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Thursday 12th April 2001

IN THE AIR: Neither Qantas nor Air New Zealand is making money on the highly competitive Tasman, so combining Qantas New Zealand operations with the Tasman and Qantas' home market by rotating 737s between all three could bring huge savings and efficiency increases

The Qantas deal expected to be signed today could see our second domestic airline becoming a downgraded 'clip-on' to its parent, GRAEME KENNEDY reports

Qantas Australia could be planning a combined domestic and Tasman international operation to benefit from New Zealand's lower cost base following its acquisition of its local franchisee, expected to be signed today.

Industry sources say the Australian carrier is expected to replace Qantas New Zealand's BAe 146 jets with its own bigger and more efficient 737s which are now well-established on the Tasman, fitting well into the routes and providing better frequency.

Qantas is understood to be considering using the twin-jets on New Zealand domestic routes as part of its Australia-New Zealand and return services. They could fly, for instance, Sydney-Auckland-Wellington-Brisbane in an international and domestic mix with engineering and maintenance work performed at its own bases in Australia.

Neither Qantas nor Air New Zealand is making money on the highly competitive Tasman, so combining Qantas New Zealand operations with the Tasman and its home market by rotating 737s between all three could bring huge savings and efficiency increases.

That move would increase utilisation and lower operating costs on its own fleet and achieve savings by using the same aircraft on the combined operation rather than placing dedicated aircraft in New Zealand.

Qantas might also base pilots and cabin crew in New Zealand for the combined domestic-Tasman operation to move its costs here and benefit from the lower exchange rate as well as New Zealand's more liberal employment laws.

Another scenario being discussed in the industry is for Qantas, under pressure from Australian domestic low-cost carriers Virgin Blue and Impulse, as is competitor Ansett, to use Qantas New Zealand as a beach-head from which to launch its own discount operation in Australia.

Lower costs to be achieved here would enable Qantas to better match the Australian newcomers' discounts.

Meanwhile, Qantas New Zealand's new owner is expected to slash staff numbers after finalising the deal which pulled the former Ansett New Zealand back from the brink of collapse last week with help from Auckland insolvency firm Ferrier Hodgson and its top gun, Michael Stiassny.

The carrier's workforce, which has almost doubled to 1100 in the past decade for the addition of just two more BAe 146 jets to 12, is an obvious target while the airline urgently needs more capacity to achieve higher revenues and enable it to better compete with Air New Zealand.

Qantas is expected to replace the 105-seat 146s with 737s which carry up to 140 passengers and provide 20-25% lower seat-kilometre costs. Greater capacity can drive lower operating costs which, in turn, can lead to lower fares.

Although the reborn Qantas New Zealand might test low-cost fares in the New Zealand market, it is unlikely to sustain them and would instead go for higher yield.

As well as identifying economic and operational improvements, Qantas bailed out the New Zealand carrier to avoid having an airline bearing its name fall over - but the former Ansett New Zealand has always had to struggle.

Huge startup expenses, high aircraft leases and operating costs and a failure to attract consistently high-yield business traffic stifled the carrier since it began flying in 1987, a situation that had not eased when a New Zealand consortium of businessmen bought the company from 100% owner News Ltd a year ago for about $36 million.

Formed in July 1987 by Newmans Air and Brierley Investments with 50% interest and Ansett Australia holding the other 50%, the carrier became wholly owned by News in early 1989 when the Lange government relaxed foreign ownership regulations and BIL got out as losses began to climb.

The airline was started with a low $58 million capital base and acquired six 737s and two Dash 8 turboprops through Ansett Worldwide Aviation Services, but could get them only on more expensive establishment leases made available to airlines without a performance record.

With the fleet change to lower-capacity BAe 146s, the higher-priced leasing arrangements were continued - the new consortium owners a year ago extended the leases for a further four years, although Qantas is expected to buy out of them.

Ansett New Zealand was forced to invest huge amounts in establishing its own engineering base at Christchurch and carry an enormous inventory of spares for its orphan fleet - the nearest BAe146s operate in West Australia and there is no airline spares pool as exists for more common types to draw on.

And New Zealand is too small to contract private suppliers to provide the maintenance and ground-handling services airlines must have.

Yields were far below expected levels, especially when Air New Zealand offered a "special" 25% discount rate six weeks before the newcomer started flying. That was the rate passengers expected to pay and Ansett New Zealand - which said it would sell on quality rather than price - was forced to follow.

Ansett New Zealand initially operated from small rented offices in airport terminals and found it could not expand as its rival leased all available space and the carrier was forced to build its own terminals on adjacent airport land.

They were an unplanned $20 million cost but introduced New Zealand travellers to Golden Wing business class lounges, air-bridges and other "luxuries" flyers in Australia and other countries had had for years.

Well-established Air New Zealand was quick to follow with its spruced-up terminals and similar Koru Clubs for its loyal and much larger customer base, particularly the valuable corporate sector.

Ansett New Zealand spent a lot of money trying to woo business travellers and get rid of scepticism - often driven by Air New Zealand - that it would not survive. Lounges like Golden Wings are expensive to run and Ansett, while doing well on the trunks where its highest costs are, never got the premium business to offset those costs.

Air New Zealand continued to win the big corporate accounts and preferred airline agreements by offering seamless domestic and international service while corporate agencies said clients did not like Ansett New Zealand's smaller 146s, increasing delays and flight cancellations.

They also said businessmen were critical of CEO Kevin Doddrell's lock-out of his pilots in late-1999 over new employment contracts as "not being the way business is done today."

Although part of his annual $28 million cost-cutting programme, the action caused flight disruptions for months and lost even more once-loyal customers until the company was losing a reported minimum of $100,000 a month.

With the slide continuing after making three small profits but losing more than $200 million, News Ltd sold the operation a year ago to the consortium organised by Clavell Capital executive chairman David Belcher.

Renaming the carrier Tasman Pacific Airways, the group, most of whom appear in the NBR Rich List, negotiated the franchise of the Qantas branding in a move that would hopefully lift the airline's profile under one of the world's most recognisable aviation brands.

They also expected increased traffic from enhanced reciprocal passenger flows and more interest from the high-yield business market as the two airlines could then offer the desired seamless international-domestic service.

Investor Sir Clifford Skeggs said then he would not have become a shareholder "if the numbers hadn't stacked up."

"But they do and there is real potential," Sir Clifford said. "We consider the airline has a good future and being a predominately New Zealand-owned company is in its favour from a marketing aspect - rest assured, we evaluated it very closely."

But the woes of the past had gone on too long and, now Australia-owned, Qantas New Zealand is being re-invented yet again.

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