talking to some of the charter operators for the next (northern) summer series based in places like Manchester and Gatwick in the UK. We’re also talking to a fairly big French broker about work within France and long haul for the French military and the UK military. ” One opportunity Strategic is not furthering is investment in a regional airline.

Strategic had looked at acquiring a stake in Canberra based regional Brindabella Airlines, which was part of the diversification strategy. But that deal fell through, and Blake says acquiring other aviation operations is not a priority, with the focus instead on organic growth.

For now Strategic is confident there are plenty of other opportunities for Australia’s newest airline to pursue.

“We’re very much opportunistic,” said Blake. “However, in saying that we have a broad structure and strategy to diversify and have a broad spectrum of aviation businesses within Australia and the rest of the world if possible. ” “This is my third recession . . . and a company that’s ready to respond to change in a recovery often can get a competitive advantage, and we’re positioned quite nicely now to take advantage of any recovery. ”