by Jim Eames
Finally, with the contract signed, the critical moment arrived for the Chinese to be ‘officially’ informed that the deal had been done, leaving Australia Asia’s general manager Alan Terrell wondering how the Chinese would receive the news. Predictably the letter of response from the Chinese to Foreign Affairs took Australia to task for even considering services to their unpopular neighbour, citing their displeasure at the exercise and describing it as a ‘disgraceful state of affairs’.
When Terrell asked Foreign Affairs how they would proceed in the face of such a response, he was told the letter was merely a Chinese ‘draft’ and the Chinese would be sent back Australia’s own ‘draft’ apologising for what had been done. ‘Then the official versions of the letter would be exchanged and that would be the end of it!’
Australia Asia Airlines began flights to Taipei in 1990, operating until the service became commercially unviable and was withdrawn in 1996. By that time Qantas was no longer a government-owned airline making any requirement for a ‘Chinese wall’ unnecessary.
24
RED TAILS AND BLUE TAILS … THE STORY OF A REVERSE TAKEOVER
Airline mergers and takeovers are extremely complicated affairs, not merely because of the necessity to rationalise management and staff, route structures and commercial aims, but also to safeguard cultures.
When Prime Minister Paul Keating announced in 1992 that his government had approved the sale of Australian Airlines to Qantas, it was part of a series of steps that would change the face of Australia’s airline industry, leading to the sale of 25 per cent of Qantas to British Airways and the eventual privatisation of the Australian international carrier. To the outside world it probably appeared a fairly normal series of transactions. Qantas agreed to part with $400 million for Australian, while British Airways added $665 million to the government coffers for the privilege of bringing two long-time partners and occasionally fierce competitors together. But achieving synergies amid cultural differences is never an easy task, particularly with airlines, where the staff might wear similar uniforms and do similar jobs but have a deep, individual sense of pride in the emblems painted on their aircraft tails.
Over its history, Qantas had some experience in the business of moulding cultures together, where backgrounds, egos and ambition have had difficulty merging for the common good. Indeed there have been occasions where, particularly at the top, one could wonder whether Qantas was two separate airlines in one, illustrating perhaps that it doesn’t need a merger factor to expose the natural conflicts, particularly between strong personalities who have their own views on where the airline should be heading. Such divisions went all the way back to those early days of clashes of ideas between Qantas founder Hudson Fysh and his general manager Cedric Turner.
Both sides might have brought their own particular vision and values to important aspects of the airline but appeared rarely in agreement as to the priorities for implementing them. Somehow it worked, but both could probably be thankful a faithful staff got on with doing a job when, as they say in the industry, the rubber finally hit the runway.
To prove mergers can be fraught with problems an example can be found in the mid-1950s when Qantas and British Commonwealth Pacific Airlines (BCPA) got together. Inevitably in such situations, one side of the equation preferred to refer to the marriage as a ‘merger’, while to the other it was nothing short of a ‘takeover’.
BCPA came into being after the war as an agreement between the governments of Australia, Britain and New Zealand to match the services of Pan American across the Pacific. Looked at in retrospect, at least from a Qantas viewpoint, it was a strange decision, given that Australia already had an international airline flying through Asia and the Middle East to London, with its own ambitions for the Pacific, leaving every likelihood that a Qantas wholly owned by the Australian government would be competing against a BCPA in which the same government had a 50 per cent shareholding.
The government finally resolved the issue in 1954, agreeing to a Qantas takeover of BCPA and that same year Qantas began its own services across the Pacific to San Francisco and Vancouver. In many respects it was not a happy merger, as the former BCPA staff were spread through Qantas management and network. While the majority of them simply got on with the job, much of the Qantas in-house memory of that time is based around BCPA’s former general manager, Alec Barlow, who was placed in charge of the Pacific route and headquartered in the United States. There is some evidence that Fysh and Barlow didn’t see eye to eye, which might explain why the latter ended up so far from head office so early.
There’s little doubt that several of the long-serving Qantas management executives didn’t get on with Barlow either, but who was at fault in that is a moot point. Certainly Lew Ambrose, one of the Qantas ‘originals’ from the days of the first DH-86 flights from Australia to Singapore in the 1930s, doesn’t seem to have disguised his personal feelings.
Qantas veteran Norm Leek remembers hearing the story of Ambrose returning from a stay in the United States and being asked what he thought it was like working there under Barlow. ‘Like Belsen with food,’ was his curt reply. The fact that Ambrose didn’t restrict such caustic references to Barlow probably best illustrates the animosities that existed anyway and didn’t require a merger situation for exposure.
George Howling, then serving in Hong Kong, remembers receiving letters from Ambrose dripping with sarcastic comments about his own peer group in Sydney. When Ambrose heard Howling was returning to Sydney at the end of his posting and would be working for another of Ambrose’s pilot colleagues, Bill Crowther, a person highly respected both inside and outside the airline, Ambrose offered: ‘George, if I was hanging from a cliff by my fingernails he would step on them.’
Howling said when his Hong Kong secretary asked if he wanted to take the offensive letters back to Sydney with him he declined, ordering her to destroy them. There is no record of a reciprocal attitude by Crowther, although Howling speculated that Ambrose’s attitude might have had something to do with Crowther’s senior rank during the war years.
Not that Crowther was the sole target when it came to Ambrose’s feelings about his former colleagues. Ambrose appears to have taken his acerbic sense of humour and personal feelings with him when the time came for him to leave the airline. When a colleague inquired as to what he intended to do in retirement Ambrose replied, in his customarily slow, measured tone: ‘Aah, I will return to my little memsahib in our home in Northbridge. My first project will be to build in my backyard a large strong cage. In it I will house all the savage beasts and birds of prey, together with all the poisonous snakes and spiders I can find, just to remind me of my days on the executive floor of Qantas House.’
While the passing years and a series of chief executives doubtless brought their own tribal power struggles, the airline marching towards privatisation via a takeover of Australian Airlines was a far cry from the days of BCPA. But there would be a few shocks in store. When it was all over one of the questions asked by many was ‘Who has taken over whom’?
To suggest the decision to sell Australian Airlines to Qantas was unpopular with Australian’s staff would be something of an understatement. Trans-Australia Airlines, formed in 1946, had a history deeply identified with the development of post-war Australian aviation and had been instrumental in overcoming that ‘tyranny of distance’ that separated far-flung centres of population. Always prepared to lead the way in aircraft development, it was the first to operate pressurised aircraft in Australian with its Convair 240s in the late 1940s; its Vickers Viscounts were the first turbine-powered airliners to fly here in 1954; and it entered the jet age with the Boeing 727 in 1964.
In between, with Ansett Transport Industries, it would become half of the airline ‘twins’ that, under the government’s ‘Two Airline Policy’, dominated Australia’s domestic skies for many of the years to follow, until deregulation of the domestic airline industry appeared on the horizon in the 1980s.
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nbsp; It was around this time that one of the main players in the eventual shape of Qantas–Australian Airlines would appear on the scene.
James Strong had been executive director of the Australian Mining Industry Council, a lobby and research organisation based in Canberra when he was appointed TAA’s general manager in 1985 to replace Frank Ball, who had joined the airline as a pilot after the war. As in the case of Qantas and Captain Bert Ritchie’s replacement by Keith Hamilton, Strong’s arrival also heralded a changing of the guard from leadership grounded in operational experience to more emphasis on finance and marketing. A lawyer by profession and with no background in aviation, Strong dramatically transformed the airline’s customer focus, culture and image. Within twelve months the company emerged under a new name, Australian Airlines, with new corporate colours.
The first serious moves towards privatisation came in the late 1980s as the Hawke government struggled to bring the left wing of its party along with the concept, at first floating the idea of a merger between Qantas and Australian. There followed a series of false starts, including a plan to privatise 100 per cent of Australian but excluding an investment by Qantas, and the sale of 49 per cent of the latter. But the problem lay not only internally within Labor Party ranks. There was also the quid pro quo to be considered for the other major player in the game: Ansett Transport Industries, now controlled by Sir Peter Abeles and News Limited, both with significant influence with the Hawke government.
The major breakthrough came with the arrival of Paul Keating as prime minister and the decision to sell 100 per cent of both airlines. Now the question was more about how to structure the sales to generate the most return to the government and whether selling them separately or together would be in the best interests of all concerned.
By now there was new leadership at Qantas, with former chairman of Ford Australia, Bill Dix, following Jim Leslie into the Qantas chair and twenty-year Qantas veteran John Ward taking over from John Menadue as chief executive. Dix and Ward believed the two airlines were worth less separately than privatised together, but both were aware that much was going on behind the scene as other suitors gathered.
British Airways, Air New Zealand and Singapore Airlines were showing an interest in Australian but it was clear British Airways’ real aim was a future with Qantas and, while Singapore Airlines was known to be lobbying the Keating government, there is no evidence it put a final bid on the table.
In April 1992 Qantas made a formal offer of $150 million for Australian Airlines, a figure that must have been a mild shock to the government, given that speculation had figures as high as $1 billion bandied about.
When Dix and Ward flew to Canberra late in May 1992 to discuss the offer with the government’s task force on asset sales, it soon became obvious that, while the $150 million was well short of the government’s expectations, there were clear indications that Qantas was the preferred buyer. It was simply a question of how much. Now with renewed confidence, when a figure of $400 million was suggested, Dix and Ward conferred briefly in private, then indicated their interest. Anxious to move quickly, they spent most of the flight back to Sydney drafting a paper for the board’s approval. Ward later confessed they had been prepared to offer more. ‘I believed $500 million would not have been out of the question as that was what we thought we could borrow to fund 100 per cent of the transaction,’ Ward recalls.
On 2 June, in what he described as ‘a little bit of history’, Keating announced the government had approved the sale of Australian Airlines to Qantas and what would subsequently lead to the sale to British Airways of 25 per cent of the new entity and its eventual privatisation in 1995.
Now the first of the real challenges began, challenges that were influenced by several significant recent events. The first was the domestic pilots’ strike in 1989 that presented the Australian aviation industry with the worst crisis in its history. Originating out of a 29 per cent pay claim by the Australian Federation of Air Pilots (AFAP), protracted negotiations failed to solve the dispute, leading to the mass resignation of more than 1600 pilots in August 1989. The AFAP’s resignation tactic proved a fatal mistake. Fearful of a wage break-out, the government stepped in to support the airlines, directing the Royal Australian Air Force to carry stranded passengers while the two domestic airlines began recruiting in Australia and from overseas, employing new pilots on individual contracts and therefore outside the periphery of the AFAP.
Qantas pilots, who had earlier broken away from the AFAP to form their own international body, continued to fly but refused to carry domestic passengers.
While he led Australian Airlines during the early days of the pilots’ dispute, James Strong didn’t see out the strike, resigning eighteen months before the end of his five-year contract to join one of Australia’s prominent legal firms. Former senior Qantas executive John Schaap took over at Australian and was there to see the strike settled. But Strong was not away from the industry for long and, by the time of Keating’s ‘little bit of history’ announcement, he had been appointed to the Qantas board.
With the merger deal done, Ward and Schaap worked to establish a template to bring the two airlines together. It was not easy. Many in both airlines, but particularly at Australian, held legitimate concerns about future job security; morale in some areas of Australian was affected by the perception of a ‘big brother’ takeover; and still others harboured bitterness and feared recriminations.
It’s an unspoken belief that low morale in any airline is a dangerous business and Ward initiated a comprehensive staff communications program aimed at alleviating concerns, quickly arranging to talk to Australian’s staff at their main ports around the country. The first meeting was to take place in Melbourne, the location of Australian’s head office and its major engineering and maintenance base. Held in a conference centre not far from Tullamarine airport before a gathering of several hundred of the airline’s staff, it was not a comfortable meeting. Some staff made no secret of their unhappiness with frequent interruptions from the floor during their new chief executive’s presentation. The atmosphere improved slightly at venues in Adelaide and Perth but the message was clear: many of them felt that when it came to preference for similar jobs, theirs would be the first to go.
In many respects their concerns were understandable. Qantas staff numbers now stood at 23,000, Australian’s at 9300, making it obvious which was the dominant partner. With both domestic deregulation and privatisation on the horizon, each airline had already retrenched around 3000 staff in recent times. With further staff reductions the obvious way to obtain cost synergies in the merger, more would have to go. Ultimately a further 1500 left.
Ward recalls not all the concerns came from staff. Several members of the Qantas board, including Strong, saw the prospect of low morale among the former Australian staff providing Ansett with a unique opportunity to increase its market share at Qantas’s expense. Ward wasn’t too concerned. ‘We accepted that might happen initially but by the end of our exercise we would have a substantially lower cost structure which would enable us to marginally price our operations to get it back.’
But both Ward and Schaap recognised the main issue to overcome had to do with culture. ‘I can’t remember the number of times I heard someone tell me ‘This is not a merger, it’s a takeover,’ says Schaap. ‘It was very much “them and us”—Red Tail versus Blue Tail.’
‘And when you had two people doing the same job you had to pit them against each other to select the best, but when you do that you actually establish a “war front” in the eyes of some people.’
Schaap says morale also tended to breed a defeatist attitude in some, which the rumour mill encouraged. ‘Some obviously had a feeling of “why should I bother as I’ve heard someone else is going to get the job anyway” which had to be overcome and, while you did your best to convince people nothing was predetermined, you had to be honest and say that whoever is the better will get the job and the other will be offered a redunda
ncy. It was a tough call.’
Schaap says such issues were further complicated by a type of ‘fifth column’ that was being created by a few who had opted to accept redundancy without contesting their jobs in the belief they wouldn’t get them anyway. ‘I’m sure some of them were pretty bitter when they left and, while they might have taken their own decision to leave, they didn’t hesitate to spread gossip which tended to unsettle others.’
‘The fact was,’ admits Schaap, ‘no one from Australian felt particularly loved, but in the end a merger is a merger no matter how you put it and there will always be some untidy ends.’
As the weeks went by, Schaap also found even his own location in Australian’s former headquarters in Melbourne was working to his disadvantage, giving his own people the impression he was cut off from Sydney where they believed all the decisions were being made. When he pointed this out to Ward, he was given an office in Sydney next day.
Gradually the two companies began to come together, with the engineering and maintenance work remaining largely the same for each airline. Engineering support areas such as spares procurement and planning were rationalised, as were backroom functions like yield management, an area critical to maintaining economic fare structures. Since most of Australia’s capital cities had both international and domestic terminals, staffing duplication had to be resolved, although there were other surprising outcomes. One was the staffing of overseas offices, which most in Australian Airlines might have thought beyond their reach, but with a domestic airline arm now an important addition to the international structure, a degree of cross-fertilisation by the infusion of people familiar with domestic pricing and packaging was essential. Choosing the people was not the only hurdle. A further complication were the airlines’ respective domestic and international computer systems that didn’t ‘talk’ to each other, requiring a great deal of the initial merging to be manually structured.