Taking on the high-flyers more than just an impulse

By GREG ANSLEY

SYDNEY - Gerry McGowan, relaxing over the boardroom table in slacks and open-necked shirt, is not good news for Air New Zealand.

As the national flag carrier receives final approval for its takeover of troubled Ansett Australia, Mr McGowan reflects on a fortnight that has shaken the domestic carrier and rival Qantas.

There is more to come.

Mr McGowan and his wife, Sue, own 40 per cent of Impulse Airlines, a cut-price operator that has moved from successful regional carrier to serious trunk route competitor.

It is taking on the majors in the key Melbourne-Sydney-Brisbane corridor, launching a new Canberra-Sydney shuttle and contemplating further expansion through New South Wales and into far-north Queensland, Adelaide and Tasmania.



This time Ansett and Qantas will not be able to shrug off the competition, as they did with the two doomed bids to get Compass off the ground in the early 1990s, when deregulation first offered a breach in Australia's rock-solid two-airline system.

Impulse was already a big regional and freight carrier by the time it launched its Melbourne-Sydney flights two weeks ago, and planned its move into trunk routes with sufficient care to attract serious institutional players.

Capitalised at $A100 million ($126.7 million), Impulse has attracted backing from AMP, National Bank investment arm National Asset Management, Hong Kong and Shanghai Banks' AGFL, the Singapore Government Insurance Offices GIC, and Citibanks CBC, with talks under way with another Australian institution.

"These guys are not naive to the industry and they are there to grow a business," Mr McGowan says.

Air New Zealand does not need to hear this.

Higher and still-rising fuel costs, exchange rates, increased airport charges and other imposts that sparked a 3.5 per cent rise in the fare structures of both Ansett and Qantas are biting just as Impulse halves the cost of flying on their most profitable routes.

Later in the year, Sir Richard Branson's Virgin Blue, with a fleet of bright red Boeing 737-400 airliners, will join the fray with minimal-service fares to match Impulse.

Analysts estimate the two newcomers will lift capacity on the prime Sydney-Melbourne route by 40 per cent, a threat already met by the majors' decision to remove penalties and conditions from their cheap advance-purchase fares.

Mr McGowan believes Ansett and Qantas will face tough decisions.

"Our fares are our fares and they're always going to be there, and Qantas and Ansett are really going to take a hit on yield by matching them, or else we're going to get some of that business ...

"The problem they have is that no matter what they do they're never going to be able to match our operating costs - and I think he who has the lowest operating costs is going to win the price war.

"They have high infrastructure, executive lounges and fancy terminals and meals on board. Instead of marketing the advantages they want to be seen to be matching an operator with much lower costs, and I think that's dumb."

Mr McGowan has already established his bona fides.

He was a TNT executive when, in 1983, he read about MPs complaining that they could not buy the Sydney Morning Herald and Australian Financial Review before mid-afternoon in Perth.

He approached Fairfax with a proposal to fly their papers from Sydney in time to catch the early morning Melbourne to Perth flight, and won a new contract.

With down-time during the day, Mr McGowan chartered his Beech 1900D to Oxley Airlines, a small New South Wales operator specialising in flights to Lord Howe Island.

By 1992, he had bought Oxley, dropped Lord Howe Island, and launched a regional network based at Newcastle.

Mr McGowan's plan was to establish direct links between regional centres, tapping into a large business travel potential focused on companies such as BHP, mining groups and the large network of colleges of technical and further education.

Business accounts for 80 per cent of Impulse's bookings, with 660 of Australia's biggest companies using the airline's regional network and with vast travel budgets to tap into: "BHP, for example, $A45 million a year, the Government $A300 million, and the New South Wales Government $A48 million."

Its fleet of 13 Beech 1900D 19-seat airliners link 12 major regional centres in New South Wales, with another route, Newcastle-Melbourne, suspended after Qantas counter-attacked by undercutting its fares with large jets.

The Qantas move is now being investigated by the Australian Competition and Consumer Commission.

Earlier this month, Impulse launched its Sydney-Melbourne run with three new Boeing 717-200s - two more will be leased when the Sydney-Brisbane links start in September - and beefed up its flights out of Canberra.

The response is growing - scrapping conditions on advance-purchase fares, Qantas has left open the possibility of its own cut-price airline, and Ansett associate Kendell Airlines has increased its Canberra services.

Mr McGowan remains confident.

The Sydney-Melbourne route, with five million passengers a year, is the third-largest city pair in the world - bigger than London-Paris, New York-Boston and New York-Miami - allowing Ansett and Qantas to operate with load factors of up to 80 per cent and yields of up to 76 per cent.

"Australian domestic aviation has been one of the most recession-proof businesses in the country.

"It's been since 1978 at better than 8 per cent a year, and when Compass came in it grew the market by 22 per cent - and when Compass stopped, the passengers kept flying. They'd got used to air travel."

Impulse aims to achieve load factors of 55 per cent on Sydney-Melbourne and Canberra operations in their first five months: it topped 50 per cent in its second week between the two big cities, although Canberra growth remains slower.

"In our business plan we only show 5 per cent growth and when you consider the market is growing at 8 per cent a year I think we will easily achieve that."

Mr McGowan says price competition from Ansett and Qantas will expand the market further.

He has a warning for Virgin: "I think Virgin will do it pretty tough. They're bringing in pretty old 737-400s. They're not Australian, which I think will count against them, and they're starting from scratch. But they do have a good brand name, which you can't underestimate."