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Royal Brunei Airlines 2017 outlook: new phase of regional growth begins as first A320neo delivered

Royal Brunei Airlines is planning to begin a new phase of growth in late 2017, focusing on regional expansion within Asia. Royal Brunei’s ASK levels have reduced by 30% compared to early 2011, but the arrival of a new fleet of new generation A320neos opens up a range of growth opportunities.

The flag carrier has been considering several new destinations in North Asia and India as it prepares to take delivery of its first A320neos in 4Q2017. Royal Brunei is slated to take seven A320neos by the end of 2018, with four of these aircraft, including the first, earmarked for growth. Royal Brunei also plans to take one additional 787-8 in 2018, which will likely be used to pursue further regional growth within Asia.

However, Royal Brunei will have to overcome challenging market conditions in 2017 as it resumes expansion. Competition is intensifying in most of the sixth freedom markets it relies on, and opportunities for growth in its local market are relatively finite – given the tiny size of Brunei.

Royal Brunei’s network focuses mainly on Southeast Asia

Royal Brunei currently operates a fleet of 10 aircraft, consisting of six A320s and four 787-8s, across a network of 17 destinations including its hub at Bandar Seri Begawan.

The 787s are mainly used to serve its four destinations outside Asia – Dubai, Jeddah, Melbourne and London Heathrow. Royal Brunei relies heavily on sixth freedom traffic to support the daily Bandar Seri Begawan-Melbourne and Bandar Seri Begawan-Dubai-London Heathrow routes, while Jeddah is a twice weekly seasonal service catering to local religious traffic. (In 2016 Jeddah was served for approximately seven months of the year.)

Royal Brunei’s regional network includes nine destinations in Southeast Asia, consisting of three in Indonesia, two in Malaysia and one each in the Philippines, Singapore, Thailand and Vietnam. Royal Brunei currently has just three destinations in North AsiaHong Kong, Shanghai and Zhengzhou.

Most of the focus over the next two years will be on expanding its North Asian network. Royal Brunei is also considering extending its network to South Asia with services to India.

Royal Brunei network summary: as of 6-Feb-2017

Total nonstop

passenger destinations

17

   Domestic

1

 

Brunei

1

   Africa

0

   Asia Pacific

13

 

Indonesia

3

 

Thailand

1

 

Vietnam

1

 

Hong Kong

1

 

Malaysia

2

 

Philippines

1

 

Australia

1

 

China

2

 

Singapore

1

   Europe

1

 

United Kingdom

1

   Latin America

0

   Middle East

2

 

United Arab Emirates

1

 

Saudi Arabia

1

   North America

0

Royal Brunei had a larger network (and much more capacity) six years ago

Zhengzhou was Royal Brunei’s only new scheduled destination in 2016 but is only served with one weekly flight, and it so far has not been operated year round. Zhengzhou was Royal Brunei’s first new destination since 2014, when Bali and Ho Chi Minh were resumed.

Bali was initially suspended in 2008, along with Shanghai, which was resumed in 2010. Ho Chi Minh was initially suspended in 4Q2011 as part of a major restructuring.

Royal Brunei also dropped Auckland, Brisbane and Perth in Oct-2011. The restructuring led to a 30% drop in ASKs and 21% drop in passenger numbers in 2012.

Royal Brunei’s ASKs peaked at 7.1 billion in 2011. Royal Brunei launched Melbourne in early 2011, giving it 18 destinations including seven outside Asia. As the network cuts in 2011 were not implemented until late in the year, the impact on annual ASKs was not felt until 2012.

For the past five years (2012 through 2016) annual ASKs have been between 5 and 5.2 million. Royal Brunei’s ASKs were up approximately 2% in 2016, based on data for the first three quarters of the year.

Royal Brunei Airlines ASKs and year-over-year growth: 2010 to 9M2016

However, ASK levels in 2016 were still lower by approximately 26% compared to 2011. In Sep-2016 Royal Brunei’s ASKs were up 2% compared to Sep-2015, but had dropped by 31% compared to Sep-2011.

Passenger numbers have also fallen as load factors have remained low

Royal Brunei’s annual passenger numbers peaked at 1.32 million in 2010 before declining slightly in 2011, and were then followed by a 21% drop in 2012. Its annual passenger numbers have since been between 1 and 1.2 million. Royal Brunei passenger traffic was up approximately 2% in 2016, to almost 1.2 million.

Royal Brunei annual passenger numbers: 2010 to 9M2016

The airline’s annual load factor has stayed relatively constant, at approximately 70% over the past seven years. Royal Brunei’s monthly load factor typically fluctuates between 60% and 80% depending on the time of the year, with the northern summer months and December typically being the strongest months.

Royal Brunei annual load factor: 2010 to 9M2016

Royal Brunei increases focus on better performing regional routes

Passenger numbers have declined less than ASKs as Royal Brunei has focused more on regional operations within Asia.

Prior to the network restructuring in late 2011, only half of Royal Brunei’s weekly seats were within Asia. Currently approximately 70% of its weekly seats are within Asia.  Over the past six years its capacity within Asia has increased by approximately 20%, to more than 25,000 weekly seats, whereas its long haul seat capacity has decreased by approximately 50%, to 11,000 weekly seats.

However, the long haul operation still accounts for more than 50% of Royal Brunei’s ASKs.

Royal Brunei ASK share (% of ASKs) by region: 30-Jan-2017 to 5-Feb-2017

While Royal Brunei’s load factor has not improved since the 2011 restructuring and remains well below industry norms, profitability has improved as Royal Brunei has reduced its highly unprofitable long haul operation. Royal Brunei does not disclose financials, but has indicated that its losses have narrowed significantly over the past five years.

Royal Brunei’s long haul routes, with the exception of Jeddah, have always relied heavily on low yielding transit traffic. Sixth freedom traffic continues to account for an overwhelming majority of traffic on the Brunei-Melbourne and Brunei-Dubai routes (approximately 80%). There is a similar ratio of combined fifth and sixth freedom traffic on the Dubai-London leg.

Royal Brunei to maintain Dubai, London and Melbourne, despite losses

Royal Brunei plans to maintain the Brunei-Dubai-London route for strategic reasons, with the government shareholder prepared to continue covering the losses. Dubai and London are essential destinations as the Brunei government wants to maintain direct links to these two markets.

Melbourne is not an essential destination, but Royal Brunei strategically needed to keep at least one destination in Australia to help feed its London service and keep its widebody fleet sufficiently utilised. Royal Brunei’s 787 fleet is almost entirely used for the Dubai, London, Melbourne and Jeddah routes, with the exception of a small number of short haul flights to Malaysia and Singapore during peak periods.

Royal Brunei carried 133,000 passengers to and from Melbourne in the year ending Jun-2016 with an average load factor of 72%, according to Australia BITRE data. It had nearly identical traffic and load factors in the year ending Jun-2015. Royal Brunei had similar passenger numbers to and from Melbourne in the years ending Jun-2014 and Jun-2013 but had lower load factors, since at the time it was operating the route with larger 777-200ERs.

Fleet expansion begins with first A320neo in 4Q2017

Royal Brunei is planning to expand its regional operation over the next two years while maintaining its current widebody network. The new fleet of A320neo aircraft will drive most of the growth, enabling Royal Brunei to add medium haul routes that were not previously feasible (due to range limitations with the A320ceo), or commercially viable.

Royal Brunei has seven A320neo aircraft on order for delivery from late 2017. The first aircraft is slated to be delivered in 4Q2017, with the other six aircraft arriving in 2018.

The first A320neo will be a growth aircraft, lifting Royal Brunei’s fleet to 11 aircraft. Royal Brunei has never had more than 10 aircraft in its fleet. Back in 2011 it had six widebody aircraft (777-200s) and four narrowbody aircraft, while the current fleet includes four widebody aircraft and six narrowbody aircraft.

Royal Brunei fleet summary: as of 1-Feb-2017

Aircraft

In Service

On Order

Airbus A320-200

6

0

Airbus A320-200neo

0

7

Boeing 787-8

4

1

TOTAL

10

8

Fleet to grow by another three aircraft in 2018

In 2018 Royal Brunei plans to phase out its four oldest A320ceos, resulting in the narrowbody fleet growing by another two aircraft to a total of nine. Royal Brunei is also committed to taking delivery of a fifth 787-8 in 2018, resulting in a fleet of 14 aircraft at the end of 2018.

Royal Brunei plans to use all three of the additional aircraft for 2018, and the initial additional aircraft in 4Q2017 to expand its regional network. The airline is currently assessing several potential new scheduled destinations – primarily in North Asia, but also in Australia, India and Southeast Asia.

At least one new destination will likely be launched by the end of 2017. Royal Brunei is considering launching a new destination prior to the delivery of the first A320neo as it has the capacity in its existing fleet to squeeze in another route.

A320neos provide improved range and slightly larger seat capacity

Royal Brunei has decided on a 150-seat two class configuration for its A320neo fleet, including 138 economy and 12 business seats. This represents a small capacity increase in economy over the A320ceo, which Royal Brunei configures with 144 economy and 12 business class seats.

The first A320neo will therefore likely be used initially on its busiest routes, such as Kuala Lumpur and Singapore. It also likely will be used on some of its longer routes, where the improved fuel efficiency of the neo makes a bigger difference.

Shanghai would be a logical route for the A320neo as it is Royal Brunei’s longest narrowbody route – approximately five hours. Slot constraints at Shanghai also make it difficult for Royal Brunei to add frequencies beyond its current three weekly flights.

Royal Brunei also plans to use the A320neo fleet to open up new longer routes in North Asia and potentially to southern India. Most of the potential North Asia routes are within range of the A320ceo, but the A320neo is a more efficient option and could make some otherwise borderline routes commercially viable.

Royal Brunei considers new routes to Korea and Japan

Royal Brunei began two weekly A320ceo charter flights to Seoul at the end of Dec-2016 and has an initial contract to operate the flights for one year. Royal Brunei could upgrade this service to an A320neo scheduled service if the charter operation is successful.

The charter service enables Royal Brunei to develop its route network without any risk, as well as diversifying its revenue base while assessing whether the Brunei-Korea market can support scheduled flights. South Korea is Brunei’s second largest trading partner and the Brunei tourism sector is also keen to grow South Korea as a source market.

The Brunei government is also keen to develop a link with Tokyo, which, similarly to the Korea flight, would support both business and tourism. Brunei does not have any scheduled flights from Japan or South Korea.

Foreign airlines currently only operate three routes from Brunei, competing with Royal Brunei in the main markets of Kuala Lumpur, Manila and Singapore.

Royal Brunei plans China expansion

China is also a growing market for both outbound and (particularly) inbound travel. Royal Brunei is considering several potential secondary cities in China and is keen to test out the market with charters, similarly to its approach to South Korea.

Royal Brunei is operating one weekly charter flight to Xian under an initial one year contract which runs from Jan-2017 to Jan-2018. In 2016 it also had a shorter three month contract for a once weekly charter service to Nanning. Zhengzhou is being operated as a scheduled flight, but is like a charter as agents are block booking most of the seats.

Royal Brunei is keen to serve Beijing, which is an ideal A320neo destination given the longer length of the flight. However, Royal Brunei has so far been unable to secure suitable slots at Beijing Capital International Airport and will likely wait for the new Beijing airport to open in 2019.

Beijing could also be served with the 787. Royal Brunei is considering using its fifth 787 to expand capacity at slot constrained Shanghai and Hong Kong while using the A320neo to serve new secondary points in China.

New partnerships are a key part of Royal Brunei's North Asia strategy

Royal Brunei has also been working on improving its presence in North Asia by expanding its partnership portfolio. Royal Brunei added China Eastern and Hong Kong Airlines as codeshare partners in 2016, giving it codeshares in its two main North Asian markets of Shanghai and Hong Kong.

While Royal Brunei aims to serve several cities in China and North Asia eventually, it needs to rely on codeshares and interlines to cover most of the region. Brunei has emerged as a popular – although still relatively unknown – e tourism destination but demand is not sufficient to support nonstop flights in most markets. Even for those markets where nonstop flights are launched, schedules are likely to be infrequent or seasonal, and therefore codeshares are needed to maintain a more regular presence.

Royal Brunei also added Turkish Airlines as a codeshare partner in 2016 and is keen to expand its partnership portfolio further over the next couple of years to help absorb capacity increases. Royal Brunei’s partners were previously limited to the Southeast Asian market. It now has six codeshare partners (according to OAG data), including its longstanding partners Garuda Indonesia, Malaysia Airlines and Thai Airways.

A320neo family opens up new opportunities in Australia and India

Royal Brunei is also assessing network opportunities in Australia and India.

Some of the potential destinations in Australia and India could be served with A321neos or A321neoLRs. Royal Brunei’s current Airbus order includes only A320neos, but it has the flexibility to convert some of these orders, or its three A320neo options, to the A321neo or A321neoLR.

Royal Brunei has determined that Melbourne is not a possibility for the A321neo or A321neoLR and therefore plans to continue serving Melbourne with 787-8s. However, Royal Brunei is evaluating the use of the A321neo or A321neoLR to resume Brisbane, Darwin and Perth. (Brisbane and Perth were cut in the 2011 restructuring, while Darwin and Sydney had been cut previously.)

With India, destinations in southern India could be launched in the near term using A320neos. Mumbai and Delhi would be longer term possibilities using the A321neo or A321neoLR.

Brunei-India is a relatively big market that is now mainly served via Singapore on Singapore Airlines. AirAsia and Malaysia Airlines also offer connections from Brunei to India via Kuala Lumpur.

Nonstop flights from Brunei to India would also help support Royal Brunei’s Melbourne service and any future Australia route. Australia-India is a large market that is served mainly with sixth freedom connections via Singapore and Kuala Lumpur.

Royal Brunei aims to reduce reliance on sixth freedom traffic

However, Royal Brunei is trying to focus on expanding markets where there is relatively strong demand for travel to and from Brunei. New destinations in Australia would counteract this strategy as Royal Brunei has historically had to rely heavily on sixth freedom traffic to support all of its Australia and New Zealand routes.

Royal Brunei has succeeded at reducing its sixth freedom traffic ratio from approximately 60% to less than 50% since the 2011 restructuring. While Melbourne, Dubai and London still rely overwhelmingly on fifth and sixth freedom traffic, the airline's expansion in regional markets with strong local traffic has enabled Royal Brunei to decrease its reliance on sixth freedom traffic.

Royal Brunei is aiming to reduce sixth freedom traffic further, to approximately 40%  even as it resumes capacity expansion. New regional routes within Asia should help Royal Brunei achieve this target, whereas resumed Australia routes would make it difficult.

A321neoLR decision not likely in the near term

Postponing a decision on Australia expansion and focusing for now on Asia growth would be sensible. Royal Brunei could put closer consideration into Australia expansion after 2018 – once its upcoming expansion phase is completed and all seven A320neos are delivered.

The A321neoLR, which is available from 2019, is being evaluated as a replacement for Royal Brunei’s last two A320ceos. These aircraft, which are less than two years old, are due to come off lease in 2023. (Royal Brunei’s four older model A320ceos, which will be replaced with A320neos in 2018, are currently 10 to 14 years old.)

If it opts for the A321neoLR Royal Brunei will likely include a more spacious business class cabin, potentially with lie flat seats, and use the aircraft on longer medium haul routes.

2017 could be a critical year for Royal Brunei

Royal Brunei has several key decisions to make in 2017 as it prepares for a new phase of growth in late 2017 and 2018. The new A320neo fleet provides opportunities for growth, but Royal Brunei needs to implement network expansion flawlessly in order to meet its targets for further reduction in losses, and eventually achieve profitability.

The expansion comes as market conditions become more challenging. While Brunei is a small market, with relatively limited local competition, Royal Brunei’s yields have been pressured in recent months due to intensifying competition in its main sixth freedom markets, including from Australia to Asia and London.

The outlook for 2017 is challenging as competition continues to intensify, yields are likely set to decline further, and fuel prices potentially start to increase again.

Demand in the local Brunei inbound and outbound market is growing. With new North Asia and India routes there are also opportunities to increase its share of the local market by attracting passengers who are now flying to and from Brunei on one stop products on the four foreign airlines that serve Bandar Seri Begawan.

Bandar Seri Begawan Brunei International Airport seat capacity by airline: 30-Jan-2017 to 5-Feb-2017

However, market share gains in Brunei will be relatively small, given that Royal Brunei already accounts for nearly 80% of seat capacity in its home market.

At the same time, demand in the local market is not likely to grow fast enough to absorb all the additional capacity planned as Royal Brunei expands its fleet from 10 to 14 aircraft.

Royal Brunei therefore may struggle to reduce its reliance on sixth freedom traffic and, given the current highly competitive environment, more sixth freedom traffic will inevitably impact yields and profitability.

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