Perth Airport

Airlines' tangled alliances evolve: British Airways-Cathay Pacific codeshare to Australia - for now

Implications continue to emerge from the Sep-2012 landmark Emirates-Qantas alliance, the latest development being a codeshare covering Australia for British Airways and Cathay Pacific. Although the two are members of the oneworld alliance and at first blush may be considered partners, they had the most minimal of ties, owing to significant competition between them.

That competitive situation still exists but other factors have changed: BA's once deep partner Qantas is now a competitor, aligned with Emirates, and is establishing a Jetstar franchise on Cathay's home turf in Hong Kong. BA and Cathay are united by a common enemy – not the first occasion this reasoning has spawned an alliance – but also other factors. BA has lost its Australian network access and Cathay fits in; meanwhile Cathay will be receptive to feed to sustain its positioning after China Southern and Singapore Airlines have made large capacity increases in Australia.

Alliances are evolving, and this partnership will surely change – or go extinct – as BA becomes more familiar with new oneworld members Malaysia Airlines and Qatar Airways, with whom it will have more in common than it does with Cathay.

Australian domestic airfares tumble as airlines wage a capacity battle

Australian domestic fares have tumbled in the past year as Tiger claws its way back into the market from its grounding in 2011, and Qantas and Virgin Australia continue to slug it out for overall market share.

It is unlikely that the pressure on fares and thus yields will let up in 2013 as Tiger continues to add capacity and Virgin and Qantas, along with Jetstar, stick to their targets to add between 7% and 9% capacity in the first half of the current financial year.

All those extra seats should keep a lid on any fare rises, and if Virgin is given the regulatory green light to take effective control of Tiger Australia, along with the promised investment to expand the LCC, there is a real prospect that fares will reduce even further.

South African Airways ends Cape Town-London service for bigger growth in West Africa and beyond

Cyclical downturns can disproportionately affect end of line carriers since they have few opportunities to pull traffic for long-haul flights, as has been seen with Qantas and to a lesser extent Air New Zealand. But now South African Airways (SAA) is feeling the pinch and will end from 16-Aug-2012 its London Heathrow-Cape Town service after over two decades of operation.

As with Air New Zealand and Qantas redistributing some capacity from competitive intercontinental routes to less competitive and higher-yielding regional markets, SAA intends to expand capacity to the healthy west African markets of Abidjan, Accra and Lagos as well as open longer routes to the healthier markets of Mumbai and Perth.

SAA has not previously encountered challenges the way ANZ and Qantas have, a result of South Africa taking a more restrictive approach to air service agreements, SAA being able to fly non-stop to key markets and there is limited sixth freedom competition from other African carriers.

Australian aviation market shows signs of slowdown just as airlines were enjoying yield premiums

There are now clear signs the Australian aviation market is entering a light slowdown, with carriers adding capacity ahead of demand while airfares decline marginally. This will affect the region's carriers differently and they should all fare better than counterparts elsewhere in the world; notably, the market in Australia is still growing, but not as fast. Most exposed are Qantas mainline and Tiger Airways Australia. The former has been slowly losing some corporate business to Virgin Australia and competes with a higher cost base.

Tiger is suffering from group-wide over-capacity and would not be able to redeploy capacity as readily. Unlike Tiger, Jetstar has a healthy and rapidly growing pan-Asian network that can absorb any surplus capacity and at a higher margin even than in Australia. Virgin Australia is seeing yield growth from its transition to a business carrier, growth that should overcome any weakness in the more leisure-exposed areas of its business.

AirAsia X continues concentration theme with Christchurch withdrawal as ultra-long-haul loses favour

AirAsia X is continuing to act on its concentration plan to build scale in key markets rather than spread itself out. The Kuala Lumpur-based low-cost long-haul carrier is withdrawing services to Christchurch and increasing capacity to Perth and Taipei. The withdrawal from Christchurch is despite high load factors, indicating – as with the carrier's withdrawals from London and Paris – the problem is of yield on ultra-long-haul sectors where an LCC's lower cost base has less advantage as fuel comprises a greater share of costs than on shorter sectors.

The withdrawal of four-weekly services to Christchurch, effective at the end of May-2012, will remove AirAsia X's longest flight, leaving all other services – primarily to Australia and North Asia – in a five-to-eight hour range. Previously the carrier's longest flights were to Paris and London, although operated with A340s instead of A330s to Christchurch, but AirAsia X announced in Jan-2012 that Paris and London would be suspended by the end of Mar-2012.

Qantas cuts international services to grow profitable domestic market as Jetstar grows all around

Qantas is making significant competitive responses to invigorated challenger Virgin Australia’s push in the lucrative Australian domestic market. Qantas will withdraw international routes and re-allocate aircraft primarily to the domestic market to keep the 65% market share it believes is optimal for overall performance. Additional network changes will right-size its fleet to demand while the company looks to shrink engineering facilities due to aircraft retirements. For its planned Asia-based premium carrier, Qantas will pursue a capital light option in which an airline partner – likely Malaysia Airlines (MAS) – shares part of the risk.

The story is more positive overall at the group’s low-cost subsidiary Jetstar, which posted its largest-ever underlying profit. The carrier is benefitting from increased yields in Australia while its Singapore operation has held up profitably despite its competition, Tiger Airways, not being able to profitably absorb significant capacity increments.