Exclusive interview with new Australian LCC Bonza

Transcript

Peter Harbison:

Big welcome today to CAPA Live, not actually coming physically from Puerto Rico, but from Sydney wish we could be in Puerto Rico. Today, we have with us, as you've seen, the latest big, new event in Australian aviation, Bonza. Tim Jordan who's got a lot of experiences in the Australian market, as well as various places like the Philippines and Kazakhstan in the low-cost airline industry. Started out with Virgin Blue in Australia many years ago with some other strings to his bow. But Tim Jordan, great. Welcome to Sydney and great to hear the news.

Tim Jordan:

Thank you, Peter.

Peter Harbison:

Tim, we've got people coming online to ask questions and we'll probably try and feature a few of those. But just quickly, let's run through what we know now from the media. Bonza, B-O-N-Z-A, is going to be a low-cost or ultra low-cost carrier. You're starting with two or three aircraft beginning early '22, or as early as you can in 2022. Operating domestically, using MAX 8 aircraft, which are fairly large aircraft. And we'll talk about that a bit later.

You're backed by a group called 777 Partners, who are an investment group with about $6 billion I think, in investment funds. So fairly hefty. They have interest in a Canadian low-cost carrier, Flair. They're really investing in this market as well as other parts of the aviation market. Let's take it from there. Anything I've missed as background that I should be saying, Tim?

Tim Jordan:

No, I think that's a good summary to start with. We very much are focusing on the leisure market, like most low-cost carriers, but pretty much 100% of our focus will be on the leisure market.

Peter Harbison:

Well, one of the things you've said, I think, is that you're, to some extent, based on the Allegiant model. This is an ultra low-cost carrier in the US which has been very successful through thick and thin. There are some differences with its model, it's original model anyway. And that was, it bought very old aircraft. So it didn't have to utilise them very much, have them sitting on the ground. But they would just operate really typically, from fairly [inaudible 00:02:44] to sun destinations, or in some cases to large ports, but also between smaller ones.

But the fact that they could leave those aircraft sitting on the ground, meant that they didn't have to operate all that frequently. These weren't daily services or twice daily services. They tended to be more almost like a charter in fact, in a lot of ways. And these are very large aircraft that you're talking about too. I think if they're configured the same way as the Flair aircraft are in Canada, they've got something like 189 seats.

These are big aircraft for small markets that are going to have to be flying very frequently. And I don't know. You're running at 12, 15 hours a day, 12 hours a day, to keep them in a way that's economic. What have I said that's wrong there? And where do you fit into that scheme?

Tim Jordan:

No, I think that's a good summary. In terms of the Allegiant model, yes, we believe we shall execute in a similar manner. However, we do believe that there are markets out there which will allow us to have utilisation, which is higher than that Allegiant model. Which as you say, does lend itself to the brand new aircraft that we'll be operating,

I guess, what we also know is the pricing and the subsequent lease rates that we're looking at are highly, highly competitive. Our investment partners, 777, private investment have secured a marvellous arrangement in terms of those particular aircraft. And it's fair to say that two or three years ago, we probably wouldn't be looking at having brand new aircraft starting this opportunity. But now we can because of the pricing involved. I think the economics have allowed us to operate brand new aircraft while also improving upon the Allegiant utilisation assumptions.

Peter Harbison:

When we talk about that, what utilisation are you featuring, Tim? Can it be able to hit 12 hours?

Tim Jordan:

I think it's a reasonable goal. Whether it's between 11 to 12 hours. I think obviously here, there are certain airports with certain curfews that lead to definite constraints in terms of scheduling. But to have that goal of 11 to 12 hours is I think not unreasonable in terms of what we're planning.

Peter Harbison:

As I said, you're operating very large aircraft. I don't know if they're going to be the same as Flair, 189 seats. But are there that many markets in Australia where you can be operating that frequently with? Because you've got to get full loads. It's one thing to have a low unit seat cost, but to have low unit passenger costs, is another issue entirely.

Tim Jordan:

Yeah, indeed. This is about using the capacity. I find myself quite often rolling my eyes at carriers that don't use the capacity. And the ultimate perishable good is when we push back. Yes, we do absolutely need to use the capacity. If we're not running, pushing 85 to 90 plus percent, I'm going to be disappointed.

In terms of the number of markets that can sustain, 186 seats is how we're going to be configuring the aircraft. In terms of the number of markets, we will look at frequency. We do believe, we are certainly not going to be a business-focused carrier. We're not going to be operating any markets two or three times a day. There's some great carriers out there already doing that.

Will we be operating markets 2, 3, 4 times a week? Yeah. That's probably the frequency levels we're looking at. Does that work for our customer base? Yes, it will do because the alternative is probably sitting in the car or sitting on the sofa. Our markets are not flying at the moment. If your alternative is sitting in the car with the kids in the back for eight hours, I'll take that hour flight on a Wednesday afternoon.

Peter Harbison:

Okay. Well, obviously, we won't go into the cities that you're talking about. But one thing to clarify too, as you've said, you're not going to be operating the golden triangle, as in relatively high frequency Sydney, Melbourne, Brisbane operations. But you will be flying to and from those cities as well from these other destinations.

Tim Jordan:

Yeah. Yes, we will be offering-

PART 1 OF 4 ENDS [00:08:04]

Tim Jordan:

Yeah, yes. We will be offering some service from Melbourne, Sydney, and Brisbane. Assuming we can get an airport arrangement with our airport partners. Obviously, if we can't, we won't. But the intention is we believe there are some new markets that are possibly unsupervised from those cities that with the right fares, we could do some market stimulation. And we can operate probably on a low-frequency basis, or certainly on a low-frequency basis. Again, nothing which is going to distort the market in terms of business travellers. We are not going to appeal it any shape or form to any business travellers. Our product is just not going to work for them. From a frequency, from a schedule, from a lounges, from a frequent fly point, none of those call them bells and whistles, but we are not going to appeal as a consequence. But will be service from Melbourne, Brisbane, and Sydney if we can get the airport arrangements, there will be some service from those locations.

Peter Harbison:

Tim, I mean, it's one thing to have low unit cost aircraft, but services in Australia, ground services tend to be fairly expensive and we've been watching Qantas having its debate with the unions over outsourcing ground handling, for example. Are you confident you can keep those costs down as well? Because there are a whole array of different areas in Australia, which is a fairly small market where those costs do tend to be to squeeze upwards, generally.

Tim Jordan:

Yes, they do. More competition in that particular space wouldn't necessarily be a bad thing. But there are providers and we are hoping, again, they look at us as an opportunity to expand their business potentially to locations where they don't maybe operate at the moment and there be a halo benefit for those places where whereby they do operate at the moment and we also want their services. So yeah, we are hopeful that those ground handling partners, the airport service providers step forward and want our business.

Peter Harbison:

Have you had any indications yet that you might be successful in that?

Tim Jordan:

We think, we believe there will be support for what we are doing.

Peter Harbison:

Good. I won't push that any further, I know it's a sensitive area. Let me turn to a few of the questions. We've got one from Western Sydney airport, which of course, as you know, won't be flying for five years or so. What is Bonza's sales and distribution strategy? That's the verbatim question.

Tim Jordan:

Yeah, we will embrace... The pandemic's been revolting for everybody, including industry partners. So we will put our hands around the industry as much as we possibly can and try and encourage more tourism and more support for our partners. Does that mean we'll suddenly be paying commissions and those sorts of things? No. Are we quite happy to work with partners who charge for the services that they provide? Yes. Why not? If that allow is the market to grow and for them to see some extra business, why not? Everyone's done it tough the last couple of years.

Peter Harbison:

Okay. On that sort of extension of that, Tim, one of the areas you've talked about, well, looking at the revenue side of things. Obviously, for very low cost carriers, ancillary revenues are a key part of it. Whether it be paying for a seat allocation or buying in flight, [inaudible 00:12:09] in flight snacks, the Australian traveller has become pretty much spoiled. And I think you'd agree Australia's domestic service on the airlines is probably as good as anywhere in the world, if not better. And therefore, a bit demanding. Are you confident you can actually squeeze those extra dollars out of passengers for getting their hands in their pockets in flight?

Tim Jordan:

We think there's a reasonable chance. We are going to be talking to the very price sensitive end of the market. So what that tells us is we've got to be fair and reasonable. We've got to look at ourselves in the mirror when we're setting some of those ancillary pricing levels. And we've got to say, if I'm hearing this as a customer, do I think this is reasonable? And if we can say yes, that's all well and good. If we are finding ourselves struggling to explain the rationale for a particular charge or we believe when we're looking at a specific charge it's oh, it's on the high side, then maybe it's telling us something. So I think fair and reasonable, we need to pass that test.

Peter Harbison:

Are you going to go beyond the normal standard fair for in flight sales?

Tim Jordan:

I guess inflight sales, I think we might see some Bonza butty smugglers making appearance on the aircraft. There may be a few quirky items that suddenly pop up on our in flight merchandise. So, but I don't want to spoil all the surprises. But yeah, we'll have a good cultural offering.

Peter Harbison:

So just to be very clear, you're not talking about the crew uniforms there.

Tim Jordan:

Yeah, you're absolutely right.

Peter Harbison:

Okay. Well, good luck with that. The Flair aircraft, I just might ask you a little bit about any similarities with Flair after this because we do have a question on that. But the Flair aircraft have inbuilt wifi are these aircraft that you're bringing in going to have wifi.

Tim Jordan:

We believe so. It's something which is being clarified at this moment. So yeah, I don't want to... That's to be confirmed on that one.

Peter Harbison:

It's probably something now you're going to need to have, isn't it? Because to be competitive in this domestic market, that's where everybody is pretty much.

Tim Jordan:

I'm not sure you do when your alternative is eight hours in the car with the kids, you'll possibly sit without wifi. So I think if you are in a highly competitive market, yes, I'd absolutely agree with you. But in a market where you're the sole operator or potentially the only low cost operator, I think you don't necessarily need those particular items. But as I say, we may end up down that particular road to be confirmed in the coming weeks and months.

Peter Harbison:

So, I mean, and talking about Flair, how much alike Flair is Bonza are going to be, Flair the Canadian URCC.

Tim Jordan:

We clearly are, our owners are shared. The aircraft, we are obviously going to be operating the same aircraft. But other than that we are in independent in terms of operations. I've very kindly got a message from Steven Jones this morning, just saying, congratulations on yesterday's announcement, but we really-

PART 2 OF 4 ENDS [00:16:04]

Tim Jordan:

... saying congratulations on yesterday's announcement, but we really haven't. We're not swapping notes in the evening or the morning, twice a day or anything like that.

Peter Harbison:

Okay. That's good to know. Well, I say you've got a bit of a latitude. There's sort of got a sting in the tail of this question. How do you envision Bonza will be different from other failed LCCs in Australia? In other words, how are you going to succeed where they can't?

Tim Jordan:

Sure.

Peter Harbison:

What's [inaudible 00:16:30]?

Tim Jordan:

I guess having been asked that question only about 30 or 40 times in the last 24 hours, you may have heard this response already, but I guess the key thing about what we do is where we fly. That's the primary part of our product. And so like any industry, this industry is particularly hard, but any industry is hard if you have too many people doing the same thing. And I don't want to critique previous airlines. I wasn't around for some of them. But what I can say is we will be doing things differently in terms of our route network. More than half of our routes that we've identified are not currently operated by any carrier. Where we are overlapping with existing operators, they're generally small business focused operators. We will be looking to stimulate a brand new low-cost market without interfering with their market. And so we're not going to be going toe to toe for the same market segment as existing carriers. And I think that is the recipe for our success.

Peter Harbison:

Well, Tim, I mean, that sounds good, but you've been around this industry a long time. You know very well, particularly when you've got a large gorilla sitting in the corner, that once you establish a particular route and it works, someone else is going to come in over the top of you. I mean, that's the way it works in the industry. The product is indistinguishable in many ways. The price is different. The smiles on the crew faces are perhaps different. But otherwise the product is the same. It flies at the same speed. It's very easy to come over the top of you. How do you plan to confront that issue?

Tim Jordan:

If a market is being flown two or three times a week, I would question the viability of a business focused operator coming into a market, especially when that market is actually highly, highly price sensitive and essentially has been created by Bonza. If all of a sudden another operator comes in over the top and suddenly the entrance pricing goes from $69 to $169, I think that market evaporates pretty damn quickly. So I think it would be unlikely for that to happen. If it does happen from our cost base, and we believe we have a cost base on a route specific basis that we'll be able to compete with anybody else in the country. So that is also a defence mechanism. And I sincerely hope that this wouldn't be the case, but I guess at the end point is there are competition authorities. And if a route hadn't been flown for 50 years and all of a sudden, we start flying a route and three weeks later, somebody else decides to fly the same route, which hasn't been flown by anyone for 50 years, then that may rise raise some eyebrows in various quarters.

Peter Harbison:

Yeah. I think you've probably got more confidence in the power of competition law in the aviation industry than I have. It hasn't [inaudible 00:20:04], but yeah, okay. Point taken. I won't labour that. But it is the first time there have been four jet airline operators in Australia operating separately. Who do you anticipate would hurt most? Do you think you'll hurt Rex or Virgin or even have a nibble at the big gorilla's toes?

Tim Jordan:

I don't think we will have an impact on any of the above to be quite honest in any significant way at all. I guess in terms of the point of four jet operators in the country, 21 years ago when Virgin Blue started, since that point, the population of Australia has grown by a third. The demographics of this country has changed markedly since Virgin Blue, and Virgin Blue seems like yesterday, and yet the population has grown by a third. Now that's a very significant population growth in the country, let alone the geographical and demographic spread which has happened across the country in terms of large regional centre that are growing up and continue to grow. So I think all of that validates what we're actually planning to execute in the market.

Peter Harbison:

Okay. Yeah. Well, you dodge that question, but I hear what you're saying. Yeah. I mean, the underlying point is that, of course, you're all competing for the same number of pockets. You might be able to stimulate some additional travellers. And good luck with that. Hope it works. I'm sure it will.

Tim Jordan:

Yeah. It's about increasing the pool of travellers because especially when you're looking at outside of Sydney, Melbourne and Brisbane, or even within Sydney, Melbourne and Brisbane, there's a lot of people that are still not getting on aircraft as frequently as they would if there was another low cost alternative or if the only alternative currently is a business focused operator. And yeah, what we plan to do is to make that pool bigger. And so therefore I would say it's not a case of taking from somebody else's pockets. That really won't be the case. And I think around the world, you've actually seen the situation where a low-cost carrier is coming to a market, the pie has grown for everybody.

Peter Harbison:

Okay. But you're starting with two or three aircraft. You obviously have aspirations to grow. So that equation is going to shift over time, isn't it, in terms of the competitive dynamics with the other airlines, but also with the demand in the market? These Max [inaudible 00:23:03] aircraft are very flexible to cost. They do have a range of what? 6,000 kilometres plus. What sort of sector lengths do you see as becoming typical once you do start operating?

Tim Jordan:

From a low-cost carrier perspective, we would love all of our sector lengths to be in that glorious one to two hour block, block hour sort of sector length time. We know that that's the sweet spot of operation in terms of yield and cost. And so where possible, we will try and adhere to that as much as possible. But we can't move cities as much as we'd love to pick them up and maybe drag them one direction or the other 500 kilometres. That's not possible. So we will deal with the geographical situation we're presented with.

Peter Harbison:

What is going to be the [inaudible 00:24:03]... I mean, you've obviously looked-

PART 3 OF 4 ENDS [00:24:04]

Peter Harbison:

What is going to be the like, I mean, you've obviously looked at roots and obviously equally, obviously not going to ask you what they are, but what is going to be the average length, if you can't get in that magic one to two hours. Will you be operating west coast as well.

Tim Jordan:

In terms of the airport process that we started at six o'clock yesterday morning, there were a good number of... The whole country was covered. In terms of the 45/46 airports that we contacted and said, would you be interested in bonds or service? Yes, WLA was in there and the NT was in there. The whole country was covered.

Peter Harbison:

That does widen the scope quite large. There are a lot of city pairs when you look at the permutations, there are lots of opportunities there. And I think a lot of routes that aren't served, you're obviously right there. What sort of expansion are you looking at? Say for mid 2023, how big, assuming your plan goes okay, how big would you be then?

Tim Jordan:

Difficult to say. I'd rather not say. What I'm really happy about though, is the flexibility that our investment partner actually brings to us. We are leasing the aircraft from 777 partners, who is our investor. So that gives us fantastic flexibility to actually speed up and slow down as we would, as the market, as our performance actually tells us to. And that is a wonderful bit of flexibility that most startup carriers just don't have available. And you're locking yourself into leases and yes, you are getting the aircraft when you said you were taking the aircraft. And being part of that 777 family with multiple airlines gives us a little bit more flexibility, which may not be the case if we were out there with other lessors.

Peter Harbison:

Yeah. That's a good place to be. This question is a bit further down the line, obviously. And I suspect with the sort of root network you're planning to operate, it might be difficult. But we've got a question, would you be looking to partner with international carriers, feeding your network, example from the US?

Tim Jordan:

No, and I'm always cautious of saying no definitively. I should probably preface it with it's highly unlikely, but we should never say never. But at this point in time, I will say no.

Peter Harbison:

Yeah. Obviously, as you get bigger than then things start to change. You start to look at new horizons, I guess. So maybe 2023, that might become something on the agenda.

Tim Jordan:

Yeah. From a previous life, you learn from all your experiences. And I do remember putting in place previously such an arrangement and really based on the complexity that it introduced and the uptaking from a passenger number, from a customer number, it just really didn't warrant the time and effort involved. And I think you just have to learn from previous experiences and actually go, yeah. Okay. Well, the world hasn't changed that much in that time. So you draw on that experience.

Peter Harbison:

Right, yeah. It sounds very reasonable. Couple of quick questions to finish with. When do you expect to get your AOC?

Tim Jordan:

Subject to us doing everything that we should do in the eyes of the regulator, we are expecting that the second quarter of 2022 is when we should be taking to Australians skies

Peter Harbison:

Right. That sounds, it's not far away, actually. It's almost Christmas.

Tim Jordan:

No, it's not, but we will be taking brand new aircraft. We aren't taking used aircraft which have come back to a lessor and have been flying around in other parts of the world, which you can understand, could potentially lengthen that particular process. These are brand new aircraft coming towards us, coming to us. And the obligation is on us, obviously with the authorities, with Cassa to make sure that we are ready, and if, once they are happy with us, then obviously we will move ahead.

Peter Harbison:

Any in the paint shop yet?

Tim Jordan:

Not at the moment.

Peter Harbison:

The politician's question. Now it's Mr. Minister, how many jobs do you [inaudible 00:29:20] create for the Australian economy?

Tim Jordan:

Hundreds initially. In a direct environment for us. In terms of head office roles, we aren't going to be based in regional Australia. A point of difference, we will be based either in Northern New South Wales or Southeast Queensland, we are currently interacting with New South Wales and Queensland government. That head office will be plus or minus around 100 roles initially for each aircraft we add. As you can imagine, with there will be about 50 team members that we add. So initially hundreds in terms of the scope of our initial operations and obviously a significant multiplier effect in terms of the general economy and tourism beyond that.

Peter Harbison:

So yeah, to close that off, eventually thousands is what you're saying. Tim Jordan thanks very much, good luck.

Tim Jordan:

Thank you very much.

Peter Harbison:

We're looking forward to having you in the market with us. Thanks, Tim. Good luck.

Tim Jordan:

Thank you. Bye-bye.

PART 4 OF 4 ENDS [00:30:40]

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