Only 10 months after it was launched in July 2000, Impulse, an Australian discount airline, has become a casualty in the cut-throat war being waged by domestic air carriers. Impulse is the third domestic carrier—after the ill-fated Compass Airlines 1990-91 and Southern Cross 1992-93—to go to the wall in the last 10 years after attempting to challenge the duopoly of Qantas and Ansett.

On May 18, the Australian Competition and Consumer Commission (ACCC) approved a deal allowing Australia's largest carrier Qantas to take over the struggling Impulse. Under the deal, Qantas will give Impulse's founder and managing director Gerry McGowan a $50 million loan to pay out the company's shareholders and lease Impulse's 21 aircraft over a 10-year period. Qantas will re-badge and operate the planes.

After paying off Impulse's shareholders McGowan will become the sole owner of the company. The future for Impulse's workforce, however, is far less rosy. The takeover has already seen over 200 jobs axed despite previous assurances that most of the airline's 1,000 workers would be retained under the Qantas deal.

Last week 70 ground staff and more than 130 permanent casuals at Impulse were suddenly told that their services would no longer be required, sparking a series of industrial bans and protests. Another 100 workers at Impulse's call centre in Newcastle could lose their jobs if it is converted into a Qantas reservations and frequent flyer inquiry facility.

Last week McGowan made clear that many other jobs could go in the near future telling the sacked workers: “No one's job is safe in this day and age. We have to perform to a standard that is acceptable to Qantas. You can't presume any position is safe... If I were sitting in Geoff Dixon's (Qantas's managing director) shoes I would do the same thing”.

Thousands of travellers at Australia's major domestic terminals have signed petitions condemning the callous treatment of the Impulse workers and demanded Qantas rehire those dismissed. Last week sacked workers staged a demonstration at Brisbane airport in Queensland, collecting more than 1,000 signatures in just a few hours.

Impulse made the decision to end services after one of its key investors, the Singapore government-owned GIC Special Investments, refused to support a new $50 million share issue. The company could not persuade other major institutional investors to make up the amount.

Conditions for the airline's demise emerged in the preceding months. Impulse began its operations with an aggressive price-cutting war offering off-peak fares on major routes. This included one-way seats between Sydney and Brisbane for only $33, well below the discounted three-week advance purchase $164 ticket offered by Ansett and Qantas.

Impulse believed it could maintain its low fares for an extended period because flight attendants and cabin crew were employed by a separate labour-hire company and paid wage rates far below those of the major airlines. According to the Flight Attendants Association of Australia, Impulse attendants were paid $25,000 a year or 30 percent less than those on the major Australian carriers.

This strategy ran into problems when other airlines, Qantas in particular, offered low cost fares on key domestic routes and used their larger operation and capital base to strike back against the new carrier.

Impulse's position was further undermined on August 20 with the entrance of Virgin Blue, another discount airline, on the domestic market. Impulse was also hit by increasing fuel and airport costs. It is estimated that Impulse was running loses of $4 million a month at the time of the Qantas takeover.

Further mergers and takeovers

The Impulse collapse points to the fragility of the entire industry. Ansett is still reeling from the grounding of its entire Boeing B767-200 fleet for safety reasons during the critical Easter period. It cost the airline $500,000 to fly 145,000 ticketed passengers on rival airlines or in hired planes.

Air New Zealand has to find over $5 billion to upgrade its fleet but cannot raise additional funds from key investor Singapore Airlines because of the New Zealand government's 25 percent cap on overseas ownership. Frustrated by these restrictions Singapore Airlines is considering finding ways to increase its share of the Australian domestic market, including setting up operations there itself.

Even though it has taken over Impulse, there is no plain sailing for Qantas either. It sustained heavy loses during in the 10-month price war and its profit margins have been savaged by other factors, including increased fuel costs and sharpening competition on the international arena. In April Qantas recorded a 22.2 percent drop in profit, down to $262.9 million, for the six months to December 2000—the largest decline suffered by the company since it was privatised in 1995.

The airline's domestic operations earned $118.1 million before tax, down 26.1 percent from a year ago, while profits from regional services stood at $66.5 million, down 30.3 percent. To cut costs Qantas axed 1,500 jobs earlier this year to produce savings of $100 million per annum and foreshadowed additional job losses.

Qantas has also reportedly begun discussions with the airline unions and is demanding the same, or better, concessions than those given to Virgin Blue last year. Under the union-brokered agreement Virgin Blue flight attendants are paid only $45,000 per annum compared to $59,000 by Qantas.

This week Qantas stepped up its drive to consolidate its position and shut the door against budget-price domestic airfares after Air New Zealand said it was considering establishing its budget carrier Freedom on Australian routes.

Qantas announced that it was proposing to join forces with Air New Zealand and buy a “significant share” or approximately 40 percent of the New Zealand carrier. Whether this takes place depends on a number of factors, including an agreement by the New Zealand government to lift the 25 percent cap on overseas ownership. While New Zealand Prime Minister Helen Clarke has said she saw no good reason to treat Qantas differently from Singapore Airlines, Air New Zealand's deepening financial problems may persuade the government to do so.

If the deal goes through Air New Zealand would have to divest itself of Ansett to comply with competition regulations in Australia, opening the way for a buyout by Singapore Airlines. This would place a question mark over the Virgin Blue's operations in Australia. Its parent company, Virgin Atlantic, is 49 percent owned by Singapore Airlines.

The entire process underscores the fact that none of the companies can survive mainly as domestic carriers but are compelled to compete seek alliances and mergers to be competitive in the international market. Whatever the final outcome of the latest manoeuvres, there is likely to be a further consolidation of the airline industry in Australia, the end of cheap domestic airfares and a new round of costing cutting and job losses as the remaining companies seek to gain a competitive edge over their rivals.