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Royal Brunei Airlines leaps forward with 787. Early A320neo or 737MAX slots to provide another boost

19-Nov-2013

Royal Brunei Airlines (RBA) will make a big leap in improving efficiency and profitability on 1-Dec-2013 as the carrier introduces Boeing 787-8s on the Bandar Seri Begawan-Dubai-London Heathrow route. Another leap could occur in 2016 or 2017 as the carrier, somewhat surprisingly given its very small size, has received aggressive proposals and early delivery slots for new-generation narrowbody aircraft.

RBA became in Oct-2013 the first 787 operator in Southeast Asia. It has already taken delivery of two 787-8s, one of which is in static display this week at the 2013 Dubai AirShow. RBA will be the first carrier to operate the 787 between Dubai and London, one of the world’s largest routes, and in Mar-2014 will become the first carrier to have an all-787 long-haul operation.

RBA meanwhile is in the closing phases of a competition between Airbus and Boeing for its new-generation narrowbody requirement, which includes over 10 aircraft for delivery from end of 2015. Airbus and Boeing are offering early delivery slots for their A320neo and 737 MAX families, with support from leasing companies, and the campaign has become very competitive as Boeing is eager to switch RBA’s narrowbody fleet from Airbus. RBA has already ruled out Embraer and Bombardier, after earlier considering large regional jets.

Royal Brunei to quickly transition all long-haul flights to 787

RBA currently operates a fleet of six A320 family aircraft along with two 255-seat 787-8s and four 285-seat 777-200ERS. The 777-200ERs will be returned to Singapore Airlines (SIA) over the next few months as RBA transitions both its long-haul routes – Bandar Seri Begawan-Dubai-London Heathrow and Bandar Seri Begawan-Melbourne to the 787.

Royal Brunei Airlines fleet summary: as of 18-Nov-2013

Aircraft In Service In Storage On Order*
Total: 12 0 3
Airbus A319-100 2 0 0
Airbus A320-200 4 0 0
Boeing 777-200ER 4 0 0
Boeing 787-8 2 0 3

Over the last six weeks RBA has been operating 787s on regional routes, as carriers typically do with new widebody types during the initial familiarisation phase. Regional flights within Asia using 787s will cease on 1-Dec-2013, when RBA dedicates both of its 787-8s to operate daily services to London Heathrow via Dubai.

RBA is slated to take its third 787 in Jan-2014 followed by a fourth aircraft in Feb-2014. The carrier is now scheduled to transition its daily Bandar Seri-Begawan-Melbourne flight to the 787 on 1-Apr-2014. But RBA deputy chairman Dermot Mannion told CAPA at the sidelines of the 15-Nov-2013 Association of Asia Pacific Airlines (AAPA) Assembly of Presidents in Hong Kong that the carrier could make the transition to 787s on the Melbourne route as early as mid-March.

RBA only operates two long-haul route routes on a year-round basis while Jeddah in Saudi Arabia, which will also be operated with the 787, is served seasonally. The carrier previously operated widebodies to multiple routes in Australasia – including Auckland, Brisbane, Perth and Sydney – but significantly cut back its long-haul operation in 2011 as part of a major restructuring initiative.

The network restructuring followed the lease of six 777-200ERs from SIA in 2010. The 777-200ERs were acquired as a temporary solution, replacing 767s and providing a bridge to the delayed 787s. Two 777s were returned in 2012, improving utilisation rates as RBA was significantly under-utilising its 777 fleet following the 2011 restructuring.

The restructuring has enabled RBA to significantly narrow losses on its long-haul operation as the cut in flights has led to significantly lower costs. But the operation continues to be unprofitable and RBA continues to rely on transit passengers to generate 80% to 85% of its long-haul traffic (excluding the seasonal service to Jeddah, which caters to local Haj pilgrimage traffic from Brunei).

RBA to focus more on Brunei point of sale for long-haul premium traffic

The 787 will enable RBA to slightly reduce its reliance on transit passengers as its new 787-8s seat 30 fewer passengers compared to its 777-200ERs. RBA will particularly be able to reduce its reliance on transit passengers to fill its premium cabin. Of the 30 fewer seats overall, 40% of the reduction will be in the premium cabin as RBA has outfitted its 787s with 18 lie-flat business class seats compared to the 30 angled business class seats it inherited from SIA on its 777-200ERs. As a result RBA’s premium inventory on long-haul flights will decline by 40% while the economy inventory will drop by only 7%.

The 30 premium seats were far too many and the outdated product made it hard for RBA to attract Brunei’s wealthy population, particularly in the Brunei-London market. RBA is confident it can woo back local business class passengers from airlines like SIA, which offer a one-stop product to London Heathrow from Brunei which before the re-fleeting was superior to the RBA product with similar timings.

“I think the business class product on the 787 with 80 inches of pitch and lie-flat is going to very much appeal for the high end Brunei traffic. We are hoping to develop a significant market there,” Mr Mannion says. “There are a lot fewer business class seats (compared to the 777). We will be a lot more focused on selling the limited number of exclusive business class seats we got in the local market than what we were previously when clearly we were selling a much higher percentage outside. … We are in there now. We got a business class product that we think will match the best of our premium carriers in our region.”

While RBA is banking on improved premium yields and load factors, the biggest benefit of the 787 operation, will come from the cost side. Based on initial operating performance for its 787-8s, Mr Mannion expects at least a 25% reduction in fuel burn per trip compared to the 777-200ER. The fuel burn reduction per seat will be less given the smaller capacity of the 787-8 – roughly 16% – but Mr Mannion points out that RBA has generally not been filling its 777-200ERs and the carrier expects to see an improvement in load factor with the smaller 787-8s. RBA does not publicly disclose traffic figures but Mr Mannion says the carrier’s average load factor is 70% to 80%, with similar figures for both its short-haul and long-haul operations.

RBA faces intensifying competition in long-haul markets

RBA’s long-haul operation, however, will almost certainly remain unprofitable. While RBA continues to reduce the costs of its long-haul operation, it will be challenging to improve economy class yields given current market conditions.

The 7% reduction in long-haul economy seats will not significantly change the huge reliance RBA has on transit passengers. Transit traffic traditionally has been pursued well below cost. Increased competition in RBA’s transit markets initially came from Gulf carriers, driving in part the 2011 restructuring. Competition is now continuing to intensify across RBA’s main transit markets, which include Melbourne to Dubai, London and Southeast Asia and Southeast Asia to Dubai, London and Australia.

For example, RBA was impacted by the launch of Qantas flights to Dubai in late Mar-2013, when the Australian carrier changed the stopover of its London flights from Singapore to Dubai.  “The competition is there but we have shown in recent times that we are able to hold our own. Everything that has to do with Dubai has become more competitive. But we have been around that market for a long time – more than 25 years. We’re not going to give up our space,” Mr Mannion says.

In addition, RBA has been impacted by the recent launch of services from Manila to Dubai by three carriers – Cebu Pacific, Philippine Airlines (PAL) and PAL Express. Manila has traditionally been a strong transit market for RBA, which offers Manila passengers competitive one-stop services to Dubai and two-stop services to London.

The Manila-London market also has become more competitive following the 4-Nov-2013 launch of non-stop 777-300ER services to Heathrow by PAL. But again Mr Mannion is confident RBA can hold its own, leveraging its extensive experience selling in the Manila market.

Royal Brunei plans to stick with one-stop service to London

Garuda Indonesia is also planning to begin operating non-stop 777-300ER flights to London in May-2014. With Garuda seven Southeast Asian carriers will serve London but only RBA will have a one-stop product. RBA is not re-considering a non-stop service to London and the carrier is committed to continue serving London via Dubai.

Mr Mannion says RBA initially intended to acquire 777-300ERs and launch non-stop flights to London but “we deliberately opted out of those aircraft because in our view the Dubai market is and is likely to remain important to us given the relatively small size of our home base in Brunei. We made a deliberate decision to have a one-stop to London.”

The Dubai-London market is highly competitive, with five carriers currently offering about 42,000 weekly one-way seats, making it one of the 10 largest international markets in the world based on current non-stop seat capacity. But RBA believes being the first 787 operator on the route will help it stay competitive. Displaying the aircraft at the Dubai AirShow should drum up increased interest in the local Dubai market.

London to Dubai capacity route total (one-way seats per week): 19-Sep-2011 to 11-May-2014

RBA will also likely use the Dubai AirShow to discuss its new-generation narrowbody requirement with manufacturers and leasing companies. As CAPA previously reported, RBA issued request for proposals (RFPs) earlier this year for A320 replacements which generated responses from Airbus, Boeing, Bombardier and Embraer. RBA is aiming to replace its entire A320 fleet, which is owned by CIT, as the current leases expire between Dec-2015 and Jul-2016.

See related report:  Royal Brunei takes another step forward as it becomes first 787 operator in Southeast Asia

RBA rules out CSeries and E190 as it increases focus on cargo

Mr Mannion confirms that Bombardier and Embraer, which proposed the CSeries and E190/E190-2 families, have been ruled out because of the limited cargo capabilities. RBA earlier this year decided to outsource all its cargo capacity to Air Logistics. The deal has already boosted RBA’s cargo revenues and the carrier does not want to compromise cargo revenues by transitioning to regional jets for its short-haul network.

“Cargo is important to us because we recently did a joint venture with Air Logistics, which is one of the top five freight forwarders in the world. Basically we have outsourced our entire cargo operation to them. They are responsible for selling all of our available cargo inventory,” Mr Mannion says. “That deal has been in place since August and already we are beginning to see elements of significant growth with that.”

RBA receives a guaranteed minimum from Air Logistics and revenue above the target is shared between the two companies. Brunei has a limited local cargo market but Air Logistics has been able to leverage Brunei’s cargo transit facility and use RBA’s bellies to carry cargo in markets such as Australia to the UK, Middle East and Southeast Asia. While Air Logistics previously did not have any presence in Brunei it has a large presence in Dubai, which the relationship with RBA leverages.

“It’s a very favourable relationship from our point of view. Quite a few other airlines have been enquiring how this model works. Airlines generally don’t know a great deal generally about how to sell cargo. We tend to be much better on passenger and we are starting to recognise that,” Mr Mannion says. “Air Logistics is quite optimistic about the future. And if it develops like we hope it will they may augment our belly cargo with their own dedicated freighter operation at Brunei.”

The A320neo or 737 MAX families will allow RBA to maintain its current narrowbody belly space for Air Logistics across its short-haul network. Airbus and Boeing have been able to offer early delivery slots, with help from leasing companies – which are backing both of the manufacturers’ proposals as well as providing independent proposals to RBA. The A320neo is slated to enter service in late 2015 while the 737 MAX is expected to enter service in 3Q2017.

RBA offered early delivery slots for A320neo and 737 MAX

It is somewhat surprising Airbus and Boeing are offering early delivery slots for an airline the size of RBA given early slots for both programmes are in limited supply and high demand. “Right now the overall campaign is a very strong battle between the neo and the MAX. We are seeing very aggressive proposals,” Mr Mannion says.

Industry sources say Boeing is eager to win the competition at RBA and switch over an A320 customer as it tries to close the gap with Airbus, which had a head start as the A320neo was launched earlier than 737 MAX. Securing a deal from A320 operators generally requires extra sweeteners to offset the transition costs. But Boeing was able to provide these for SIA regional subsidiary SilkAir, which operates A320s but opted in 2012 for a combination of current-generation 737-800s and 737 MAX 8s. As the MAX is not entering service until 2017, RBA could similarly end up switching to 737s as its A320s come off lease in late 2015 and early 2016 by initially taking current generation 737s as a temporary solution.

Mr Mannion says that the “ideal solution” would be to replace its A320s when the leases expire and “we are working to achieve that”. But he confirms that some of the solutions could involve a temporary extension of its existing leases or a bridge aircraft before it switches to new-generation aircraft. Some of the solutions proposed involve a mix of orders and leases while other solutions involve entirely relying on leases.

“We put out an RFP to the manufacturers for an outright purchase and we also put out an RFP to the leasing companies. For early deliveries up to 2018 we will be depending on the leasing community,” Mr Mannion explains. “We are talking to a number of leasing companies. We could find a one size fits all solution. Right now all six aircraft are leased from CIT and that has certain advantages. But we won’t rule out a combination of leasing companies.”

RBA expects to grow its short-haul operation

RBA only currently has six narrowbody aircraft, which it uses to serve 10 regional destinations within Asia. But the carrier is also seeking several growth aircraft plus options that could see RBA’s narrowbody fleet double or even potentially triple in size.

RBA believes the new-generation narrowbody fleet will enable the carrier to launch new destinations given the improved economics and range of the A320 neo and 737 MAX families. For example RBA could potentially resume services to Brisbane and Perth. “With additional range capabilities we can look at points in Australia for instance that previously would require a widebody aircraft,” Mr Mannion says. “Those routes have a much better chance of working with a narrowbody.”

He adds that RBA also plans to consider using the A320neo or 737 MAX to open destinations in South Korea and Japan. Currently RBA’s only destinations in North Asia are Hong Kong and Shanghai. New destinations in India are also currently being evaluated.

Royal Brunei top 10 routes based on return frequencies: 19-Nov-2013 to 25-Nov-2013

Destinations in southern India, unlike Japan or Korea, could be launched using RBA's current narrowbody fleet. But network expansion will not likely come until at least 2015 as the carrier plans to first focus on bedding down its long-haul operation. “In terms of growth 2015 to 2016 will be the next target. That’s narrowbody activity,” Mr Mannion says. “We have a big job next year to stabilise. Bear in mind even though we are relatively small in size we will be the only airline in the world operating an exclusive 787 long-haul service. That’s a big challenge for us. And we need at least a year to bed that in.”

In addition to new generation narrowbody aircraft, regional growth will be driven partially by the delivery of a fifth 787-8. Mr Mannion says the fifth 787 will be used on regional routes rather than long-haul expansion but a delivery date has not yet been determined for the last of its 787 orders.

The carrier remains committed to a fifth 787 and is not currently considering cancelling the last aircraft from its order. A decision on the delivery date for the final 787 is expected to come within the next few months, potentially in combination with a narrowbody order.

RBA’s short-haul operation has traditionally performed significantly better than the long-haul operation. The carrier is able to rely mainly on the local market for its short-haul operation as only about 30% of its short-haul traffic transits to other short-haul or long-haul flights. This makes it significantly easier from a yield perspective given that RBA accounts for almost 80% of seat capacity in its home market.

Brunei capacity share (% of seats) by carrier: 18-Nov-2013 to 24-Nov-2013

RBA profitability continues to improve

While RBA continues to face increasing competition regionally from low-cost carriers the short-haul operation has seen considerable growth. Annual passenger traffic will reach a projected 1.3 million in 2013, matching the levels from prior to the restructuring, when long-haul routes accounted for a significantly higher portion of total traffic. Passenger traffic could reach 1.4 million in 2014, driven by the full-year impact of short-haul expansion from 1H2013.

RBA is still not approaching break-even but profitability has improved. “There’s still a little bit to go but we are getting ever closer,” Mr Mannion says.

See related reports:

The upcoming transition of the long-haul operation to 787s should further improve profitability. The 787 operation will likely still be loss-making but the Brunei government, which owns 100% of the carrier, sees the national benefit of maintaining a long-haul network albeit slimmed down. The short-haul operation has more potential to become self-sufficient, particularly after the anticipated switch to new-generation narrowbody aircraft.

RBA still faces huge challenges, including intensifying competition throughout Southeast Asia as a huge influx of capacity is poured into the region. As one of Southeast Asia’s smallest carriers – and the smallest of the seven widebody flag carriers from the region – life will never be easy. But having the distinction of having the world’s first all-787 widebody fleet and potentially the world’s first all-A320neo or 737 MAX narrowbody fleet will significantly raise RBA’s profile and long-term outlook.


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