Flying backwards

By Fiona Rotherham

Tuesday 1st June 2004

Troubled airline Origin Pacific is down, but not out. Fiona Rotherham reports on what it needs to do to survive

It goes against the grain, but publicity-shy Origin Pacific founder Robert Inglis has had to talk to the media a lot lately, explaining why 70 creditors owed $11.4 million should back a restructuring proposal to save his troubled airline.

Origin's financial problems stem from Air New Zealand's aggressive pricing tactics since it launched its Express Class in 2002 and Qantas's decision to end a codeshare and wet-lease agreement (in which Origin supplied an aircraft and crew for a guaranteed income) that accounted for 40% of Origin's revenue.

Suddenly the eight-year-old Nelson-based airline was left with an infrastructure it could no longer afford to run.

But Inglis, a veteran aviation operator, is the quintessential Kiwi battler. Sufficient creditors, including Air New Zealand Engineering (owed $338,000), this month voted in favour of a restructuring proposal that will see them get just 40c in the dollar over the next five years. Bigger creditors - the regional airports and Airways Corporation - decided it was in their interests for the airline to survive so they would continue getting revenue from landing and air traffic control charges.

Not everyone is happy though. Air Works boss Hugh Jones expresses the view of smaller commercial operators, arguing he would have been better off for tax purposes writing off the debt than accepting 5c in the dollar now and the rest much later.

As part of the restructuring, Inglis and his founding partner Nicki Smith have injected another $2.5 million into the company. Some of this will be used to immediately repay in full 275 creditors owed under $10,000 each - amounting to less than $500,000. Origin has also laid off 93 of its 450 staff, and is reducing aircraft capacity and its flight schedule.

For the first time, Inglis has been forced to take a step backwards - fighting to return to the small but profitable regional airline Origin was before joining forces with Qantas in 2001. He's forecasting Origin will be profitable by March next year. But it's never as easy cutting back as expanding, and in the meantime fares have plummeted.

Ian Thomas, senior consultant for the Centre for Asia Pacific Aviation, says Origin's challenge is getting its structure right, and "curbing its ambitions until it brings on additional investors or obtains funding at a rate that makes it viable for the future".

Critical to Origin's survival long term is spending some big money. Late last year it appointed KPMG to raise capital for fleet expansion, but then had to defer the move when Qantas confirmed it was ending the codeshare deal. Companies Office records show at that stage Origin had already issued 16.95 million shares, including 2.8 million shares to wealthy Nelson businessman David Lucas. The rest went to existing shareholders including Inglis, who owns around 70% of the private company. Lucas has since been repaid his $2 million investment personally by Inglis because it was conditional on the $7 million capital raising. Inglis says once a new business plan is finalised, he'll proceed with the capital raising in the next financial quarter. He hopes Lucas may put his money back in then.

Why ask investors for dosh when you've just narrowly avoided going bust? The answer lies in Origin's fleet. Origin needs the right mix of routes, frequency and aircraft and will "inherently struggle" against Air New Zealand unless it upgrades its fleet, says recently resigned marketing manager Ewan Wilson. The full service regional market has traditionally operated with a mix of 19-seat and larger aircraft. While 19-seaters are less costly and have some major advantages in developing routes with less demand, they are becoming less competitive following new Civil Aviation Authority requirements for things such as passenger weight limits. The travelling public has also become accustomed to aircraft with no fewer than 30 seats and a flight attendant, Wilson says. Origin's fleet includes six 19-seater aircraft and five 29-seater Jetstream planes. It needs new investors to fund more of the latter. "We see that as Origin's product of the future," confirms Inglis.

In hindsight, Inglis erred in accepting the 2001 deal with Qantas to replace the routes formerly provided by the failed Tasman Pacific (Qantas New Zealand). It shot Origin into the big league, flying on the main trunk routes but vulnerable to the whim of its partner.
Qantas is emphatic Inglis knew the lucrative deal was short term while it built up its own domestic capacity in New Zealand - now nine aircraft. New Zealand group general manager Grant Lilly insists Inglis was given more than the required 90-day notice of termination before the contract ended in late March.

The end of the contract coincided with Origin's outspoken opposition to Qantas's proposed alliance with Air New Zealand, currently under appeal.

While the Qantas wet-lease arrangement was lucrative for Origin, the two 64-seat ATRs Qantas required for the flights were more expensive to run than forecast (this included paying Air New Zealand Engineering $1600 per hour for maintenance - a lot more than expected). When Qantas pulled the plug, Origin was left with mounting debts and planes that no longer suited its business. It's grounded one of these aircraft and is negotiating an alternative use for the other.

So now Origin is returning to its roots as a regional player flying mainly single sector journeys, with a heavy freight focus. But times have changed. "It's now like Nelson Bays playing the All Blacks with the Wallabies on the bench," Inglis says wryly. Origin's raison d'être as the regional price leader has been undercut by Air New Zealand's Express operation dropping fares by 20%-50%. Air New Zealand says sales on its express service grew 22% in the first year and 11% since. That's caused a $30-per-passenger reduction in yield for Origin.

Inglis says it's bad enough that the government bailed out his chief competitor to the tune of $885 million in 2001. But what really upsets him is the government's failure to create a level playing field with a good referee. He is referring to Origin's complaint, laid in September with the Commerce Commission, over Air New Zealand's alleged predatory pricing tactics. The complaint centres on a new Hamilton to Christchurch direct service Origin had planned to introduce in October. Air New Zealand suddenly announced it, too, would launch a daily service on that route, leaving at the same time as Origin's aircraft with twice as many seats available. The smaller airline canned the idea. Air New Zealand claimed the timing was coincidental. Nine months on, the Commerce Commission can't say how much longer it will take to investigate the complaint.

All part of the rough and tumble of business? Maybe, but it matters to provincial New Zealand whether Origin survives. You only have to look at routes where Air New Zealand flies without competition. It costs around $237 to fly from Wellington to Gisborne. Compare that with Wellington to Christchurch - a similar distance, but it happens to be one of Origin's main routes - which has attracted fares as low as $29. On other routes both airlines fly, a quick fare check earlier this month shows Origin is still predominantly cheaper than Air New Zealand.

No other aspiring regional airline operators lurk in the wings. Qantas has said it will stick to the more lucrative main trunk routes, and has been using Air New Zealand's regional services for feeder traffic. Pacific Blue has indicated it will start flying domestically by Christmas, but will also cherrypick the main trunk and tourist routes. Managing director Tony Marks is confident Pacific Blue will eventually align itself with Origin in the same way Virgin has done in Australia with regional operator Regional Express.

Origin has made a number of deals with other international airlines flying into New Zealand that will provide additional customers, although at discounted fares. A strategic alliance between Origin, a full-service airline, and low-cost Pacific Blue is problematic because of their differing sales channels, but would be worthwhile. Inglis says he's not expecting huge volumes through such a deal. He's already learnt the hard way not to rely on a rival operator for financial success. Instead, his future lies once again in the hands of provincial New Zealand.

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