Why the Fox-Lew game plan is a winner
By Robert Gottliebsen
LINDSAY Fox and Solomon Lew are going ahead with their bid for Ansett and in two weeks will begin training Ansett pilots for new Airbus aircraft.
They've decided to ignore the government backflips because they believe their formula will work. It's one many others will need to consider in this environment.
The bid is subject to creditor and court approval. Before we look at why the new Ansett will be so different from the old – and how it plans to take on Qantas – it's important to understand why its government relations became such a mess.
The government stance is that it shouldn't give Fox and Lew special help because this would have to be extended to everyone else. I don't challenge the principle, but it was a rocky road getting there.
With an election looming, transport minister John Anderson wanted a solution to the Ansett crisis. The only one on offer was the Fox-Lew bid. Just what Anderson indicated the Government would deliver will be debated for a long time, but the principle Cabinet eventually adopted wasn't at the top of the agenda.
Publicly, Anderson spoke of a Qantas market share of about 65 per cent and there were hints of lots of government business. Fox and Lew believed he'd deliver – and that they were entitled to help.
The weekend before the poll, Anderson indicated the Prime Minister would be involved in a relaunch announcement. Suddenly, this was withdrawn. The Ansett deal was announced a few days later – without the Government. But Simon Crean was there, which didn't go down well.
Anderson likes to please. But he can't always deliver. He might have been able to if Fox and Lew were the only bidders and liquidation the only option. Once Corrigan entered the race, the game changed.
Qantas and Virgin have warned Lew and Fox to expect aggressive pricing when they relaunch Ansett next month.
Just as the old Ansett and Qantas made life miserable for Compass, so Fox and Lew can expect to be tested.
Why would two wealthy men decide to take on Qantas? Why go against a government that, at best, has misled and, at worst, prefers a rival bidder?
As Fox and Lew have gone deeper into the business, they have become even more enthusiastic about Ansett's prospects. They believe their business model is better than anyone has used in Australian aviation and that their rivals will eventually get sick of giving away airline seats at fire-sale prices.
The first part is to secure new aircraft on terms no one else can better – way below Qantas's. And they'll offer passengers internet, TV and phone access.
Second, they've secured world-class work practices. The unions agreed because staff will get 5 per cent of the operation.
Third, they have a great brand on which to superimpose a new operation.
Fourth, the new Ansett will operate only on main routes. The combination of these factors means it will be able to break even with 20 per cent market share and make money at 25 per cent. The old Ansett probably needed 50 per cent to break even.
The big cost is taking over the old Ansett terminal contracts. The terminals were designed for a bigger airline. Fox and Lew will have to pay for space they won't need.
Just what profits Ansett delivers will depend on how they use the excess.
Neither man wants to actually run the new airline. They've set up the model and invited other international airlines to run it.
The plan includes a minority equity for the manager. So the new Ansett would have four shareholders – Fox and Lew with up to 40 per cent each, the manager with 15-20 per cent, and 5 per cent for staff.
Singapore is the favoured manager but it will want to ensure creditors back the proposal. Staff dominate the secured creditors and shouldn't be a problem. Among the estimates of what unsecured creditors will get, 15c in the dollar seems a likely outcome. Many unsecured creditors, including holders of frequent-flyer points, would benefit from Ansett resuming operations.
Qantas has had to provide 90 per cent of air traffic since Ansett collapsed and has locked in corporate customers. It will continue to make good profits from its domestic operation but will need to lower its cost structure to meet the competition.
If Qantas decides Fox and Lew are a long-term threat, it may go for the throat.