This is one of the best articles I've seen for some time
Ansett scarred in latest air-fare battle
Canberra Times - Australasia; Mar 5, 2001
BY PETER CLACK
The first casualties have been revealed in Australia's newest air-fare war and, while Qantas was announcing how many jobs are to go in the coming months, it's Ansett looking the most battle-scarred.
The airlines in Australia have had a good past few years. Qantas, in particular, has rebounded strongly from the Asian economic crisis, with each half-year result eclipsing the last as its best. But that ended as the carrier announced a 22 per cent reduction in its half-year result to December 31. Notwithstanding the reduction, their colleagues at Ansett could only have hoped for a result as good as the $263m Qantas announced. On the other side of the Tasman, Ansett's new owners, Air New Zealand, told a story of woe.
High fuel prices, reduced market share, increasing costs, lower productivity and a slower-than-expected integration between the carriers marked the last six months as a horror period for them, coming as it did on top of a maintenance oversight which grounded their Boeing 767 fleet, and a wide perception that their Olympics sponsorship was not worth what they paid for it.
But why has it been such a horror period for the two airlines? The answer lies, principally, in the hands of two, starkly different, people - Gerry McGowan, a quiet former truck driver from Newcastle, and Sir Richard Branson, a flamboyant billionaire from England.
Since Impulse airlines, under Gerry McGowan's stewardship, started one of the most aggressive and astute business ventures in Australian aviation history by setting up a war chest, buying new Boeing jets and starting services between Sydney and Melbourne, the landscape has changed. McGowan has added another 3 117-seat Boeing 717 jets to his existing five, and is now operating 19 return flights a day between Sydney and Melbourne, giving him big capacity, high frequency and, using one of the most efficient passenger jets available, a very cost-effective operation. Frequency gives him the ability to steal some of the lucrative business market from Ansett and Qantas, while capacity lets him offer discounted fares on all his flights to steal the leisure market. In addition, he's now running 10 return flights a day between Brisbane and Sydney and, unlike the old fare wars, his schedule of flights to Canberra from Sydney and Melbourne gives locals access to that new market. On the other side, Branson breezed into Australia and thumbed his nose at the establishment, promising a discount airline with a good route network and some of the flair which marks his Virgin empire around the world. Despite a shaky start, with a delay to his commencement of operations caused by a lack of certification from the Civil Aviation Safety Authority, in just six months, Branson has started operations to Brisbane, Sydney, Melbourne, Adelaide and Townsville. Perth and Canberra are also on the radar screen.
The effect of this on Ansett and Qantas is felt in two ways. Firstly, market share for both carriers is down as the growing market is split among four carriers instead of two.
This is far more dangerous for Ansett, which was also losing the market war to Qantas.
Industry analysts suggest Ansett's market share could be as low as 40 per cent now - the lowest it has had ever. And while Qantas has lost market share because of the entry of new participants, it still has well over 50 per cent, and is doing well in the corporate and business market.
But the second effect is far more invidious. Yield is down for the airlines. Yield is quite literally the amount of money an airline earns per seat on a flight. Airlines traditionally support their ability to offer cheaper, holiday fares because of the higher yields earned on business fares, particularly by business and first class passengers. As more businesses see the quantifiable savings of the introduction of new carriers, the demand for premium services, at higher cost, is being tested.
Although there is a market for that travel, Qantas' decision to use newer aircraft on their domestic services is giving them the market edge over Ansett.
So while Ansett is losing customers from the leisure market to Impulse and Virgin, it is also losing customers from the front-end to Qantas. That's why this war is likely to claim far more casualties at Ansett than the 1470 Qantas announced on Thursday.
Lurking in the wings remains the other new player in the Australian aviation scene - Singapore Airlines. The financial strength of Singapore Airlines is the envy of every Australian airline: the carrier has announced aircraft orders in the last six months totaling $A26b, to be funded from cash flow, and announced its own half-year results to 30 September 2000 late last year, returning a $1.1b half-year profit, up 94 per cent on the previous year. Even after extraordinary items are taken out, and fuel prices included, the result is still up 38 per cent on the previous year.
Last year, Singapore Airlines completed a transaction to purchase 25 per cent of the Ansett Air New Zealand group. Last week, Air New Zealand chairman Sir Selwyn Cushing admitted that his company paid too much for Ansett. The irony is it was well-known that Singapore Airlines wanted to buy Ansett, and is probably the one airline which could have afforded to pay too much for Ansett. But it was astute enough to defer to Air New Zealand, then buy 25 per cent of that company for a far more reasonable sum. Analysts point to a growing concern in government and industry circles in New Zealand that Air New Zealand may have over-committed itself in its acquisition of Ansett, and by doing so, cannot afford to service the equity, which could lead to both brands running down.
But those analysts would be wise to cast an eye north, where the extraordinary developments in aviation in this country are being watched by arguably one of Asia's most astute businesses.
Singapore Airlines won't play in this war, but you can guarantee they'll be ready to pounce on the survivors to boost their already-impressive portfolio.
Anyone can fly, only the best Soar.