Why Air Australia was bound to nosedive

With misguided business strategy, lack of funding and little to attract a potential buyer, Air Australia's reality never met the veneer it tried desperately to create.

Crikey

It is not surprising 4000 of Air Australia's customers are now being told to make their own way home after it went broke in the early hours of this morning. The break point was the refusal of a jet fuel supplier to refuel an Air Australia flight from Phuket to Melbourne last night.

However, the story being told today – that KordaMentha was voluntarily appointed its administrator after an emergency board meeting in the early hours in Australia – is not the whole story.

It was reported earlier this week that KordaMentha had been "working closely" for some time with Air Australia, which is owned by former Ansett flight attendant Michael James, in a bid to avoid collapse.

Once administration is officially started, that situation has to be disclosed to the public, which is all but guaranteed to bring a business down, because even the dumbest of customers run away.

It is highly unlikely that Mark Korda, who spoke to the media this morning, would have learnt anything more about the state of affairs at Air Australia after it appointed his firm as the administrator than it had already learnt while "working closely" in the period prior.

Korda said one of the top priorities for the administration would be to seek a "white knight" to save the carrier. Yet on December 29 The Australian reported that Air Australia had been looking to Geoffrey Edelsten, the former owner of the Sydney Swans and a convicted criminal, to be such a white knight.

As a criminal – Edelsten served one year for his 1990 conviction for perverting the course of justice – it is highly unlikely that he would have been acceptable in any management role in Air Australia under the character and fitness requirements of Australian aviation law or under the discretionary powers of the Civil Aviation Safety Authority, all of which would have been abundantly well known to KordaMentha, which suggests that James may not have been paying attention to whatever advice they were offering, or was so desperate as to ignore it.

Whatever the fine details, Edelsten didn’t pony up as the white knight, and airports exposed to Air Australia as unsecured creditors became increasingly restless.

By Wednesday, the rumours of impending financial collapse were substantial and detailed. The response from Air Australia was late, grudging, and lying. There was categorically and absolutely no truth in "more garbage rumours" about Air Australia, according to its spokesperson.

The politer part of that denial was reported in Crikey blog Plane Talking in this line: "Air Australia yesterday specifically and comprehensively denied that it had entered into administration."

It was learnt that CASA had also been sufficiently concerned in December to grill Air Australia management as to its capacity to meet all of the legal obligations to the safety rules, but was given clear assurances that this was the case.

At about this time Air Australia was also claiming that it would in fact make a profit in the current financial year, although it was seeking "cornerstone" investors, and was not in a position to discuss its commercial-in-confidence figures, including a widely rumoured figure of debts of $30 million, some of which were being pursued by creditors.

Air Australia's claimed strategy was to serve routes ignored by Qantas and keep out of harms way. It chose Phuket, Bali and Honolulu as foreign destinations and rebranded its fleet of five assorted and aged Airbus A320s and an A330 from Strategic Airlines to Air Australia.

There were cocktail parties, press junkets, and a lots of feel good window dressing, and feature stories that ought to have been labelled prominently as advertorials duly appeared.

It offered two-class cabins but claimed to be low cost. It entered the Brisbane-Melbourne market in December, guaranteeing it would not be ignored by Qantas and Virgin Australia and Jetstar and Tiger any more than it was going to be ignored in Denpasar, Phuket or Honolulu, and, to the surprise of observers, priced itself out of contention compared to the best deals on its longer-established competitors.

However, the biggest surprise was its appetite for collecting traffic allocations to Vietnam and China, along with other countries, which are in most cases available to any Australian-owned and controlled airline, but for which it had no coherent, detailed plans to raise the necessary money and aircraft to actually serve.

It was often assumed that Air Australia was setting itself up to be bought by Qantas or Virgin Australia but this never made sense. Those aircraft it had in service were old, and it had, in reality, nothing to sell to an Australian flag carrier, and after today, not even any goodwill.

This story first appeared on www.crikey.com.au on February 17. Republished with permission.

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