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Airbus deal gives Qantas commonality and range advantages

Analysis

The unsurprising decision by Qantas to purchase up to 134 Airbus narrowbody aircraft will allow the airline to update its core domestic fleet and to open up new markets, thanks to the greater range of the replacement models.

Despite the improved performance of the new aircraft, perhaps the most compelling factor in the Airbus deal is that it enables the Qantas Group to pool its new orders with its large existing backlog of Airbus narrowbody orders that were earmarked for its Jetstar subsidiary.

This made Airbus the most likely choice in the contest to replace Qantas’ current Boeing narrowbody fleet. Not only will Qantas gain efficiencies from fleet commonality, it will also have much more flexibility in growing different parts of the group, timing its capital expenditure, and focusing on the most promising demand segments.

Summary:

  • Qantas wanted to take advantage of a buyers’ market for its narrowbody deal.
  • Initial firm order will comprise 40 A321XLRs and A220s, with 94 purchase rights.
  • Combining with the Jetstar backlog, this order gives Qantas valuable flexibility in the delivery stream.
  • XLR deployment remains unclear, but the aircraft's range will bring interesting opportunities.
  • Switch from 717s to A220s will open more secondary domestic city pairs.

Qantas saw opportunity to bargain-hunt due to industry downturn

The commitment by Qantas is particularly significant, given the current state of the airline industry. Most airlines are still struggling financially due to the lingering effects of the COVID-19 crisis, and have been more focused on deferring orders rather than placing new ones.

However, Qantas CEO Alan Joyce has made no secret of the fact that he wants to take advantage of the current buyers’ market. Mr Joyce has often stated his belief that there are good deals to be had for airlines with sufficient financial support.

So although Qantas did delay its narrowbody replacement decision due to the onset of the pandemic, the airline brought it back on its agenda this year. It asked for proposals from the manufacturers and has been carrying out its evaluation in recent months with the aim of selecting a preferred provider by the end of 2021.

The result of the evaluation was revealed on 16-Dec-2021, with Qantas announcing its intention to buy up to 134 aircraft from the A320neo and A220 families. The total comprises 40 firm orders and 94 purchase rights, with the initial 40 to be split between 20 A321XLRs and 20 A220s.

Qantas says all of the models in the contest met its technical requirements

The order is due to be finalised by mid-2022, subject to board approval. Deliveries are expected to begin in the first half of FY2024 (the second half of CY2023) and will be spread over more than 10 years.

Placing firm orders in phases rather than all in one hit is similar to the approach Qantas took with its Boeing 787-9 orders. This allows it to secure delivery slots and pricing in advance, and progressively decide whether to exercise the purchase rights as they come due depending on the state of the market.

Qantas currently has 75 Boeing 737s and 20 717s in its fleet. The 737s have an average age of nearly 14 years according to the CAPA fleet database, and are used for domestic and short haul international operations. The 717s have an average age of approximately 20 years and are used in the QantasLink network under the Cobham Aviation Services brand.

The airline had previously confirmed that it was in discussions with Airbus, Boeing and Embraer regarding its domestic fleet replacement.

Mr Joyce stressed that the Boeing contender for the narrowbody order, the 737 MAX, is “a great aircraft,” and Qantas had no concerns about it at all. Also under consideration by Qantas was the Embraer E-190 family, which presumably would have been paired with an order from one of the other manufacturers.

The selection was “an incredibly competitive process,” and was “neck-and-neck almost right to the end”, said Qantas CFO Vanessa Hudson. All the models considered by Qantas “ticked all of our boxes” from a technical perspective, Ms Hudson said.

Pooling the orders was a big plus in Airbus’ favour, and may have tipped the balance

So it appears the major drawcards for Qantas were the fact that it can get enough variation within the A320/A220 families to handle all of its narrowbody needs, as well as the ability to pool the Qantas and Jetstar orders.

Jetstar already has more than 100 Airbus narrowbodies on order. This includes 28 A321LRs, the first of which are due to arrive in the second half of 2022. The existing order total also includes 36 of the A321XLRs, and in 2019 the Qantas Group said these could potentially be assigned to Qantas as well as Jetstar.

So even before it announced the new order, the airline had signalled that it was keen on the idea of XLRs in the mainline fleet. That was perhaps a clue as to what direction Qantas might go with the narrowbody order.

Combining the new order with the Jetstar orders means the Qantas Group “can draw down on a total of 299 deliveries across both the A320 and A220 families as needed over the next decade and beyond”, Qantas said.

The Airbus deal offers “huge flexibility” within the order, meaning Qantas can “continue to choose between the entire A320neo and A220 families depending on our changing needs in the years ahead”, said Mr Joyce.

There are a lot of details yet to be revealed on how the initial XLRs will be used

A typical two-class configuration for the A321neos and XLRs would be 180-220 seats, although the airline stressed that it had not yet determined the exact seating configuration it will use.

Qantas said the A321neos and XLRs could carry 15% more passengers than the 737-800s they will replace. This will be an advantage on domestic trunk routes connecting the state capitals, and the airline said the 8,700km range of the XLRs will allow new city pairs to be opened.

However, it remains unclear why Qantas has opted for the XLR – or extra-long range – variant of the A321neo with its first tranche of orders. The airline has described the latest deal as renewing the domestic fleet and replacing the 737s and 717s. Plainly the range of the XLR increases its reach far beyond the domestic and short haul international routes served by the 737s.

The airline would not give more details about how the initial 20 XLRs will be used, and it said further information would be released when the firm order had been completed. Specifics on markets and cabin product will no doubt be drip-fed over the next year or so.

While the XLR has the flexibility to be used on domestic routes, Qantas obviously has a reason for selecting the extended range version. So it appears likely the airline has at least some new international long haul markets in mind for these aircraft.

Greater range of the A220s will unlock more secondary domestic routes

Qantas said the initial 20 A220s would be the -300 version of the family, and the smaller A220-100 version would be included in the purchase rights. The A220s are designed for the 100-150 seat category, and they will have 20% lower fuel burn than the 717s they replace. Their greater range – up to 6,390km – along with their smaller size will enable more domestic route opportunities.

The airline said the increased range would allow the A220s to serve markets such as Brisbane-Broome or Perth-Brisbane, and flights from Adelaide to North Queensland.

Boeing's dominance in Qantas fleet from previous era has almost reversed

Qantas has selected Pratt & Whitney GTF engines for the new A320 and A220 orders. This differs from the CFM engines selected in the previous Jetstar A320neo orders. However, the airline believes that the Jetstar and Qantas fleets will each be large enough to obtain economies of scale for the different engine types.

The replacement of the 737s and 717s will give Airbus dominance in the Qantas Group fleet. In addition to the Airbus narrowbodies, Qantas also operates A330s and A380s, and plans to order A350-1000s for ultra-long haul flights.

Aside from the 737s, the main Boeing types in the Qantas fleet are the 787-9 with the parent airline and the 787-8 with Jetstar.

Mr Joyce dismissed any suggestion that the Airbus dominance would reduce the airline’s bargaining power in the future. He said that typically if manufacturers lose an arrangement with an airline, such as the Qantas narrowbody program, they “get very motivated” to win the next one.

Mr Joyce noted that Qantas used to be a predominantly Boeing airline, which made Airbus very keen to force its way in. Historically, as a solely international airline, it was unique in the world for having an all-747 fleet.

The large order will go a long way to reducing Qantas' emissions

With a current fleet that carries an average age in the mid-teens, Qantas' emissions profile is in the poorer quartile of world airlines. The substantial combined group orders of nearly 300 new highly fuel-efficient narrowbodies for delivery during the 2020s will greatly reduce both fuel costs and carbon emissions as the changeover filters through.

Extra factors meant the Airbus deal was the right way to go for Qantas

It is hard to fault Qantas’ decision to go with Airbus narrowbodies. The benefits from pooling the new orders with the existing backlog will be significant, and the flexibility to adjust and redirect its growth across the group is a factor not to be taken lightly. While it is yet to emerge exactly how Qantas will use the new XLR orders, the airline clearly has big plans for them.

Picking up the Qantas narrowbody business is no doubt another good win for Airbus. It also provides further vindication for the benefits of having the A220 in the stable alongside the larger narrowbodies.

However, in this case the decision should not be read as a slight on the 737 MAX. In many respects the odds were against Boeing winning due to the major benefits of having common narrowbody types across both fleets and a combined backlog. After all, Qantas had already signalled this thinking with its previous XLR order.

This seemed to be the kind of advantage Mr Joyce would be unlikely to pass up. 

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