Ansett Australia is grappling with international expansion, toughening domestic competition, questions over its ownership, and a heavy debt burden. Tom Ballantyne assesses the future of Australia's second major airline. Fledgling international carrier Ansett Australia, striving to establish a permanent presence amongst Asia-Pacific's airlines, is wondering what cards fate will deal out next.

A month after launching into the critical Japan and Hong Kong markets last September, one of Ansett's two leased B747-300s made a dramatic nosedown landing at Sydney Airport after the nosewheel's failure to extend apparently went undetected in the cockpit. No-one was injured but the incident did more than just scrape paint from the aircraft's belly - it put an A$3 million (US$2.3 million) dent in the carrier's offshore budget and added another financial pressure to an operation which remains marginal at best.

Then, in January, the catastrophic earthquake which shook Japan's second largest industrial region of Osaka to the core rattled the foundations of Ansett's foreign venture as well.

While it ponders its international future, Ansett is also readying itself for a telling year in the domestic market, which remains its core business and accounts for 90 per cent of revenue. The carrier is confronted by a resurgent Qantas, which is vowing to reclaim leadership of a local market Ansett has dominated in recent times.

Meanwhile there are persistent reports that Air New Zealand is poised to take a stake in Ansett. And toughest of all, Ansett has to consolidate gains in its financial performance to further trim a net debt of around A$1.7 billion (US$1.3 billion).

Ansett's managing director Graeme McMahon and his team are still studying the implications of the earthquake on Ansett's international venture, but flights to Osaka are pivotal to the carrier's offshore success. Though operations were hardly affected the impact on traffic could be serious. Half the 700,000 Japanese who visit Australia annually come from the Osaka region, and a rush of cancellations is expected as travellers abandon overseas trips to stay at home and repair battered lives.

As McMahon points out, Ansett does not have rights to Tokyo/Narita to ease the pain - unlike its rivals in the Australia/Japan market, Qantas, Japan Airlines, All Nippon Airways and Air New Zealand.

Ansett ploughed A$75 million into the birth of its international arm and events in Japan will force a reassessment of revenue expectations for its first full year as an overseas carrier, which ends on 30 June. Japan flights were performing above budget while in Hong Kong, where traffic is strong, there are yield problems as the carrier has priced its product too low in an effort to get established.

The airline had planned to increase its five weekly Osaka services to daily by December, but the earthquake could kill that idea. It also intends to lift its Hong Kong frequency from three to five weekly in April.

Nature struck as some senior managers were talking about a major strategic shift which would see Ansett's Asia-Pacific network expand far more swiftly than was originally planned.

Ansett's public pronouncements on its international intentions have confused analysts. The airline stressed from the start that its regional expansion would be measured, slow and cautious. Yet Ansett International's executive director Hugh Thorburn has hinted the carrier now hopes to add Seoul, Taipei, Singapore and Kuala Lumpur to its network by the end of the year. Talks have taken place with both Malaysia Airlines and Singapore Airlines about leasing additional B747-300s to handle expanded flights.

McMahon isn't as bullish as Thorburn, insisting the priority is to stabilise Hong Kong and Japan and adding: 'Those are the ones we are concentrating on making a success.' The other routes are developments 'which may or may not happen.'

In reality Ansett faces a dilemma: if it doesn't use the rights it holds to additional Asian ports it could lose them altogether under tough 'use it or lose it' rules laid down by the Australian International Air Services Commission (IASC).

Qantas has already complained that Ansett is 'hoarding' valuable air rights and that it keeps changing its mind about flying to Singapore and Kuala Lumpur. After originally being granted capacity to operate to both destinations, the newcomer last year advised the IASC it intended to discard them. Then it reviewed the situation, concluding both markets did offer good opportunities. Ansett also has to launch its Seoul services before the end of this year or risk having them taken away.

Services to Korea and Taiwan do appear to make sense - both are leading Australia's inbound tourist growth - but it is difficult to find any evidence to support moves into Singapore or Malaysia. Singapore is a hotly contested market where, as the newcomer, Ansett would face stiff competition from alliance partners British Airways and Qantas, as well as SIA and a host of other established Europe-Australia operators.

Another reason for flying to these two ports, a possible codeshare linkage with European or Asian partners through a Singapore or Kuala Lumpur hub, has also diminished. Ansett, which has a passenger feed arrangement with Virgin where they meet in Hong Kong, may have had designs on a similar arrangement in Singapore or KL. But Virgin has now signed a deal with MAS (also an Ansett partner) under which the two will collaborate on UK-Malaysia-Australia traffic.

One of Ansett's main European partners, Lufthansa, has also decided to meet some of its Australian market needs through a commercial arrangement with Thai Airways International.

As Ansett wrestles with its international development, life has not been getting any easier in the home market, its lifeblood. Industry officials - including its opponents - describe Ansett as a fundamentally very good airline which delivers an excellent product. It has held supremacy in the domestic market for several years.

But times have changed, particularly due to the emergence of a revitalised Qantas which, after more than two years in the doldrums, is in the midst of a serious effort to win back market share. It seems to be succeeding and is placing increasing pressure on Ansett, which is suffering a serious capacity shortfall.

In the past 12 months Qantas has lifted its domestic capacity by more than 25 per cent without acquiring new aircraft. It has done this mainly by using excess international widebody capacity - B767-200s and some B747s - on domestic routes, and unused seats on the domestic sectors of international flights. Yields and load factors have remained roughly constant.

McMahon admits Ansett can't match that, even though the airline has lifted its own domestic capacity and load factors - available seat kilometres rose 10 per cent and revenue passenger kilometres 12 per cent in the year to 30 June.

Ansett achieved the capacity growth by leasing four additional Boeing 737-300s from its sister company Ansett Worldwide Aviation Services, plus a fifth B767-200, and it now operates a fleet of 77 aircraft: two B747-300s, six B767-200s, 12 A320s, 20 B737-300s, five B727-200LRs, 12 BAe146s, six Fokker 50s and 14 Fokker F28-1000s, although the F28s will be phased out by October.

Even though it will take delivery of the first of five extra Airbus A320s in August and has an option on another B767-200 from Britannia, Ansett is still having to work hard to keep pace with Qantas. McMahon says a decision on extra capacity will be based on projections for market growth this year but believes expectations of a 10 per cent increase are exaggerated.

Nevertheless, the capacity crunch will continue to be a thorn in his side, placing pressure on a fleet which is constantly working to operational limits. When flights are delayed or system congestion causes a buildup of schedule problems, Ansett has no spare aircraft.

McMahon was forced to write to his 350,000 frequent flyers late last year explaining why a staggering 91 per cent of flights through Sydney airport were suffering serious delays. He blamed it on air traffic and airport congestion at Australia's major hub, which is throwing the nation's airways system into disarray. But Ansett suffers more seriously than Qantas, which has reserve capacity.

Despite the capacity war, Ansett's domestic market share peaked last year at 56 per cent, helped by a virtual monopoly on some routes, such as regional sectors within Western Australia and to Queensland's Whitsunday islands.

'Qantas has now entered into WA . . . and very clearly they are preparing an ongoing effort in the advertising and marketing side of their business,' says McMahon. 'Against that background we expect there will be some change in market share.' In other words, Ansett is bound to see its share shrink. Qantas is believed to have lifted its market share to 53 per cent already, and its capacity advantage, along with strong growth and more aggressive marketing, will allow it to solidify that position.

As Ansett battles it out in the marketplace, its future ownership remains uncertain. There have been talks between Ansett's owners, TNT and News Corp, and New Zealand's Brierley Investments Ltd (BIL), the majority stakeholder in Air New Zealand, over a possible Air NZ stake in Ansett.

Such a move would probably have been completed last year if it hadn't been for Air NZ's concern about Ansett's debt level. Now that Air NZ has been barred from operating domestically in Australia, the result of Canberra's eleventh hour abandonment of a previously agreed trans-Tasman single aviation market, the Auckland-based airline considers a stake in Ansett as a definite option to achieve its goals.

Failing an equity link, talks are continuing on a commercial agreement which could see Air NZ provide the trans-Tasman link to connect Ansett's separate domestic operations in Australia and New Zealand. But any deal could be complicated by the competition between the two carriers in New Zealand.

Ansett continues to improve its financial position. Cost rationalisation and improved productivity, together with an average rise in domestic air fares of 6.3 per cent in the year to the end of September, were the catalysts for its best result in several years in the year to 30 June 1994.

Fares increased mainly because of a lift in business travel with the economic upturn, though 80 per cent of Ansett passengers still fly on discount tickets, compared with 40 per cent before deregulation in 1990.

In the past four years Ansett has improved yield management and other systems, and has increased the number of passengers per employee from around 700 to 1,000, allowing costs per available seat kilometre to shrink by nearly 20 per cent in the same period.

Revenue increased by 15 per cent in 1993/4 to a record A$3.01 billion. Operating profit quadrupled to $209 million, and the company swung from a net loss in 1992/93 to a net profit of A$151.7 million (US$116.7 million). But chairman Ken Cowley concedes that represents a 'fairly modest' return on assets of about 4 per cent and that the company has to improve on this and reduce its debt further.

Last year the company signalled its intention to return to an airline-focused group by selling off a range of non-core assets and changing its name from Ansett Transport Industries to Ansett Australia Holdings Ltd. It rid itself of boat charter, road transport and manufacturing subsidiaries and disposed of an investment in America West.

These measures, along with strong cash flows and reduced capital expenditure, allowed net debt repayments of more than A$300 million in 1993/4. Debt repayments are also better structured, with more than 32 per cent of debt maturing more than five years hence and over 35 per cent having a maturity of between two and five years.

While Ansett has reduced its net debt from a high of over A$2.4 billion in 1991 to A$1.7 billion last June, this figure remains massive compared with the company's shareholders' equity of just A$217 million. Managers prefer to consider subordinated loans of A$234 million as equity, bringing the total to A$451 million, but this still gives Ansett a net debt:equity ratio of 3.1:1.

McMahon says Ansett is aiming for similar, if not better, profits in the current year and is on track to make 'further significant debt repayments'. Neither will be easy. Disruption to overseas revenue expectations and tough competition at home are likely to cause some shrinkage in profits, with a boom in domestic travel through last year already showing signs of considerable softening. And a decision to expand into new overseas markets will require substantial investment. Still, Ansett is determined to make its mark and play a full part in the increasingly competitive Pacific marketplace.

McMahon says Ansett is aiming for similar, if not better, profits in the current year and is on track to make 'further significant debt repayments'. Neither will be easy. Disruption to overseas revenue expectations and tough competition at home are likely to cause some shrinkage in profits, with a boom in domestic travel through last year already showing signs of considerable softening. And a decision to expand into new overseas markets will require substantial investment. Still, Ansett is determined to make its mark and play a full part in the increasingly competitive Pacific marketplace.

Source: Airline Business