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Qantas 787 cancellation could kill its long haul operations

The consequences of the Qantas decision to strip firm orders for new airliners off its long haul international operations could cause its collapse or sale to predators in the near future.

Some critics of its current management and board have already said this is ‘the plot,’ and it may well be.

However it isn’t necessary to believe in such a strategy or conspiracy to identify the likely negative outcomes of the decisions, which involve cancelling $US 8.5 billion worth of orders including 35 keenly bargained Boeing 787-9 Dreamliners.

The very act of cancelling those orders is of direct benefit to Virgin Airlines alliance partner Singapore Airlines, a 787-9 customer that had been adversely affected by the program’s delay; has an expressed intention to use the Dreamliners to replace its fleet of A330s; and can now look forward to deploying them as a support airliner to its A380s on its multi-daily services to Melbourne, Sydney, Brisbane and Perth much sooner than it had hoped.

These larger, more capable Dreamliners were always said to be the key to modernizing and growing the Qantas fleet on secondary international routes, and Cityflyer domestic routes currently flown by a mixture of aged and increasingly inefficient 767s and more recent and larger A330s, some of which are due to be returned to Qantas from Jetstar when the budget carrier gets the initial version of the Dreamliner, the 787-8, from sometime in the second half of next year.

The cancellation leaves in place fixed price/fixed date production options for 50 Boeing 787-9s from 2016, which are much cheaper to keep alive than is the case for ‘firm’ orders, but Qantas will need to spend serious money to convert them to orders, and conversion train or otherwise recruit the pilots and operational support for these opportunities no later than about 18 months before the options expire.

In the case of  a management that has expressed contempt, anger and frustration over the performance of the international division, much of which reflects poorly on management itself, it is a big ask at this stage to believe that by this time in 2014 it is going to begin reinvesting in the full service long haul brand.

And even if it did, its competitors will not have been marking time.  They will by then be bigger and better equipped competitors who have been growing their presence on routes and to markets Qantas can’t or won’t serve, and can’t reclaim or contest without new and more cost efficient airliners.

The market rewarded Qantas this afternoon for cutting capital expenditure and continuing the dividend drought into a fourth year. But without that expenditure the value of Qantas as a brand and product of diminishing relevance to travellers will implode. Qantas isn’t just losing customers, but experienced pilots, engineers, and executives to Virgin Australia and foreign carriers.

If the company is averse to the risk of a transformational order for new airliners, surely it is going to be resistant to exercising options to spend the same amount of money per jet as it negotiated when it did the 2005 deal to buy or option up to 115 Dreamliners for delivery from 2008.

Painful though the cancellations may be for Boeing up front, every one of those relinquished manufacturing slots will be sold for at least twice and probably three times the original price tags of between $US 76-90 million apiece agreed for the original Qantas orders, using figures extracted over a period of time by the world’s leading 787 reporter Jon Ostrower.

The so called fleet restructuring that was given the soft sell by Alan Joyce this morning is arguably of latent lethality to the very future of a modern, relevant and competitive Qantas, and a bonus to any airline desperate to get 35 shiny new and suddenly available 787-9s.

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  • 1
    RossM
    Posted August 23, 2012 at 6:59 pm | Permalink

    Agreed. Joyce has basically killed the international division today and most likely won’t be around to see it happen, of course after he walks away with millions for doing so.

    Such a shame that one of the biggest brands and a company most Australians are proud about is being hobbled by its present management. If I was a pilot not of retirement age in the next few years I’d be racing for the exit now….

  • 2
    Louis Davis
    Posted August 23, 2012 at 8:50 pm | Permalink

    Ben,
    There is another way to look at Qantas’ move. To date the B787 programme has both been late and its performance not what operators expected with most of the reports I’ve seen indicate that promised efficiencies will be attained in later production models (bear in mind the B787-8 model was promised with a 7700nm range but since 2009, this was reduced to 6900nm for early deliveries). Given this precedent I think it makes sense to force Boeing to deliver on its promises or walk away. This effectively the options Qantas now has on the table, first deliver on the promises with the B787-9, second give us clarity on the B787-10X which is a plane we really want. By 2014 (which is when a excerise decision would effectively have to be made) the A350 will be flying. Bear in mind that Qantas talked about using the B787 non stop to Vancouver at its B787 order, its hard it see how an B787-9 could operate this route if the early delivery models arrive with a range shortfall of circa 10% that’s being experienced with the early models of B787-8. My 2 cents worth.

  • 3
    keesje
    Posted August 23, 2012 at 9:10 pm | Permalink

    IMO Qantas needs fuel efficient, 270-300 seaters short term, replacing 747s and 767, fighting of competition. QF missed out on the 777-200ER and 787-9. Boeing says the 787-9 will be an excellent platform. Udvar Hazy says they’ll remain heavy and Boeing succeeded in breaking 787 every schedule promise during the last 7 yrs. Boeing also recently put out a 777X decision and delayed a 787-10X development.

    Lets be realistic instead of optimistic. How can QF revamp its long haul operation within 2-3 yrs at minimal costs. No more Dream(s)liners. Lets look at a DL/Northwest Airlines like strategy, radical and successful.

    Can Boeing assist in getting 10-15 used 200ERs, pimp them & put them in good 2 class service in 18 months? Or lease & revamp a similar number of dirt cheap A340-300s for 5 yrs? Skip the expensive Qantas aircraft flights to Europe and US East coast, it doesn’t work like that anymore. Codeshare, increase frequencies. Don’t aim to be the best of the world on service, proudly boasting global presence. Better be reliable, connected, good enough and competitive.

    IMO Qantas partly remained stuck in old glory strategies/ ambitions that were overtaken more then a decade ago.

  • 4
    Ben Sandilands
    Posted August 23, 2012 at 9:17 pm | Permalink

    That’s a good point. I hesitated to add performance delivery to the picture in part because Boeing insist that much has been learned from the 787-8 issues and that the -9 is almost a total redesign of some major areas. A further slip in the -9 is probably a given too. Will it get into service before the A350-900? Then I thought Qantas has no chance getting the delivery times or price it had with the -9 with the Airbus, but given the time that has passed and the growth that is occurring maybe the A350 is the better sized product.

    As to the 787-10, which seems to be to the Dreamliner family what the 767-400 was to the 767 program, a range payload trade that didn’t really thrill too many customers, colour me agnostic. It would be highly attractive if it has trans Pacific range etc, which is what is promised for the -9, but the higher MTOW is going to need a much stronger and more elaborate main gear according to some papers, or a whole new engine according to others, to do those things. And it would then come into conflict with the 777-X.

    I feel like waiting until I can see the eyes of the beast before getting too excited.

  • 5
    thebozeian
    Posted August 23, 2012 at 10:47 pm | Permalink

    Putting aside the “no good news” story and Joyce’s apparent ability to defy both basic laws of physics and accounting (we can bring the International division back to profitability without any investment, and with a rapidly aging fleet), there is something to be said for pulling the plug on the order. However, if the 787 is not as efficient as touted, why go on with the -8 order and continue porting it to the cut price Jetstar outfit where seat prices and margins are less?

    And of course Joyce has apparently got absolutely no plan to back any of this up with concrete action like ordering alternatives. Instead we are expected to wait for Jetstar to get it’s shiny new jets at which time they then hand back 5-7/8 year old A-330′s that will have been thrashed and in need of heavy maintenance and a new interior fit out (no prize for guessing who has to pick up that tab). Whats worse I have been told by 767 pilots that the 330′s are runway length/weight limited out of Sydney’s shorter second runway, which during peak hour will prove a headache. So why did Joyce not announce an alternative plan?

    There is of course an alternative. Ditch the older 767′s including the seven -336 “ZX” fleet and lease some new build 300ER’s with the announced new interior 12-15 would be a big help. And have them ordered with the Aviation Partners winglets so that fuel savings can be realised particularly on the longer sectors. Just getting rid of the older non EEC engine’s, coupled with airframes that are not suffering from fatigue and corrosion would immediately see big reductions in engineering costs and yet exactly the same infrastructure and licensing and training could be used. Whats more this program could be put in place fairly quickly.

    So will any of this happen? Having seen the Joyce interview on ABC’s 7:30 Report, probably not while we have a CEO who is totally indifferent to what can work, and who would rather chase fantasy markets in Asia.

  • 6
    patrick kilby
    Posted August 24, 2012 at 7:59 am | Permalink

    To me the plan seems sensible, he gets a squillion in compensation, keeps the order for 787-9s (but can switch to A350s if the price, performance, and timing is right) but a year later than he would have got them (and given the delays probably would have been in 2016 anyway), has a dozen A332s to play with in the meantime, on international as well as domestic (Perth Dubai Frankfurt could use three of them), and according to Ben the A332s are much the same as the 787s in performance, so not a huge set back. I cannot beleive he is doing new 767 intersisn for only 1-2 years, so some more A332s to international to pick up Asian growth. Note he has to negotiate a pilot deal for teh 787s so a delay can ease that process

  • 7
    Bill Williams
    Posted August 24, 2012 at 1:01 pm | Permalink

    Joyce might be forced by financial circumstance to make a better decision than he wanted to make. One of the core values of Qantas that has been compromised by recent management is the principle of not being “first to market -early adopters” with new aircraft. This principle ensured that Qantas always, in the past, purchased “tried and proven” aircraft types. Qantas’ recent experience with the A380 seems to testify to the validity of that conventional wisdom. While we can’t entirely blame Joyce for the 380, his desire to purchase new aircraft types (rather than updated tried and proven designs) is well documented….the narcissist has to wear the latest fashion. Financial compulsion, rather than his good judgement, may help Qantas in the “long haul” with respect to aircraft purchase decisions……even if only by leaving a competent successor to Joyce with more flexibility to put things right.

  • 8
    ButFli
    Posted August 24, 2012 at 1:15 pm | Permalink

    The solution is simple. Qantas needs 777s now but if it orders new ones it won’t get them for 5 years. Emirates has 120 77Ws on order. Emirates gives Qantas some of its 77W delivery slots in exchange for Qantas pulling out of LHR and FRA and going codeshare on Emirates flights to Europe via DXB. Qantas then uses the 77Ws to expand into more destinations in Asia and to replace 747s transpac. Qantas keeps a few 744ERs to do Africa and South America and keeps the A380s on SIN, HKG and LAX.

  • 9
    Cat on a PC©
    Posted August 24, 2012 at 4:13 pm | Permalink

    Woah! ButFli, I like the way you think. A handful of 777s for slots? You may very well be on the mioney there.

  • 10
    SladeyP
    Posted August 24, 2012 at 6:13 pm | Permalink

    What I’ve never understood is that Joyce always harps on about the fact the “Qantas future is in Asia” – especially with the burgeoning middle class in China. Well if that was the case wouldn’t Qantas want to be looking to fly to more Asian (especially Chinese) destinations?

    The current QF Intl Asian destinations ex Australia leave a glaring gap in China.

    ex PER > HKG, SIN
    ex ADE > SIN
    ex BRS > HKG, SIN
    ex MEL > HKG, SIN
    ex SYD > NRT, PVG, HKG, BKK, SIN

    So the only mainland China destination is Shanghai but only directly accessible on QF from Sydney.

    So take Melbourne for example – where you have Australia’s 2nd largest population and Australia’s 2nd largest Asian population but no direct access on QF to mainland China. Sure, you can get to Shanghai on Air China or China Eastern which has an especially lovely old beaten up Shanghai Airlines 767 running that route. Opportunity for QF much?

    We know the Chinese are generally very aspirational in their choice of brands and love a good premium brand if they can afford it (just look at the explosion of high-end retail in China). Surely there’s a glaring gap in offering a ‘premium’ Australian airline service? Some of us might not view QF in terms of a ‘premium’ amenity but I’m sure compared to the Chinese airlines QF must offer a better product alternative.

    Not to mention Beijing. How about MEL > PEK? Sorry no QF service but you can fly Jetstar via SIN (with a nice long layover in between). Choice.

    Then there’s the so called ‘secondary’ cities within China which can have 3-10million populations. Chengdu, Guangzhou, Fuzhou etc.

    Ok so if the future isn’t Qantas then what of Jetstar?

    Why doesn’t Jetstar fly from Australia to mainland China (except via SIN)? Are the only Asian tourists interested in heading to Cairns & the Gold Coast Japanese?

    As ever there just seems to be a glaring gap between the rhetoric and the reality.

  • 11
    ltfisher
    Posted August 25, 2012 at 2:57 am | Permalink

    Maybe the QF paint shop was fully booked and there wasn’t time to put the roo on the QF Cargo Airbus I saw in Sydney on Mon 20th…or had roo got advance advice on the QF annual loss, decided enough was enough, and hopped off?

  • 12
    Ben Sandilands
    Posted August 25, 2012 at 6:51 am | Permalink

    This may help. (Or not!)

    http://blogs.crikey.com.au/planetalking/2010/12/07/qantas-kangaroo-banished-from-new-freighter/

  • 13
    ghostwhowalksnz
    Posted August 25, 2012 at 9:38 am | Permalink

    Itfisher, the cargo jets lack of a kangaroo is a bit baffling as Lufthansa cargo and MAS cargo, to name a few have full airline branding.

  • 14
    Uwe
    Posted August 25, 2012 at 7:32 pm | Permalink

    Ben, comment #7 in your link is a hoot in this context ;-)

    What about the Taiwan/China thing? ( Other Airlines have “special livery”
    planes to fit the “exclusive or” access problem )

  • 15
    ltfisher
    Posted August 26, 2012 at 2:20 am | Permalink

    Thanks Ben for the QF freighter history. It really does smack of a continuation of the ‘second class’ approach which some airlines took in the past to staffing their cargo ops with pilots on a separate, lower, pay scale, although flying exactly the same aircraft as used on passenger operations. The more general concern however is that these days too often the customer doesn’t have a clue who is operating the aircraft, painted in a company’s livery, or naked.

  • 16
    green-orange
    Posted August 31, 2012 at 4:54 pm | Permalink

    The A380 is the most fuel efficient aircraft. By miles. No Boeing aircraft can compete on long haul routes.

    The claimed efficiencies of the 787 for direct flights is swamped by their higher costs to buy compared with older single aisle aircraft (the repayment costs outweigh the lower running costs of older aircraft). At the end of the day Qantas can’t really justify such a major increase in debt in a year they announce a big loss.

  • 17
    green-orange
    Posted August 31, 2012 at 4:55 pm | Permalink

    (higher running costs I mean).

  • 18
    TT
    Posted August 31, 2012 at 5:29 pm | Permalink

    Speaking of airline logos on their freighters – I remember a few years ago (during the GFC) Cathay Pacific Cargo try to save fuel remove paintwork from most of the B747-400 bodies (only retain the logos on the tail and the head section). They claimed by doing so it would reduce the weight by several hundred pounds (thus save fuel usage).

    Fast forward to 2012 and I can see CX cargo brand new B747-8F freighters with full paintwork… it does make me wonder all the claims of high fuel prices by airlines eating into their profits, yet there are some minor thnigs that airlines can do to save fuel yet they don’t want to exercise it?

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