A Strategic ending

The end came shortly after the airline was forced to cancel a flight from Phuket after refuellers refused to extend any further credit to the ailing airline, stranding passengers and staff on the holiday island.

KordaMentha said in a statement immediately following their appointment as administrators: “It currently appears that there are no funds available to meet operational expenses so flights will be suspended immediately . . . it also appears highly unlikely there will be any flights in the short to medium term.”

The grounding immediately threw into doubt the future of the airline’s 354 staff as well as thousands of travellers who held tickets for future travel. Hopes that a white knight investor might be able to intervene were soon dashed, with no parties coming forward to take over.

The news got worse on February 29 when administrator Mark Korda held the airline’s first creditors’ meeting, revealing that the airline had debts of almost $90 million and only $442,000 in the bank. Over its three-year lifespan, the airline had never turned a profit.

Inevitably, Korda announced that the small asset base would be liquidated, while employee entitlements are likely to be paid out under the General Employee Entitlements and Redundancy Scheme arrangements, albeit capped at $128,000. Unsecured creditors, including passengers who had booked ahead, are likely to receive little.

So it seems the airline’s three-year journey, which began with strong backing, a solid customer and bold plans to be a leading charter carrier and later niche holiday airline has come to an emphatic end.

The Air Australia story started in the early 1990s when Melbourne businessman Shaun Aisen started Strategic Aviation, which originally traded as Air Charter Logistics and specialised in charter brokerage and freight.

In 2002, former Ansett employee Michael James joined the company as an equal shareholder and executive director. With James on board, the company changed its name to Strategic Aviation and soon picked up a lucrative Department of Defence contract to transport troops and equipment between Australia and the Middle East.

The contract, using an Airbus A330-300 wet-leased from Portuguese carrier HiFly, soon became the major source of revenue for Strategic, which also grew its portfolio of government contracts and clients.

While the arrangement with the ADF and HiFly was understood to be lucrative, it wasn’t without its criticisms. In 2007, it was accused of putting profits before troop safety by continuing to use HiFly rather than using an Australian air operator’s certificate.

This led to James and Aisen kick-starting Strategic Airlines to take over the Defence contract as well as specialising in offering charter and wet-lease services to a wide range of clients. At the same time, it also announced it would establish a second carrier based in France to serve the European market.

As James said at the 2011 announcement of the rebranding from Strategic to Air Australia: “The business was originally started on $20,000 and it got to a point where we said, ‘Well we’ve got enough work where we actually should bring in our own fleet and start our own airline’, which is what we did.”

Strategic soon sourced a single Airbus A330-200 on lease from Swiss International Air Lines, began to source A320s and launched its first services in September 2009. Before this, its French subsidiary had begun flying an A320 for Solomon Airlines in mid-August.

As well as the regular Middle East flights, Strategic had grand plans to enter the lucrative resources market, utilising the A320s for charter flights from bases in Perth and Brisbane. In doing so, it would come up against carriers such as Cobham, Alliance Airlines and Skywest, who had more experience in serving the industry.

Fortuitously — or forebodingly — Strategic’s rise came as charter carrier OzJet went into receivership. This saw Strategic move to take over the OzJet air operator’s certificate, a number of staff and an exclusive license to operate RPT services between Perth and Derby, a route well supported by local mining companies.

Despite the Defence contract and the Perth-Derby route, there were initially a number of detractors. Many industry watchers felt that the airline would have problems getting the right utilisation out of its aircraft, particularly given the global financial crisis had just surfaced.

But then CEO David Blake, former CEO of OzJet), told Australian Aviation in mid -009 said that there was little concern for him, saying: “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 steady growth of one or two aircraft being added a year.
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Shifting Strategy

Despite the volume of enquiries claimed by the charter carrier, by early 2010 Strategic had little other to show for its efforts, failing to secure regular charter contracts for much of its A320 fleet, though some aircraft were used on occasional ad hoc charters.

The situation necessitated a change in strategy for Strategic. Instead of focussing solely on charters, the airline saw a gap in the market for a full-service carrier on select holiday routes, as well as a role in opening up new links between the east coast and major mining centres in the north-west.

It launched services on the Perth-Denpasar route in June 2010. Despite strong competition from low-cost carriers such as Jetstar, Pacific Blue and AirAsia, Strategic’s management believed that there was a niche for an Australian full-service carrier offering business class on the leisure-dominated route.

The decision to fly to Bali was made easier partly by its acquisition of the remainder of OzJet, which had flown there previously and had established contacts with travel wholesalers and other related companies.

In May 2010, it also announced plans to fly direct services from Brisbane and Melbourne to Port Hedland to offer more choice for the mining industry. It launched flights on the Brisbane-Port Hedland route in August that year but cancelled Melbourne-Port Hedland before they even began due to low bookings.

Buoyed by the strong response of its launch of flights between Perth and Denpasar, Strategic also added Port Hedland-Denpasar services later in 2010, offering connecting fares for passengers from Brisbane.

Chief commercial officer for the airline was Damien Vasta, who had had no previous experience working in the aviation sector. He was involved in key decisions on routes, pricing and flight frequency as well as product design and other major decisions at the airline.

His earlier experience included work as a delivery driver and waiter at his family’s restaurant, and he was a commercial director of hospital operator Healthe Holdings before joining the airline in June 2009.

He told Australian Aviation in June 2010, soon after launching the Perth-Denpasar service: “What we’re trying to do in terms of RPT is not necessarily compete along the well-worn paths of the major carriers. What we’re trying to do is find opportunities where a particular community need or industry need is under-serviced or may respond well to the introduction of a service that doesn’t already exist.

“We do not want to be an airline that people talk about as growing too fast, too quickly and disappearing. “We want to be an airline that is considered and measured in its decision making and proceeds along a sound business development strategy.”

Nevertheless, expansion continued and Strategic added Brisbane-Townsville-Denpasar to its network in December 2010. It then added a short-lived service between Brisbane and Gladstone between April and August 2011.

But as Strategic’s RPT network was shaping up, the airline took what some consider to be its fatal blow in 2010 with the loss of the Defence contract to major rival Adagold Aviation.

Ironically, Adagold secured the contract based on a bid using an A340 operated by HiFly, the same operator that Strategic had partnered with to win its original contract.

In response to that, Strategic alleged foul play in the tender process, resulting in Adagold gaining an unfair advantage.

The key claim was over the involvement of former SkyAirWorld CEO David Charlton in securing the contracts. Following the collapse of SkyAirWorld, Mr Charlton returned to the Army Reserve and was involved in the ADF’s Joint Movements Group at the time. Strategic alleged that he was close to senior managers at Adagold and had passed on inside knowledge to the company.

Further complicating the matter, following the awarding of the orginal contract to Strategic, Charlton and another Army man, John Davies, were later employed in senior positions by Strategic. A further probe by Defence into the 2005 awarding of the contract to Strategic was referred to the Australian Federal Police but no charges were laid.

Strategic’s allegations that Charlton had passed on sensitive information to Adagold were investigated by the Department of Defence, which found that there were no irregularities and that the contract would still be awarded to Adagold, which began service in October 2010.

The airline’s French subsidiary also faced problems in late 2010 after a series of mechanical problems and mishandled delays prompted the Directorate General of Civil Aviation not to renew its air operator’s certificate. In response, the airline was successfully granted an AOC in Luxembourg, which allowed it to continue operating through Europe.

Towards Air Australia

With the loss of the ADF contract, Strategic was faced with the loss of its largest revenue source and was forced to change its strategy again, this time signalling that it would focus more on leisure routes.

With the A330 now relieved of its duties, Strategic announced initially that it would use the aircraft on new non-stop services between Brisbane and Denpasar. Then, with the withdrawal of V Australia’s flights on the Brisbane-Phuket and Melbourne-Phuket routes, the airline saw an opening and launched services on the routes.

However, these were not without problems. In one incident, the airline’s sole A330 was taken out of action for almost five days as it needed maintenance for a defect in Kuala Lumpur in June 2011. This saw a number of frustrated Air Australia passengers take to social networking sites to complain about their treatment by the airline. Nevertheless, bookings continued.

Strategic also announced bold plans to add more A330s to its fleet and applied for rights to fly to Vietnam, China and the US. It also took over the lease of the former Boeing hangar at Brisbane Airport to set up Strategic Engineering, which aimed to look after the airline’s fleet and also provide third party maintenance, repair and overhaul services.

But all was not well. It has now been revealed that James’s long-time business partner Shaun Aisen pulled out of Strategic, leaving Mr James as the sole shareholder. CEO David Blake had also left to return to the UK, where he continued to control Strategic Airlines Europe — and so James took over as executive director of the airline.

By mid-2011, the airline announced that it would rebrand itself as Air Australia and that it would change its strategy to become a low-cost carrier.

The brand would “represent the Australian heritage” of the airline. Gone was the blue dominated livery, replaced with a lime green, yellow and grey palette, shown off on one of its A320s at a launch event in August 2011.

The airline also planned to relaunch itself as a low-cost carrier. As well as unbundling a number of services such as baggage from its fare structure, it added twice-daily services between Brisbane and Melbourne with its A320s. It also committed to continuing to grow on more medium-haul routes with services to Honolulu launched in late 2011.

To support the new services, the airline introduced a second A330, albeit wet-leased from Turkish carrier Atlasjet. Air Australia said at the time that Atlasjet would operate the aircraft for a short time until it received its second A330, after which it would take over the lease of the Atlasjet aircraft and place it on its own AOC

But as the airline was celebrating its new identity, the years of losses had taken their toll. It would later emerge that Mr Vasta had begun seeking out potential investors seeking more cash to keep the airline afloat.

He said in an email from October 2011: “The financial assistance is urgent if the airline is to remain as a going concern … The airline will require $10million to trade independently again but our urgent requirement for Monday is $2million to allow an aircraft leasing company and the Air Navigation authority to be paid.”

The email also revealed that the airline had spent $5 million to rectify the problem that had grounded its A330 earlier in the year and that its current and aged creditors were owed $18-20 million in total.

Despite the poor state of the airline Mr Vasta said it had bright prospects, including the possibility of picking up fly-in, fly-out contracts with WA mining firms. But no such contracts were forthcoming.

Other interested parties also soon got wind of Air Australia’s financial troubles. A number of travel insurance companies withdrew their airline insolvency cover for passengers who had booked flights on Air Australia.

Late last December, Sydney socialite Geoffrey Edelstein told The Australian newspaper that he had been approached to invest in Air Australia but had declined. Soon after, Strategic said two overseas companies were interested in investing in Strategic Engineering.

It is not known how long that Air Australia continued to seek out the investment but with so many questions being asked about the airline’s finances it seemed that it was only a matter of time before it would collapse.

Bold plans, tough realities

In the opinion of most aviation industry analysts, the demise of Air Australia came with the loss of the Defence contract in 2010. Up until that point the airline had a guaranteed source of cash flow that would at the very least be able to support the growth of its other operations.

Credit must be given for the persistence of Air Australia’s management as they tried to adapt to its new circumstances. Rather than close down the carrier at the loss of the ADF contract, they sought out alternatives and were willing to take opportunities as they arose. The problem was most of those opportunities were not able to bring in the cash needed to sustain the airline.

It suffered also from not being able to secure the mining charter work that it had been chasing meant that it often had spare capacity — capacity that still had to be paid for.

As there were few options available, it turned to leisure routes, concentrating on direct services without much direct competition. The strong Australian dollar helped drive traffic up on Asian holiday routes but with such a range of destinations and carriers available, Air Australia couldn’t stand out from the crowd.

On the cost side, the airline lacked the scale to become a true low-cost carrier and be able to effectively compete against others such as AirAsia. That lack of scale also meant that as the price of fuel began soaring during the second half of 2011 it had to pay the price at the pump. If the clock hadn’t already been ticking on the airline, it certainly was by then.

Nevertheless, there are some signs that at least one Air Australia element will endure. Strategic Airlines Europe continues to operate with a small fleet of A320s and has been assuring its customers that it is not being affected by the collapse of Air Australia, despite being 49 per cent owned by it.

In March there were also media reports that Michael James had approached some former Air Australia staff to gauge their interest in taking part in a new business venture.

For the moment though, it seems that the Air Australia story joins OzJet and SkyAirWorld as failed companies who tried to build up unique niches but ultimately succumbed to the harsh realities of aviation in Australia.