Airline CEO Interview - Jetstar Airways

Transcript

Peter Harbison:

(silence)

Gareth Evans, CEO of Jetstar. Welcome to CAPA Live for March. Great to see you again, Gareth.

Gareth Evans:

Thanks Peter. Good to see you too. It's been a while.

Peter Harbison:

Hasn't it? Just. Aviation is usually pretty boring industry, but it's been very interesting recently, isn't it?

Gareth Evans:

I wouldn't agree with the normally pretty boring. It's normally pretty exciting, but it's been super exciting or super challenging, perhaps is a better way to put it, over the last 12 months.

Peter Harbison:

Yes, that was a bit a timing on it. But at the moment, I was eating out last night, actually at a restaurant, and the waiter who was from Melbourne said, "I've just been down to Melbourne and then I flew back to Sydney and then I flew up to Brisbane. It's fantastic." It's just like life again. So it must feel that in spades for you.

Gareth Evans:

I think you're right. Obviously it's been a tough 12 months and I'm sure we're going to touch on some of the aspects of that. But right now, it does feel more optimistic than it has done since this time, last year. And lots of people that I've bumped into are saying the same things. I've been down to Melbourne now, four weeks, three weeks out of the last fall.

People are starting to come back into the office in Melbourne because the mask wearing came off this week, and the caps on the number of people you can have in the office increased. And there's a level of optimism there now, and what people want to do as they return their lives, it's a whole range of things they want to do.

But one that's right up there is travel. And they know that's going to be domestically, first of all. But they want to go and see their friends, they want to go and see their grandma, or their auntie, or their parents. And everybody deserves a bloody holiday right now as well. So they want to do that too. So it's coming back into the conversation again, and people are getting excited for the first time in 12 months, I think.

Peter Harbison:

Yeah, it's been difficult from a consumer point of view, hasn't it? Obviously, from an airline point of view. But when we had the first flush of spring, a couple of months ago before Christmas, and then you had this big sale and massive surge of interest in buying on that. Reopening, presumably it's been a bit more restrained from the consumer side because of the concern that gates might close again very quickly. Is that what you've experienced?

Gareth Evans:

It depends, I think is the answer. So you're right, we had a bit of a surge of optimism. Well, just prior to Christmas, because everybody wanted to go and travel at Christmas, understandably. And the Avalon cluster impacts we're at the worst time of the year possible. I think it's the 18th of December that the first one was announced. And that was just as people were about to go on the Christmas holidays. And that threw everything into disarray for most people in most States where we're impacted.

And we were hoping to fly circa 80% of pre-COVID levels in December. And we ended up flying, I think it was 45%, and so, massive disruption. And people, in a sense, it has become the new normal to a certain extent. People, many people, have their plans disrupted and dealt with it. And we've tried to be as flexible as possible with everybody and help them through it.

But what we're seeing now is where borders, and we're seeing before as well, where borders are open and there are no restrictions, people are booking. It's really strong, 10 to 20% above pre-COVID levels of bookings for leisure.

Peter Harbison:

Yes.

Gareth Evans:

But where borders are closed or there are restrictions, bookings are zero. So if people feel they can go, they want to go. If people have any sort of restriction hanging over them, understandably, they're going to hold on and wait to see what happens. But right now, with all the borders open, pretty much, it's looking very positive from a booking perspective.

Peter Harbison:

Yes. That's good. It must be incredibly hard from an operational point of view to, to crank up just before Christmas, to have all that activity, everybody in position rostered, all the mechanical side of things, then to let all that down and now to start up again. But are you now effectively, fully operational?

Gareth Evans:

90, March, where 90% of pre-COVID domestic flying. And about the Auckland's in lockdown or of having those cases at the moment, we were actually about 80% of pre-COVID for domestic New Zealand. We're not there right now, but we'll go back to that sort of level. And then we've got one service a week across the Tasman, and then nothing internationally in and out of Australia. So we're getting there from a domestic point of view.

I just want to, the point you made about the operational roller coaster. I take my hat off to our operational teams and how they cope with that. When you're ramping the business up from very little up to sort of 80%, over a relatively short period of time, only for that, then to become 45%. That's a huge amount of work that had to be done from a network perspective, from a day of operations perspective, the engineering challenge, and then changes that took place were enormous.

And there's almost another sort of tragic story for some of our staff, who've been on stand down for a long periods of time, who we were then standing up for the peak, only for the work to disappear again. And so they're getting excited about coming back to work and then they weren't able to work because we had to cancel half the schedule. So it's really been a roller coaster, both operationally and emotionally for our people through this period. So we've all got everything crossed that, we don't have to go there again. And we're now on a positive curve back to 100% of pre-COVID flying and beyond, domestically.

Still, a wait up far, for international. And we still got a whole range of staff, who are, the 787 pilots in Jetstar, for example. It's going to be a way wait until they come back to work, but its good news that we're getting there domestically.

Peter Harbison:

Yeah, that is good. I was looking at your schedules for March. You've got, I think, give or take, you've got about a dozen dailies on Melbourne from Sydney, but only about four on Brisbane. Is that an indicator of the fact that there's a lot more activity, Sydney-Melbourne and Brisbane is not so good? Or what, why is that difference?

Gareth Evans:

Oh, the guys have been pretty dynamic at managing capacity and, and moving things around, and trying to find demand pools. And to be honest with you, if we can see, if we see something strengthening, then we will move capacity around onto that. Even in the very difficult roller coaster like the environment that we've operated in, we've had two sorts of network within there.

We've had the government supported network. So we've had some government supported flying all the way through, which has enabled us to mount services. Essential services on routes where demand has been virtually zero, but where the government, and from a national interest, and they just needed some flying to take place for freight needs and to move essential workers around. Obviously, the load factors there have been very, very low.

But on the remainder of our network, which has been our commercial network, all the way through this, we still operated at about 80% seat factors. So the guys have done a phenomenal job in being flexible and moving things around. Right now, we're seeing demand emerge at different rates in different markets. New South Wales to Queensland is good, but it's Cairns, and it's to Gold Coast, and things like that. Probably a bit less so on the capital city pairs. There's still some challenges on Sydney-Melbourne as well. And obviously the recent lockdown in Melbourne hit demand there too. So we're, kind of, putting it out there and then remaining flexible too. If we see extra demand from somewhere, we'll get a bit more of it. It's, sort of, the new reality of scheduling. It's not you do it once a month, or once every quarter, you're doing it once every two days right now.

Peter Harbison:

Dynamic scheduling. Yes.

Gareth Evans:

Literally.

Peter Harbison:

And obviously the dynamics of the market have changed a bit too on Sydney-Melbourne. You're noticing a difference already? Just a week or so into having a third carrier on that, Jet carrier on the route?

Gareth Evans:

Oh well, yes. Lots has changed and as we come back, there's going to be a new market dynamic as well. It's still very early days from that perspective. And also, we welcome competition and you'll say, "Oh, you're just saying that," and and I'm not. We really do welcome competition because competition does keep us.

I've seen, in my career at Qantas, how competition has honed us. So we do want to have competitors in the market and Rex are giving it a go and good on them. And I know for us, we're absolutely going to be watching them very carefully as we do all competitors, but they're not going to be directly competing against Jetstar. They're, sort of, said that, middle of the market. They've got business class. A low cost carrier doesn't have business class. They've got lounges. A low cost carrier doesn't have lounges. So they're definitely going for somewhat different cold customer pools than we're playing in, but there will be some overlap. And right now they've got some pretty competitive fares out there, as you would understand these days. As they start the ramp up, $49 fares on Sydney-Melbourne.

For us, what's important is, we're the low fares' leader. We're always going to have the lowest fares in market, and we've had $29 and $39, in response to that. And we will make sure that we're being very competitive and leveraging our low cost base and choice model. I think what's going to be very interesting, and I'm going to be very interested to see is how it plays out in the middle of the market against Virgin as well.

Peter Harbison:

Yeah.

Gareth Evans:

Because Virgin are talking about that space as well. And I think that competitive dynamic is going to be very interesting. For us, we're going to be about what we were before. Low fares, low cost and choice, and delivering a great experience at a really a competitive price point.

Peter Harbison:

It must be actually quite nice for you competing because from your great height, really in Qantas, competing with essentially a couple of minnows, must be an attractive proposition, but it is from a public point of view. It's obviously a good thing. Your prices in the Melbourne market are very low. I notice on Brisbane, they're actually considerably higher than the relative ones.

Gareth Evans:

I think we got some $55 in there, on Sydney-Brisbane, those sorts of things. You need to look a bit harder. Peter, they're out there.

Peter Harbison:

I'm going to go look at it. Do you think it'll change when Rex starts operating Sydney-Brisbane?

Gareth Evans:

Oh, well, the first thing I'll say is we don't think that Virgin and Rex are minnows, so I'll have to come back to that. They're good airlines in their own right. Obviously, they've both been through a bit of a metamorphosis through COVID. And Virgin are going to come out some. We know James very well. And I know they're going to come out, and led by her and they're going to be very competitive. And they're going to have a much change cost base. Again, they're going to be middle of the market. And she's been very clear about that. But we are going to have overlap and competition with them too.

And Rex have been a good airline for a long period of time, but just in the regional space. So we're not taking them lightly at all. Or we don't think of them as minnows. And in terms of how we compete on markets, we'll compete how we've always competed. Nothing's going to change for us. We're going to be competitive. We're going to leverage our competitive advantages. We're going to want to have low, low fares out there, wherever we possibly can. And we'll make sure we do that too. And get our capacity on there and provide great value for customers.

Peter Harbison:

Yeah. The regional market in Australia is obviously very important too. A critical part of this is it's become very competitive now. And this, of course, the overflow with Rex flying regional, as well as main trunk routes now, as well. So we've got three carriers who are doing that.

But you've also got the alliances of the world. You've got a large jet order in at the moment, or large order for jets, small jets. That takes us to the issue of fleets. You've got basically an A320 fleet, you've got in the domestic sphere anyway. You've got, I think the last count of that, 28 Neo LRs, on order.

How do you see the market changing? And in terms of bringing those into the fleet? Because these are going to be very important in the international, regional markets, would it potentially?

Gareth Evans:

Yeah, look, that's a good question. And obviously Covid meant, right across the Qantas group and most, pretty much all airlines in the world, were pushing back working with the manufacturers, pushing back new fleet deliveries. And so obviously we've pushed back the dates for the Neos. But the 320s right now, within the Qantas group, are probably the most flexible vehicle that we've got. Obviously we use them, Jetstar uses them, as a domestic and short-haul international vehicle. But we have been moving 320s into network aviation, Western Australia for use in mining, charter, flying space, freeing up 737s back into Qantas. We've net with converting two 320s into freighters as well. So we've got a line into that. So the 320 [crosstalk 00:15:09] Sorry?

Peter Harbison:

These are the Jetstar freighters or?

Gareth Evans:

No. These are Qantas, Qantas domestic freighters. So we're using the 320s for that.

And the benefits we've got, is from the access to 320s, is we are part of, Jetstar is a group. So it's not just the planes in Australia. It's the planes in Singapore and the planes in Japan. So we've already moved five aircraft out of Singapore into Australia. Sorry, five aircraft out of Singapore. One was a least returned and four have come back to Australia to go into Western Australia.

And now we're looking to bring six of the Jetstar Japan aircraft down to Australia, for a temporary period, not permanently, but for two to three years, perhaps. To enable, to provide some capacity for growth for Jetstar, domestically, and potentially to leverage into Western Australia as well. And to bridge growth into the Neos. So that when we were, clearly once we to start taking the Neos, when we've got our balance sheet is ready, and that will give us another boost from a cost-based perspective.

But those 320s that they had got get dropped out, we can either retain them for growth, we can move them into the West, we can return leases, we can use them for freighters, as there's lots and lots of flexibility from that perspective. So we are seeing the benefits of being a group right now. And moving aircraft out of Singapore, where obviously the recovery is going to take longer. Japan, where the recovery is going to take longer.

And giving us some growth in Australia, and Jetstar is going to grow. We've got no tiger in the market. There's a space there for us to grow into. We're not going to overheat the market, clearly, but there's, we've got a right to grow. We're the low fares airlines with the bottom end of the market, and we're going to do that flexibly using aircraft from elsewhere within our group.

Peter Harbison:

Right. Right. And in the short term. So with the Neo LRs, they going to be coming in this year or has that really pushed back?

Gareth Evans:

No, they won't be coming this year. So it's out into the 2022 to 2023 timeframe. Clearly, we still, we're really looking forward to getting them. They do a lot for us. Not just from a cost-based perspective, but, and I think we've talked about this before. We can fly them to Bali and we can free up 787s. And essentially, you get a free, long haul plane off the back of putting them onto medium haul international flight. And then you've got the XLRs beyond that potentially, which can fly into Japan from Northern Australia as well. So these aircraft are great for us because, not because, just because of the cost base, but also there can be flex between international and domestic. And that is a very valuable fleet unit, taking that into the business.

Peter Harbison:

Yes. So going back to Jetstar Japan, then obviously that's a substantial downsizing of that operation. There have been some suggestions of change in that net operation, JAL didn't want it to go international... You're looking if, the effect of it, quite a considerable contraction, in Jetstar, Japan. And I noticed in the joint business operation between JAL and Qantas, and including operating behind the gate place, there's no mention of Jetstar Japan in that. So they're not included in that process. Is this a substantial downgrading of the Jetstar Japan operation?

Gareth Evans:

No is the answer to that question. Jetstar Japan isn't included in the joint business with JAL and Qantas because it is very complicated and difficult to incorporate a low cost carrier into a premium carrier joint business. I won't go into the details, but it makes something that's quite complex, extremely complex.

Peter Harbison:

Yeah.

Gareth Evans:

And both, ourselves and JAL, were very much of that view. And also both ourselves and JAL are very much supportive of Jetstar Japan. It's pretty tough up there right now. And they're just starting to lift the state of emergency. The businesses has had to hunker down, but we were both very supportive from a future perspective. We are moving these planes down to Australia temporarily, and the fleet goes from 25 to 19. But for some period of time, we've got a flexibility to move them straight back again as well, if we can, if we need to, and just demand recovers.

But Jetstar Japan had also just prior to COVID, ordered a number of Neos that are coming through a leasing company. Now those aircraft are built, or one or two of those aircraft are already built, and deferred. So we can also bring those aircraft in, all the fleet is leased by the way. So this is a lease for lease effectively.

Peter Harbison:

Yeah.

Gareth Evans:

So we've got those aircraft as well that we will bring in at the right time. So, we're not about downsizing Jetstar Japan, what we're about is right sizing and then recovering in line with demand.

Peter Harbison:

Right.

Gareth Evans:

And at the same time, getting the right aircraft in the right part of our universe, to take advantage of demand pools as they recover. Both ourselves and the Jetstar Japan, it's a journey. But for the last four years prior to Covid, it was profitable, returned its cost to capital in FY19, one of the most recognized brands in Japan, the biggest low-cost carrier in a huge potential market. Both ourselves and JAL are 110% behind it.

Peter Harbison:

With the alliances, is there any prospect that, going in the future, Jetstar Japan going international?

Gareth Evans:

Well, it is international already, but about it's about 80-20, 80% domestically and 20% internationally. So, yes there is because it does now. And we will plan to do that, ultimately, when we return from Covid, using narrow body aircraft. So it'll be, sort of, short haul international. And as Neos come in, then we can leverage the greater capability of those aircraft. But it will always be primarily, a domestic airline in Japan. And clearly as the recovery takes place, that's going to be initially, very much primarily, a domestic led will come.

Peter Harbison:

Right. Yes. And let's hope it gets led into the Olympics coming up pretty shortly.

Gareth Evans:

Well, that's right. That's the end of July. And I know there's a fairly ambitious vaccination program up in Japan to try and get the country moving again, prior to the Olympics. They're very focused on that.

Peter Harbison:

And talking vaccinations and timeframes, obviously Alan's talking about October for Qantas going international. Are you all of one mind in that, in that respect, from a group point of view, is Jetstar looking at bringing 787s back at that time?

Gareth Evans:

Yes, we're very much of one mind. And the logic being that at the end of October, that's when the government is saying, we'll all be vaccinated, the whole population. So once we've hit that point, there seems to be no reason why the borders should remain closed. So that is what we've moved our planning assumption to, and we're now we're looking forward to working towards that sort of date. As I said earlier, it's been very difficult for all of our international staff, 7500 staff across the Qantas group, directly related to the international business, who've been stood down for a year already. And there's a period of time until international flight are all recovers. We want to get that up and running as soon as practically possible. So we'll continue to work with the federal government, and the state governments, tourism authorities, to work towards a date, but that seems to be a very, very viable date indeed.

Potentially we could look at getting some 787s flying domestically earlier than that. Particularly, if domestic borders stay open. And as I said, we need some other, some more domestic lift around the peak periods. And it would great to do that because they're a great product, but just to get some of our pilots and cabin crew associated with those aircraft flying again, it'd be great to do that. So if we do see the borders open, remaining open through the middle of the year, it'd be great to get a couple of 787s up, domestic one. But certainly when the international borders are back open, end of October, then we'll be looking to get all the services back on again, all the destinations.

Peter Harbison:

What are the priority? International ones, Gareth? For example, it looks as if Indonesia is going to be pretty much off limits, probably beyond that time, because they won't be getting vaccinations, and Bali's looking like a bit of a hotspot at the moment. Which are your priority routes, do you think at this stage? Obviously it's still a long way off.

Gareth Evans:

Anywhere and everywhere that Australians want to travel to, I suppose. New Zealand first and foremost, we are assuming that New Zealand opens at the beginning of July. So let's hope we can get that together with the Kiwis and get a New Zealand bubble open, and then we'll start flying there. Obviously, Bali is a priority for us. It's the biggest international market. I think that's where a lot of Australians want to go to, once we're all vaccinated. There's no reason why we can't open Bali and allow Australians to travel there. But potentially, we may also need to be flexible from a destination perspective, depending on what is open and when, if it happens in a piecemeal way because... I'm talking off the top of my head here.

So this is just, Taiwan is a potential country that could open as a bubble because they've had very low rates of infection. So Taiwan open is a bubble, would we think of flying there? Yes, we absolutely would because I suspect what will happen is if only Taiwan and New Zealand, and I'll make it up, Singapore are open, Australians will probably want to go to Taiwan.

Peter Harbison:

Yeah.

Gareth Evans:

And if there's demand there, we'll have a look at flying there. Now, ultimately we want to get back to lots of Bali flying, and lots of Japan flying, and Vietnam, and Honolulu, and Korea, and all the places that people want to go on holidays. But we're going to be flexible from a desk international destination point of view. We'll fly wherever Australians want to fly.

Peter Harbison:

Australians and New Zealand is, [crosstalk 00:26:40] I guess the New Zealand is the likeliest. Would you look at significantly upgrading the Tasman, from a Jetstar point of view, if that does become a bubble.

Gareth Evans:

Oh, probably same answer, if there's demand there, yes, we'll work together with Qantas and we'll put seats on there so that people can fly. And like all airlines right now, we're very incentivized to do that. We want to generate cash. We need to start to repair our balance sheets. And if we can generate cash, then we will be putting aircraft on there. Certainly, if the alternative use of those aircraft was to sit them on the ground, then we will be looking to do that. But clearly in those markets where we're jointly operating with QF, which to be honest with you, as international markets open up, we'll probably be acquiring a lot of them, then we'll work together to get our capacity right.

Peter Harbison:

Well, it's certainly nice to be able to be talking in these terms at this stage. I think we're very lucky. You've obviously got a lot of obstacles to overcome. But we are, I think, in a very positive end of the funnel now, in terms of optimism. Good luck with the next couple of months, they're going to be critical, obviously. Good luck with it. And hope we've got some much brighter times ahead. Well done so far.

Gareth Evans:

Yeah. thanks Peter. And it's good to see you and it's good to be talking about these things. I'm sure there's going to be some rocks in the way, and some more twists and turns to go, and we've just got to remain nimble, but we are feeling certainly more positive than we have for 12 months. And then hopefully everybody involved in the industry is.

Peter Harbison:

Good. I think nimble is the word. Thanks you so much Gareth.

Gareth Evans:

Thank you.

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