The Final Straw

The falling Australian dollar, the loss of three Queensland government sponsored route contracts and a resources sector in transition conspired to bring down yet another Australian regional operator.

Rather than muddle through hoping to avoid the inevitable, Wild madewhat he described as a “responsible, lawful and terribly difficult decision” to cease flying.

“That was the right thing to do,” Wild said on Friday, January 2.

“Today there is no celebration, beyond the pride everyone in Skytrans shares in having delivered a safe reliable passenger and freight service to communities as diverse as Birdsville and Boulia, Bamaga and Brisbane.

“We will miss them all, for they have all been relationships built over a lifetime of trust and mutual support, collaboration and shared endeavour, and good old fashioned friendships forged easily between good people. ” The announcement led to some swift action on the part of the Queensland government, whichorganised Townsville-based West Wing Aviation to operate scheduled regular public transport (RPT) flights to some of the affected communities with 19-seat Beech 1900Ds. The first flights took off on the next scheduled flying day, Monday January 5.

That initial 15-day contract was later extended until the end of February.

A commercial advisor to West Wing Aviation, Mike Thinee, said the services had been well supported.

“The routes are viable, they always have been,” Thinee said. “Certainly they are good routes. ” Later in January, Cairns-based operator Hinterland Aviation sought and received Civil Aviation SafetyApproval (CASA) to operate RPT flights with 12-seat Cessna Grand Caravans. Those flights to Pormpuraaw and Kowanyama began on January 21.

Hinterland chief executive Mark Dorward said the airline had already done some preliminary work on potential Cape York flights prior to the Skytrans shutdown, having put a team in place during late 2014 to evaluate any potential opportunities that could arise in the event its local rival stopped flying.

He added that Hinterland was in a strong position to offer a good service to the Cape York region.

“Our entire Cessna Caravan fleet we bought from the factory brand new and we do all our own maintenance so we control some of those external issues,” Dorward said.

“All our aircraft are whollyowned with no debt. That gives us a very good position to provide a strong service.

“These are the things I have had to explain to people because of the fear factor of losing their service again. ” Dorward said the decision to start the new routes was made in consultation with the local councils in the area.

“They have been fully-engaged in our plans and we have really approached [them] as partnerships,” Dorward said.

“We are looking at how we can involve the communities in the ground handling and the ticket sales and so forth. ” The first major sign of trouble for Skytrans came in October 2014 when the Queensland Department of Transport and Main Roads (TMR) announced the results of the tender process for its regulated air route contracts.

Already having to deal with weak consumer confidence and reduced mining-related flying, Skytrans was then hit with the news it had failed to retain all three of its contacts. Instead the Western 1, Western 2 and Gulf routes were awarded to Regional Express (Rex).

In response, Wild and his management team embarked on a restructure of the business in the hope that they would be able to ride out the storm.

Some 121 full-time employees were let go – with their full entitlements – and the fleet of nine aircraft was in the process of being reduced.

“Unfortunately with the contraction in multiple sectors of the Australian economy and specifically in the resource sector, the loss of the TMR contract turned a snowball into a wrecking ball,” Wild said.

Another headache for Wild and his team was the threat of new entrants on its Cape York routes – Skytrans served the communities of Lockhart River, Coen, Aurukun, Pormpuraaw, Kowanyama and Bamaga from its Cairns base – which would have likely resulted in a damaging price war as carriers competed for marketshare.

The biggest bodyblow, and one that would ultimately bring Skytrans’s 25- year operation to an end, was lurking around the corner. The Australian dollar was continuing to fall, dropping to 81 US cents at Christmas and looking likely to touch 75 US cents in the new year.

Wild said the currency movements turned “an extremely challenging situation into a catastrophe or what is commonly called a ‘perfect storm’,”

That was the right thing to do. SIMON WILD

with estimations the slumping Australian dollar over the final two months of 2014 would have increased the airline’s costs by $3 million per year.

The airline had based its 2015 modelling on an exchange rate of 91 US cents per Australian dollar and Wild said anything below 88 US cents meant Skytrans’s business model would not be a viable long-term proposition.

“We had been resizing the business to adjust to market forces such as the downturn in mining, loss of some contracts, cutback in government spending, the high cost in aviation direct operating costs and the demand for cheap fares,” Wild explained.

“Unfortunately the straw that broke the camel’s back has been the fall in the Australian dollar. The weakened Aussie dollar makes our future no longer viable.

“We have been talking with possible investors and have pursued these interests diligently, but unfortunately every road pointed to unsustainability and as such we could and would not entice investors to a business we did not believe ourselves had a strong future. ” A search on the CASA website showed Skytrans was the registered operator of nine Australianregistered Dash 8 aircraft.

Of those, eight were leased from overseas entities based in the United Kingdom, Luxembourg or United States. Given leasing contracts were typically denominated in US dollars, as the Australian dollar fell against the US dollar, those leasing costs would have increased in Australian dollar terms.

Skytrans entered voluntary administration with Bentleys Chartered Accountants on January 5.

While every community that Skytrans served before it shut down still had air services from either Hinterland or West Wing, theprospect of Rex entering the market sits in the background.

Rex, Australia’s largest independent regional operator, appeared keen to grab a slice of the action, even announcing a schedule for flights from Cairns to a number of Cape York centres.

However, it later backed away from those plans, saying in a statement on January 9 it would conduct further consultation with local councils in the area.

“Rex has made its best endeavours to speak with local councils in the Cape and they have expressed that they are not yet ready to receive Rex’s services,” Rex general manager of network strategy and sales Warrick Lodge said in a statement on January 14.

“Rex remains willing to continue discussions with all interested Cape communities and we will be open to commencing air services once the communities have made firm decisions. ”

The straw that broke the camel’s back has been the fall in the Australian dollar. SIMON WILD

Lodge said Rex was adding a 34-seat Saab 340 aircraft to its Townsville base, in anticipation of further work in the region.

“Queensland represents the perfect opportunity for us given its size, geography and absence of quality regional carriers,” Lodge said on January 30. “Rex will continue to inject more aircraft into Queensland in tandem with new opportunities opening up in the state. ” Both Hinterland and West Wing expect it will only be a matter of time before Rex begins services in Cape York, given some of those routes were able to sustain 34-seat aircraft, which were larger than the 12-seat Cessna Grand Caravan or 19-seat Beech 1900Ds being used currently.

“There is still a lot of charter going up there because there simply is just not enough capacity going up there with Beech 1900s rather than Dash 8s,” West Wing’s Thinee said.

“Services have certainly been well supported and there is a need for additional capacity. There is no doubt about that. ” Dorward added: “Between the three operators, all the ex-Skytrans services will be taken up. I have looked at the passenger route data and I think there is something in each route out there for everyone. ”