Another crash landing
Tue "The Australian"
Another crash landing
The forced landing of Ozjet has cost its founder millions and shown that Australia will remain an airline duopoly for the time being, writes Steve Creedy
March 14, 2006
WHEN Ozjet founder Paul Stoddart flew into Melbourne late last week to look at the company's books, he quickly realised that his pet enterprise was bleeding to death.
The time had come to stop the rot. He had no choice but to shut down the business class airline's services between Sydney and Melbourne. "The operating losses on a bad week were a million dollars and on a good week they were three-quarters of a million dollars," Stoddart says. "That's the kind of money it was blowing."
As word went out on Sunday and Stoddart began fielding calls, he sat absorbed in his other great passion, Formula One racing televised from Bahrain.
Most people had given the start-up six months before it failed, depending on the depth of Stoddart's pockets. But virtually no one outside the airline was convinced its all-business class format would find the niche it was so desperately seeking or that it could break the Qantas-Virgin Blue stranglehold on the market.
Ultimately, the travelling public agreed. Australian travellers ignored the start-up to the extent the experiment has cost Stoddart, 50, an eight-figure sum before he ended it.
Up to 70 per cent of the airline's 100-strong work force will lose their jobs as it moves into its new charter role with just two aircraft.
The warnings came as early as last July when Singapore Airlines chief executive Chew Choon Seng said the carrier's study of the Australian domestic market had shown it could support only two domestic airlines and the regional carriers.
Most experts agree that the Qantas decision to set up low-cost offshoot Jetstar has made it even harder for another carrier to enter the market. To do so would mean competing for market share against two robust carriers, Virgin and Jetstar, with low operating costs.
"I think that's really made this market virtually impregnable now for the two carriers," Centre for Asia-Pacific Aviation executive chairman Peter Harbison says.
Ozjet's executives, however, believed they could tap into a niche market by luring 1 per cent or 2 per cent of well-heeled travellers to defect from the established airlines. They would do this by offering business class service at full economy prices.
The new airline would use ageing 737-200 aircraft configured to offer 60 comfortable business class seats with a 20kg cabin luggage allowance that would allow travellers to avoid wasting time checking in and picking up their baggage. It chose Australia's busiest route and the third busiest in the world, Melbourne-Sydney, to launch its inaugural service. It was immediately at a disadvantage; pitting eight return services a day against half-hourly peak departures by Qantas and Virgin.
Delays in regulatory approvals also meant it had to launch in late November as the industry entered the quietest time of the year for business travel. By mid-December, Ozjet was cutting services after flying with as few as three people on its planes and was cutting prices to attract travellers.
Ozjet executives say they went into the Christmas launch with their eyes open and expected to lose money during the break. They used the period to iron out bugs in the system and prepare for the return in business traffic after the Australia Day long weekend.
Stoddart says historical and other data showed a huge 65 per cent surge in business traffic after Australia Day. "And for us that just didn't happen," he says. "We were carrying the same passengers in February, and projected through March that we were carrying, as we were in January."
The airline's decision to cut fares also bumped up its break-even load factor, the level at which it fills enough seats to cover costs. The original break-even of 50 per cent had been set with one-way fares of $325.
Stoddart says the airline's decision to lower fares pushed the break-even to 75 per cent to 80 per cent. "And we were only seeing, at best, the sort of mid-30s," he says.
So what went wrong? Stoddart rules out the anti-competitive practices blamed for the demise of previous entrants such as Compass.
"I have to be honest, we didn't find problems with the environment," he says. "We didn't have problems with Civil Aviation Safety Authority, they were fantastic, and we were very proud of getting our approval on the first go. We certainly had no problems with Sydney and Melbourne airports, and I'm certain we wouldn't have had with any other of the airports.
"And Qantas - all right [Qantas chief executive] Geoff [Dixon] and I go back a while - but we had no real problems with Qantas and none with Virgin.
"It failed because it simply was getting 25per cent of the revenue that was predicted and it just wasn't getting the bums on seats."
Stoddart points to two factors that contributed to the airline's problems.
"In going for business customers, we didn't have a frequent flyer program which, it became clear, was incredibly important," he says. "And we certainly didn't have the Australia-wide network."
He also acknowledges that launching on the highly competitive Sydney-Melbourne route, with its short flying time and half-hourly peak departures by Qantas and Virgin, also appears to have been a mistake. "Obviously we did have good support from a loyal bunch of people, but I don't think people necessarily felt the need to move to Ozjet because of the services we were offering," Stoddart says.
Harbison agrees. "I didn't see how it could work because we have a price-sensitive market and price dominates on sectors of an hour," he says. "People just aren't that fussed about comfort and Australia's not really that big on prestige and being seen to be travelling business class. If they can save 50 per cent on the fare, they'll save 50 per cent on the fare."
How much Ozjet will cost Stoddart in total remains to be seen. The former Minardi Formula One team boss estimated in 2004 that it would cost him $70 million to set up the airline and said last August that 75 per cent of that money had already been spent.
Add to that losses of $750,000 to $1 million a week during the 15-week life of the carrier and it's easy to see why the losses are hurting.
"If I've got any regrets about this it's because I spent most of the last year when this was happening ... with Minardi and was seeing management reports and listening to people who were highly optimistic about what potential loads were going to be," he says.
"Indeed, I was told repeatedly that our biggest problem coming into this was that we didn't have enough seats in the market and we were not going to have the capacity for the demand. Quite the opposite was true."
Stoddart now has the unpleasant job of making redundant much of Ozjet's work force, but it is not the first time he has faced the situation. In 2002, he had moved to sell European Aviation Air Charters, the air charter company he started in Europe using aircraft and spares bought from the RAAF. In 2004, he stepped back in to save the company, but had to sack 585 staff.
Last year, he told reporters he had subsequently hired back more than 300 staff and the company was trading profitably.
He is confident the Australian charter operations will also work, probably with one aircraft converted back to a 100-plus seater and keeping the other with existing configuration. In addition to traditional charter work with mining companies, it will seek to attract entertainers, sporting teams and businesses wanting to take staff to conventions.
But having been bruised by Ozjet, he is not going to fall for the same trap twice and says the charter operation will be lean and mean and grow only through hard work.
"This is a market I've personally been in for 13 years so it's not new to me," he says. "You're very much controller of your own destiny because you're only flying when you have the demand.
"Because we own the assets and we don't have massive overheads we can take a soft start to it and I have to say I've been rather encouraged this morning.
"Thanks to Qantas we've had no passenger issues whatsoever that I'm aware of - and certainly I've been monitoring the call centre myself this morning - and all we have had is people making inquiries for charter."
While Ozjet is another lesson to people besotted with starting a domestic airline in Australia, it will probably be only a matter of time before another attempt is made.
CAPA's Harbison says the chances of success remain small. "It's fairly telling to say that there have been 55 years of aviation in Australia where there's never been more than two airlines that have been able to keep a hold on the market on a national scale," he says.
Stoddart isn't about to disagree.
"Would I recommend anybody else try it? Not particularly," he says. "It has certainly proven to me that Australia is a duopoly and it always has been."
Steve Creedy is The Australian's aviation writer.
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