Qantas' evolving A380 network highlights some of Asia's biggest airline strategic shifts

The insight on the network is from the paperwork Qantas submitted as part of an injunction against Rolls Royce for the Trent 900 uncontained failure that occurred on Qantas flight QF32 in Nov-2010. It shows the change that has occurred in the region and underscores the need for airlines to respond to it, even if it means making unpopular decisions with unions.

Asia's hubbing power at heart of change

In the space of a year Qantas' flagship QF1 service from Sydney to London Heathrow will have passed through three stopover hubs: Bangkok, Singapore and Dubai. Qantas originally envisioned launching A380 services on Melbourne-Singapore-London Heathrow nine times a week, with its second A380 route Sydney-Bangkok-London Heathrow operated daily for a total of 16 weekly services. Qantas would end up only operating 14 weekly A380 services between Australia and London.

While the service between Melbourne and London via Singapore did eventuate (although Melbourne-Los Angeles was the first A380 route), the Sydney to London service was routed through Singapore, not Bangkok. Bangkok has lost some of its stopover allure due to demand, the airport not always operating in a politically certain environment, and Singapore gaining favour due to its larger financial sector as well as Qantas' Jetstar having an operating base there.

At the time of the initial route planning in late 2000, the thought of LCC proliferation in Asia may have been considered a pipe dream. It would still be nearly a year before Tony Fernandes would launch AirAsia, after famously mortgaging his house to cover start-up costs.

In Australia, Virgin Blue as it was called then was young and had yet to force Qantas into a crisis reckoning that resulted in the creation of Jetstar, which would spawn affiliates in Singapore and New Zealand and later Vietnam and Japan (and soon Hong Kong) to begin the framework for a pan-Asian network. That was a pattern replicated by AirAsia and eventually by Tiger, which over time morphed and hybridised to provide connections, effectively creating not a LCC but a network carrier with a low cost base, challenging the industry's acceptance of what a LCC is, and how to cater for it with airport infrastructure.

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QF1's first change, from Bangkok to Singapore, was implemented in Mar-2012 as part of Qantas' halving of Heathrow services from four to two. That saw its monthly capacity at Heathrow drop to about 28,000 seats, the lowest point in a decade. Qantas' capacity at Heathrow built up in 2002 and saw a sharp increase in late 2004, from which point capacity saw few changes, save for dips in late 2009 owing to the QF32 incident that saw the A380 fleet grounded, and then a bump in 2010 with the deployment of A380s between Melbourne and London.

As part of the Mar-2012 change, Bangkok-London and Hong Kong-London were cut, so QF1 (Sydney-Bangkok-London) was assigned to the Sydney-London routing via Singapore. The pull-down reflected Asian hubs losing their European might, primarily to network carriers in the Gulf that offered more efficient connections.

Qantas monthly seat capacity to London Heathrow: Jan-2002 to Dec-2012

Source: CAPA - Centre for Aviation & OAG

It is not Qantas alone that has felt this change. Asia's major sixth-freedom carriers, Cathay Pacific and Singapore Airlines, have seen traffic shifted too, some of it originating in Asia and heading westwards, and other portions from Australia, where they have been large players. Malaysia Airlines in Oct-2012 shelved plans to operate its A380s to Melbourne and Sydney, detecting demand would have been too small with Gulf carriers, and Asian rivals, better positioned.

Asian carriers are changing strategies to place a larger emphasis on intra-Asia connections, where Gulf carriers have no muscle. As part of that, Singapore Airlines formed an alliance with Virgin Australia. To cater for growth, there is great interest in regional subsidiaries, from SIA's established SilkAir to the relatively new Thai Airways unit Thai Smile.

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A new status quo is not settling in, however. Chinese carriers are seeking greater roles in sixth-freedom traffic, not to mention their own connections to mainland China, which Cathay and SIA rely on heavily. Chinese ambitions are represented most boldly by China Southern, whose Guangzhou hub has the same geographic advantages as Hong Kong, just over the border.

Other corridors are opening, too. Air China's Beijing hub gives access to northeast Asia while its Chengdu hub generates traffic links from south Asia. China Eastern has a Kunming hub to work with, as well as a partnership with Etihad that could shake up east-west connections. And there are smaller players, too, like China Southern hubbing out of Urumqi in far western China and Air Astana serving as a link around the growing west Asia, Russia and CIS region.

The second change to QF1, routing via Dubai instead of Singapore, is part of Qantas' partnership with Emirates, pending regulatory approval although Qantas, perhaps too defiantly, insists it will keep the routing via Dubai irrespective of approval for the Emirates partnership. (If approval is not secured, lower-level cooperation could be established that still makes use of Emirates' Dubai hub.) The cause of this seismic shift from Singapore to Dubai, which Qantas says is the largest shake-up in its history, is clear.

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The role of Asian hubs do not however end at the point that Qantas has dropped Singapore for Dubai. Qantas will maintain capacity to Singapore, where services will terminate instead of continuing onwards to Europe. While Qantas' Australia-Singapore capacity will decrease by 7%, connections within Asia will increase since Singapore-bound passengers no longer have the option to connect to London (the Singapore-Frankfurt service will remain until Oct-2013). As the carrier now has to allocate a large share of its Australia-Singapore seats to passengers continuing onto Europe, Qantas says it is effectively increasing by about 40% the number of seats terminating in Asia.

As CAPA previously wrote:

Of Qantas' approximately 2,250 daily one-way seats between Australia and Singapore, Air France estimates it takes 100 Qantas passengers onto its flights while data from Australia's Bureau of Infrastructure, Transport and Regional Economics indicates approximately 1,000 passengers continue on to Qantas' three European services (this excludes passengers taking flights from Darwin, Perth and Melbourne on low-cost subsidiary Jetstar). From 31-Mar-2013, Qantas intends to drop its Singapore-London Heathrow services (Frankfurt will remain until Oct-2013) and the AirFrance codeshare will end, significantly reducing intercontinental connecting opportunities in Singapore. (Qantas will continue to codeshare on Finnair's Singapore-Helsinki service but Australia-Finland is a very small market.)

See related article: Qantas presses ahead with post-Emirates European & Asian restructure as competitors show no leniency

Asian hubs are changing, with hubbing power in some markets (Europe) decreasing while growing in other markets (intra-Asia), and growing not just by increasing existing connections but opening new types, and this will continue to evolve.

As liberalisation makes waves, Qantas contends with open skies to America

Liberalisation of air rights has facilitated Asia-Pacific's growth, although more barriers remain to be broken. Open skies agreements are growing in popularity, and were introduced in one of the region's most lucrative markets: Australia-United States. Where Qantas planned 17 weekly A380 services between Australia and Los Angeles (three from Melbourne and 14 from Sydney), only 14 became implemented, evenly split between Melbourne and Sydney.

At the time of the orignal thought to have 17 weekly services, an open skies arrangement was not being considered. The cosy duopoly, as Qantas' and United's grasp of the market was called, became under such great pressure that Qantas in 2004 introduced non-stop Brisbane-Los Angeles services in a move to placate calls that its limited capacity - with exceptionally high fares - was hurting Australian tourism.

The largest effect from the open skies arrangement was allowing Virgin Blue, via its V Australia unit, to operate between Australia and the United States, which it did so from Feb-2009, when Qantas' monthly capacity to the US from Australia and New Zealand dropped to its lowest point in four years. It has since averaged lower capacity than prior to the open skies arrangement, helping to negate the need for extra A380 services. While Melbourne's own demand profile changed since Qantas originally thought to have only three weekly Melbourne-Los Angeles services, the increased competition - including from V Australia, which serves Melbourne-Los Angeles directly - would have necessitated that Qantas step-up its offering.

Qantas Australia/New Zealand-United States monthly seat capacity: Jan-2002 to Oct-2012

Source: CAPA - Centre for Aviation & OAG
Note: Includes Hawaii services but excludes Jetstar

Although Qantas' capacity fell, the overall market grew and consumers benefited - a similar turn of events happening as Asia continues to push liberalisation, from ASEAN open skies to Japan's breath-taking liberalisation that allowed the entry of LCCs but also gave greater access to Middle East network carriers, a concept still being stonewalled in Canada and Germany.

Japan falls out of favour as China rises

The final network adjustment was the three weekly A380 services between Sydney and Tokyo Narita never eventuating, but a three weekly Sydney-Hong Kong service being implemented. That reflects the change that has occurred over the past decade with Japan's economy slowing while Hong Kong rises. Japan's fall has been evident in the declining Australia-Japan traffic. Where Japan Airlines once operated scores of flights to multiple destinations i Australia, its presence has dwindled to a lone daily service to Sydney.

Qantas' offering to Japan has primarily shifted to lower cost arm Jetstar and 2011 saw the dropping of Perth-Tokyo Narita services, leaving Qantas mainline's only service a daily Sydney-Tokyo Narita offering. Qantas' position and profitability has been able to stay where it is largely due to JAL having an inconvenient daylight service from Sydney whereas Qantas has an overnight service in both directions.

See related article: Australia-Japan open skies agreement fails to gain traction in shrinking market

Qantas' future in Hong Kong is still in its early days, as not only does it have Jetstar Hong Kong launching in 2013, the city will be considered when Qantas undoubtedly re-visits its plan for an Asian-based full-service regional carrier.

Change in A380 cabin configuration also shows trend shift

Qantas' A380 development also reflects the shift in cabin layouts away from first but also business class. For assessment during aircraft selection, Qantas thought a plausible configuration (not yet even a preliminary layout) could be 514-524 passengers in three cabins: 14-18 in first, 96-106 in business and 390-414 in economy. Qantas later decided to include premium economy, making the final original configuration a four-class product seating 450: 14 in first, 72 in business, 32 in premium economy and 332 in economy. The overall capacity was reduced given the extra space required by modern premium seats, but the largest difference was the sharp drop in business class seats.

As part of a retrofit currently underway, the number of business class seats are being further reduced to allow for more premium economy and economy seats. The new configuration is a four-class product seating 484: 14 in first, 64 in business, 35 in premium economy and 371 in economy.

Before Qantas deferred the delivery of its last eight A380s, it decided that tranche would not have first class at all, testament to weakening demand for premium travel as budgets become tightened. Cathay Pacific has taken delivery of a handful of 777-300ERs with business class as the highest class of service, a concept - a long-haul aircraft with no first class - that for some is still jolting. (Although Cathay during the global financial crisis did wonder if premium travel was to see unrecoverable falls.)

What has grown, from almost no base, is demand for premium economy. Although the name implies many different levels of service depending on the airline, Qantas has offered one of, perhaps, the highest level, followed recently by Cathay Pacific's introduction of the class. The premium economy trend is still gaining traction in the region, with some carriers like SIA believing it is not a right fit.

A network of change, not always popular

While deployment changes at Qantas' A380 fleet are reflective of larger industry shifts around Asia-Pacific, they have not always been received warmly at home. The need for change has never been stronger, and there is no better time to implement it when the operating environment is threatening. Yet the most difficult part is often not making the operational adjustment but convincing others of the ideological change that is required.