Weekend Australian article by Steve Creedy
Troubled Virgin reduced to a wing and industry prayers
Dark memories of the 2001 Ansett collapse are stalking the Australian aviation industry again as debate rages over the future of Virgin Australia.
They hark back to a traumatic time that led to the loss of 15,000 direct jobs, suicides by former workers, shattered careers, broken companies and higher full-service fares for corporate customers.
It resulted in a $10 ticket tax that raised more than $250m for employee entitlements and resulted in Qantas becoming the 400lb gorilla of Australian aviation.
Questions again are being asked about whether we want to repeat that trauma or see the government step in to ensure that a vital Australian industry remains competitive.
Virgin chief executive Paul Scurrah was managing 550 people at Ansett when the end came in what he describes as one of the most distressing periods of his career.
He recalls seeing families where two or three generations lost their income and economic carnage among businesses that relied on the airline.
Scurrah tells The Weekend Australian this is partly why he has been working tirelessly to avoid a repeat of the “long-lasting” pain of the Ansett collapse.
“A huge amount of businesses went broke but the thing that sticks in my mind most about it is the mental health cost,’’ he says.
“There were many much-loved people who couldn’t see beyond the crisis for whatever reason and that was the most distressing part of the whole exercise.”
Virgin has appealed to the federal government for an urgent “statement of confidence” and $1.4bn in assistance but has yet to receive a response. Analysts are predicting the airline could run out of money within as little as three months.
The dire nature of the situation was underscored on Friday when Virgin cut its already reduced flying schedule to a daily service between Melbourne and Sydney because of the enormous fall in demand.
It continues to fly repatriation flights and some charter services in areas such as the resources sector, but for all intents and purposes it has gone into hibernation after previously standing down 8000 people and announcing it would make 1000 redundant.
It looks grim — it is grim — but it is not Ansett.
The factors behind Ansett’s downfall were many and complex but the trigger was a decision by Air New Zealand to exercise its pre-emptive rights on a half share owned by News Ltd.
A deal had been done for the stake to be taken over by deep-pocketed Singapore Airlines, with the proviso that then Ansett chief executive Rod Eddington stay at the helm.
Air New Zealand was unprepared for the problems at the Australian carrier or to take on the aggressively competitive Qantas, which also had lobbied against Singapore’s involvement.
The move almost killed the Kiwi carrier — the New Zealand government had to step in to save it — and it left a cast-off, debt-laden and gutted Ansett mortally wounded.
Virgin Australia was a long way from the poster boy category of Qantas when it came to pre-COVID-19 profitability, but it was nowhere near the miserable final state of Ansett.
Like other airlines globally, however, it has been devastated by government restrictions, passenger fears and a colossal slump in demand.
“Ansett was a dead dog and Virgin isn’t really,” says CAPA Centre for Aviation chairman emeritus Peter Harbison. “These circumstances are just totally different.”
Qantas has been lobbying hard against Virgin receiving any special assistance, arguing it should be given $4.2bn if Virgin receives $1.4bn, but Harbison argues that the government should be looking not at fairness to Qantas but what is in the public interest.
The latest estimate of Virgin’s economic contribution to Australia is about $11bn but the airline says the loss would amount to $30bn if it were to disappear because of the flow-on impact to jobs, infrastructure and suppliers.
Harbison views the circumstances on the other side of the pandemic as unknown and “potentially worse than most people are contemplating”.
He believes the government faces a choice of letting Virgin collapse or keeping it alive and having “at least the seeds of a competitive environment”.
He is also doubtful that another airline will be rushing to fill the vacuum if Virgin falls over.
“You have Qantas, which is the most powerful domestic airline of any in the world in terms of market coverage and really seriously good management,’’ he says. “What airline in their right minds is going to start up against them?”
There is also another key difference when it comes to the situation with Ansett, according to Virgin founder and former chief executive Brett Godfrey.
He notes that at the time of Ansett’s collapse, there were already two other more efficient airlines operating in Australia — the Qantas Group and the small but disruptive Virgin Blue.
“If you take a step back and look at the differences, they were that you had an airline (Virgin Blue) that had nine aeroplanes in the market at that time and a trajectory that showed it had great potential to fill the void,’’ he says. “And so they were able to step into the breach.
“It’s different this time because you don’t have an indispensable second competitor in the wings.”
Godfrey echoes Harbison’s doubts about a new entrant, arguing: “If Virgin falls over, we end up with a lottery. Given every airline in the world today is hibernating, those that survive to fly ‘tomorrow’ will have their hands full recommencing in their home markets, let alone launching new brands in Australia.”
One similarity with 2001 is Qantas is likely to have excess international aircraft it can deploy in the domestic market to fill some of the void left by a Virgin collapse. The expectation is that domestic travel will take off before international.
Qantas and others have been vocal in arguing that Virgin’s existing shareholders — Etihad Airways, Singapore Airlines, Nanshan group and HNA — should stump up the cash to help Virgin, but there is little faith this will happen.
These are companies embroiled in their own crises and even Singapore Airlines’ long-harboured desire for a foothold in the Australian domestic market is taking a back seat to survival, despite the $US19bn ($21bn) the company is adding to its war chest with the help of its state-owned major investor.
Others believe the government should give foreign carriers the ability to carry passengers on some Australian domestic routes if Virgin fails. But none of the industry figures contacted by The Weekend Australian say they think this system, known as cabotage, is a good idea.
“Cabotage is an interesting theory but it never works in practice,’’ says one former airline chief executive, pointing to the desire by most passengers to take direct flights and the extra expense to airlines of flying just one stop. “It has never worked anywhere because you never get the amount of capacity you need.”
If it turns out that there is another airline willing to jump into the Australian domestic market to replace Virgin, it still would face a plethora of regulatory requirements and the need to sew up commercial agreements on issues such as slots and gates before it can start.
It took Virgin three years of preparation to get its first two planes in the air in 2000 and the Civil Aviation Safety Authority says it takes about 12 months to issue an air operators certificate, depending on the quality of the application.
Nor is rapid growth a given: Virgin’s growth was constrained to a rate of about one aircraft a month — two in some months — as it trained cabin and flight crew and met various regulatory hurdles
Scurrah observes it took 10 years to get Virgin to the point where it had 30 per cent market share and that people overlook the fact it is incredibly difficult to start an airline from scratch, particularly against a powerful competitor such as Qantas.
“It has taken us 20 years to do it. What we would say is that beyond this, if there’s not a robust and competitive two-airline industry on the other side of this crisis, you start the clock again at day one,” he says.
Steve Creedy is a former aviation editor at The Australian who has covered the sector for 25 years.