Southern Contrails is CAPA's blog devoted to the Australia, New Zealand and Pacific Island markets. CAPA uniquely takes an industry perspective on strategy, partners and alliances, routes and more in this dynamic region.
Qantas' withdrawal from a series of international routes promises the single largest benefit to its loss-making international division, delivering AUD100-120 million (USD101-122 million) in annual benefits, with the majority to be realised in FY2013. But with the international division reporting a loss of AUD216 million (USD219 million) in FY2012, Qantas will continue to operate a number of unprofitable routes, primarily to Europe and Asia.
Qantas expects to reduce those losses through the reconfiguration of its Boeing 747-400 and A380 fleets, which when complete towards the second half of FY2014 will deliver AUD70-90 million (USD71-91 million) of benefits annually. Qantas previously put those retrofit changes at a cost of AUD400 million (USD406 million). They include reconfiguring nine 747-400s to have no first class while 12 A380s have a reduced number of business class seats but more economy and premium economy seats.
Virgin Australia and CEO John Borghetti deserve all due credit for creating an airline with wide and deep partnerships that has become a formidable competitor to Qantas. But Virgin Australia's claim that it has the largest network out of Australia is perhaps stretching the point.
Importantly, Virgin has put in its own qualification that this claim is based on seats, some of which are operated by its partner carriers. It is measuring itself and its partners against oneworld seats in and out of Australia.
The recent history of Australia's two main airports – Melbourne and Sydney – has been one of Melbourne being on the offensive to capture traffic that went to Sydney by default while Sydney sat back, even as its growth lagged that of its competitor. But that is no more. A revitalised Sydney airport, with the backing of a new government, is out to hold its place. That was evident at last week's annual Routes Asia forum where both Melbourne and Sydney took the opportunity to announce respective strategic partnerships to drum up support.
As Australia's domestic market shows signs of slowdown, increasingly presenting itself as an opportunity for mainline Australian carriers is flying for the booming resource sector. The resource industry flying has been heavily concentrated in Perth, where charter carrier with small aircraft sub-737/A320 size can effectively reach most of the state of Western Australia, where the majority of resource work occurs, although increasing amounts are in Queensland too.
But as Perth becomes saturated – from peak aircraft movements, housing availability and skilled labour – resource companies will be increasingly pulling from the country's more populous east coast. These distances place restrictions on existing charter carriers, creating the opportunity for Qantas and Virgin Australia to fill demand just as their traditional regular public transport markets are weakening. In a second phase of growth, resource flying could even be extended to Southeast Asia to tap that region's skilled labour pool, if Australian immigration policies allow.
The inaugural AirAsia X flight arriving into Sydney on 02-Apr-2012 is ushering in the era of low-cost, long-haul carriers at Australia's largest airport, which is poised to take the title of offering the most service from low-cost long-haul carriers between Australia and Asia. While Jetstar already links Sydney to long-haul destinations and previous carriers like Viva Macau tried, this new wave is of carriers going beyond point-to-point traffic to offer connections out of large Asian hubs.
AirAsia X will be followed by Scoot, and the presence of a Singapore low-cost long-haul carrier in Sydney makes it likely that Jetstar too will enter the Sydney-Singapore market, although parent company Qantas will have to accept that corporate routes previously in its exclusive domain must now be shared if it wants to remain relevant in a market with increasingly diversifying traffic.
The sudden influx of long-haul LCCs can be attributed to competitive responses but also the new government in New South Wales that is eager to better promote Sydney Airport.
Qantas and Air Pacific have been caught in a proxy fight between their home countries as Australia condemns the ongoing lack of democracy in Fiji since military leader Frank Bainimarama took control of the island nation last decade. Bainimarama in turn has had the civil aviation ministry pass a decree requiring, amongst other statutes, Fijian airlines to have local citizens comprise two-thirds of the board. Fiji has a 51% stake in Air Pacific while Qantas holds a 46% stake and accounts for four of the nine board seats.
While it is apparent Qantas will have to relinquish a board seat to comply with the new regulations, the carrier for some years has been seeking to sell its stake – and would surrender all board seats – but Fiji is unwilling to spend the AUD15 million that Qantas' stake is valued at. Fiji is also irritated that Qantas' LCC Jetstar serves Fiji, to Air Pacific's detriment, although Virgin Australia has significantly more capacity.
Air New Zealand's decision to end Auckland-Beijing services in favour of a one-stop service on its Shanghai flight with onward connections by partner Air China is the latest example of the difficulties 'end of line carriers' in Australia and New Zealand are having serving China, which is a top trading partner for both.
Ending services to Beijing is not a light decision given how coveted Beijing slots are, but Air New Zealand's move is not unprecedented. Qantas in 2009 made the exact same move, ending Beijing service in favour of a one-stop partner connection. Qantas also bolstered its Shanghai schedule, which Air New Zealand is doing too with progressive daily service.
Hong Kong Airlines in Jan-2012 signed a deal with Qantas allowing Hong Kong Airlines to sell its new all-premium A330 Hong Kong-London flights to Australia with Qantas covering the Hong Kong-Australia sector. Hong Kong Airlines is pitching its all-premium service, which offers business class and premium economy seats, as offering a high quality product at a lower fare level. Not too long after the Hong Kong Airlines-Qantas deal was completed more senior managers at the Australian carrier became fully aware of the contract and realised giving traffic to a competitor was not in its best interest.
Hong Kong Airlines has now done a deal with Virgin Atlantic, which operates between Hong Kong and Sydney. Australia-London tickets offer Hong Kong Airlines segments in either premium economy or business between Hong Kong and London with a Virgin Atlantic economy sector between Hong Kong and Sydney. While the Qantas deal included business class, Virgin Atlantic is not offering its business class or premium economy product, and Virgin Atlantic's flights are only available from Sydney whereas the Qantas agreement also brought Brisbane, Melbourne and Perth destinations online.