The Domino Effect How Ansett Airlines’ failure impacted on Traveland franchisees
Ms Jenny Buchan, LLB (Otago), LLM (Melbourne) PhD candidate (USQ) Lecturer School of Business Law and Taxation University of New South Wales Sydney NSW 2052 Australia Email:
[email protected] Jenny Buchan acknowledges, with thanks, a grant from CPA Australia to enable her to conduct the empirical research that informs this paper.
Professor Lorelle Frazer, PhD (USQ) Service Industry Research Centre Griffith University Brisbane Q 4111 Australia Tel: +61 7 3735 3705 Email:
[email protected]
Abstract
This research presents a case study of the Traveland franchise network. Following the liquidation of Ansett Airlines, the Traveland franchisor, a subsidiary of Ansett, became insolvent. The case study explores the resulting impact on a sample of the franchisees of the Traveland network. Literature on small business and franchising failure is examined, with a particular emphasis on franchisor insolvency. This preliminary research illustrates the impact of franchisor insolvency on the franchising sector and highlights the difficulty of obtaining information about businesses that have ceased to operate. It further illustrates the challenges the franchise business model poses for insolvency law. Keywords: Ansett, Traveland, franchise, insolvency, failure
Electronic copy available at: http://ssrn.com/abstract=1326164
The Domino Effect How Ansett Airlines’ failure impacted on Traveland franchisees Introduction After 66 years of operation, Ansett Airlines was placed in liquidation in 2002. Ansett was a public listed company that operated an Australian-based international and domestic airline. Despite generating revenue of $3.2 billion in the year to 30 June 2001 and being the official carrier of the 2000 Olympic Games in Sydney, a combination of competitive forces and operational shortcomings saw the demise of the company (Easdown and Wilms 2002). Ansett had 45 subsidiaries, including Traveland, which conducted business as a travel agency. Traveland operated successfully for 33 years and had approximately 250 franchisee units before an Administrator was appointed in 2001. Entering into a franchise agreement with Traveland should have been a reliable investment for a travel agent. The ultimate insolvency of Traveland was not the fault of its employees or the franchisees. The Traveland business was an asset in the Ansett insolvency. This research investigates what happened to the Traveland franchisees. Small business and franchise failure research Although extensive literature exists on the nature of small business failure, differences in definitions, approach and sampling by researchers have produced diverse results (Pinfold 2000). We will provide a brief review of the current status of this research. Firstly, the literature on small business failure is reviewed. A major preoccupation of researchers has been the attempt to estimate failure rates of small businesses. Illustrating the difficulty of this task, Watson and Everett (1999) demonstrate that differences in failure rates can vary from 1 percent to more than 9 percent, simply depending on the definition of failure used. Commonly used definitions include bankruptcy (for example, Hall and Young 1991) discontinuance of ownership (for example, Williams 1993), and cessation of business (for example, Bates 1995). These definitions are often treated synonymously, but it is clear that they actually have different meanings (Beaver 2003). Whilst often reported that 9 out of 10 new businesses close in their first year of operation there is no data to substantiate the claim (Phillips and Kirchhoff 1989) and it is believed that small business failure rates are probably lower than commonly stated (Stanworth and Purdy 1998). Moreover, the mythical high closure rates of new firms are believed to be failures (Headd 2003) but closures are not necessarily negative outcomes for entrepreneurs who report positive learning experiences which may be applied to their next venture (Stokes and Blackburn 2002). Another focus of research has been what causes small business failure. Most consistent findings support the notion that internal factors are mostly to
1 Electronic copy available at: http://ssrn.com/abstract=1326164
blame. The two major causes have been attributed to a lack of appropriate management skills and knowledge (for example, McNight 1990; Thomson and Gray 1999), and lack of capital (for example, Everett and Watson 1997). However, it is simplistic to assume that small business failure is purely endogenous because factors external or unique to the firm may also be responsible (Beaver 2003). For example, the abuse of entrepreneurial power has been linked to small business failure (Beaver and Jennings 2005). The topic of franchising failure has also been widely debated, with a strong emphasis on comparing failure rates of franchise outlets with those of independent businesses (for example, Bates 1995; Castrogiovanni et al. 1993). As with the small business failure literature, variances have been reported in franchise failure rates due to differences in definitions, research approach and samples (Holmberg and Morgan 2004). The franchising sector has a vested interest in advocating that franchising is a less risky way of conducting business than independent small business operation and this theme has been actively pursued by representative bodies such as the International Franchise Association (IFA), the British Franchise Association (BFA) and the Franchise Council of Australia (FCA). This message has reached folklore status and whilst it is intuitively logical, has little empirical evidence to support it. For instance, a press report in The Australian in 2003 states that “franchising has a success rate of 80 percent, while for stand-alone business it is 20 percent” (Bryant 2003: 1). However, no mention is made of the source of this fictitious evidence. It is apparent that “franchising myths are in the making” (Dant 1995: 2). An Australian longitudinal study found that franchised outlets were 2.25 times more likely to succeed than independent operations (Williams 1992), although this study has since been criticised over its selection of sampling frame (Haswell and Holmes 1989; Pinfold 2000). In contrast, failure rates of franchise outlets have been reported at 35 percent, compared with 28 percent for independent businesses, in the United States (Bates 1995). Researchers blame the use of uncorroborated statistics (Stanworth and Purdy 1998) and inaccurate, incomplete data (Cross 1998) for the disparity in research results. By using a broader concept of franchisee failure where failure is plotted on a continuum, these apparently inconsistent results may be better reconciled (Holmberg and Morgan 2003). More recent research has investigated the causes of franchisee failure. In a study of Australian franchise systems, it was found that industry type, level of franchisor experience and support, and the degree of personal involvement of the franchisee were the main contributors to ‘failure’ of franchisees (Frazer and Winzar 2005, forthcoming). Most research into franchising failure has focused on the franchise outlet level, that is the success or failure of franchisees. However, few studies have concentrated on the issue of franchisor failure. Using United States data, a 75 percent failure rate of new franchisors was calculated across a 10-year period (Shane 1996), consistent with the 70 percent failure rate over 12
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years reported by Lafontaine and Shaw (1998), indicating that franchisor failure rates are indeed high for new firms that are typically small and therefore have not reached a break even capability (Stanworth et al. 2000). Australian data is equally alarming, with some 127 franchisors estimated to have ceased operating in 1998 (Frazer 1999), despite a net overall growth in franchise systems (McCosker and Frazer 1998). Similar to research in the United States it is assumed that while many new franchisors appear, giving the impression of strong growth, many are also exiting, leading to an overall growth rate that is “at best, commensurate with the growth of the economy as a whole” (Lafontaine and Shaw 1998: 95). Causes of franchisor failure have been linked with younger and smaller firms (Shane and Foo 1999). The efficiency of franchising contracts was investigated by Azoulay and Shane (2001) who conclude that franchisors who offer franchisees exclusive territorial rights experience lower exit rates, presumably because the exclusivity of the territories provides protection against encroachment and encourages growth. Given that most of the research concerning franchisor failure rates has occurred over only the last decade, this field of inquiry is in a stage of relative infancy. Whilst there appears no doubt that franchisor failure rates are of concern, a related issue is the fate of the franchisees attached to the system. The purpose of this paper is to provide some insights into this perplexing issue by investigating the demise of the Traveland franchise and the effect on its franchisees. Case study approach A single case study design was adopted in this research in order to provide a comprehensive understanding of the issue using a representative or typical case (Yin 2003) and thereby acting as a pilot study for further research. As demonstrated below, accessing former franchisee operators is extremely difficult, so the pilot case provided an opportunity to refine our data collection procedures. Given the paucity of prior research in this field, a case study enabled an in-depth study of the issue to be conducted as a starting point for future research (Carson et al. 2001). A qualitative inquiry was appropriate in this research because we were interested in investigating the effect of the franchisor’s insolvency on franchisees; hence we needed to focus on the participants’ perspectives (Creswell 1998) and the ‘substance of the human experience’ (Marvasti 2004: 7). In particular, we followed the Lincoln and Guba (1985) case study structure of identifying a problem, investigating the case in context, analysing the issues, and determining the lessons learned. By choosing the Traveland franchise, which was a large wellestablished franchise that had operated successfully for many years, we were able to access ‘rich’ information about the phenomenon (Patton 2002: 242). The case study method was used in this research as franchising is a business model that is capable of being applied to almost any business that can be replicated. This means that each case will have significant similarities, and significant differences. The similarities will include the fact that each franchise is
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based on a contract between the franchisor and franchisee, and each franchisee in Australia is protected by the Franchising Code of Conduct 1998 in that pre contract disclosure is mandatory. Beyond that, there is almost infinite variety possible. Because this research was a pilot, we wanted to limit the number of variables and to focus on the actual experience of the franchisees. We did not want to use a system where the franchisees and the level of internal system dispute were blamed for the franchisor’s failure (for instance Cut Price Deli). By using Traveland, we chose a high profile franchise system where the failure was not the fault of the franchisor. We wanted to use a system that also had franchisor owned outlets so that in the future, comparisons could be made between outcomes for franchisees and for franchisor’s employees. By using a travel company for our case study we chose a sector that is identified specifically by the Australia and New Zealand Standard Industry Codes (as Travel), in the 1998 Profile of Franchising survey (travel TRAV) (FRANDATA 2000) and in the French Franchise Federation’s 2005 franchise statistics (Voyages) (Banque Polulaire et al.). This will permit our findings to be readily used in future research of the travel franchise sector. Thus, the case study method was seen as a pragmatic way of investigating the effect of franchisor insolvency without needing to factor in variations from one industry sector to another. It was decided not to survey any former franchisee unless contact had been made with them and they had expressed an interest in participating in the research. The identity of franchisees of any franchise system is information that belongs to the franchisor. There is no requirement that franchisors or their liquidators list franchisees on a public database. Even where, as in this case, the parent company is a public listed entity, the names of franchisees do not appear in the company’s annual report. Usually a business can be found through Telstra’s Yellow Pages directory. This presents challenges for a business such as Traveland: 1. Of the approximately 390 units, 140 were franchisor owned, the remainder franchisee owned. Neither the Yellow Pages entry, nor the Australian Securities and Investments Commission (ASIC) differentiates between franchisor owned and franchisee owned units. 2. Once the franchisee has re-branded with an existing brand (in this case many franchisees re-branded three months after the Ansett liquidation), it is impossible to determine from the Yellow Pages which of the Travelworld agencies was formerly a Traveland. Thus, with no publicly available list of franchisees, former Traveland franchisees were identified by conducting electronic searches of Australian print media (using the FACTIVA database), searching court reports (www.Austlii.edu.au), ASIC records (National Names Index.), Google, one advertisement on the internet based weekly newsletter (http://www.etravelblackboard.com); an ongoing advertisement on the Bailiff Sheriff Australia website (http://www.bailiff-sheriffaustralia.com.au) and via advertisements placed in The Australian and daily newspapers in Brisbane, Sydney, Melbourne and Adelaide inviting former franchisees to contact the
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researchers. There is a legal requirement that businesses register their business name with the Office of Fair Trading of their State or Territory if the name they trade under is not the same as their own or their company’s name. A search of the ASIC Name Register (which includes Business Names Registered at State level and Company names) revealed only 70 names that included the word “Traveland”. This included the franchisor and its related entities, franchisees and company owned agencies. These public records do not indicate which are franchisors, franchisees or neither. An example of the result of an ASIC search is shown in Table 1. It can be seen that there is little information beyond the name available. TABLE 1 Example of ASIC Search Name TRAVELAND (NOWRA) Registered state/no. Type Registration Date Next Review Date Status Principal Place of Business Jurisdiction
NSW T0638702 Business Names Unknown Unknown Business Names - Removed not available Department of Fair Trading, New South Wales
No document list available for this organisation type Source: Extracted from ASIC's database at 09:24:25 on 10/04/2005
Most successful were the FACTIVA searches and etavelblackboard. General newspaper articles about the demise of Ansett revealed that 150 of the former Traveland franchisees had re-branded as Travelworld franchisees. Twenty had become UTAG franchisees and a small number had become JetSet or Harvey World Travel franchisees, or had become independent agents. It seems that nearly all former franchisees have remained travel agents and that all but three of these still have a franchised agency. The two who are no longer franchising do still work in the travel sector. Twenty eight former franchisees were identified by name. An attempt was then made to cross match them with one other piece of information so as to positively identify them as a franchisee and not a Traveland employee. As the Traveland agencies were no longer operating, it was not possible to simply search ‘Traveland Cardiff’ for example. A small number of matches was made using Telstra’s online White Pages directory. An initial survey was sent by mail or email to 10 former Traveland franchisees, who had operated a total of 15 franchised businesses, to gather
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information about their history, franchise investment, treatment in the Ansett and Traveland insolvencies and the effect on the franchisee’s business. Five people responded and two of these were multiple unit operators. One former franchisee held two agencies and another had operated four. The main themes arising from the data collection are outlined next. Before becoming a Traveland franchisee all of the franchisees surveyed had experience in the travel industry, ranging from 2 to more than 12 years. The initial franchise fee paid was $10,000 per agency, thus, the franchisee who had four agencies paid $40,000. The total investment (including fit out and equipment costs) ranged from less than $50,000 to more than $250,000. The term of the franchise varied among franchisees from 3 to 5 years. The franchisees interviewed were experienced operators who had been with Traveland for more than 5 years when the liquidator was appointed. During the liquidation of Ansett and Traveland, franchise agreements are categorised as an asset which the liquidator may sell, or a liability that the liquidator may disclaim. Lacking status as a creditor, franchisees have no legal right to influence the liquidator’s sale of their franchise agreements as an asset. One of the franchisees surveyed had a clause in his franchise agreement that permitted him to terminate the agreement if the franchisor became insolvent. He did so. When a franchisor becomes insolvent, the franchisees often re-brand. In the case of Traveland, there was a period of three months when ownership of the franchisor, Traveland, changed hands three times before finally being brought by a travel company. This was a period of intense uncertainty for the franchisees. It was compounded by the fact that the first and second buyers had no understanding of franchising or of the travel industry. The effect on franchisees is illustrated by this comment provided by a former operator: “We had just signed renewals of our franchise agreements with Traveland (this franchisee had multiple agencies) for another 5 years when Ansett became insolvent. We went to see a QC to see if we could get out of the contracts because the new owners didn’t know anything about the travel industry or about franchising. There was no way we could get out.” An operational problem experienced by the former Traveland franchisees was that some had 2 to 3 years remaining on their premises lease. This was a primary liability for the franchisee, unrelated to the solvency of their franchisor. Had they not been able to trade on as travel agents, they would still have been liable to pay the rent on their premises. One of the franchisees surveyed had to close the business when Ansett became insolvent and a further one closed when Traveland became insolvent. The remainder re-branded as a franchisee of another system and kept trading. Only two franchisees reported losing money as a result of the franchisor’s insolvency, but for those the outcome was disastrous. For example: “I lost so much money I could not continue with level of loss” and
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“I lost a lot of money, reputation and health”. As franchising is a sector which provides a significant number of people with employment, questions about staff were revealing. Two of the franchisees surveyed employed up to 5 staff and the remainder had from 6 to 10 staff at the time the franchisor’s liquidator was appointed. Two thirds of these staff were full time employees and one third were casuals. At the point where the administrator was appointed to Traveland, two franchisees continued to employ all their staff and the remainder laid some off: “When Ansett collapsed, and took Traveland (franchisor owned agencies) with it, the franchisees were tarred with the same brush. When the media reported headlines like “Traveland staff not getting paid” it gave the impression that the franchisees were not paying their staff. We would hear people in the shopping centre commenting when they saw our Traveland sign; “ they’re the ones that went broke!” Ongoing liabilities are of concern to a business that has its image linked with that of an insolvent franchisor. In the case of Traveland, the insolvency of the franchisor meant that the majority of franchisees could not pay all their business related liabilities. Two of the franchisees lost more than $75,000 as a result of the franchisor’s insolvency. The remaining franchisees all lost between $5,000 and $75,000. On being asked to comment about the impact of the Ansett or Traveland insolvency, former franchisees said: “I think that the emotional turmoil and lack of assistance from Government, Associations and lawyers (due to fear of repercussions) left us weaker and more vulnerable, which has resulted in many owners selling up or becoming ill from exhaustion - trying to rescue their businesses. This event had major impact on staff/ sick days also.” “…very unhappy with how the whole issue was handled by Traveland, their lawyers and buyers.” Discussion and conclusions This paper has served three major purposes. Firstly, it demonstrates the difficulty of conducting research on franchise systems in Australia when the franchisor and franchisee units are no longer operating or have re-branded. Secondly, it illustrates the far-reaching and damaging effects a franchisor’s insolvency has on franchisees attached to the franchise network. Thirdly, it identifies a legal void that franchisees fall into when their franchisor becomes insolvent. In the case of Traveland, most of the former franchisees have demonstrated their resilience by continuing to work in the travel industry. The highly competitive nature of this industry makes it usual to operate under the banner of a well-known brand, which is why most of the former franchisees are again operating as franchisees in other systems. The monetary and non-monetary
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costs associated with the disruption are high and effects are felt personally by the former franchisees and their families as well as staff, many of whom lost their jobs. Since some franchisees were unable to pay their debts, many creditors have likewise been affected. The case study used in this research has served as a pilot study for further investigation. The identification of potential participants has proven to be very difficult and we anticipate a painstaking approach ahead as we track down former franchisees and other insolvent franchisors. Whilst we focused on former franchisees in the pilot study, a larger scale study is anticipated, involving a multiple case study design and incorporating collection of data from franchisors, franchisees and staff, financiers, landlords, other suppliers and liquidators to more fully assess the impact of franchisor insolvency on a range of stakeholders.
Limitations of using only Traveland in the study Franchisees operate in a huge range of businesses, both service and product based. Many franchisees receive on the job training, whereas Traveland franchisees will already have been trained as travel agents before they buy a travel agency. This may make them less dependent on their franchisor than they would otherwise be. The franchisee in Traveland has the premises lease in its own name. In many systems, the franchisor has the premises lease in its name, with the franchisee occupying the premises as a sub tenant or licensee. The legal outcome in the typical Traveland is that the franchisee is in a direct contractual relationship with the landlord, so the franchisor’s insolvency does not have a direct impact on the lease. If the lease is in the franchisor’s name, its insolvency is a breach of the lease, justifying termination. This leaves the franchisee with no legal right to occupy the premises. The flow on effect is that the franchisee has to negotiate direct with the landlord, may be locked out of the premises while the issue is resolved, and will have fitted out the premises but will not own the parts of the fitout that have become fixtures (for instance plumbing, wall tiles, shop front, floor coverings). A third significant difference between a travel franchise and, say, a pure retail franchise, is that the travel franchisee carries virtual stock, whereas the retail franchisee has paid for tangible stock. The consequence of losing the right to operate does not have such a crushing financial impact if there is no risk of stock perishing or going out of fashion before the issues surrounding the insolvency are resolved.
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