19-Mar-2012 11:46 AM

Royal Brunei settles in for medium term with expanded Australian services

Analysis

Royal Brunei Airlines (RBA) this month is increasing capacity to Melbourne and adjusting the schedule there in a bid to generate scale and improved financial performance. The government-owned carrier is settling into its restructured route network that in mid-2011 saw many loss-making long-haul routes eliminated, which RBA deputy chairman Dermot Mannion says is helping create financial stability as costs decrease and cash flow improves. The carrier will continue to monitor its regional network but is unlikely to open new destinations, preferring instead to add capacity when opportunities arise.

The restructure left RBA with significant excess capacity on its widebody Boeing 777 fleet but RBA later this year will return two of its six leased 777s and retain the rest until 787s arrive in late 2013. RBA expects the aircraft, combined with a new interior and redevelopments at Bandar Seri Begawan Brunei International Airport, will give the carrier a boost after high fuel prices and increased competition made it undertake the restructure and staff retrenchment.

Summary

Royal Brunei Airlines (RBA) is increasing capacity to Melbourne and adjusting the schedule to improve financial performance.
RBA is settling into its restructured route network, which saw loss-making long-haul routes eliminated in 2011.
RBA will return two of its six leased Boeing 777s later this year and retain the rest until the arrival of Boeing 787s in late 2013.
The Melbourne route is important for RBA as it connects with RBA's daily Brunei-Dubai-London Heathrow service.
RBA's Melbourne route also optimizes connections to Manila, Bangkok, and Kota Kinabalu.
RBA's long-haul network is built around its London Heathrow slots, and the carrier is not concerned about under-utilization of its long-haul fleet.

Melbourne goes to daily same-time service with connections optimised for Dubai and London Heathrow

RBA launched four times weekly service to Melbourne in Mar-2011, complementing its existing services to Brisbane and Perth as well as New Zealand's Auckland, all three of which were cut during the restructure. RBA said it was keeping the Melbourne service given the city's strategic importance and growth rate - the largest internationally in Australia.

From 25-Mar-2012, RBA will bring the service to a daily, same-time offering. RBA's initial schedule was erratic, with two flights leaving past midnight and two during the day. Mr Mannion, speaking earlier this year when announcing the increase, explained the change with an industry adage: "If it's worth doing, it's worth doing daily."

Royal Brunei Airlines Brunei-Melbourne schedule: 25-Mar-2012

Route	Depart	Arrive	Frequency
Brunei-Melbourne	11:50	20:45	Daily
Melbourne-Brunei	12:25	17:35	Daily

Although Melbourne is a monopoly route for RBA, transfer traffic accounts for 90% of RBA's long-haul service, and the Melbourne flight is timed to connect with RBA's daily Brunei-Dubai-London Heathrow service. RBA's long-haul network is built around its London Heathrow slots, creating a lengthy overnight stay in Melbourne for the aircraft, but Mr Mannion says RBA's long-haul fleet has slack and he is not concerned about under-utilisation - especially as profitable long-haul routes prove elusive.

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RBA had competed in the kangaroo route for traffic between Australia and London, but typically had to price below cost given the two stops in Brunei and Dubai. Its restructure saw it turn away from the very competitive, and often low-yielding kangaroo route, but Mr Mannion says it is worth keeping the connection.

Potentially more lucrative is the carrier's one-stop service to Dubai from Melbourne. Only one of Emirates' three daily flights from Melbourne goes non-stop to Dubai; the other two connect via Kuala Lumpur and Singapore. There is less competition to Dubai than Europe, and Australia-Middle East fares - on Emirates, Etihad or Qatar Airways - are often slightly less than extending the trip to Europe. The demand profile works in RBA's favour as Mr Mannion says the carrier has strong demand between Dubai and London owing to a good traffic base in Dubai it has accumulated since launching services in 1988.

Cargo is also a notable factor for RBA's Melbourne route. Although most cargo out of Australia is produce and not higher value items, RBA has had to leave cargo on the ground at times.

RBA's capacity increase will see the Southwest Pacific region tie with Europe as holding the carrier's third largest number of seats by destination. RBA's Southwest Pacific capacity currently only sees the four-weekly Melbourne services.

Royal Brunei Airlines international capacity by region (seats): 19-Mar-2012 to 25-Mar-2012

Melbourne route also optimised for Manila, Bangkok and Kota Kinabalu connections

A greater significance for RBA's Melbourne route is onward connections in Asia, which more typically turns a profit for the airline. About 75% of the traffic on intra-Asia flights is O&D, with the remaining 25% accommodating intra-Asia connecting passengers and long-haul transfer traffic.

RBA's traffic is heavily weighed towards the VFR and ethnic markets. Mr Mannion says demand is particularly strong to the Philippines, where RBA serves Manila daily. While Philippine Airlines operates seven weekly services from Melbourne, Jetstar has also seen the potential of the Filipino market with four weekly services from Darwin. Filipino LCC Cebu Pacific intends to launch long-haul flights to Australia as well as the Middle East in late 2013.

Mr Mannion also says Bangkok and Malaysia's Kota Kinabalu are in demand connections. The Australia-Thailand market will see reductions later this month when British Airways (BA) ends 747 service between Bangkok and Sydney while Qantas downgrades its Bangkok-Sydney service from a 747 to an A330. BA and Qantas had used the route primarily for onward traffic to London, so while capacity is being reduced, Qantas will now have to place greater emphasis on selling Bangkok as an O&D market and not a transfer point.

Out of Melbourne Jetstar, in addition to Thai Airways, operates to Bangkok. RBA has had a reputation for being a discount full service carrier and intends to maintain its position of competing with the likes of AirAsia X and Jetstar in offering full service carrier service for less, even if its operating cost is higher. Mr Mannion said RBA's restructure intentionally trimmed the carrier's size but not service.

RBA over the last year has grown service to Kota Kinabalu, which is part of Malaysia but like Brunei on Borneo. The city, a hub for ecotourism growing in popularity, is one of the fastest growing airports in Malaysia. RBA's capacity has increased from eight weekly services in 2011 to presently 15 weekly services.

Royal Brunei Airlines top 10 international routes (seats per week): 19-Mar-2012 to 25-Mar-2012

One destination RBA's Melbourne flights do not connect well to is Singapore, but Mr Mannion says the market, which RBA serves with two daily flights, is one of the carrier's highest in terms of point-to-point traffic. "We have a large proportion of our traffic originating in Brunei or destined for Brunei, so that route to Singapore doesn't need external feed. It's a substantial trunk route," Mr Mannion says.

RBA this month is seeing the introduction of another A320 that brings its Airbus narrowbody fleet to five. Expansion will mainly come on adding frequency to existing destinations than open new routes.

Losses stemmed but profitability awaits

RBA's long-haul network was almost entirely transfer traffic and loss-making; the government was effectively subsidising traffic that did not benefit the country and decided to end that standing. "Our ownership, and rightly so, doesn't see any future in incurring losses on routes where over 90% of the traffic doesn't connect to Brunei" as an origin or destination, Mr Mannion said. "There's no strategic rationale at all for it. We're now operating in an environment where our route network needs to stand much more on its own two feet."

Although RBA would like to increase the percentage of local traffic on its long-haul flights, Mr Mannion does accept that transfer passengers will comprise the far majority. "I think 20% [local] would be a terrific target but I very much doubt if you could do more than that," he said. "Let's be realistic. Brunei is a small market. There are only 400,000 people there. In order to launch the kind of international operations we have, there is always going to have to be a significant reliance and dependence on transfer traffic, and we don't apologise for that."

The small market size Mr Mannion mentioned is reflected in the capacity profile of Brunei Airport, the country's sole passenger airport and where it accounts for 70% of all capacity. Only four other airlines currently serve Brunei.

Bandar Seri Begawan Brunei International Airport capacity (seats per week): 19-Mar-2012 to 25-Mar-2012

While Mr Mannion says RBA's remaining long-haul routes from the restructure - Dubai, London and Melbourne - are important for the airline, he acknowledges they are important for the Government too.

RBA is not publicly discussing a return to profitability, but Mr Mannion says the restructure is bringing stability and reducing costs. Further savings will be achieved when RBA returns two of its 777s later this year.

Reduced international network allows for returning of two 777s

RBA leased six 777-200s from Singapore Airlines (SIA) in 2010 to allow it to retire ageing 767s, which were supposed to be directly replaced by 787s, which have encountered numerous delays. RBA's reduced international network will allow it to return two of the leased 777s - one third of its long-haul fleet - in mid-2012 as the original contract stipulated, and not earlier as RBA had explored. All five of RBA's 787s are due for delivery by the end of 2014, by which point most of the remaining 777s will have been returned. RBA will have flexibility with the 777 fleet in the event of further 787 delays.

787s to further help stabilise finances

RBA's first 787 is due around Aug-2013, although further delays are likely given recent Boeing delays for other customers. The aircraft will feature a new interior - its leased 777s use SIA's old interior - RBA is currently developing. Mr Mannion says RBA wants to connect the interior with the themes of Brunei - tranquility, rejuvenation, peace - as part of an effort to build local traffic into Brunei.

RBA is the 787's launch operator in southeast Asia and, assuming current delivery schedules, expects its entire long-haul network to be flown by 787s by the end of 2014. Its London route will remain a one-stop service via Dubai given the traffic importance, Mr Mannion said. Even if RBA wanted to operate non-stop, Mr Mannion said, the 787 would not be able to fulfill the mission. "The 787 is not capable, and nor designed to be. We never bought it with that in mind."

The aircraft will bring not only a step change in efficiency but also reduced capacity from the 777-200s, which will better match RBA's demand profile. The 787-8, the only variant RBA has ordered, seats 240 in a standard two-class configuration while the 777-200 seats 400 in a standard two-class configuration. (These figures are typically high; RBA seats 285 in its 777-200. Of the 787 configurations airlines have announced so far, most are under 200 seats in a two-class configuration.)

See related article: Announced 787 configurations

RBA's order for five 787s provides more than coverage to accommodate its long-haul schedule. Mr Mannion previously told CAPA he expected to operate the 787 on high-demand Asia routes like Shanghai.

Under more hubristic times RBA had agreed with Boeing to take 777-300ERs, but Mr Mannion said the reduced long-haul flying has eliminated the need for the aircraft. "RBA did have a contract for four 777-300ERs but we will not be taking delivery of those aircraft," he said. "We're in negotiation with Boeing how to resolve that."

Royal Brunei Airlines route map: Mar-2012

Regional emphasis right strategy for Royal Brunei

Airlines globally are increasingly realising that supporting unprofitable long-haul flights is unsustainable, especially as fuel prices and competition increase. RBA has the right strategy to emphasise regional routes. While the additional Melbourne flights will add significant long-haul capacity, history shows daily services and same-time frequency do let airlines leverage scale. RBA's short-haul network is more robust and the carrier will be carefully watching its markets to see where it can add capacity. The 787 offers the biggest opportunity for RBA to improve its long-haul network, provided the Brunei Government is still willing to accept Dubai, London and Melbourne as strategic destinations.