Royal Brunei Airlines Part 2: long haul growth may resume with London nonstop, Brisbane relaunch

This is Part 2 of an analysis report on Royal Brunei Airlines. Part 1 focused on Royal Brunei's short/medium haul network within Asia and expansion opportunities using the new A320neo fleet.

See related report: Royal Brunei Airlines Part 1: North Asia & India expansion as narrowbody fleet expands with A320neos

In this part CAPA will examine Royal Brunei's long haul network and expansion opportunities in the Australia, Europe and Middle East markets.

Royal Brunei's long haul network consists of only two regular routes

Royal Brunei's long haul network currently consists of only two regular long haul routes - Bandar Seri Begawan-Melbourne, and Bandar Seri Begawan-Dubai-London Heathrow. Both are operated daily with 254-seat 787-8s.

Royal Brunei also operates seasonal services to Jeddah using the 787-8. In the current northern summer schedule Royal Brunei operated two weekly flights for two months - from late March to late May. The last Jeddah flight operated on 23-May-2017, and is scheduled to resume in late Nov-2017.

Royal Brunei tries to schedule 787 heavy maintenance during periods when the Jeddah flight does not operate. The delivery of a fifth 787 in mid-2018 gives Royal Brunei the flexibility to operate the Jeddah flight during periods when one of its 787s is out for maintenance. The fifth aircraft could be used essentially as a spare, improving reliability on the two year-round long haul routes and enabling more flights to Jeddah.

However, Royal Brunei is also looking for new routes for the 787 fleet in order to keep the utilisation rate above 13 hours. A reduction in the utilisation rate would be costly, and potentially result in bigger losses.

Royal Brunei long haul operation remains unprofitable

The long haul operation is already unprofitable, whereas the short haul operation is now in the black. Royal Brunei is therefore focusing mainly on regional growth, as outlined in the first part of this report.

However, Royal Brunei needs to continue operating long haul services for strategic reasons. As the 787 fleet expands, there will be opportunities to make adjustments that should reduce the losses - although profitability is still unlikely.

"For short haul we are there and we'd like to continue to grow that short haul footprint and deliver stronger profit on the short haul sectors", Royal Brunei CEO Karam Chand told CAPA in Jun-2017.

"Long haul is a challenge as we don't have the optimal fleet or the network size. That brings its own challenges as you can't drive a unit cost that will suit the yields in the market."

The fifth 787 provides a bit more scale. However, it will not be easy to generate sufficient additional revenues to offset the cost of the additional widebody aircraft.

Royal Brunei could use the fifth 787 to launch London nonstop flights

Royal Brunei could potentially use the fifth 787 to upgauge regional routes, particularly to slot constrained airports such as Hong Kong, Jakarta, Manila and Shanghai. However, these markets are not quite big enough to support a 70% increase in capacity on a year-round basis.

Royal Brunei therefore also needs to examine potential opportunities to expand and improve its long haul offering. One option under evaluation is upgrading London to nonstop.

The local Brunei-London market is not big enough to support a nonstop flight. The UK is the fifth largest source market for Brunei's tourism industry, but visitor numbers are small (less than 20,000 per year). London is a popular destination for Brunei residents, but Brunei has a tiny population (slightly more than 400,000).

However, a nonstop flight to London would significantly improve Royal Brunei's position in sixth freedom markets. Royal Brunei now offers a two-stop product in connecting markets from London and has to offer aggressive fares to attract passengers.

London nonstop would improve connections to Kota Kinabalu and Melbourne

Kota Kinabalu in the east Malaysian state of Sabah, and Melbourne in Australia, are Royal Brunei's main two-stop markets from London. Royal Brunei has approximately a 17% share of total London-Kota Kinabalu traffic and a 13% share of the much larger London-Melbourne market, according to OAG Traffic Analyser data.

Royal Brunei carries approximately the same number of passengers in the London-Melbourne market as Emirates - and slightly more passengers than Etihad or Singapore Airlines. This makes it virtually tied with Emirates as the second largest competitor in the Melbourne-London market, after Qantas.

Royal Brunei is also the second largest airline in the London-Kota Kinabalu market after Malaysia Airlines, which has a more than 50% share. Kota Kinabalu and the Malaysian state of Sabah have become increasingly popular tourist destinations for Brits. Royal Brunei believes it can attract significantly more Kota Kinabalu traffic by offering a one-stop product.

Its position in the Melbourne-London market would also strengthen significantly. A one-stop product would be more competitive, enabling higher yields and attracting more traffic overall as passengers who will not consider a two-stop option are brought into the mix.

Runway surface upgrade project could enable nonstop flights to London

Mr Chand told CAPA that nonstop services to London will be considered once a runway surface upgrade project at Bandar Seri Begawan Brunei International Airport is completed. The runway surface currently cannot support 787-8s at full payload. "We got to get the pavement strength sorted out. The work is being carried out today", he said.

Once a new grade is determined for the runway surface, Royal Brunei will analyse the Bandar Seri Begawan-London route to make sure it can be operated nonstop year-round without any limitations on passengers or bags. Royal Brunei is somewhat concerned that there could be limitations during winter months when there are strong headwinds - although technically, the 787-8 easily has the range to operate the route.

If operationally the Bandar Seri Begawan-London route is deemed feasible, Royal Brunei will assess the economics of the route closely, including the impact on the Bandar Seri-Begawan-Dubai sector, before determining whether it is able to decouple Dubai and London. "We'd love to do something like that", Mr Chand said. "We just have to look at the economics. We carry a lot of fifth freedom traffic between Dubai and London at the moment."

Royal Brunei to rely more on Asia-Dubai connections if London is decoupled

Royal Brunei will need to continue serving Dubai for reasons of national interest. Dubai could potentially be reduced to less than daily if London is upgraded to nonstop, but the government shareholder is not about to let Dubai be dropped entirely.

Without the London leg, Royal Brunei will lose a large portion of its existing Bandar Seri Begawan-Dubai traffic. Royal Brunei would therefore need to develop new markets, and expand existing one-stop markets, from Asia to Dubai to support a Dubai turnaround service. Royal Brunei has not yet assessed its existing regional network to determine whether it can generate sufficient one-stop traffic to Dubai to replace the Dubai traffic that is now carrying onto London.

Over the past several years Royal Brunei has been focusing mainly on long haul to long haul connections, rather than long haul to regional connections or regional to regional connections. The preference is to continue with the existing strategy, but changes to the long haul network would likely require more short haul feed.

Royal Brunei could resume expansion in Australia

Royal Brunei is also considering resuming expansion in Australia, which could become more feasible if the airline launches nonstop flights to London. Australia is regarded as a long haul market, and requires significant sixth freedom traffic due to the small size of the local Australia-Brunei market.

Australia expansion can potentially be pursued with the new A320neo fleet or with the fifth 787. Sydney can only be operated with the 787, and the type is already used for Melbourne.

However, Brisbane is feasible with the A320neo. Darwin and Perth are feasible with the A320ceo or A320neo, but would benefit from the significantly improved operating economics of the A320neo on routes of more than four hours.

Royal Brunei has previously served Brisbane, Darwin, Perth and Sydney. It has also previously served Auckland in New Zealand. Melbourne has been Royal Brunei's only destination in Australasia since late 2011, when it dropped Auckland, Brisbane and Perth as part of a major network restructuring. Darwin and Sydney were dropped in 2008.

Royal Brunei currently has slightly less than 1,800 one-way seats to Australia/New Zealand, compared to nearly 5,000 weekly seats prior to the 2011 restructuring.

Royal Brunei weekly one-way seat capacity to Australia/New Zealand: Sep-2011 to Sep-2017

Source: CAPA - Centre for Aviation & OAG.

Royal Brunei has focused on Melbourne in the past five years

In 2012 Royal Brunei decided to focus on Melbourne, upgrading the route from four weekly flights to daily and rescheduling it to maximise connections. The current schedule includes seven hours of ground time in Melbourne every day, which is not ideal from an efficiency standpoint, but provides fast connections to Dubai and London in both directions.

More than 70% of Royal Brunei's Melbourne passengers transfer beyond Brunei, with London the most popular destination. While Australia-Brunei is a very small local market, the airline strategically needed to maintain one Australia route in order to help feed its daily London service and keep its widebody fleet sufficiently utilised.

Royal Brunei's capacity to Australia - and its overall system-wide capacity - have been flat the past five years. Since the beginning of 2012 the airline has operated at a system-wide ASK level approximately 30% below 1H2011 levels.

Royal Brunei's Australia operation peaked in 2011, when it generated 293,000 seats and flew 180,000 passengers to and from Australia. In 2016, the airline flew only 130,000 passengers to and from Australia and generated 184,000 seats, with an average load factor of 71%.

Royal Brunei Airlines annual passenger traffic and average load factor to/from Australia: 2007 to 2016

Source: CAPA - Centre for Aviation and BITRE.

Royal Brunei has been satisfied with its performance in Melbourne over the past few years, despite having to rely heavily on transit traffic on highly competitive city pairs. "We are totally happy with Melbourne. It's done well", Mr Chand said.

Brisbane is the most likely Australia route to resume

Royal Brunei's Australia performance has improved enough to consider resuming expansion. Several destinations in Australia could potentially be resumed, but Brisbane seems to be the highest priority.

"The neo brings Brisbane into the mix", Mr Chand said. "We did Brisbane before so we will relook at it pretty hard."

Royal Brunei is closely assessing the economics of operating the A320neo on Bandar Seri Begawan-Brisbane to determine whether it can generate sufficient revenues and yields to cover the relatively high cost of a seven hour narrowbody flight. As most of its traffic from Brisbane would transfer beyond Brunei on highly competitive city pairs such as Brisbane-London and Brisbane-Bangkok, the average yield may not be sufficient to cover the operating costs and justify launching the route.

As CAPA highlighted in the first instalment in this series of reports on Royal Brunei, new destinations in North Asia are generally the focus as the airline expands its narrowbody fleet from six to nine aircraft by early 2019. Brunei-North Asia is mainly a point-to-point market, potentially offering higher yields than Brunei-Australia, given that Royal Brunei will have to rely mainly on low yielding transit traffic from any new Australia destination.

Brisbane would feed London

The potential launch of nonstop services from Brunei to London could sway Royal Brunei to resume Brisbane, despite the relatively bleak yield prospects for the Brisbane-Bandar Seri Begawan route.

Royal Brunei would need more than just Melbourne and Kota Kinabalu traffic to fill up Bandar Seri-Begawan-London. Royal Brunei could rely more on some of its existing regional destinations, including Bali and Manila. Royal Brunei currently has only approximately a 1% share of London-Bali traffic, and an even smaller share of the London-Manila market, according to OAG Route Analyser data.

However, Royal Brunei do not have many empty seats to Bali and Manila as Bali is a popular connecting point from China, while Manila is a large local market. Royal Brunei may also need to allocate some of its Manila capacity to Dubai if Dubai becomes a dedicated turnaround service. Brisbane is ideal, given the large size of the Brisbane-London market and the fact that Brisbane-Brunei is a tiny local market, enabling Royal Brunei to allocate a large proportion of Brisbane-Brunei capacity to London.

Brisbane would also help support potential new flights to southern India. India-Australia is a large and fast-growing market, but is relatively underserved. Royal Brunei could offer among the fastest connection times from Melbourne and Brisbane to southern India, and would have highly competitive fares.

Royal Brunei resumes capacity expansion

Mr Chand expects overall ASKs to grow by 25% as Royal Brunei's fleet is expanded. This would still put ASKs slightly below their peak level in 2011. However, seat capacity and passenger numbers will be higher than 2011 levels, reflecting a much larger concentration of short and medium haul capacity compared with those before the late 2011 restructuring.

Royal Brunei's annual passenger numbers peaked at 1.321 million in 2010. The airline carried 1.16 million passengers in 2016 and is on pace to carry almost 1.2 million in 2017. In 1H2017 the passenger numbers were up 2%, to 581,000. Passenger numbers could potentially reach 1.5 million by 2019.

Royal Brunei passenger numbers and year over year growth: 2008 to 1H2017

Source: CAPA - Centre for Aviation and AAPA.

Royal Brunei is still by all measures a small flag carrier. However, the resumption of expansion over the next two years is impressive, given the tiny size of the Brunei market and intense level of competition in the Asian marketplace, including most of its one-stop city pairs.

Profitability continues to improve

Profitability has also improved significantly since the 2011 restructuring. The suspension of several long haul routes and reduction/renewal of the widebody fleet, from six 777s to four 787s, has been a key contributor to the turnaround.

Royal Brunei exceeded the targets set in the initial five-year business plan after the restructuring. Mr Chand said the airline is now tracking ahead of targets in the second five-year plan, which began in Apr-2016.

The short haul operation is in the black, and should become even more profitable as the narrowbody fleet is renewed and expanded, leading to a high level of efficiency and improved economies of scale. The biggest challenges remain with the long haul operation, which continues to be loss making, leading to overall losses at the airline.

Decoupling Dubai and London would be a bold decision that could potentially lead to even steeper losses. However, it may be a gamble worth taking as Royal Brunei tries to carve out a sustainable niche and improve its position in a highly competitive market.