The date is April 1994: at Sydney's international terminal, a Boeing 747-300 jumbo with a familiar blue-flag tail is cleared for takeoff to Hong Kong.
It is an Ansett flight. For many in the airline industry and just about everyone in the finance industry, this is science fiction. But in submissions to Canberra, Ansett has firmly committed itself to jumbo operations as part of a dramatic push for flights to six Asian destinations during the next three years.
The planned routes are to Kuala Lumpur (already granted), Singapore, Hong Kong, Jakarta/Denpasar and Osaka's new Kansai airport (each applied for in the past month), and Bangkok (not yet applied for). Taiwan and Korea would be next once Australia secured landing rights. Ansett is also interested in China.
The team applying for the Asian routes includes executives from Ansett's owners, TNT and News Corporation, which will have to raise some of the money. With News Corp's Ken Cowley installed as executive chairman, Ansett is now operating in overdrive compared with the former days of running with dual chairpersons and managing directors Sir Peter Abeles and Rupert Murdoch, a structure that diffused energies.
Ansett's cherry-picking on the Asian markets will enable it to run with considerably lower unit costs than Qantas's global services. Indeed, in some ways, Ansett aims to "do a Compass" on Qantas; it will start a price war immediately on the Asian routes.
Ansett's description of Qantas's pricing on some routes verges on the insulting. Ansett's submission to fly out of Osaka's Kansai airport next year says Qantas and the two Japanese airlines, JAL and ANA, have created the only heavy-traffic route from Australia on which there is no discounting from published airfares. A Qantas spokesman says the claim is "a load of rubbish" and says fewer than 4% of passengers in economy seats have paid full economy fares.
Ansett's chief executive, Graeme McMahon, in the course of promising travellers "unambiguously lower fares", says: "Ansett submits that whether or not Qantas has been a willing participant in the arrangements to maintain high fares on the route, it has been the largest beneficiary.
Qantas has dominated carriage on the route since Japan permitted the entry of a second national carrier in 1988. It has also primarily priced its own shareholders -- the people of Australia -- out of the route. Fewer than 50,000 Australians travel to Japan each year, a surprisingly large proportion of them business passengers. In contrast, nearly 600,000 Japanese residents travel to Australia."
McMahon quotes from Qantas's own submission for additional capacity on its Hong Kong route, in which it says it will meet any significant pricing initiatives by its competitors. McMahon says Qantas is openly conceding that it needs more competition before it will bring down its fares.
Other Ansett managers say the airline will offer Japanese tourists discounts and packages that could swing them away from other destinations. "But we are not talking two tickets for the price of one," jokes James Kimpton, manager for aviation policy, in reference to Ansett's domestic promotion a month ago.
Australia-to-Japan flights, on average, carry a disproportionate share of high-margin business passengers. Ansett says its initiatives will boost the outbound holiday traffic, especially the many young Australians who now study Japanese.
A study by the Bureau of Transport and Communications Economics published late last year noted that in 1991, the Tokyo-Sydney route enjoyed revenue per kilometre that was 48% higher for economy fares than the Tokyo-Los Angeles route over the same distance. The Tokyo-Sydney route also had the second-highest fares per kilometre of six Tokyo routes analysed by the bureau. The Tokyo-London route was the highest.
Qantas angrily accuses the bureau of bias and says the research ignored the widespread discounting of economy fares. The airlines ' actual rates charged to wholesalers on the route were not only competitive but also often below rates from Japan to competing destinations, Qantas says.
McMahon wants Ansett to start with a major network, not add destinations piecemeal, to get what he calls critical mass for his marketing and operations. In broad terms, this means the equivalent of a jumbo a day on five Asian routes and four a week on the Indonesian run, for which Perth-based Indian Ocean Airlines is tentatively seeking the equivalent of 1.8 jumbo loads.
Close to half the tourists to Australia are now from Asia, creating about 5% of Australian export earnings. For global airlines, Asian routes remain lucrative in an industry that lost the equivalent of $A15 billion in the past three years, as much as the sum of all its previous profits.
Ansett would take several years to break even on most new routes. However, prospects in these buoyant regions appear better than in the stagnant New Zealand market, where an Ansett subsidiary has accumulated losses of about $A120 million in the past four or five years.
Last September, McMahon was talking about starting Asian flights in three years. He has now committed to Ansett to start by December this year. Ansett executives aim to win what they say is a modest slice of the market, perhaps 10%. This is not so modest in relation to Qantas's present share of some Asian routes, which is usually 30-45% but 54% in the case of Japan.
By 1994-95, Ansett wants revenue of up to $700 million from the Asian operations, a figure BRW has arrived at by combining analysts' forecasts of about $3 billion for Ansett's domestic aviation revenue, with its goal of earning up to 20% of revenue
from the Asian routes in that year. Currently, Ansett earns about 10% of its revenue overseas, mainly through ticketing deals. The $700 million revenue also implies capital spending of about the same amount. Ansett believes it will be long before foreign earnings equal those from domestic operations.
Because of the close links between domestic and foreign air travel, the success of an Asian operation would flow to the home market, Ansett's main battlefront. It will have a tough contest with the revitalised Australian Airlines/Qantas (the overseas carrier is now offering about 6500 domestic seats), Compass and possibly Air New Zealand, which, from late next year, will be able to fly to Australian cities, carry domestic passengers between them and also fly out to foreign destinations.
The planning for Asia has been quarantined to a small group of Ansett executives, leaving their colleagues to concentrate on their task of filling more local seats as the domestic war intensifies.
Kimpton asked if Ansett's Asian thrust would involve spending tens of millions or hundreds of millions of dollars, replies tersely: "Some hundreds of millions." Asked how Ansett would finance it, he says: "Both major shareholders (TNT and News Corp) have indicated that they expect in due course to take an additional partner into Ansett.
Both have said that the partner could be an airline or airlines. The partner would need pockets but not necessarily enormously deep ones. We don't expect to go into international markets for funds with our balance sheet the way it is now. Our shareholders are addressing that issue."
The foreign airline partner could hold up to 25% of Ansett, or 35%, in alliance with other foreign airlines. Kimpton also sees funds coming from Ansett's program of sales of non-core assets, which range from furniture removal to making turbine blades and buses. (Ansett now regards Hayman Island, worth up to $150 million, and Diners' Club, worth about $30 million, as core assets). No sales have been concluded, and press reports in December that a buyer had been found for Ansett's Melbourne headquarters were incorrect.
Ansett has rejected the option of becoming what Kimpton calls "an instant clone of Qantas", deciding instead to pick routes where an additional airline could expand the flow of tourists. "We see Asian capitals as destinations. Our opposition has tended to see them as mid-points en route to Europe," Kimpton says.
In its submissions to Canberra, Ansett acknowledges the heavy spending needed but says that one of the causes of its present debt levels -- its now-completed re-equipment and computerisation program -- is a plus for entering foreign markets. Ansett's niche strategy also takes into account the limited funds that Ansett could expect to raise from Australian capital markets, Kimpton says, particularly as Qantas plans to raise about $2 billion in its float this year.
Kimpton also makes these points about the Asian strategy:
* Ansett intends to fly in its own right. "It's stand-alone. We don't intend to operate on code-sharing. We'll have Ansett planes with Ansett tails."This rebuts industry speculation that Ansett would aim merely to share the services of established carriers, in the same way that people can book on Qantas but board an Air New Zealand plane. However, it would be open to Ansett to go back to the International Air Services Commission in Canberra to approve any code-sharing.
* Ansett's three-year planning for the six routes it is applying for would probably involve "several" new Boeing 767-300 twin-engine aircraft and"several" Boeing jumbos, probably the 747-300 type. "We could buy aircraft or lease them. Whichever way we go, we would not have difficulty when we consider the expectation of getting additional partners and our shareholders' commitment to helping us with finance." The core of the Japanese plan would be daily 747 operations from Sydney and Brisbane and 767-300 flights from Melbourne.
* The 747s would mean a quantum leap in Ansett's capabilities and infrastructure, even though it already operates 200-seat 767s capable of flying to shorter-haul Asian destinations such as Bali. Operationally, flying outside Australia is familiar to Ansett. Its crews fly an Ansett 767-200 weekly to Ho Chi Minh City (Saigon) and points beyond in a lease arrangement with Air Vietnam, so Ansett already has an air operator's "ticket" for airports in Kuala Lumpur, Singapore, Hong Kong, Taipei and Ho Chi Minh City.
* Ansett, despite significant spending to upgrade its domestic terminals in the past few years, will probably lease facilities in international terminals from the Federal Airports Corporation to service Asian flights. But its Australia-New Zealand operations will use domestic terminals, Kimpton says. The services of Customs, immigration and quarantine officials will be provided gratis, as is customary. But the Government is now flying a kite to the effect that all international carriers should be charged in future.
On the New Zealand project, the Government initially ruled that Ansett would have to pay for the officials. McMahon was further astonished to be told that 19 officials would need to be on duty for each flight from New Zealand. However, the bureaucrats persuaded the Cabinet to give Ansett free service, and after detailed committee work, they also got the number of officials per plane down to 12.
* Each Asian service will be launched within a year of approval by the IASC, and decisions on all routes are expected to be made within a few months. Because approvals are given for only five years, and Ansett needs three years to build up to its frequency ceilings on the routes, Ansett will re-apply for routes only two or three years after developing them. Kimpton says the presumption in the guidelines is that existing rights will be renewed, but not if an operator blots its copybook, such as by failing to begin services by the scheduled date.
* The 747's freight capacity is three times that of a 767, and Ansett is keen to win freight and mail business on all routes. It would discount freight rates to Australia and match the already competitive outbound rates, particularly for Asia's booming fruit and vegetable trade. Using TNT, it could create a South-East Asian door-to-door freight network with a Singapore hub.
The master plan will make further cost-cutting within Ansett imperative. In the past 18 months, it has reduced its workforce by 1000 to about 10,800, mainly through attrition. With Qantas-Australian now entering another round of severe staff cuts, analysts suggest that Ansett will have to shed a further 1000 jobs.
Ansett would like to emulate Qantas's intra-Asian services involving the Jakarta-Singapore-Bangkok triangle, requiring inter-governmental agreements. It expects to be able to use its trans-Tasman rights to inveigle Asians into a New Zealand-Australia-Singapore circuit and other multi-destination routes.
In the meantime, Ansett is combating the Qantas/Australian/British Airways alliance with a grouping of new allies, including Malaysia Airlines, Cathay, Lufthansa, Alitalia, United, All Nippon Airlines and Garuda. Although Ansett has lost its Qantas feeder agreement -- and very soon, a cooperative deal with British Airways -- it believes its new links are a satisfactory offset.
Having Asian routes will enhance Ansett's attractiveness to potential partners. Another Ansett jewel is its dominance in the Australian retail travel agency business; it can switch what McMahon calls "huge slabs" of business to its foreign airline affiliates.
Prime Minister Paul Keating's decision in February last year to create this sort of local competition against Qantas effectively cut the sale price for Qantas's privatisation. But apart from the political problem of the demise of Bryan Grey's Compass for Keating, Keating knew that the system of having Qantas as the sole national carrier was a dinosaur.
An Industry Commission report in 1989 calculated that the system cost the economy between $400 million and $700 million a year. In May of that year, the commission studied actual fares charged to wholesale agents in Australia by international airlines on similar routes. Qantas fares were generally the highest and typically 22% higher than the cheapest airline; some fares were 68% higher.
On the Australia-Malaysia run, Qantas had been using only 15% of its entitlement of flights, the Industry Commission reported but was leasing capacity to the rival Malaysia Airlines for $1.25 million a year, plus a levy on certain passengers. The total deal increased the cost of a Malaysia Airlines one-way economy seat by 10%, or $40. (Qantas still assigns rights to a jumbo-capacity each week to Malaysia Airlines for about the same fee. Malaysia Airlines will soon gain this flight capacity officially at no charge).
A Qantas spokesman says the original deal arose as a compromise after Malaysia sought more capacity than it could justify and was told it could lease some Australian capacity instead. "The airline boosts its annual revenue by about $20-25 million a year, so they were very happy to pay the $1 million or so fee," the spokesman says. "They went into that one with their eyes open."
The Ansett submission concerning Malaysia includes the odd angry shot. Nearly 650,000 Malaysians now travel overseas each year, but Australia attracts fewer than 8% of them, it says. "To date, the Malaysia-Australia market has received very little in the way of service or frequency."
Until recently, Qantas operated only three weekly flights to Malaysia, including flights via Singapore. Ansett executives say that Qantas, which was disgruntled about the recent increase in capacity on the Malaysian route, has already begun pepping up its Malaysian marketing in a pre-emptive strike against Ansett.
The Qantas spokesman says Ansett's criticisms are a further"load of rubbish". He says Qantas has four flights a week to Kuala Lumpur. Still, Ansett pretends to overlook Qantas's 48 flights a week from many Australian cities to Singapore, within easy reach of any Malaysian city.
Ansett says it will be more flexible in using gateway airports, especially Melbourne, Perth, Darwin and Broome. Qantas also is planning to widen the tourist route away from the Barrier Reef-Ayers Rock-Sydney circuit. Restrictions on capacity over the years encouraged Qantas and other airlines to focus on the best market, Sydney, at the expense of other capitals, Ansett claims.
McMahon proposes non-stop Ansett services from Japan to Brisbane and Melbourne, two cities not serviced by incumbents' airlines, he says. Qantas counters that it services Australian cities more broadly than any other international airline, using its Singapore and Bangkok hubs to channel Australian passengers to other trunk routes.
The big conflict between Ansett and Qantas is over rights into Osaka's new Kansai airport next year. Apart from lucrative fares, the attraction is that Kansai will become one of the best hubs for travel throughout Japan and the only main hub operating 24 hours a day.
Qantas's chief executive, John Ward, describes Japan as the "cornerstone" of Qantas's growth plans. Hence, both Qantas and Ansett want all 14 new Kansai weekly flights on offer.
Ansett's plan would give it 23% of Australian capacity on total Japan-Australia routes, leaving 77% to Qantas. Ansett's goal is a 9% share of passengers in 1994-95 and 11% in 1995-96. Currently, Qantas commands 54%, JAL 33%, ANA 12% and Northwest 1%.
For Singapore, a market with a 10% annual growth in two-way travel to Australia, Ansett wants seven of the 14 new 747-capacity loads on offer by late 1995. This would leave seven for Qantas, but it might lose two of its 33 existing jumbo-loads to Ansett in 1995. Qantas holds 42% of the traffic, and Singapore Airlines holds 50%. Ansett has pledged to carry a"substantial" proportion of discounted-fare passengers.
Ansett also says it will provide new direct services to Singapore from more Australian cities. Unlike Singapore Airlines and Qantas, Ansett will have nothing to lose by promoting its discount northbound fares with the lure for Australians of being able to have access from Singapore to the cheap third-tier airlines operating to all points further north.
As for Indonesia, Ansett's application for four 747 loads a week would increase the used capacity on the route by 50% and require heavy marketing and promotion. Garuda has 62% of the traffic compared with Qantas's 38%, but by restricting its number of flights, Qantas gets more passengers per flight and greater profitability. Garuda has even obtained, free of charge, one unit of Australia's capacity on a temporary basis.
Ansett would start with two Australian gateways to Jakarta and later offer non-stop flights to other capitals like Broome and Port Hedland. It would also seek to funnel some of the increasing numbers of passengers going south to Bali on other airlines into Australia.
Ansett also claims that Qantas has used the capacity restrictions on the Hong Kong run to create high-margin flights rather than bringing more tourists into Australia. Qantas replies that it has given strong support to a substantial increase in capacity on the Hong Kong route in the next two years. The original capacity problem was created by complex international disputes between Australia, Hong Kong and Britain, which had held up the expansion of flights through no fault of Qantas, it says.
Ansett wants seven Hong Kong flights a week and argues that from July 1995, seven flights that were awarded to Qantas last year are claimable, making a total of 4400 seats a week, equal to Qantas's present services.
Ansett initially wants to use 747s to Sydney and Melbourne, then 767-300s to other capitals, emphasising leisure traffic. It acknowledges that starting with 747s to Hong Kong would be onerous. To fill the jumbos, Ansett will be touting cheaper fares and packages, "although we won't sell the shop", Kimpton says. Ansett will also be luring foreign tourists from other parts of Asia into Australia via Hong Kong.
Qantas executives obviously are annoyed at Ansett's line of attack. They say that the whole argument about capacity restrictions and excessive fares has collapsed, with excess capacity on a multitude of routes and airlines declining to use it because they cannot make money at the fiercely discounted fares now applying.
Ansett Boeing 747-312 VH-INH arriving at Hong Kong's Kai Tak International Airport in February 1998.
Credit - Gerhard Plomitzer / Tony Thomas. January 29, 1993 AFR.
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