Ansett’s collapse set decade of positive change for aviation in Australia – and beyond

Mainline route capacity was quickly restored

Ansett Airlines had accounted for nearly 40% of Australia's domestic aviation when it ceased operations on 14-Sep-2001. Administrators quickly determined the carrier was unviable after being placed into voluntary administration on 12-Sep-2001, following mounting losses. The carrier had been haemorrhaging cash ever since Virgin Blue and Impulse almost simultaneously entered the market in 2000.

Ansett's collapse, in no way linked to the 11-Sep-2011 terrorist attacks, saw an immediate market contraction. But, despite pleas for a government bailout that focused more on supporting staff interests than Australia's aviation system, the capacity gap was remarkably quickly filled. Domestic passenger numbers, excluding those on regional services, decreased 6.7% from 26.8 million in 2000/2001 to 25 million in 2001/2002, but by 2002/2003 surpassed the pre-Ansett exit period with 27.1 million passengers carried and as low fares stimulated new growth.

Domestic passengers annually carried by mainline carriers, 2000/2001-2010/2011

Source: BITRE and CAPA - Centre for Aviation

Obtusely, 9/11 was however significant in the market's recovery as rapid fleet growth was made possible through cancellations Boeing received in the wake of the New York terrorist attacks. Virgin Blue increased its B737 fleet from nine in Sep-2001 to 28 by Dec-2002. In Oct-2001 Qantas meanwhile took over an order from American Airlines for 15 B737-800s, with the first aircraft arriving in an unprecedented three months. Qantas also leased B737 and B767 aircraft from other sources as interim measures.

Revenue passenger kilometres had a similar rebound, decreasing from 31.1 billion in 2000/2001 to 29.2 billion in 2001/2002 and recovering in 2002/2003 with 32.3 billion.

Domestic mainline annual revenue passenger kilometres (in '000s), 2000/2001-2010/2011

Source: BITRE and CAPA - Centre for Aviation

The number of flight departures took longer to recover, with the 2000/2001 peak of 260,836 flights not surpassed until 2004/2005 with 290,164 flights, although this is partially offset by load factors that rose from 76.2% in 2000/2001 to 78.2% in 2001/2002, with that increased level sustained for the duration of the decade.

Number of annual domestic mainline flights in Australia, 2000/2001-2010/2011

Source: BITRE and CAPA - Centre for Aviation

The effect on international services to and from Australia is difficult to separate from the global downturn in 2001, but Ansett's long-haul international network had only consisted of services to a handful of Asian cities, a shadow of its 1997 pre-Asian financial crisis network. Short-haul international services were confined to Fiji at the time of collapse.

Lost decade for regional aviation - but new jet services opened up

Ansett had been through its subsidiaries a major player in the regional, largely turboprop market. As they struggled to recover, competition was largely removed, so the recovery in regional flights took much longer to occur. Aircraft departures dropped from 357,097 in 2000, a full year prior to Ansett's collapse, to 256,917 in 2002, a full year after Ansett's collapse, and the peak for the decade, with flight numbers not surpassing that figure since. But the number of passengers has fully recovered. Regional carriers flew 11.1 million passengers in 2000 and then 8.2 million in 2002 - a 27% drop - but in 2007 eclipsed the pre-Ansett collapse carriage with 11.3 million passengers flown.

During that period there was however a shift in the profile of service to some larger regional centres, notably along Australia's East Coast, as Virgin Blue led with jet service, changing forever the lifestyles of many. Commuting was now possible at low prices and the simultaneous spread of higher quality internet access meant new opportunities for regional ports to become more attractive to businesses. At the same time, several tourism destinations, previously languishing, saw a burst of activity which changed their fortunes dramatically.

Number of regional Australian passengers carrier annually, 2000-2010

Source: BITRE and CAPA - Centre for Aviation

This phenomenon unfortunately did not overflow onto non-coastal destinations and, as regional airlines struggled to recover and, as Qantas' regional operation regained near-monopoly control of many markets, regional airline revenue passenger kilometres did not recover from the 2000 high of 2.3 billion until 2007's figure of 2.6 billion.

Domestic regional annual revenue passenger kilometers (in '000s), 2000-2010

Source: BITRE and CAPA - Centre for Aviation

Load factors over the decade meanwhile remained within 3ppt of 2000's 63% figure.

Compared to the fast recovery in the mainline market, which accelerated growth - with airlines today carrying 78% more passengers than before Ansett's collapse - the regional market consequently lost growth opportunities over the past decade, which ended with only 10% more passengers carried in 2010 than 2000.

Comparison of total passengers carried annually, mainline vs regional carriers, 2000-2010

Source: BITRE and CAPA - Centre for Aviation

Between 2000 and 2005, 36 airports lost scheduled regional airline services, although with services to new airports, the net reduction was 12. Fourteen of the 36 services lost were in New South Wales, the primary market for Ansett's subsidiaries, although no statistics are available on services lost exclusively to Ansett's grounding. The next largest loss of services was eight airports in Northern Territory, a region not served by Ansett's subsidiaries.

Australian regional airports that lost services between 2000 and 2005

Source: BITRE

Ansett's collapse grounded its four regional subsidiaries: Hazelton Airlines, Kendell Airlines, Skywest and Aeropelican. All progressively returned to the air, the latter two under their own brand and operation, while Hazelton and Kendell merged to form today's Regional Express ("Rex"). The regional market would have recovered more slowly were it not for Ansett, starting in 2000, having increasingly moved thinner routes to its regional subsidiaries, giving them the experience with the higher demand as well as actually helping generate the higher demand itself.

This largely contributed to regional carriers having higher growth rates than mainline carriers, which has in recent years reversed as mainline carriers move into regional cities. Proserpine Airport, for example, had 33,822 passengers pass through on regional flights in 2000/2001, but none in subsequent years as passengers on mainline carriers increased from 42,153 in 2000/2001 to 213,619 in 2009/2010 - a 407% increase.

While the carriers returned to the air and have now recovered, albeit with lost growth, they now are at a distinct disadvantage being independent as they lack the marketing power, corporate contracts and frequent flyer opportunities that Ansett offered and Qantas still does, although head-on competition between the regional and mainline carriers is low. Skywest has gained footing with a codeshare and frequent flyer agreement with Virgin Australia. They also lack the government lobbying power Qantas provides for its regional subsidiaries, a loss that will be played out over the next year as regional carriers argue the government's carbon tax is not appropriate for regional services and will have disproportionate affects on regional aviation.

Strategic Airlines, which later this year will change business model to being an LCC with a re-branding to "Air Australia" has now also entered the regional market, serving industry resource routes, including a link between Brisbane and Gladstone, which Virgin Australia will replicate in Oct-2011 when its ATR72 aircraft enter service under a partnership with Skywest. Additional regional growth, albeit measured, will come from Virgin Australia's ATR72 fleet increasing to eight aircraft, and possibly more if 10 options are exercised.

Market at large benefitted from Ansett's exit. Fares immediately dropped substantially

Ansett's collapse saw the immediate and direct loss of 16,000 jobs, with an additional 54,000 jobs lost indirectly. It was only in Sep-2011, ten years later, that former employees received their final payment of entitlements. But the market at large over the long-term benefitted from Ansett's exit, which permitted then-Virgin Blue (now Virgin Australia) to secure a position in the Australian market it had entered in Aug-2000. Most importantly it allowed the much lower cost, but lightly funded Virgin Blue to keep flying. Quickly faced with rising fuel costs, a falling Australian dollar, and bigger competitive response from incumbents Ansett Australia and Qantas, Virgin Blue had been struggling until Ansett's exit. Impulse, also briefly reborn as a low cost airline with B717s, but without the same low costs, struggled hard and was taken over by Qantas only a few months later, in Apr-2001, folding into Qantas Link, its regional arm and eventually morphing into Jetstar.

Virgin Blue's impact on fares, and benefit to the market, was now pronounced: the lowest economy fare available in the first full month of its operation was 40% lower than the average lowest fare since Oct-1992, when the Bureau of Infrastructure, Transport and Regional Economics (BITRE) began record keeping. It was also 43% lower than the best fare over the preceding 24 months, which saw a rise in fare levels consistent with a regional rebound from the 1997 Asian Financial Crisis.

Best discount economy fare, Oct-1992 to Sep-2000 (July 2003=100)

Source: BITRE and CAPA - Centre for Aviation

The lowest economy fare in Aug-2000, the month leading up to Virgin Blue's launch, was the 19^th highest monthly airfare since 1992, placing it in the top 20% of highest recorded fares. The figure can partially be explained by a four-week delay to Virgin Blue's launch, due to longer-than-expected processing of regulatory paperwork, creating higher demand with lower capacity. Since then, however, the lowest measured fare by BITRE has never exceeded the Aug-2000 level.

Lowest economy fares from the month prior to Virgin Blue's entry to the present (July 2003=100)

Source: BITRE and CAPA - Centre for Aviation

While the month after Virgin Blue's launch saw the historically lowest fare up to that time, it would not be until Jul-2004, two months after Qantas' low-cost subsidiary Jetstar commenced operations, that the lowest economy fares would return to the level seen immediately after Virgin Blue's launch. What occurred in the intermediate years, with capacity progressively growing to meet demand, was a general decreasing of the cheapest economy fares, although less pronounced than the immediate drop post-launch, due to Virgin Blue's launch excitement receding and Ansett's exit eliminating a competitor to Virgin Blue.

Had Ansett survived even only a few months longer, it is unlikely Virgin Blue would have remained in the market; its withdrawal in turn would have permitted air fares to continue their upward trend. In turn, Jetstar was only created in response to Virgin Blue's success at the expense of Qantas. Fares would probably not have fallen had Ansett survived and Virgin Blue gone out of business, eliminating the need for Jetstar. Although it is unlikely an Ansett and Qantas controlled market would have gone unchallenged until the 2007 launch of Tiger Airways, low fares and new jet service to regional centres would have taken at least several more years to arrive.

The overall gradual decrease of the lowest economy fares showed an anomaly between 2001 and 2002, when the lowest fare increased from 107.6 (with July 2003 being a baseline of 100) to 112.4, but this was due to outlying effects. A domestic far ware broke out in Apr-2001, significantly lowering fares. While far wares are not uncommon amongst new entrants and LCCs in particular, this episode proved unstable, with Qantas later that month acquiring Impulse, partially snuffing out some discounting. Excluding the fare war, the year's average lowest fare would have increased to an indexed 109.8.

Ansett meanwhile strove to recover, but finally ceased operations in Mar-2002

All this time a a revitalised but drastically slimmed-down Ansett - referred to as Ansett Mark II - had continued to operate, but as losses continued and it became obvious to its opportunist owners (more interested in Ansett's real estate interests, notably in its Melbourne and Sydney Airport terminals) that a government subsidy would not be forthcoming, the airline ceased operations on 4-Mar-2002. Fares then rose disproportionately in Mar-2002 and Apr-2002 as a result, once again creating higher demand with lower capacity that airlines can exploit with increased ticket prices. Without these two months of increased fares, the year's average lowest fare would have been 109.9, only a marginal increase from the preceding year's offset level of 109.8, showing economy fares were in a gradual decline following Virgin Blue's entry and position strengthening at the expense of Ansett.

Today's lowest economy fares are 58% lower than the month prior to Virgin Blue's entrance - a figure also due to the entrances of Jetstar and Tiger Airways Australia. But the same trend was not observed for business class fares.

Business class fares and market, on the surface, largely unchanged

Today's lowest business class fares are 9% higher, inflation adjusted, compared to the period prior to Ansett's exit, according to BITRE figures. But this growth did not occur disproportionately. Business fares had increased 10% in the five years preceding Ansett's collapse, but then increased 9% in the five years after, while Qantas held a monopoly on business class, supported by an increasingly valuable Frequent Flyer Programme and its dominance of corporate contracts. Virgin Australia only introduced business class in May-2011 on the Sydney-Perth route.

What these figures belie is that, unlike economy fares, the majority of business class tickets are purchased through corporate contracts, whose value is publicly unmeasured. But it is difficult to believe Qantas would not have taken advantage of monopolistic market conditions and increased corporate contract prices disproportionately, or that had Ansett stayed in the market there would have been greater competition as the corporate sector grew and product innovations afforded greater points of differentiation with premium services - or that holding a monopoly meant Qantas had to invest less in its premium product - a position evidenced by deploying more aircraft with lie-flat beds only after Virgin Australia announced its entry into business class.

The effect of Qantas' post-Ansett monopoly on business class will be measureable later this year when Virgin Australia offers business class for sale across all of its mainline routes. Preliminary evidence from the trans-continental routes (Brisbane/Melbourne/Sydney to Perth) where Virgin Australia has so far offered business class fares shows Virgin Australia's public, non-corporate contract offering is 8% lower as Qantas fares have decreased - upwards of 22% - following Virgin Australia's entry.

Virgin Blue's Oct-2007 strategy of introducing premium economy had evoked no major change in pricing; the average lowest business fare in 2008 actually increased marginally from 2007 before dipping in 2009 with the global financial crisis and economic downturn.

Monthly lowest business class fare, 2000 to 2010 (July 2003=100)

Source: BITRE and CAPA - Centre for Aviation

More secondary routes opened

The post-Ansett period coincided with a rapid increase in passengers carried on routes outside of the Melbourne-Sydney-Brisbane triangle, with some routes doubling in passengers carried every year or every other year. This growth can be attributed to Virgin Blue's growing presence, which was secured after Ansett's exit. Operating and expanding to under-served secondary routes is commensurate with typical LCC practice and Virgin Blue CEO Brett Godfrey talked frequently of targeting the "low hanging fruit" of regional centres with populations in excess of 50,000. The launch of Jetstar, created to counter a Virgin Blue growing after securing a position post-Ansett's exit, helped further grow secondary markets.

Sample of growth in non Melbourne-Sydney-Brisbane triangle passenger traffic, 1996/1997-2005/2006

Source: BITRE

A dynamic aviation market was born out of Ansett's demise

Ansett's collapse is the starting point to weave the narrative of where Australia's airlines have been, where they stand today and why the contentions currently underlying the carriers exist.

While the re-branded Virgin Australia expects next year, with its partners, to rival Qantas and oneworld's ex-Australia international capacity (but excluding un-aligned carriers), in 2001 Virgin Blue had focused exclusively on the no-frills domestic market, giving Qantas a monopoly on international services and domestic premium services, including business class for the profit-generating corporate sector.

Although Virgin Blue's initial focus was narrow, it was powerful and successful enough to threaten Qantas, which had responded with a wholly-owned low-cost subsidiary Jetstar in May-2004. At the time such spinoffs were in vogue, albeit rarely successful, with Air Canada's Tango, British Airways' Go, Delta's Song and United's Ted. So ubiquitous and over-marketed they seemed, especially after Ted's name came from the last three letters of its parent company, that a satirical newspaper joked low-cost carrier jetBlue would start a spin-off named "Lue". Globally such carriers soon failed - except for Jetstar, and it was no coincidence.

Legacy low-cost spinoffs were created to compete with the low-end of the market, but the legacy carriers largely failed to define their target markets, offering a low-cost subsidiary with a nearly identical - if not better - product than the mainline operation, which rather than having injections of premium service, let itself partake in a race to the bottom of the cheap fare barrel.

Ansett's collapse left its corporate market share exposed, and Qantas was quick to acquire it. When looking to combat Virgin Blue, Qantas could not afford to surrender its corporate market monopoly, and so appropriately segmented the market by targeting the premium market above Virgin and the price-sensitive market below it, sandwiching Virgin Blue in the middle - a term the carrier was always sensitive about.

As part of Jetstar's creation, Qantas' less profitable routes were handed to the upstart, causing contention to this day of a shrinking Qantas, seen as the death of a national carrier. But it is forgotten Jetstar was born as a response to a LCC that succeeded only after another national carrier failed due to a high cost base and other inefficiencies.

Over the next five years Virgin Blue began to fill Ansett's position as Australia's second carrier. By 2009 it carried 42% more traffic than Ansett did at its peak, but with a third of the staff numbers, demonstrating Ansett's unsustainable position. The Qantas Group also grew, and today is 87% larger than at the time of Ansett's collapse.

The almost comfortable division of labours - between a higher cost Qantas with dominance of the higher yielding market and a low cost, purely domestic Virgin Blue, at the leisure end, each with its adequate profit margins - was disturbed as Jetstar was increasingly effectively applied to the market. Virgin took a conscious decision to evolve into a "new world carrier", the first formal recognition globally of the potential for LCCs to morph into entities capable of attracting higher yielding segments.

This involved introducing a premium economy service, with mixed success, lounges, and eventually a long-haul subsidiary, V Australia. While Ansett's international routes focused on Asia, and retreated heavily after the Asian financial crisis, V Australia instead focused on the less competitive and duopolist trans-Pacific route, in the process forcing Australia to concede an open skies agreement with the US. Virgin Blue was positioning itself to become a full-service carrier, and is presently working towards that position as well as doubling its corporate market share to 20%.

An international vacuum at home has delivered Qantas/oneworld a strong position

While the post-Ansett period saw Virgin Blue challenge Qantas domestically and on the leisure sector, Ansett's exit saw Qantas gain a near monopoly on the national corporate sector, and arguably allowed a degree of complacency to settle in. Nowhere was that more obvious than in its long-haul network concentrated in Los Angeles (and San Francisco) and London Heathrow.

Despite talking of plans to do so many years earlier, and having capable aircraft - the B747-400ER - in its fleet since 2002, it was only in May-2011 under threat of a combined Delta and V Australia trans-Pacific operation that Qantas launched services from Australia to Dallas/Fort Worth, creating better connections for passengers. Its proposed joint business agreement with American Airlines, which is awaiting final approval from the US Department of Transportation, offers further benefits to passengers, but none of the benefits arises from a previous inability to provide them - rather the need to respond to increased competition.

Qantas and American Airlines could have enhanced services significantly earlier, but with a duopoly there was little need. Had Ansett survived, there are a number of scenarios under which a Star Alliance-led combination of Ansett, Air New Zealand and United Airlines would have posed a serious threat to Qantas on the trans-Pacific market. Indeed, when Ansett collapsed, United quickly felt the pain, losing valuable domestic feed and later worked with Virgin Blue to establish a one-off interline system to help restore some of that.

Qantas fared worse in Europe. The absence of home based competition allowed Qantas to favour European services exclusively from London Heathrow - and Frankfurt to a smaller degree. European destinations outside of those cities were to be served through select codeshares such as those with Lufthansa and Air France, or connecting flights from London, creating a two-stop backtrack journey.

Had Ansett survived, its domestic grasp would undoubtedly have aided the Asian members of Star Alliance to capture the Australian market more effectively. That would have perhaps galvanized Cathay Pacific to work with Qantas rather than largely ignore its Australian oneworld partner and let its Asian rivals stitch up the market. Either way, a growing Star Alliance would have pressured Qantas to respond, delivering a number of possible scenarios, including perhaps concluding a JV with Malaysia Airlines or warming up more to Etihad, rather than keep the network carrier confined to channeling passengers to Middle East destinations, a restriction that caused Etihad in Aug-2010 to defect to Virgin Blue and form a joint-venture.

Domestic network focus with international ramifications

While the domestic market was Ansett's heartland, the airline's collapse thus had ramifications on the international stage. Star Alliance was left without an airline in Australia.

Yet, for passengers in this regional market, the alliance between Virgin Australia, Air New Zealand and (pending regulatory clearance) Singapore Airlines will be more fruitful, productive and financially beneficial than any opportunities involving Ansett. History has also repeated itself between Air New Zealand and Australia's second carrier, with ANZ in Jan-2011 taking a 14.9% stake of Virgin Blue.

Eventually and somewhat ironically, there is an evolving symmetry to the situation now evolving. Air New Zealand, Ansett's sole owner at the time of the collapse, and Singapore Airlines, which in turn owned 25% of ANZ, wanted something from Ansett that they will now receive from Virgin Australia. But only the space of ten years has allowed the healing of several severe impacts as Ansett failed - including the neo-bankruptcy and majority renationalisation-plus privatisation of Air New Zealand and a seemingly insoluble divide between that airline and SIA; the passage of time and changes in CEOs have enabled a new environment.

But now, Virgin Australia, by forging alliances with differently aligned carriers - Star Alliance, SkyTeam and unaligned - is contributing to the global story of alliances increasingly overlapping and coming into contention with each other.

(The reincarnation of owner Air NZ, while Ansett failed, had been viewed dimly by Ansett employees. Ansett airport workers at Melbourne in 2001 positioned ground equipment around an Air New Zealand aircraft, blockading it and unknowingly preventing New Zealand's prime minister from boarding it and returning home - such was the disdain of Air New Zealand. Today, under a very different management, Air New Zealand has become a cultural and national force, offering compassionate fares after an earthquake, lending crisis management and grief support in the wake of a mine collapse and earthquake as well as offering discounts on its monopolist and profitable regional routes - all done with little fanfare or bravado.)

See related article: Global airline alliances: transformed by antitrust immunity but confronted by uncertainty

Virgin Australia is now building a network to combat the dominating power of Qantas that arose after Ansett's collapse. Asia-Pacific, the world's largest growing market, is emerging as a market divided between Singapore Airlines/Virgin Australia and Malaysia Airlines/Qantas, with the former including Tiger Airways and soon Singapore Airlines' new medium/long-haul LCC, and the latter combination including AirAsia and Jetstar, although many large carriers are outside of this dichotomy.

See related article: New Qantas Group full service carrier could further alter competitive landscape in Singapore

Ansett's collapse was the most sudden and substantial in industry history - with no bailouts

The terrorist attacks of 11-Sep-2001 concentrated attention away from Ansett's high-profile collapse that arguably rivalled, in public sentiment, that of Pan Am. While Pan Am had a significantly wider reach, its selling of assets - London Heathrow slots to United, Berlin to Lufthansa, other European routes as well as its New York JFK terminal to Delta - meant that its 1991 collapse saw jobs lost but services largely unaffected. This was far from the case with Ansett.

Also in America, the buyout of financially challenged Trans World Airlines by American Airlines largely kept the former from abruptly ceasing operations, with American instead slowly unwinding TWA and its network, eliminating the sudden change that Ansett's collapse brought.

Sudden impacts from high-profile collapses in Europe of Sabena and Swissair were similarly offset by convoluted processes that saw new long-haul carriers quickly emerge from the old company and resume part of their previous services. They were accompanied by government bailouts - USD1 billion for Swissair and EUR125 million for Sabena - that were pale in comparison to the USD15 billion bailout US airlines received after the 11-September-2001 terrorist attacks.

Since then Air India and Japan Airlines have been recipients of government funds that would otherwise see the carriers collapse with a potentially wider and more sudden impact than Ansett's incurred. JAL may be an exception (and it did go through a serious process of bankruptcy which has seen it greatly downsized), but the positive outcomes following Ansett's demise may point the way for governments which still lean heavily towards propping up airlines that are clearly unsustainable.

Ansett's legacy at the centre of today's industry and contentions

This year both Qantas and Virgin Australia have invoked Ansett's legacy as part of their respective strategic plans. For Virgin Australia, the reference was in bringing competition back to all sectors of air transport. "We have a significant cost advantage on Qantas who hold a near monopoly position in the business market and have done so since the demise of Ansett," CEO John Borghetti said in Apr-2011.

The reference from Qantas CEO Alan Joyce was less upbeat and more fear-inspiring, warning that unless Australians, Qantas union employees in particular, accepted the carrier's restructure and increasing reliance on a lower cost bases, Qantas could meet the same fate as Ansett.

See related article: Qantas profit doubling and strategic developments overshadowed by change resistance

"Ansett was a good airline. Many Australians believed that it too would be around forever. Ansett collapsed because it failed to respond to changing times. It failed to keep control of its strategy. It failed to keep control of its costs. Qantas International is such a large part of our business that to do nothing about it would threaten the future of the whole company," Mr Joyce remarked in Aug-2011.

In Ansett there is evidence that Qantas' plan is not irrational. Qantas is criticised for withdrawing from Asian destinations or increasingly relying on Jetstar, but Ansett had already pulled out from a number of international markets after the Asian financial crisis and did not return to them after a rebound was well underway.

Had Ansett responded to the changing times Mr Joyce speaks of, it is likely the Australian market would have taken longer to realise the benefits of low-cost carriers. Ansett's survival would meanwhile have created a less significant regional balance of power narrowly centred on oneworld versus Star Alliance.

Instead, today's status quo of the region's airlines - whether aligned and unaligned to a global alliance - tend to select between Qantas and Virgin Australia as partners. In doing so they have created a more dynamic marketplace, with implications for the entire industry.