The collapse of Ansett has sparked a confrontation over both what precipitated the crisis and what its consequences will be. But, as the major players trade recriminations, Ansett's demise raises questions over the nature of the Australasian market

Court-appointed Administrators are close to a decision on whether to sell the remains of Ansett Australia and its affiliates in pieces, or as a going concern. That decision could turn on the willingness of Singapore Airlines (SIA) to become an advisor to what is left of Ansett. Either way, the 65-year-old airline that once ruled Australia's skies is effectively finished

Still in shock at the speed of its fall, Australians and New Zealanders are blaming each other. But the carrier's collapse raises deeper questions about the very structure of Australasian aviation.

"There's never just one thing that kills an airline," warns Bob Booth,long-time chairman of the Av Group consultancy. Bad decisions, the market, competition; events have a cumulative impact."

The immediate cause of Ansett's collapse is well known. Parent Air New Zealand (ANZ) was forced to abandon the carrier to save itself after a three-month struggle with the New Zealand Government over its recapitalisation.

This struggle culminated in Wellington resuming 83% control of its flag carrier, which it had privatised in 1989. Through the process, ANZ shareholders Singapore Airlines and Brierley Investments will see their respective 25% and 35% stakes in the company diluted to equal only 4.3% and 5.2% ownership. Shortly after the renationalisation was announced, chief executive Gary Toomey submitted his resignation after less than 10 months in the job.

In Australia, Ansett had crumbled within days of ANZ pulling its support in September, although extensive efforts by the administrators and a ticket guarantee from Canberra have restarted the carrier in slimmed-down form to boost its prospects for sale as a going concern.

How the airline reached such a state has sparked angry debate on both sides of the Tasman Sea. Australians accuse ANZ of mismanaging Ansett and selling its assets for the parent's benefit. ANZ retorts that the Australian Government pushed it into buying Ansett, and that it did not learn how badly off Ansett was until it was too late.

Sale-leasebacks, ANZ claims, were essential to keep Ansett afloat pending its recapitalisation. The carrier also disputes assertions by News Ltd - Ansett's former 50% owner - that the company was profitable. ANZ claims any profit was an accounting gimmick and Ansett had in fact been "hollowed out". It could take lawsuits to settle the matter.

What everyone does accept is that, by the time of its collapse, Ansett was badly undercapitalised. It had the second oldest fleet among the world's top 50 airlines, with a mishmash of aircraft types. Twice within the past year, Australian officials had grounded Ansett jets over maintenance concern($2 billion) to upgrade its fleet.

Every airline in Australasia has suffered from high fuel costs, currency devaluation, and the global slowdown. Certainly these added to Ansett's woes, but neither they nor its under-capitalisation can fully explain the company's failure.

Before the privatisation of Qantas Airways started in 1993, Canberra effectively recapitalised it by assuming its A$1.35 billion debt. At that time Ansett had 56% of Australia's domestic market and an even higher share of its business travellers. But the privatisation of Qantas unleashed that airline's potential.

Without the resources to match its stronger rival, Ansett's market share started to slide - a trend that continued until its collapse, at which point its share had shrunk to 39%.

Jim McCrea, ANZ's managing director when it became Ansett's parent, blames Ansett's troubles on the changing Australian market and a failure to adapt.

Service superiority

In the competiton to win Australia's business traffic, Qantas' vastly superior international network, rendered Ansett second best in the eyes of the country's corporations. This resulted in the carrier's share of premium business being even worse than its overall decline.

In the contest for economy class, Ansett became a victim of Australia's changing policy on competition. To stimulate the domestic market, the government opened Australia's skies last year to wholly owned subsidiaries of foreign airlines, and took the Qantas-Ansett lock off airport slots and gates. The result was Virgin Blue and Impulse Airlines, two discount startups that wreaked havoc on Ansett.

It was caught in a squeeze between a better positioned, stronger Qantas on one side, and two aggressive new carriers on the other. When Qantas initiated a fares war, it resulted in the death of Impulse, but hurt Ansett considerably.

The dilemma for incumbent airlines facing low-cost startups is universal. While a major airline has higher costs, it also has benefits of network feed, loyalty programmes, economies of scale and a host of other full-service attractions.

The successful incumbent finds a balance between cutting costs and keeping those services that preserve its advantage. Where Qantas exploited its strengths, Ansett never seemed to find that balance. Its sole strategy was to seek to eliminate the source of its woes by buying Virgin Blue. When that failed it had no other options.

Australians are starting to put to themselves the same question Canadians ask: is our sparsely populated country big enough for two airlines? There are 19 million Australians and 31 million Canadians. In both countries - which span vast areas - the dominant carrier now controls 70-80% of the market.

Ansett's demise cost the Star Alliance an Australian foothold; Canadian's take-over ended oneworld's presence in Canada. The only Canadian alternatives to Air Canada are low-cost WestJet and Canada 3000. The only Australian alternative to Qantas is now Virgin Blue.

In both countries, these low-cost airlines lack the dominant carrier's domestic network and do not begin to match its international routes.

So whoever buys Ansett or picks up its pieces must ask themselves several questions. First, if Qantas launches another rival-killing fares war, will Australia's competition commission put more effort into protection than it did in the case of Impulse or Ansett? The commission seeks stronger powers, but will Canberra grant them, will they go far enough, and - if they do - how will those powers themselves affect competition?

Also, what will happen to Ansett's terminal leases? Will the government abandon the ill-conceived policy that locked startups out of most airports by awarding these long-term leases to Ansett and Qantas? Some analysts claim the cost of taking over Ansett's terminals alone could inhibit the start of another full-service carrier.

The size of the New Zealand market dictates ANZ will re-enter Australia. Under Australian law it can fly anywhere in Australia, via a subsidiary or on its own. Even if buying Ansett was a mistake, the carrier still needs an Australian presence. The question is not whether, but when and how ANZ will return.

The early hints from Auckland are that "Ansett 2" - as it might be called - will be a low-cost unit, not another full-service airline. The question of timing depends on how long ANZ needs for its own recovery.

It could buy back the remnants of its former subsidiary. If SIA is managing those remnants, that might be easier. Another option is to seek an alliance with Virgin Blue, which would be ironic after Richard Branson thumbed his nose at ANZ's attempt to buy his startup. The prospect of a Virgin Blue connection has a familiar ring to it, in view of the talk two years ago that SIA might gain an Australian foothold via the company.

An ANZ-Virgin Blue alliance has some logic. It would give ANZ a quicker and cheaper re-entry into Australia than if it had to rebuild from scratch, and ANZ and Virgin Blue could concentrate on competing with Qantas instead of each other.

But this sort of alliance faces obstacles. Inter-lining without equity might do ANZ less good than if it launched its own Ansett 2. Branson, who jealously guards his independence, is unlikely to yield the kind of control over Virgin Blue that ANZ might seek. The carrier seems keen to expand in its own style and in its own right - even to New Zealand - rather than become an interline partner.

Alliance dilemma

Whether ANZ re-enters Australia via Virgin Blue or Ansett 2, the Star Alliance may face a dilemma: whether to accept a low-cost, one-class airline as a member. If it does not, Star could lack an Australian presence. Oneworld faces this question in Canada, where Canada 3000 has added a business class section on some flights specifically to attract more foreign interlines.

Some believe the question facing thinly populated countries such as Australia and Canada is not whether they are big enough for two airlines, but what type of airlines? Perhaps Ansett's collapse demonstrates that such countries cannot support two full-service carriers, especially with well-capitalised and disciplined low-cost rivals.

Source: Airline Business