How Qantas planned to make its Asian premium carrier viable

The rationale: more points, better timing

The basic plan called for a new airline to be established no earlier than mid-2013 in southeast Asia, with Singapore and Kuala Lumpur the contenders. The carrier - possibly to be named RedQ, RedQ Executive Flyer, OneAsia or RedSky, all names Qantas submitted trademarks for in Jun-2011 - would operate an initial fleet of eight A320s, growing to 11 in the medium-term, focused on service to key medium-haul Asian destinations like China and India as well as to Australia.

After making substantial route cuts in early 2001, Qantas publicly discussed the option of a lower-cost premium carrier in Asia Pacific to recapture lost growth, although that only eventuated later that year with Jetconnect, the subsidiary of Qantas that operates most trans-Tasman flights between Australia and Jetconnect's lower cost hub in New Zealand.

Qantas in 2008 had to pare back its Chinese and Indian services to a single Shanghai flight and a Mumbai flight routed via Singapore. The premium carrier could enable Qantas to serve more Asian points on its own metal with associated yield benefits by having pick-up rights in Asia. Mr Joyce succinctly described the Asian market by saying it has "massive untapped potential". The carrier has achieved success in Asia with its low-cost brand Jetstar, but as the continent continues to grow, Qantas is betting on suitable demand for higher service carriers too.

Asia has a much larger passenger catchment than Australia and the narrow-body nature of the operation reduces the amount of seats needed to be filled. "For the first time in our history Qantas will fully participate in the benefits of an Asian aviation hub," Mr Joyce said, explaining the carrier could receive traffic feed from Australia and Europe for onward transfer to other Asian points, rather than having an Asian hub as an intermediary point between Australia and Europe.

One-stop services are often not competitive bragging rights, but for Australia with its large landmass and small population, one-stop services to Asia will be common. That is the strategy favoured by Qantas rival Virgin Australia, which intends to primarily link Australia with Asia via its partner Singapore Airlines over the Singapore hub. "Most of the traffic to both China and India is not monodestinational. It's multiple, usually. Fly into Delhi and come out of Mumbai. If you just service one point in those countries, you're going to get imbalances on your directional flows. So unless you're prepared to operate to a number of ports it's best not to do it," Virgin Australia CEO John Borghetti remarked in Aug-2011. "The best way to serve [China and India] is via a mid-point. Singapore is in a perfect position."

The premium carrier as originally envisioned would deliver Qantas enhanced schedules more appealing to the corporate travellers. The carrier's Asian routes have been timed to primarily depart Australia late in the day to optimise over-night connections to Europe, a market with fierce competition, low yields and from which Qantas will scale back from in Mar-2012 with the suspension of two of its five daily services. "As a nation we used to fly over or via Asia, on our way to Europe. Now we fly to Asia, both for business and relaxation. And as Asian economies grow, the future will be about travel both to and within Asia," Mr Joyce said in Aug-2011.

As Qantas focuses on intra-Asia traffic, it needs to have suitable schedules that arrive earlier in the day in Singapore to permit same-day connections. "Up until now our flying has been predicated on the best connecting times to Europe. So instead of convenient day time services, we have late night arrivals into Singapore. This means that business customers can't make same day connections into the many Asian cities which are developing fast," Mr Joyce said in Oct-2011. A sample of Qantas' and SIA's arrival times into Singapore illustrate how SIA is able to offer same-day sixth-freedom connections to elsewhere in Asia via earlier arrival times in Singapore.

Sample arrival times into Singapore from Australian points on Qantas and Singapore Airlines: Feb-2012

Australian Origin Point	Qantas Arrival Times into Singapore	SIA Arrival Times into Singapore
Adelaide	19:30	17:20
Brisbane	19:25	05:35, 20:30
Melbourne	21:40	05:40, 15:35, 21:20
Perth	17:35, 20:50	07:20, 12:50, 21:10
Sydney	21:45, 22:25	14:30, 17:20, 21:20, 00:15

Source: CAPA - Centre for Aviation and Innovata

A320 sharklet service from Southeast Asia hub

While a normal A320 would not have the range to fly from Southeast Asia to eastern Australia, and its main cities of Melbourne and Sydney, Qantas CEO Alan Joyce confirmed to CAPA the aircraft would be fitted with Airbus' form of winglets, called Sharklets, which are now undergoing testing.

"We're going to take the aircraft with Sharklets, with extra range," Mr Joyce said in Sep-2011. Airbus says the Sharklet reduces fuel burn by 3.5% and can extend the A320's range by 100nm. Mr Joyce said those, with what he described as a less dense configuration and lightweight seats, would enable the carrier to serve eastern Australia non-stop from the carrier's southeast Asia base.

The carrier was initially referred to as a premium one, in line with the all-business-class service British Airways operates between New York-JFK and London City. Mr Joyce in Aug-2011 said the product would be a "very exclusive, executive jet-type style operation that we believe very much will have a strong capability of working in this market." However group executive for customer and marketing Lesley Grant in Aug-2011 toned down the exclusivity. "It will be very much designed for the business-purpose traveller, both for business and leisure travel - a very premium offering. We will have a higher premium mix onboard this aircraft."

The inconsistency between Mr Joyce's "very exclusive" and Ms Grant mentioning the product would also appeal to the leisure market indicated how the carrier's development was still underway when announced in Aug-2011. (Qantas may have been forced to announce the carrier earlier than planned due to media leaks.) In the following months it became clear the carrier would more closely resemble Ms Grant's vision. The carrier would use one of the newer business seats developed by the market and also have an economy class akin to the carrier's current product or possibly with some additional legroom. The closest comparison is United Airlines' "p.s." premium service on 757-200s that connect New York to Los Angeles and San Francisco where about 75% of the cabin space is allocated to first and business class seats, which although nicer than United's standard domestic offering, fall short of international standards.

Hub narrowed down to Singapore or Kuala Lumpur

Mr Joyce confirmed in Aug-2011 Singapore and Malaysia's Kuala Lumpur were the frontrunners for the hub, with Singapore likely favoured more. It has a larger local market and Qantas had a significant presence unlike in Malaysia, where it withdrew from early last decade. Only low-cost subsidiary Jetstar Asia serves Kuala Lumpur, but from Singapore. If Qantas re-launched flights to Kuala Lumpur, either for its premium carrier or for benefits with MAS entering oneworld, Qantas would maintain a significant presence in Singapore and would have to balance two operations in relative proximity to each other.

See related article: New Qantas Group full service carrier could further alter competitive landscape in Singapore

The base selection was due in mid/late-2011 but that timeframe was dropped for two reasons. First, Qantas received backing from sections within Singapore but national carrier Singapore Airlines was understandably lobbying against the carrier behind closed doors, stagnating final approval.

Second, Qantas was watching industry developments in Malaysia. In Jun-2011 Malaysia Airlines (MAS) announced its intention to join Qantas in the oneworld alliance. Two months later in Aug-2011, and just before Qantas announced the premium carrier, MAS and low-cost rival AirAsia announced an equity swap that saw a management shake-up at MAS. AirAsia's Tony Fernandes, who had cordial relations with the Qantas Group, gained a seat on the MAS board and drove many reviews of the carrier's performance.

That created an opportunity for Qantas to work closely with MAS. Opportunities in Malaysia could have been genuine or alternatively used as a negotiating tactic for the Singaporean government as Malaysia and Singapore have a long rivalry. In local Australian reports Qantas officials were eager, officially and unofficially, to talk of opportunities for the premium carrier in Malaysia, even if the context was no longer an A320 operation but a much riskier A330 operation.

A base in Malaysia raises other questions Qantas officials never officially or unofficially discussed. First, traffic at the new carrier would take traffic away from MAS, Qantas' partner, whereas in Singapore the impact would be felt most on SIA, Qantas' competitor. Second, MAS had already developed plans to launch its own premium carrier named "Sapphire". While route and network strategies were never defined for Sapphire or Qantas' carrier, overlap seemed a likely outcome. Or if Qantas and Sapphire were to work together, it was not evident what substantial benefits Qantas could bring that would make MAS want to involve Qantas.

Tony Fernandes' plan not a competitor, but Qantas must further justify plan in face of weakened markets

At the same time Sapphire and Qantas' premium carrier were panning out, Malaysian reports indicated Tony Fernandes was looking to establish his own premium airline in Asia. While an excitable press was quick to draw conclusions, Mr Fernandes' planned operation was of a very different nature, focusing more on short-haul corporate taxi service around Southeast Asia whereas Qantas and Sapphire were looking at wider Asia.

See related article: Why Tony Fernandes' new possible premium airline isn't a competitor to Qantas' Asian premium carrier

"That venture is very different from the one we're talking about," Mr Joyce said in Nov-2011. "It's more in the corporate jet space. It will have 16 seats on a Bombardier aircraft. Tony is happy for us to be involved if we want to be. It's a very different proposition from the scheduled service proposition we're talking about." Mr Fernandes has not made additional comments except to hint that MAS would be involved in some level with his planned carrier.

That underscores how aviation in Southeast Asia is still playing out, even after initial announcements, and how inter-linked it can be in a relatively small geographic area.

Although Mr Joyce when first announcing the premium carrier in Aug-2011 gave a sense of urgency, saying "competitors are encircling the opportunities", weak markets in Europe and curtailed growth in Asia are seeing investors favour a less risky option, such as a partnership with another carrier like MAS rather than see Qantas enter alone.

In its final hub selection and network strategy, Qantas' premium carrier will have to find a balance between what partners can offer, what each hub can offer, which carriers are advocating for or against it and most recently market response, following Qantas' credit rating downgrade, although it is still of investment grade. Qantas' desire for a premium carrier shows insight, but also a lot of challenges and details it will need to address.