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One Aussie Airline To Bite The Dust  
User currently offlineAussie_ From Australia, joined Dec 2000, 1767 posts, RR: 4
Posted (15 years 2 months 11 hours ago) and read 2507 times:


I know we have heard lots about this recently, but I think this is a well written article (Sydney Morning Herald). There are many sad truths brought up in it.

Personally, as I said in another thread, I think Impulse and Virgin should cooperate and allow each other exclusive access to different parts of the markets. This is the only way I can see them both surviving.

* * *

One will bite the dust as airlines chase a slice of pie in the sky

The recent bleatings from the new players are signs the discount war is starting to hurt, writes Stephen Bartholomeusz.

When start-ups run to the regulator, you just know they are finding the going tougher than they anticipated. With Impulse and Virgin accusing Qantas of capacity dumping and predatory pricing, you just know that the price and capacity war now escalating rapidly in the domestic aviation market is going to result in casualties.

With two new discount-oriented entrants to what had been a two-carrier industry, it was always a long shot that the industry structure would smoothly adjust to allow four airlines to co-exist. It would have required extraordinary discipline, even co-operation, between the new players and a preoccupation with profitability over strategy by the incumbents.

For a while, it looked like Impulse and Virgin might navigate their way through the competitive minefield without blowing themselves up in the process, although Impulse increased their vulnerability to competitive response by establishing unsustainably low precedents for discount levels ahead of Virgin's entry. They were aided by the buoyant domestic economic conditions last year and the financial and operational problems at Ansett, which put a lot of market share up for grabs.

Then they got cocky and started talking about their plans to add lots of capacity to the core east coast routes. Impulse forecast a maiden profit and a public float. Virgin enthused about the degree to which it was surpassing its own original expectations.

Now, weeks after it forecast the profit, Impulse is conceding that it will incur a loss and is trying to raise fresh capital from its investors.

Virgin has started referring to its experience in the UK, where BA tried and failed to drive it out of the market at horrendous cost to both airlines. Both Qantas and Air New Zealand issued profit warnings in the past week.

The abrupt change in the environment follows a significant increase in the intensity and depth of discounting in the market. That is being driven largely by a rapid rise in the amount of capacity being added to the eastern seaboard routes.

Qantas is shifting capacity from recently closed international routes to the domestic market. Impulse and Virgin are both adding planes as part of a planned build-up in their operations. Before the end of this year, there will have been a 30 to 40 per cent increase in capacity in the industry, mostly focused on the Sydney-Melbourne-Brisbane routes. At its peak, Compass probably added only 15 per cent to industry capacity.

The rise in capacity and discounting are having a predictable effect, with passenger traffic soaring, load factors at historically high levels and yields being savaged. As the Compass experience revealed, however, doing increasing amounts of low-yield business ultimately marginalises an airline's revenue structure and accelerates and leverages that into a tide of red ink.

The airlines are, moreover, suffering from more than their own inability to keep the competition civilised. Soaring fuel prices, in Australian dollar terms, have been amplified by the plunging dollar. The lower levels of economic activity are starting to hurt the volume of business travellers, the key to maximising yield.

Impulse and Virgin are relying on their significantly lower cost structures to protect them - Impulse claims a 40 per cent cost advantage over Qantas and Virgin is even more efficient. Compass, of course, had a similar advantage.

The problem for the smaller operators is that once the industry stability has been undermined by deep and broad discounting activity, and the dominant player sees a real risk of its franchise being significantly eroded, the rules change.

Cost advantages are overwhelmed and it becomes a simple matter of whether the players have sufficient capital to survive a fully-fledged price war.

The key message from Qantas's recent redeployment of capacity and its new fare structures is that it is prepared to suffer significant financial pain in the near term, and accept the sharemarket's response, to protect its market share and franchise.

While the likelihood that at least one of the new entrants will be forced from the skies is starting to increase quite rapidly, Ansett is being ravaged by the escalation in hostilities.

Having been starved of capital for a decade by its former shareholders, it now finds itself with an aging and cumbersome fleet, a parent with no balance sheet flexibility and, following a clumsily managed integration with Air New Zealand, poor morale and a dearth of executives with the experience of the two Compass-inspired discount wars.

Air New Zealand's new chief executive, former Qantas CFO Gary Toomey, and its 25 per cent shareholder, Singapore Airlines, are about the only things Ansett has going for it. Before the industry is stabilised, Singapore will either own a lot more of Air NZ or have a direct interest in Ansett. If it doesn't, and soon, Ansett and the long-term health and competitive structure of our domestic aviation market would be at dire risk.

In the meantime, the best hope for Impulse and Virgin, and no doubt the aspiration for Qantas, is that they can strip sufficient market share from a reeling and vulnerable Ansett to improve their own viability, or in Qantas's case, its degree of dominance.

Fasten your seatbelts, there is extreme turbulence ahead.

12 replies: All unread, jump to last
User currently offlineAvman From United States of America, joined exactly 11 years ago today! , 0 posts, RR: 0
Reply 1, posted (15 years 2 months 10 hours ago) and read 2429 times:

Whovever starts flights to Perth first will survive. Although it is a small market the loyalty to the airline which broke the QF / AN stranglehold on flights to Western Australia would be huge.
The W.A. governemt will be putting proposals to Virgin and Impulse in the not too distant future.

User currently offlineRayChuang From United States of America, joined Jun 2000, 8361 posts, RR: 4
Reply 2, posted (15 years 2 months 6 hours ago) and read 2399 times:

However, does Virgin Blue or Impulse have the planes that can fly SYD-PER non-stop? I don't think their fleet have such a plane just yet.

SYD-PER will require a bigger plane--very likely at minimum a 757-200 or A321 higher-MTOW version.

User currently offlineSingapore_Air From United Kingdom, joined Nov 2000, 13756 posts, RR: 18
Reply 3, posted (15 years 2 months 5 hours ago) and read 2389 times:

Air New Zealand's new chief executive, former Qantas CFO Gary Toomey, and its 25 per cent shareholder, Singapore Airlines, are about the only things Ansett has going for it. Before the industry is stabilised, Singapore will either own a lot more of Air NZ or have a direct interest in Ansett. If it doesn't, and soon, Ansett and the long-term health and competitive structure of our domestic aviation market would be at dire risk.

Dire risk!!!! What is it talking about!

Anyone can fly, only the best Soar.
User currently offlineOz777 From Australia, joined Jun 2000, 521 posts, RR: 5
Reply 4, posted (15 years 2 months 4 hours ago) and read 2374 times:

Singapore - if you cannot understand it, let me spell it out.

AN to lose SO MUCH, and drag ANZ with it that they pull out of the Australian market, or at the least require such a huge shareholder capital injection, that SQ's investment starts to look like a bottomless pit.

Prediction: QF to buy Impulse, and use it as it's low cost carrier in Australia, and possible regional with some "spare" B767's.

SQ to help Branson again and the Virgin Blue brand to disappear, or be "merged" into a "Star Alliance" domestic carrier.

This is only 3 months away!!!


User currently offlinePhileo From , joined Dec 1969, posts, RR:
Reply 5, posted (15 years 2 months 4 hours ago) and read 2369 times:

SYD-PER is 4 hour flight currently operated with A320, B734 and B767 by Ansett and Qantas.

Virgin needs the B737NG to fly to PER and I dun think B717 can fly that far.

User currently offlineAirnewzealand From New Zealand, joined Oct 2000, 2549 posts, RR: 6
Reply 6, posted (15 years 1 month 4 weeks 1 day 22 hours ago) and read 2341 times:

I agree with Oz777 here. Everything he is saying looks likely!!


User currently offlineRyanair From United Kingdom, joined Jul 1999, 654 posts, RR: 0
Reply 7, posted (15 years 1 month 4 weeks 1 day 21 hours ago) and read 2331 times:

I think the article is a bit alarmist. For instance, comparing Compass to now. Neither Compass was ever a budget airline (Compass II was 30% first class), both Virgin and Impulse are budget players. Also, both Australian and Ansett had very deep pockets then (despite the pilots dispute) - quite clearly not so now. I doubt either AN or QF can afford a full out "buy one get three free" Compass type war. QF needs good income flows to pay for all those new expensive widebodies when they arrive, AN/ANZ are short of cash.

Further take a look around the world, budget airlines quite happily operate at these fare levels (in USD terms). Play around on some of the various websites and see, (iflysouthwest.com, easyjet.com, ryanair.com)

No one expects airlines to turn a profit for the first two/three years, the fact Impulse and Virgin aren't should be expected. It's also to be expected Impulse would be looking for aditional funds, business tends to work like that, rather than have big wads of cash hidden under the matrice.

Complaining to the competition authorities is common practise for budget airlines (Southwest, Easyjet and Ryanair all very profitable and all regulars), mainly for publicity purposes. (We're the battler being screwed by those big evil corporate bastards, just like you are)

It's true ANZ/AN is an absolute disaster so far, but AN's been a disaster for years. OK they're loosing money, but it's hardly huge amounts in airline terms. The fleet is not exactly pensionable, the life of an airliner is approx. 30 years - Ansett have few over 15 years. OK they need to pull something out of the bag, but they're not about to go bust just yet.

I think the basic underlying analysis of this article is wrong and typical beatup journalism during a slow news week. Of course if you start something new or expand a market very quickly there will for a time be large losses even if there's the demand there and if you've not enough capital to see you through you'll go out of business. So lots of people are about to go bust, apart from conjecture, is there any evidence in the article this is the case here??

User currently offlineCedarjet From United Kingdom, joined May 1999, 8656 posts, RR: 53
Reply 8, posted (15 years 1 month 4 weeks 1 day 19 hours ago) and read 2319 times:

Interesting thread. I don't see how the Aussie domestic scene can possibly support four carriers when it couldn't support three in the Compass era. Ansett is my first love but now they're owned by Air NZ I don't really feel that loyalty anymore (remember when their ICAO two letter code was TE from the Tasman Empire Airways days?). The international services and 747s are nice but they are obviously struggling and poorly managed, poor morale is obvious as well - grounding a whole fleet (767s) because of a maintenance oversight would never happen at a happy well-managed company.

It'll be an interesting year or two with what my boss calls "blood on the walls". Looks like AN are going to suffer the most, maybe Impulse too.

fly Saha Air 707s daily from Tehran's downtown Mehrabad to Mashhad, Kish Island and Ahwaz
User currently offlineMadog From Australia, joined Nov 2000, 91 posts, RR: 0
Reply 9, posted (15 years 1 month 4 weeks 1 day 19 hours ago) and read 2318 times:

This article seemed to be the contrary of whT "The Heard Sun" reported on last Friday.

It mentioned Impulse havbe recorded a profit after three months of losses during its first three months of operations.

User currently offlineBNE From Australia, joined Mar 2000, 3215 posts, RR: 11
Reply 10, posted (15 years 1 month 4 weeks 1 day 18 hours ago) and read 2306 times:

I think what OZ777 said was interesting.

If Singapore own part of NZ and then NZ owns Ansett I can't see Singapore being happy with Richard Branson.
The Australian market can support 3 carriers 2 majors and a discount carrier.
717s are an ideal size for an Australian carrier as they are small enough to fill on off peak flights and low demand destinations. Virgin using 162 seat 737-400 I feel is just to big a capacity for some places especially Brisbane-Adelaide.
Both 717 and 737-400 will not make it to Perth due to range I think 717 only have range of about 2000kms while 737-400 can do 3800 kms. 737-700 and 757s both could do the distance to Perth. Read somewhere that Impulse were looking at 757s for Perth but this could have been a joke.

Why fly non stop when you can connect
User currently offlineMD-90 From United States of America, joined Jan 2000, 8530 posts, RR: 11
Reply 11, posted (15 years 1 month 4 weeks 1 day 18 hours ago) and read 2301 times:

Sydney to Perth is 1796 nm. That's a little far for a 717. But Boeing's website says that the 717HGW model can fly 2060 nm. That's far enough.

Or they could find some cheap, used MD-80s or even some MD-90s (although the -90s are probably more money than they want to spend) to fly the route.

User currently offlineWirraway From Australia, joined Mar 2001, 1321 posts, RR: 1
Reply 12, posted (15 years 1 month 4 weeks 1 day 7 hours ago) and read 2264 times:

I think Ryanair air sums it up fairly well, I spent 5hrs
today(Sunday) counting the load factors on both
Impulse and Virgin Blue and Virgin is definatly on top
with what I counted, 84% against Impulses 63%, although this is the only time I have counted and could
be well different during week days.

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