Stretching Australia’s Wings: Compass Mk1

November 1990 marked the date that the Australian domestic airline market was finally fully deregulated, however unlike in other markets this did not signal a rollercoaster of new entrant airlines. The Australian market had always been hyper-regulated and even with deregulation the grandfathered airlines, Australian and Ansett, had major advantages. So much so in fact that only a single challenger appeared to compete with them. This was Compass Airlines.

Compass Airlines Airbus A300B4-605R VH-YMA Aeroclassics 1:400 Scale Model Airliner

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Deregulation had been announced on October 31, 1987 giving both Australian and Ansett the opportunity to strengthen their positions prior to the arrival of competition. One of the first things they did was acquire almost all the regional airlines enabling them a stranglehold on feeder routes, whilst Ansett’s acquisition of EastWest allowed it a bulwark with which to compete on leisure heavy routes also.

Even more damaging was the ‘gates agreement’ signed on December 31, 1987 that gave Australian and Ansett ownership of all aircraft gates in Australia on a 30 year lease, both new and old. Only a tiny number of gates were left available for new airlines and these were controlled by Ansett and Australian. The fact that this agreement was signed the day before the new Federal Airports Corporation came into being shows what a shady deal it was. Even with deregulation this practically killed the chance of a successful competitor dead.

VH-YMK at Adelaide in August 1991. Photo by Daniel Tanner from Wikipedia

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Other considerations made a new startup look unfavourable. The nationwide Pilots’ Strike of 1989 had resulted in a mass resignation, which had enabled Ansett and Australian to save a fortune in salaries. Worse Ansett and Australian had a stranglehold on the Galileo Computer Reservation System and therefore the travel agent network. In these days before the internet any new airline would struggle to get its message and flights in front of the public.

Nonetheless Bryan Grey, who had been part of EastWest, persevered with his new airline, Compass, despite the setbacks and an inability to raise more than $65 million in capital – a figure that even Grey had said was $20 million short of what he thought he needed.

Compass Airlines began operations on December 1, 1990 with a pair of nearly new Airbus A300-605Rs leased from Monarch Airlines of the UK. These were an unusual choice for a startup but their usage was largely due to the effects of the ‘gates agreement’. Both Ansett and Australian had used the agreement as best they could to stifle competition. In Sydney Australian leased Compass two gates at excessive rates, which were not next to each other. In Melbourne Ansett went one better and provided two gates 1.5km apart! In Adelaide Compass was forced to operate from a hangar, which became known as the “tin shed”. At Perth Compass had to operate from the international terminal and all baggage had to be hand searched.

With these restrictions Grey felt he had no option but to use larger aircraft since he couldn’t get the gate space he wanted. His first choice, the 767, was denied to him when the government refused to let Qantas maintain them. The next best option was the larger still A300 but these aircraft were unsuitable as they were expensive to lease, required high load factors to break even, restricted which airports could be operated too plus were fitted out to too high a standard. The latter point was made worse when Compass spent a fortune refitting them to seat 288 in an 8 across config rather than the 360 in 9 across they came with.

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In hindsight the choice of the A300 was a major error as even with limited gate facilities smaller aircraft could have been turned around more quickly increasing utilisation and would have been a lot more flexible.

Faced with a perfect storm of issues Compass ran into another – a major global economic downturn. Passenger volumes should have fallen by 20-30% in 1991 but instead by September it was 37% above that of 1988. This was almost entirely due to the presence of Compass, however obviously in that economic environment it was hard to make a profit even before the incumbent airlines clobbered them with a fare war of enormous ferocity.

The Compass Airlines Mk1 Fleet

Compass had said it would be 20% cheaper than the existing airfares but with its first owned A300 arriving in April 1991 the increase in capacity was guaranteed to create a pricing based war. This began in January when Ansett discounted seats by 47-61%. A ceasefire lasted until May but the rest of the year saw escalating fare wars amongst the three majors. It was a boon for customers but could not last. Ansett and Australian were losing a fortune but they had vastly deeper pockets than the underfunded Compass did.

Nearing the end. VH-YMB with dark nosecone at Sydney in December 1991. Photo by Daniel Tanner from Wikipedia

Over the period of 1990/91 Ansett lost $200 million, whilst Australian lost $12 million in the first 6 months of 1991. Compass rather creditably lost $16.5 million in its first year but this compared dreadfully to the $20 million profit it expected. Nonetheless by the middle of 1991 Compass had acquired a 10.6% share of the overall market and an impressive 21.3% on just the routes it flew. It had done especially well on the long services to Perth.

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Crazy discounting continued throughout the latter half of 1991. By November Compass was offering $100 return flights between most Eastern cities. It could not continue even as Compass received its 4th A300 in August and a single A310 in June for fleet of 5 widebodies.

On December 18, 1991 Polaris Holdings attempted to repossess an A300. The CAA fearing the aircraft would depart the country and leave it unable to recoup $12 million in unpaid landing fees basically grounded the airline. Over 8,000 passengers were stranded per day during the Christmas peak.

The failure of Compass in hindsight seems almost inevitable from day one. It caused a huge public outcry over the percieved unfair nature of the competition used against the airline. Somehow a formal Trade Practices Commission enquiry managed to find no evidence of predatory pricing or misuse of market power.

The sole A310 wore a white scheme. Photo by Daniel Tanner from Airliners.net

Even if a large part of the airline’s failure can be levelled at Australian and Ansett it remains clear that Compass itself was also to blame. Aside from the A300s the airline’s competitive strategy was muddled, its forecasting errors fantastical, ability to attract high revenue business traffic limited and its yield management poor.

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Compass Airlines Airbus A300B4-605R VH-YMA Aeroclassics 1:400 Scale Model Airliner

As it happened the Compass brand was purchased by a second airline and although it avoided many of the issues that afflicted Compass Mk1 it lasted even less time (only 6 months). The Compass experiment was an expensive mistake given the market conditions, however briefly it provided what has been termed as a ‘one off gift’ to the people of Australia. It would be nearly a decade until real competition appeared in Australia bouyed by the internet age. By then the market had changed massively but the question still remains whether Australia can support more than two airline groups. History to date suggests that it cannot.

References

1992. Compass - the popular bankrupt. Greenleft Weekly
Douglas E.J. 1993. Airline Competition and Strategy in Australia. Bond Business School
Compass Airlines. Wikipedia