This Article in 2 parts
Sun "Singapore Straits Times"
A slice of the Aussie skies
What began as a casual invitation to hear a proposed sale of two modest Ansett subsidiaries became a determined move by eight Singaporeans to help an Australian consortium acquire them and move into the Australian domestic flight market.
Now the eight own the largest single block of shares in the Australian group which owns the Regional Express airline.
Offering some 1,300 flights to 30 airports a week, Rex now has to prove that it can compete with the titans of Qantas and Virgin Blue.
With airlines reeling from drastically reduced passenger traffic and massively higher insurance premiums in the aftermath of the terrorist attacks on the United States last September, why would eight Singaporeans sink millions into two money-losing domestic carriers in Australia?
For the entrepreneurial eight, the real question was: 'Why not?'
In an interview with Sunday Review, the group's leaders told a fascinating tale of how chance, trust, risk-taking and nimbleness combined to lead them to do aerial battle with arguably the region's mightiest airline - Qantas - in its home skies.
Together, the Singaporeans pumped in enough funds to fuel the ambition of an Australian consortium to buy Kendell Airlines and Hazelton Airlines and merge them into the country's newest domestic carrier, Regional Express, or Rex for short.
For their money, the Singaporeans were alloted more than 30 per cent of the shares - the largest single block - of the consortium, Australiawide Airlines, and two seats on the board of seven directors, two of whom were from management.
It began around the middle of this year with a casual invitation to Mr Lim Kim Hai, 45, to drop by and listen to a banker talk about the proposed sale of Kendell and Hazelton.
These were two subsidiaries of Australia's second biggest domestic airline, the Air New Zealand-owned Ansett, which had crashlanded with A$3.5 billion (S$3.3 billion) worth of debt in September last year.
It was not even a scheduled presentation as the banker was merely passing through Singapore.
Mr Lim, a former civil servant turned business consultant, went, listened and set it aside in his mind.
While he was on holiday in Malaysia, a long-time friend, Mr Lee Thian Soo, 47, whom he had mentioned the sale to, called to ask him what he was doing about it.
The affable Mr Lee, who started working life as a Straits Times journalist and then went into marketing marine oil and gas products before switching to trading aircraft, had been helping friends to manage their funds, and he wanted to see if the sale was an opportunity worth pursuing.
They decided to go to Australia to talk to the parties involved. By then, it was already August and the administrators of Kendell and Hazelton were pushing for a sale.
The two Singaporeans started talking to the Australiawide Airlines consortium and asked to attend a shareholders' meeting.
Within the space of three days, as their examination of the assets on offer progressed, they went from merely curious to negotiating the extent of their possible participation in the consortium.
While others saw the A$3.5 million the two airlines were bleeding each month while under the care of administrators, Mr Lee and Mr Lim saw something else: an opportunity.
Their first move was to decide who to invite on board. Said the soft-spoken Mr Lim: 'I had no difficulty finding co-investors. I had developed a relationship with these people and they trust my judgment.'
Trust also came into the picture when Mr Lee and Mr Lim met the leaders of the Australiawide consortium.
They felt comfortable with their potential partners and confident that the forecasts they were shown were professional and reasonable.
This was important: had they felt at any time they were being taken for a ride, they would have walked out the door.
The Singapore investors were also convinced that officialdom was genuinely interested in giving their consortium a decent chance of making their proposed operation a success, thereby securing jobs and ensuring small towns would continue to be connected by the Kendell and Hazelton air bridge.
Said Mr Lee: 'The consortium was getting almost daily calls from high-ranking government officials checking on how the negotiations were going.
'In the end, Australiawide Airlines received several concessions on labour, tax and other issues without which the fledgling operation would have had a hard time getting off the ground.'
He declined to go into detail. But observers noted, among other things, that though the Australian unions are notoriously retrenchment-averse, the total staff for rex is a trim 620 people instead of the 1,000 people who used to work for Kendell and Hazelton combined.
While some of the Australian investors in the Australiawide Airlines consortium were from the airline industry, the Singapore investors came from other backgrounds.
For example, Mr Lim was an electronics engineer by training and worked in the Defence Ministry before going into business.
But their lack of knowledge on how to run an airline, even a relatively small one like rex, did not faze them. What they looked out for were 'proxy' indicators to give them an idea of the potential of rex.
For example, they checked how Kendell and Hazelton did before being taken over by Ansett, and later the administrators, and learned that both the 30-year-old airlines had been profitable.
They talked to staff and customers and found that the Australians had a strong sense of loyalty and love for the underdog - qualities which translated into family and friends giving business to the company their relatives and chums worked for.
They checked the service and was pleased to find unusual touches like hot meals for the domestic flights, sheepskin-covered seats, and a crew so friendly that the captain would greet passengers at the door as they embarked and similarly bid farewell as they left the plane.
Also, they looked at the propeller-driven aircraft and found them in good condition and ideal for the short-haul services offered. And by keeping to just two types of planes, 21 36-seater Saab 340 and seven smaller 19-seater Metro 23 aircraft, the new airline would lower maintenance costs.
One of the most persuasive 'proxies' was the 'load factor' or the amount of revenue space filled. All rex needed to break even was a small 50 per cent load factor. And this seemed eminently achievable given the modest slice of the business - which some observers put at around 10 per cent - the small player wanted from a lucrative domestic aviation market estimated to be worth about A$2 billion.
There were many other signs that signalled a positive future for the consortium but time was running short. And so was the sum of money pledged. The Australiawide Airlines consortium needed to shore up its position so that it could put in a serious bid for Kendell and Hazelton.
Having assessed the opportunity, the Singapore investors decided to join the consortium. But since they were the last and crucial entrants, they could negotiate the cost of their participation from a position of strength.
Mr Lee declined to say just how much money they eventually agreed to commit for their more than 30 per cent share, but added: 'We were very pleased with what we had to put in and what we could be getting out in return.'
Once they were satisfied with the risk-to-returns ratio, Mr Lee and Mr Lim rounded up the acceptances from the other Singapore investors.
They would not say who these were other than to describe them as 'quietly successful' people who shun the headlines.
More significant, they were people with considerable financial clout. Because they had no boards to persuade, shareholders' meetings to call, or partners to consult, the individuals could decide on the spot: yea or nay.
Cont:
And a new domestic airline was born in Australia.
Rex is no tyrannosaurus: Virgin Blue operates 23 Boeing 737 jet aircraft on domestic routes, while Qantas uses about 130 Boeing 767, B747, B737, B717 and Bae 146 aircraft on its domestic and regional routes.
Observers say that given the size of rex, the next six months will be critical in determining how much of a dent the new airline makes on the Australian aviation scene.
'Its future will depend largely on reaching some accommodation with either Qantas or another large airline,' Mr Peter Harbison, managing director of the Centre for Asia-Pacific Aviation, told Sunday Review from Sydney. 'This is because rex cannot afford to compete head to head with a major airline like Qantas on small routes.'
Moreover, 'a large minority of the passengers want to connect from and to Sydney with inter-state routes'.
Apart from Qantas, the only other large Australian carrier is Virgin Blue, owned equally by Richard Branson's Virgin Group and Australia's biggest maritime cargo handler, Patrick Corp.
Currently, rex competes on six routes with the incumbent players, Qantas and Virgin Blue, Sydney-based spokesman Armon Hicks said.
After the collapse of Ansett last year, both Qantas and newcomer Virgin Blue moved to fill the void left by the former No. 2 carrier. Qantas now holds about 80 per cent of the Australian travel market with most of the other passengers going to Virgin Blue.
Headquartered in Sydney with its main operational, engineering and maintenance base in Wagga Wagga in New South Wales, Rex launched its new schedule this month, plying routes in NSW, Victoria, South Australia and Tasmania. It now offers 1,300 flights to 30 airports a week - an increase of about 30 per cent from previous levels.
Besides serving the capital cities of Adelaide, Canberra, Melbourne and Sydney, it flies to regional centres such as Wagga Wagga, Orange, Coffs Harbour and Broken Hill.
Since its official launch on Aug 6 when the airline said it was aiming to fill 52 per cent of its seats, the carrier has seen a 'significant improvement in bookings', said Mr Hicks, without disclosing the passenger load levels.
But, he added, passengers' response to the new airline has been so overwhelming that it announced on Aug 12, barely a week after its launch, that it will double its call centre capacity.
It also launched an Internet site where passengers can book their tickets online.
But even as the airline sees encouraging signs of growth, some of its critics have started a death-watch.
The vice-president of the Aircraft Owners and Pilots Association, Mr Bill Hamilton, told Australia's Canberra Times that he doubts Rex will make it past Christmas.
'I sincerely hope I'm wrong, but my personal opinion is that they will be unlikely to succeed because there have been 11 airlines, big and small, go under in the last two years and Rex will face all the same fixed costs as those other airlines,' he said.
'It's all largely factors beyond their control, like the situation in the bush and fuel and airport costs.'
However, aviation consultant Harbison said Rex was different from the higher profile trunk route carriers which have failed.
'This is a regional airline with small turbo-prop aircraft. Its market is predominantly business traffic - characterised by fairly slow growth and not very responsive to lower prices - to and from Sydney with some other routes,' he said.
There is one other card it has yet to play: interline agreements with an international airline. This will boost its attractiveness, as its passengers will be able to buy just one ticket to go from a regional centre like Wagga Wagga to a big town like Sydney and out of Australia.
Rex said it had been discussing such an agreement with Singapore Airlines and Qantas. Though Qantas has domestic flights too, the overlap is very small, said rex spokesman Hicks.
He dismissed criticisms of rex as uninformed and inaccurate: 'They haven't seen our business plan, and are unaware of our capital backing. We believe that our business plan is robust and sustainable.'
The leader of the Singapore investors, Mr Lee, had the last word: 'We're not in this for charity.'
(Paul Jansen and Rebecca Lee are with the Straits Times Money desk.)