Sydney view: Internet brings flying costs down to earth

By GILES PARKINSON

The battle for airline profits is moving from the skies to the internet.

Impulse, the regional airline challenging the duopoly on the Sydney-Melbourne and Brisbane-Sydney trunk routes, created its most effective marketing campaign last week when it announced a one-way fare of just $A66 ($85).

The strategy was simple: gain maximum publicity, obtain revenue from seats that would otherwise be empty, and put the wind up Qantas, Ansett and aspiring new entrant Virgin Blue.

Impulse went one better at the weekend, offering a $A33 one-way ticket on its Brisbane-Sydney route.

The reason it could sell tickets at such low prices has a lot to do with yield management systems - computer programs that let management know how many cheap tickets they can sell before they send the company bust.

In the case of Impulse, the airline offered about 15 per cent of its tickets on the Melbourne-Sydney route. The non-refundable tickets sold out almost immediately.

The offering was also all about attaining the airline equivalent of nirvana (or at least healthy profits), which is being able to sell the bulk of tickets direct to the public.

Well over half of Australia's domestic airline tickets are sold through travel agencies, who take a hefty commission from the sale - sometimes up to 30 per cent.

Impulse's $A66 fare is the first step in getting the public to think that good deals can be obtained direct from the airline via the internet.

The web offers all sorts of possibilities to airlines.

Qantas, for instance, said on Friday that it had joined another eight airlines in the AirNewco e-commerce procurement exchange.

This is designed to bring savings on the $US45 billion ($100 billion) of equipment the airlines buy each year.

A day earlier, Qantas announced a major e-commerce alliance with Telstra, which will encourage Telstra, banks and retailers to buy frequent flyer points from the airline. Qantas reckons that will translate into added revenue of $A100 million.

They are important initiatives for the airline, which has been struggling to reassure analysts and investors that its business plan is not about to collapse because of the arrival of Impulse and Virgin.

Although Impulse is already flying, Virgin is perceived to be the main threat to Qantas and Ansett.

Virgin arrived in Australia in a blaze of publicity, even though it has yet to get a plane in the air and its plans have been set back several months.

The key is that Virgin Blue, as it will be known in Australia, has the full backing of Sir Richard Branson's financial empire. And while the financial clout of this empire may be a moot point, its marketing potential is not.

Virgin may struggle to post a profit - it does not expect one for the first three years - and it will have to reassess its pricing strategy after the Impulse move.

But the main fear of the two established carriers is that Virgin will carry its Australian offshoot as a loss leader that will be used to promote the other products and services under the Virgin umbrella.

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When Pacific Dunlop chairman John Ralph and managing director Rod Chadwick return from their US roadshow to institutional investors and visits to their American businesses, the fate of the struggling conglomerate could be sealed.

PacDun's share price is labouring near record lows at about $A1.52, and many believe its only hope of a decent return is a complete breakup of the company.

The GNB Batteries division, the electrical distribution business and the cables section have been sold.

The Goodyear Tyre joint venture, which suffered a debilitating slump in profits in the past year, looks set to be renegotiated.

Ansell was to have been floated, and the only division yet to have a sale option made public is the Pacific Brands clothing division.

The predators are prowling. Roy Disney's Shamrock, which made a lot of noise when Brierley Investments went through a similar process a year ago, and Alan Newman, the former right-hand man of Robert Holmes a Court, have formed an alliance that accounts for nearly 10 per cent of the stock, and will probably have the tacit support of other institutional investors.

The whole issue could be resolved before what promises to be a volatile annual meeting in October.

* Giles Parkinson is deputy editor of the Australian Financial Review.