Qantas’ B787 orders juggled again as it prepares for domestic war. Jetstar to take 787-8s from 2012

Qantas, with 50 firm B787 orders and another 50 or so options/rights, is one of Boeing’s largest clients for the Dreamliner aircraft and gets second billing with the manufacturer after All Nippon Airways, the seed purchaser. The latest move, announced today, will now reverse the order in which Qantas’ LCC subsidiary Jetstar receives the aircraft. This implies an important reshaping of Qantas/Jetstar’s domestic and international strategy.

As a result, the LCC will now be receiving the smaller, first version, the B787-8, instead of Qantas, with eight of them being delivered in the 18 months between mid-2012 and 2014. This is one of a sequence of juggles of the orders, with the first deliveries previously destined for Qantas. Now that Jetstar is taking the B787-8s, the larger A330-200s can be shifted to its big brother, allowing the retirement of the domestic B767-300s.

Preparing for domestic war?

Qantas the mainline carrier is under attack on several fronts now in the domestic market. That’s hardly unexpected, as the Group holds two thirds of its home market and a much larger proportion of the higher yielding corporate business. From there it only has two ways to go: cling on to those market shares, or see them eroded. Its competitors obviously are intent on the latter. And that has to be the most likely outcome as the decade unfolds.

So what today’s announcement implies is a renewed focus by Qantas/Jetstar on its domestic operations, protecting both its leisure share and its premium market. This is necessary. Tiger Airways plans to add substantial capacity in the next two years, targeting the very low price end.

And, under John Borghetti’s new leadership, Virgin Blue must inevitably start ramping up its own capacity domestically, using newer large aircraft, with greater attraction for the corporate traveller. The carrier’s B777s have not yet been applied domestically, instead being put onto long haul, generally low yielding international routes (South Africa being the exception).

With Mr Borghetti’s predilection for yield, these shiny new B777-300s are a disaster waiting to happen for Qantas in the domestic arena, should Mr Borghetti wish; and, even if he chooses not to redirect them for the time being, they are sufficient threat to make Qantas think twice. Not only are they new, but as presently configured they carry 363 passengers in three classes, at very low seat costs. Their main problem in domestic routes is filling all those seats, especially where Virgin is not picking up the business traffic to make them work – but here there is an issue that Virgin Blue has to face right across its operations: to capture that traffic it is going to have to lead with more costs.

Then there is a third shadow in the background. An impending alliance between Virgin Blue and Air New Zealand, with potential to expand over time – probably quickly, now that Mr Borghetti is in the Virgin seat – will further increase the market challenge. The full potential of the single market between Australia and New Zealand hasn’t been exploited yet, but there is plenty of upside there.

Now, as a result of Jetstar moving to take over the B787-8s in 2012, Qantas will be able to drop its geriatric B767s sooner and replace them with Jetstar’s A330-200 hand-me-downs. These are bigger than the B767’s 250-odd seats, currently configured with 297 seats, including “Star Class”, but they are much more efficient and a better passenger product than the aged B767-300s. That will help Qantas restore its operational strength.

The B787 role has been constantly adjusted, as Boeing delays and market changes demanded

The prolonged and unpredictable delays in production of the B787 have created havoc for Qantas, which had based much of its Jetstar long haul/low cost expansion strategy on using the aircraft. It particularly wanted the B787-9, which is longer haul and would have given access to European markets. Those plans have had to be placed on hold and are, in today’s announcement, become secondary to Qantas’ need to ramp up its domestic presence. Being a large customer for the B787 does give Qantas considerable flexibility in its dealings with Boeing, allowing Qantas to shift its plan regularly.

As recently as Dec-2009, Qantas announced that it would be using the B787-8s as replacements for the B767s from 2014 onwards, while Jetstar would use the B787-9 from 2013 onwards, allowing expansion into Europe, North America and new North Asian destinations.

Qantas had always planned to use the B787s to replace the older domestic aircraft. Qantas’ website notes that “The B787 will be ideal for point-to-point flying on medium density short and long haul routes. It will facilitate Jetstar’s growth into Europe and in Asia, be operated by Qantas on services into Asia and, potentially, high traffic Qantas domestic routes. The arrival of the B787 will allow for the progressive retirement of Qantas’ B767 fleet.” The last sentence is a key to the new reshuffling of the orders, from Qantas to Jetstar. Today’s announcement accelerates that process.

Jetstar’s  lower cost B787 product than most medium haul competitors

Boeing’s public “fact sheet” offers the B787-8 with a seating configuration of 210-250 seats. Today’s announcement has Jetstar using the new shorter range aircraft on long haul routes from mid-2012, fitted with 313 seats, including an unspecified number of “Star Class”/business seats.

So, build into that an additional 70-odd seats along with the fact that Boeing  claims a 20% lower fuel burn per seat (and other cost savings) than competitor aircraft and you have an operation that should generate a seat cost perhaps a fifth below its immediate competitors – a remarkable advantage.

Jetstar also shuffles strategy, leaving Europe out for now?

Under the previous schedule, Jetstar was not to start taking the B787s, in the -9 version until well into 2014.

As a result, the carrier will be constrained in terms of the markets it can serve. For example, where the B787-9 could fly non-stop to Europe over the Qantas/Jetstar hub in Singapore, the B787-8 would need another stopover.

The result is therefore presumably therefore to put Jetstar’s Europe plans on hold – or force it to add another stop, probably in the Middle East, not the most attractive of options against one-stop service.

Meanwhile, AirAsia X is providing a one-stop low priced Europe option and will continue to expand its presence in Australia – constrained only by the Malaysian government’s keenness to protect Malaysia Airlines, for example by preventing AirAsia X from operating into Sydney. That is a situation that will surely change over time, placing Jetstar’s competitive edge further at risk.

Also, from early 2014, Air Austral promises to provide its 800-plus seat A380 at the disposal of the Australian and European customers – quite apart from increasingly intensive competition from other sixth freedom airlines in Asia (China’s airlines for example are only starting to recognise the potential) and the Middle East and you have a strategic priority for low price long haul capability that will not go away.

Domestic priority therefore forces refocused international strategy – with long term implications

The pre-eminence of Qantas Group’s attention to its domestic stranglehold is understandable. The high yields it is able to command through its corporate contracts have a double benefit. The direct revenue enhancements are obvious. But this in turn now helps drive Qantas’ massively successful Frequent Flyer Programme, its saviour in last year’s economic slump.

So, as one piece of the picture is adjusted, another of Qantas Group’s complex (but happily wide-ranging in terms of options) strategy will need to be adjusted. Lingering always in the background  is the opportunity to forge deeper partnerships internationally.

Qantas has talked seriously with Malaysia Airlines, Jetstar has a form of alliance with AirAsia (although that seems unlikely to reduce AirAsia X’s competitive threat) and it has friendly relations with the rapidly expanding UAE-based Etihad Airways. Malaysia relations would become very productive in these conditions, while a closer Etihad arrangement could both allow Qantas the luxury of a wide range of codeshared one-stop European destinations and expand its virtual presence at one stroke.

But unless Jetstar is part of such a deal, this would mean that Qantas Group’s international strategy – which largely relies on Jetstar expanding to cover the Group’s long haul needs – could be under the microscope now.

If so, this is a powerful reflection of Qantas’ need to protect its castle. That is both a compliment to its domestic opposition and a very big threat.

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