Ailing industry flying on one engine

By CHRIS DANIELS

In December, the world will celebrate the centenary of the Wright Brothers' first 12-second flight over the sandy Atlantic coast of North Carolina.

A cause for celebration certainly, but after the past year of turmoil, hundreds of thousands of out-of-pocket investors could be forgiven for wishing Wilbur and Orville had never made that fateful flight.

Because, once again, billions of dollars of shareholder wealth have been sucked into airlines, set ablaze and destroyed forever.

The once glamorous whiff of aviation fuel now smells increasingly sour since the full-service airlines ran into trouble across the globe.

At the very end of last year, industry giant United sought bankruptcy protection and our own national carrier, Air New Zealand, set off on its mission of seeking regulatory and public blessing for an alliance with one-time enemy Qantas.

The terror attacks of September 11, 2001, provided the final push to the already teetering airlines - businesses that quite simply could not continue providing such a service for the amount of money people were willing to pay.

And the amount of money lost by airlines, while less than 2001, was still enough to make you weep - US$13 billion ($24.5 billion) was lost last year, compared with US$18 billion in the previous year.

The last two years' losses exceed all the profits the aviation industry has made since 1945, says Giovanni Bisignani, chief executive of the International Air Transport Association (IATA).

Bisignani said this week that the industry was "really in grave, grave problems".

IATA was forecasting small profits to return in 2004, he said, but that depended on the threat of war in Iraq.

Such outside shocks can scuttle the best-laid plans of airline executives.

Ralph Norris, who became Air New Zealand's chief executive in February, says the aviation business is not even a properly commercial industry, mainly because of the heavy influence of governments.

Many airlines in the past couple of years have been bailed out by Governments, including Air New Zealand, making the whole industry a strangely uncompetitive one.

Qantas chief executive Geoff Dixon, speaking to the Business Herald in November, said there were few barriers to new entrants in the aviation business, but barriers to exit seemed prevalent.

"I don't think there's any barriers to entry, because any bugger can set up an airline. What I'm worried about is that I'm not sure there are any barriers to exit any more, because every time it happens, Governments come in and prop them up.

"What we've got is an incredible situation. The industry is distorted."

Airlines such as Qantas and Air New Zealand are competing against others that are not playing by the same rules, says Dixon.

While the Government did step in to save Air New Zealand, it is having no input into the way the airline is run.

But that is not the case for many of Air New Zealand's rivals.

"There are carriers out there who are just arms of Government policy - they don't have to make money, they tear the industry economics apart."

Norris says he took the job to ensure that Air New Zealand began operating as close as possible to a true commercial model, with a "customer focus operating at world's best practice levels".

For him, a highlight of last year was the introduction of Air New Zealand Express - all business-class seats were pulled out of the domestic 737 fleet, hot meals axed and ticket prices slashed. All designed to shut out any low-cost rival casting an envious eye over the New Zealand domestic market.

And the plan worked. Money lost in fare reductions was made up by more people travelling - making trips they would not have made under the old system.

The Air New Zealand Express model was based on an assumption that it could stimulate the market by 20 per cent - an aggressive target.

For November, the airline saw the market grow by about 27 per cent.

"We can't find another airline in the world that has been able to implement a project like this and stimulate, in one month, anything like 27 per cent," says Norris.

Other airlines, he says, including the now humbled United, had sent representatives to New Zealand, eager to learn from Air New Zealand's success with its introduction of Express.

Norris is presiding over a more ruthless world in New Zealand's domestic aviation scene - baggage weight-limits are now rigorously enforced, people arriving late for flights get no latitude: they are told they must book on the next flight and pay hundreds of dollars extra.

And the state of competition in New Zealand aviation? Diminishing rapidly, especially if Air New Zealand and Qantas succeed in their alliance plans.

"It's unrealistic to think that you can have head-to-head competition in what is a very small market," says Norris.

Barriers to entry would not be raised, though, he is quick to point out. Any competitor would be able to enter the New Zealand market and carve out a stake.

Norris says he will be spending a lot of time in the first part of this year working on convincing regulators and the public of the worth of the Qantas alliance. And he thinks the issue will be determined on the facts, not the political heat generated.

"I would be surprised if there's any real political dimension to this ... This will be determined on the basis of competition framework.

"This should be done from a position of principle - we do have a process to assess this. Everyone should be prepared to sit back and allow the process to operate."

But something that bugs him is what he sees as an unfortunate focus on the identity of the alliance partner, not the business case for the deal itself.

"The issue I find most disturbing is that it is not about the arrangement per se - it is just the fact that the party is Qantas."

Just a year earlier, there was no public opposition to the prospect of Singapore Airlines buying 49 per cent of Air New Zealand.

"It is not a merger or a takeover."

It is frustrating, says Norris, "to see things that I believe are either being misunderstood, misrepresented or just plain mischievous."