SE Asia-London: Royal Brunei launches new competition

Summary

• Royal Brunei is decoupling Dubai and London by launching daily nonstop flights in Oct-2018 to London and introducing four weekly turnaround flights to Dubai.
• The new nonstop flight to London is made possible by the delivery of a fifth 787-8 and crew bunk retrofits.
• The new nonstop London service will improve Royal Brunei's competitiveness in the Southeast Asia-London and Melbourne-London markets as travel times are reduced significantly.
• The new nonstop London service is part of a major expansion for Royal Brunei which also includes regional expansion, which will help feed London and Dubai.
• Royal Brunei will rely heavily on sixth freedom traffic to fill its new London nonstop flights and Dubai turnaround flights but also expects an increase in local traffic as Brunei works to double visitor numbers over the next four years.

Royal Brunei confirms launch of London service

Royal Brunei Airlines announced on 22-May-2018 plans to launch daily nonstop services from its Bandar Seri Begawan hub to London Heathrow on 28-Oct-2018. Royal Brunei currently operates daily services to London via Dubai and will serve Dubai with four weekly turnaround flights after the new nonstop London service is launched.

The announcement was not a surprise. CAPA reported in a Sep-2017 analysis reports that Royal Brunei was looking at using the delivery of a fifth 787-8 in mid 2018 to decouple Dubai and London.

"Royal Brunei could upgrade its daily London Heathrow service to nonstop following the delivery of a fifth 787-8 and the completion of a runway surface improvement project at Bandar Seri Begawan," CAPA stated at the time. "The expansion of the 787 fleet in mid-2018 provides an opportunity for Royal Brunei to resume long haul growth, following a major network restructuring and reduction in the widebody fleet in the early part of this decade. Dropping the Dubai stop on the Bandar Seri Begawan-London route would significantly improve Royal Brunei's product in the Melbourne-London market and other smaller sixth freedom markets, such as Kota Kinabalu-London."

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

Royal Brunei to install 787 crew bunks ahead of London nonstop launch

It became clear Royal Brunei was moving forward with proposed nonstop flights to London in early 2018 after Boeing announced at the 6-Feb-2018 Singapore Airshow an agreement with Royal Brunei covering five 787-8 overhead flight crew rest retrofits. Boeing stated at the time the retrofits will be completed at its Shanghai maintenance facility and enable the airline to operate long haul routes.

Most 787s are delivered with crew bunks but some operators decide against the option if they do not intend to use the aircraft for any long haul flights. The crew bunks are above the cabin in an area that is not otherwise used however an empty space in the cabin is required for hatches, therefore resulting in fewer passenger seats.

Royal Brunei's 787-8s currently have 254 seats, including 18 lie flat business class seats and 236 economy seats. Royal Brunei will likely need to reduce its business class cabin by two seats and its economy class cabin by three seats to make room for the hatches required to access the two new crew bunks (one for pilots at the front and one for flight attendants at the back).

As CAPA sister publication Blue Swan pointed out in a Feb-2018 analysis: "The loss of five seats is not significant given Royal Brunei's low average load factor and the fact that upgrading London to nonstop should improve the airline's average yields and overall position."

See related report from CAPA sister publication Blue Swan: Royal Brunei Airlines could launch nonstop flights to London following 787 crew bunk retrofit

Royal Brunei to operate Dubai as a turnaround service

Royal Brunei currently uses its fleet of four 787-8s to operate daily year-round services on Bander Seri Begawan-Dubai-London Heathrow and Bander Seri Begawan-Melbourne. These two routes essentially require three aircraft.

The fourth 787 is used for seasonal services to Bander Seri Begawan to Jeddah in Saudi Arabia and during certain periods some regional flights. The current 787 schedule includes two weekly flights to Jeddah, three weekly flights to Hong Kong and one weekly flight to Singapore. When the Jeddah and regional flights do not operate the fourth aircraft is used as a spare to cover for maintenance.

With a five aircraft fleet, Royal Brunei is able to decouple London and Dubai while maintaining Melbourne and Jeddah. It should also have the capacity to continue operating some regional flights with 787s, which is sensible during peak days to slot restricted airports. The Jeddah route, which is currently operated most of the year with two weekly flights, caters mainly to local religious traffic while Melbourne, Dubai and London rely heavily on sixth freedom traffic and (on the Dubai-London leg) fifth freedom traffic.

Dropping Dubai entirely was not an option. "Royal Brunei will need to continue serving Dubai for reasons of national interest," CAPA stated in the Sep-2017 report. "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."

The new four times weekly turnaround flight will result in more local Brunei-Dubai capacity than the current daily flight as a majority of Brunei-Dubai passengers now continue to London. However, Royal Brunei should still be able to achieve decent load factors on the four turnaround flights by pursuing more sixth freedom traffic. Bali, Manila, Melbourne and Surabaya will particularly be targets for feeding the Dubai service and will also help fill up the new nonstop Bandar Seri-Begawan-London flights.

Royal Brunei will be the seventh SE Asian airline to serve London

Royal Brunei will become the seventh airline from Southeast Asia operating nonstop flights to London compared to only three airlines seven years ago. Garuda Indonesia, Philippine Airlines (PAL), and Vietnam Airlines now compete in the Southeast Asia-London nonstop market along with longstanding competitors Malaysia Airlines, Singapore Airlines (SIA) and Thai Airways.

Vietnam Airlines launched services to London in Dec-2011 followed by PAL in Nov-2013 and Garuda in Sep-2014. All three airlines initially served Gatwick but subsequently were able to secure slots at more popular Heathrow. Garuda initially served London via Amsterdam and subsequently via Singapore but began operating nonstop return flights in the Jakarta-London market on 31-Oct-2017.

Offering a nonstop product is important as it results in one-stop connections to other destinations in Southeast Asia as well as to Australia. Garuda, PAL and Vietnam Airlines are now relying heavily on Australia to help fill its London flights, although they need to accept low yields to secure traffic in the highly competitive Australia-London market.

Royal Brunei upgrades Melbourne-London to one-stop

Royal Brunei is now a relatively large competitor in the large Melbourne-London market, capturing over 10% of total traffic despite its current two-stop product. However, Royal Brunei has to accept lower yields than its Southeast Asian competitors in order to attract passengers. Melbourne has been Royal Brunei's only destination in Australia since a 2011 restructuring while its Southeast Asian competitors all have multiple destinations in Australia.

Royal Brunei stated in the 22-May-2018 announcement that it will reduce return travel time between Melbourne and London by over 5 hours as it introduces nonstop flights to London. Travel time between Brunei and London will also reduce by 3.5 hours but the shorter times in the Melbourne-London market are more important because it will give Royal Brunei a product which is similar to competitors while it already has the quickest transit times in the much smaller Bander Seri Begawan-London market.

Royal Brunei is re-scheduling its Melbourne flights as it introduces nonstop flights to London. The current Melbourne flights connect relatively well with Bandar Seri Begawan-Dubai-London but Royal Brunei has had to change its London timings to accommodate the nonstop service, necessitating a change in Melbourne.

Under the new schedule, Royal Brunei is offering a total transit time of 23hr10mins from Melbourne to London and 24hr55mins from London to Melbourne. Currently the total transit time is 27hr10mins from Melbourne and 26hr15min from London.

Royal Brunei offers attractive fares between Melbourne and London

Royal Brunei is currently selling Melbourne-London flights in Nov-2018 for slightly more than USD700 return including taxes. Royal Brunei and PAL are generally the cheapest option.

However, several airlines are only slightly more expensive. Emirates, China Southern and Malaysia Airlines have Melbourne-London fares starting at about USD800 return. The cheapest fares on several other competitors start at about USD900 including British Airways, Etihad, Qantas, Qatar, Singapore Airlines (SIA), Thai Airways and Vietnam Airlines.

Malaysia Airlines, SIA and Thai have always been large players in the Australia-London market but have experienced market share declines as airlines from the Middle East and North Asia have expanded in Australia. Qantas is also of course a significant player and now offers the only nonstop service from Australia to London (from Perth) along with one-stop services from Australia's four main cities via Singapore. In the Melbourne-London market, Qantas now offers one-stop service via Perth on the 787-9 and one-stop service via Singapore using the A380.

Royal Brunei will be eleventh airline overall with SE Asia-London nonstops

Qantas resumed Singapore-London Heathrow services in Mar-2018 as it suspended Dubai-Heathrow. In addition to competing in the local Singapore-London market Qantas is able to offer one-stop connections from other destinations in Southeast Asia using LCC affiliate Jetstar Asia. However, Qantas is a relatively small competitor in the Southeast Asia-London market as most of its Singapore-Heathrow passenger originate in Australia.

Qantas is now one of 10 airlines operating nonstop flights between Southeast Asia and London. Royal Brunei will become the eleventh airline with Southeast Asia-London nonstops, joining the six Southeast Asian airlines mentioned earlier as well as Qantas, British Airways, Norwegian and EVA Air.

Southeast Asia-London nonstop one-way seat capacity by airline: 21-May-2018 to 27-May-2018

Rank	Airline	Seat Capacity	Capacity share
1	Singapore Airlines	9,576 seats	24%
2.	British Airways	8,337 seats	21%
3	Thai Airways	6,097 seats	15%
4.	Malaysia Airlines	4,032 seats	10%
5.	Qantas Airways	3,388 seats	8%
6.	Philippine Airlines	2,590 seats	6%
7.	EVA Air	2,310 seats	5%
8.	Vietnam Airlines	1,704 seats	4%
9.	Norwegian Air UK	1,352 seats	3%
10.	Garuda Indonesia	1,131 seats	3%

Norwegian entered the Southeast Asia-London nonstop market in Sep-2017 as it launched services from Singapore to Gatwick, becoming the first LCC in the market since AirAsia X suspended Kuala Lumpur-Gatwick service in early 2012. British Airways is a much larger competitor and has grown in Southeast Asia, primarily by adding Kuala Lumpur in 2015 to supplement its longstanding services to Bangkok and Singapore.

Taiwan-based EVA competes against BA and Thai on the Bangkok-London route with fifth freedom rights as part of a service that originates in Taipei. EVA's competitor China Airlines (CAL) launched nonstop services from Taipei to London in late 2017, which could pressure EVA to upgrade its London service to nonstop.

East Asia-London capacity increases rapidly

CAL is one of five North Asian airlines to launch nonstop flights to London over the last six years. China Southern began serving London in 2012, followed by Tianjin Airlines in 2016, Beijing Capital Airlines, CAL in 2017 and Hainan Airlines in Mar-2018.

North Asia-London nonstop seat capacity will exceed 110,000 return seats during peak periods this summer, representing approximately a 10% increase compared to summer 2017 and a more than 20% increase compared to summer 2016. While North Asia-London passengers generally do not transit in Southeast Asia, the rapid growth in the North Asia-London market has impacted Southeast Asian airlines as more North Asian airlines have started to compete in the Australia-London market.

Southeast Asia-London nonstop seat capacity will reach approximately 85,000 weekly return seats during peak periods this summer. This also represents growth of approximately 10% compared to summer 2017. The growth rate is less than 10% compared to summer 2016 but is approximately 30% compared to summer 2015.

Northeast Asia to London one-way total nonstop seat capacity: Sep-2011 to Aug-2018

Source: CAPA - Centre for Aviation & OAG.

Nonstop link to London to boost Brunei tourism efforts

Royal Brunei will add just under 1,800 one-way seats to the Southeast Asia-London nonstop market. This will drive a further 4% increase in total Southeast Asia-London capacity.

The launch of nonstop services to Heathrow is strategically important to Royal Brunei and Brunei as a country. Brunei has embarked on a major initiative to boost tourism, aimed at increasing the number of visitors to 500,000 by 2021.

Brunei recorded 259,000 visitor arrivals in 2017, representing an 18% increase over 2016. Royal Brunei and its government shareholder expect the nonstop London flights will be an enabler for increasing tourism from the UK and Europe although Asia is its main source market.

The UK accounts for less than 5% of visitors to Brunei. Malaysia, China, Philippines, Indonesia and Singapore are the top five source markets and combined account for two-thirds of total visitors to Brunei.

Sixth freedom traffic will be critical

London is also a popular destination for Brunei residents. Outbound traffic is relatively limited given Brunei's tiny population (less than 500,000) but Royal Brunei expects by offering a nonstop link will boost cultural, economic and political ties.

However, even factoring in significant outbound and inbound growth in the local market, Royal Brunei will need to rely heavily on sixth freedom traffic.

As Royal Brunei is a small airline it will have to rely a much smaller number of city pairs to feed its new nonstop flights to London compared to the other Southeast Asian airlines. This will result in a disproportionate impact on the small number of London city pairs Royal Brunei competes in - namely Bali, Kota Kinabalu, Manila, Melbourne and Surabaya.

Royal Brunei has 15 destinations in Asia Pacific but the other 10 destinations require significant backtracking and are served nonstop from London by other airlines. Of the five city pairs targeted, only Manila has nonstop services but Royal Brunei has the ability to offer a competitively priced service with a total transit time that is only a couple hours longer than the nonstop option.

Feeding London will be a factor as Royal Brunei adds short haul flights

As highlighted earlier in this report, Royal Brunei will reduce total return transit time in the Melbourne-London by over five hours compared to its current one-stop product. Royal Brunei will similarly reduce transit times in the Kota Kinabalu-London and Manila-London markets.

Royal Brunei already operates evening departures from Bander Seri Begawan to Bali, Kota Kinabalu, Manila and Surabaya that connect well with the new nonstop from London, which lands in Brunei in the early evening.

In the opposite direction, Royal Brunei already has flights from Kota Kinabalu and Manila that land in Bander Seri Begawan in the late evening, resulting in quick connections to the new nonstop from Brunei to London departing slightly after midnight. However, Royal Brunei will need to adjust its schedules from Bali and Surabaya (perhaps by adding frequencies) in order to offer a decent connection from these markets to London.

Royal Brunei is expanding its narrowbody fleet from six to nine aircraft in 2018, which will give it the capacity to add flights to existing destinations as well as launch new destinations. The airline is slated to take seven A320neos this year while returning four of its six A320ceos, resulting in narrowbody fleet of seven A320neos and two A320ceos compared to a current narrowbody fleet of six A320ceos.

See related report: Brunei: SE Asia's smallest market, and its national airline, poised for rapid growth in 2018

London will be a factor in deciding additional short-haul flights to existing destinations and new destinations. For example, Royal Brunei is considering resuming services to Brisbane with its new A320neo.

Brisbane becomes feasible as London becomes nonstop

Brisbane-Brunei is a very small market but the route could be viable with new generation narrowbody aircraft when factoring in quick connections to London. CAPA stated in the Sep-2017 report that: "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."

However CAPA pointed out 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."

Brisbane would also connect with potential new services from Brunei to southern India, which Royal Brunei is looking at launching using the improved range of the A320neo fleet. "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," CAPA stated in the Sep-2017 report.

London nonstops is strategic and nationalistic but not profit driven

Royal Brunei's decision to launch nonstop flights to London is sensible and will raise Brunei's profile as a country. Royal Brunei is planning to introduce improvements to its inflight product to coincide with the new service and is also pursuing significant expansion of its regional network this year, which will should help the long-term viability of the London service and help Brunei achieve its tourism goals.

However, the profitability prospects of the Bander Seri Begawan-London route are bleak. Southeast Asia-London and Australia-London are highly competitive markets.

The three newest entrants from Southeast Asia - Vietnam Airlines, PAL and Garuda - have all incurred significant losses so far in the London market. Royal Brunei will face the same challenges and could have an even harder time given the tiny size of its home market and its lack of scale.