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Feb 23, 2015

Qantas versus Growth revives aviation-trade policy issues

Commentary With airline activity continuing to surge in China and the Middle East it might be time to replace the tyranny of distance arguments about Qantas 'protection' wi

How about double daily Etihad A380s for Sydney and Melbourne?

Commentary With airline activity continuing to surge in China and the Middle East it might be time to replace the tyranny of distance arguments about Qantas ‘protection’ with a discussion about the tyranny of growth.

And with Qantas possibly outlining firm plans to begin expanding its fleet at its first half year financial results briefings this Thursday, the major Australian flag carrier may have better news for those concerned that it is being swamped by foreign airline activity.

The key to that good news could be a decision to exercise some of the bargain priced options it has held since late 2005, when it first ordered or optioned up to 115 Boeing 787 Dreamliners.

(That deal has been much modified since then, but it remains substantial, and the only deliveries from it have been eight 787-8s for its low fare brand Jetstar.)

The point is that in a world that has been delivering around six percent growth annually in international traffic through the major Australian gateway airports for years, the until recent Qantas policy of standing still against the tsunami to reorganise the businesses translates into plummeting market share.

The problem, if it is a problem, is compounded by the clearest of signals that most of the growth in coming decades will comes from China, the rest of eastern and northern Asia, the Middle East, central Asia, eastern Europe, and Africa, the Africa that contains massive largely unrealised mineral and energy resources.

As a ‘mature’ market, Australian demand for overseas flights will grow, but at nowhere near the rate of increase from rapidly emerging markets that want to fly here, and buy more of what we grow or mine.

At the moment one of the key disadvantages for a “little” or “cautious” Qantas, no matter the quality of those arguments, is that Qantas is seen in trade and tourism quarters as attempting to stand in the way of this growth, saying “Not until I’m ready”.

But if fuel costs have really come down in a lasting manner, and if Qantas has finally shrunk itself into a fighting fit midget, maybe the pivotal moment is nigh, rather than ‘nay’.

There are difficulties. The original excitement about the 787 Dreamliner was ‘route fragmentation’ as well as the replacement of the 767 and younger A330 fleet, and the accelerated departure of aging 747s on those routes where frequency could be increased freely, rather than run into problems arising from major airport congestion, such as in Sydney, or London Heathrow, or Los Angeles or Hong Kong.

However Qantas since 2005 has radically shrunk its reach so that its major lift is to the US, followed by token daily returns to London from Sydney and Melbourne via Dubai, with much of the flying to and from the European sphere from cities other than Sydney and Melbourne being given away to Emirates.

If Qantas were to adhere to that focus, it needs more A380s, not 787-9s, because slots at the major middle east, European, and American and Japan and China airports are at prevailing growth rates, totally wasted on smaller jets.

However, if, as Qantas group CEO Alan Joyce has on rare occasions hinted, it wanted to re-open some abandoned routes (like Manchester or Amsterdam) or take on new routes, the 787-9 might be the starting point, although the pace of growth is such that maybe the much larger Airbus A350s 0r Boeing 777-X series would be more effective in the long run. The Dreamliners looked like giant killers ten years ago. Now they look like toys.

This Thursday’s first half FY15 results will be good for Qantas. (Or else.) The guidance has been very good. But whether the fleet news is good is open to conjecture, with most analysts cautiously anticipating some movement to exercise some of the Dreamliner options, which will, thanks to the Dixon era, produce what may be the cheapest 787s for any airline taking delivery of this type.

By coincidence the three leading Middle East carriers, Emirates (way out in front) followed by Etihad and Qatar Airways, have been submitting growth scenarios to Canberra that are opposed by Qantas. Last week the Trade and Investment minister Andrew Robb, was even turned into chief spruiker for more capacity for Qatar Airways by one report, and this morning it is Etihad’s turn to seek more capacity on Australia routes.

This polarising debate, about ‘throwing open’ Australia to foreign carriers that are too cheap, too successful, too well run, too supported by their investors, and too ‘not like us’ needs to be much more sophisticated than it is.

It’s also a debate that rages in America and Europe, and not just against Middle East carriers, but low cost giants like Ryanair and the astonishing rise of Norwegian, which has the legacy carriers of Europe and America in a frenzy of hate because it is perceived as being potentially far more effective than say Emirates or Etihad.

Norway, as one of the most costly, and it might be argued, entitled states when it comes to high costs of doing business, now has a flag carrier that is massively outsourcing its employment base to Ireland, a low cost Euro zone economy in terms of labour, as well as Thailand, just for starters.

It has always been tempting to think of Norwegian as achieving what Jetstar had hoped to do with an arc of offshore Asia bases for its operations, except that it hasn’t as yet come anywhere near achieving such an outcome, and seems bogged down in high cost locations like Japan and Hong Kong, while pausing its activities in Singapore.

But back to the Australian situation. The value of free or ‘freer’ trade to Australia is said to vastly outweigh the value of Qantas to the national economy, the more so if the former was cut back as a consequence of waiting for Qantas to get comfortable with the twenty first century.

Special pleading from Qantas is unlikely to gain much traction. As the aviation growth switches to offshore sources like China, so the relevance of national Australian brands to those newly enriched and motivated travellers falls toward zero.

Fairness in outcomes in traffic access to Australia is vital. But so is the need for Qantas, or Virgin Australia, to continue to build fair and profitable partnerships that will keep their brands alive in massive new markets like China so that they can swim with the flow, rather than get smashed trying to resist it.

This Thursday might see Qantas tell us more about how it might grow with the flow.

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12 thoughts on “Qantas versus Growth revives aviation-trade policy issues

  1. paul rogers

    Will be interesting to see if Qantas do base some 787s in Dubai and take up some European destinations in their own right!
    There was a plan way back when Qantas flew via Bahrain to London to base some 767s in Bahrain and operate from Bahrain to Frankfurt/Paris etc.
    Fleet wise the interesting quandry is what they will do with the Santiago and Johannesburg routes, i dont see CASA allowing the use of 787s on these routes anytime soon, which only leaves the 380,
    If Qantas however do not acquire anymore 380s, then perhaps they could use the 787 on Melbourne to Los Angeles double daily, in lieu of the current 10 times per week schedule 7 380 3 744?

    [Very attractive ideas. I’d also like to see the 789s do SFO non-stops.]

  2. Red Devil

    With secrecy surrounding the QF/EK deal re on carriage rights with one suggestion as low as 7%(hardly covering costs), maybe it is time to stop complaining and start doing and henceforth stop gifting the opposition(cleverly disguised as a partner) traffic and begin to take 100% of the revenue on it’s own fuel-efficient metal.

  3. reeves35

    Route fragmentation being the dominant force in aviation was always a bit of a dream and the belief that it would remove hub flying always a myth.

    Whilst there has been growth in P2P flying, the major hubs have experienced the most growth with them adding new services to secondary cities rather than being replaced by services between 2 secondary cities.

    Many people damn the A380 as being too big but with inter-hub traffic continuing to grow and nearly all of these airports facing restrictions in capacity growth, the A380 (and 777X) will be the main aircraft operating into inter-hub flying within 10 years.

    Already EK is moving to a point where the 77W will soon be its smallest aircraft operated. Due to its location, it is the ultimate hub but its liking for larger aircraft will be matched by its competitors as they seek to keep up with EK’s reach

  4. Confirmed Sceptic

    The 787: can’t live with it, can’t live without it.

    Qantas is in the odd position of having these 787 deliveries available very soon, at crazy low prices. Too bad its the wrong aeroplane for the route network. The majority of the routes need either an A330 (9 hrs) or a 777 (14 hrs) or indeed an A380. I think that the A350 might be the best compromise one-size-fits all, but sadly not available this decade.

  5. Tango

    Bargain prices on 777-300ERs coming to a kiosk near you!

  6. patrick kilby

    Confirmed Sceptic I suspect QF will also take some 787-10s for that reason for the 9-10hr routes with more (A359 size) capacity, and also take some (couple) more A380s. Not a prefect solution though but a good way to sue the bargain basement prices to best effect.

  7. paul rogers

    Confirmed Skeptic, why is the 787 the wrong aircraft for the Qantas network?
    The 787 is capable of doing 9hr sectors Ok, and as United have shown it can do 14-15hrs!
    But you must not forget that the Qantas Domestic network is very important to Qantas,and one of the main reasons Qantas chose the 787, was because unlike most Airlines in the world,QF need a wide body Aeroplane that can operate domestic sectors of 1-5 hrs!
    The 777 and A350 whilst capable Aircraft in their own right, are too big to op Melbourne Sydney or to/from Perth at current frequencies.
    So the 787 was chosen as it can do both, and ultimately will give Qantas a very efficient 3 type fleet, 737/787/380,
    However agree with patrick to bridge the 787 380 gap, they will need some 787-10s,

  8. Confirmed Sceptic

    To clarify, and to answer Paul R.’s points:

    For under circa nine hours the A330 is the current champ for lift/efficiency. The 787 certainly looks like it has the chops to operate at a profit on anything from an hour to twelve or so. BUT, QF already has a mature A330 fleet that operates in the 1-9 hour sector routes at a profit.

    Not to say that the 787-9 probably could not do those routes and the handful of longer sectors that QF should be operating already. (Beijing, Mumbai, SFO, YVR to name four off the top of my head). But we need replacements for the 747 more than we need replacements for the current (more than adequate) twins. And the long range sectors that I mentioned could be operated with a 777 or 350 as well or better than the 787.

    As far as the domestic wide body ops go, I think that the A330 and 787 are equally inappropriate, using the common industry metrics. Of course, our city pairs are uncommon, so perhaps either will generate the requisite profit. The per-sector savings may amount to a couple of hundred in fuel and the same in finance costs for the 787 over the 330…so say around 3 or 4 thousand each oer day. Over five planes. Seven million a year. Noise, really.

    (I am an A321 believer in the cycle & load answer for the short haul trunk routes, but that is easily tempered by what seems to be seasonal fluctuations in loads, prices and costs.)

    One thing is certain: Qantas is asinine in having Airbus narrow bodies/Boeing wide bodies at Jetstar, and a mixed bag of makers and types at mainline. All the potential training synergies in the world frittered away on the altar of industrial ideology. (Not to mention the concurrent F-100 and 717 operations by owned and contracted operators. Its as bad as Ansett was in the old days.

  9. Rais

    Perth-Dubai? All right, I know, the airline that still calls Sydmelbris home. That’s all right, other countries’ airlines give Australia’s Western gateway the comprehensive service that Qantas refuses. Perth Airport website says there are 19 international airlines that operate at Perth Airport. It includes Qantas because you can fly to Sydmelbris and join an international flight from there. So there are 18 real ones, oddly including Jetstar.

  10. paul rogers

    Agree Perth Dubai would be a perfect route for a Qantas 787-9, and while there at it, why not at least a Qantas 737 800 daily Perth Singapore!

  11. Red Devil

    Try something new. Melbourne-Singapore-London! Then Perth passengers have somewhere to go!

  12. ghostwhowalksnz

    Rias, qantas flies Perth Auckland non stop… but not in off season.

    Sceptic, the Sydney Melbourne pair with up to 7 million passengers a year is up there with the Japanese city pairs as the most heavily traveled routes in the world. And they use 777’s!
    The problem with using widebody on domestic routes only occurs when they are configured for international routes and the mix of premium seats is wrong. Im sure Jetstar has been using its 787s on the Melbourne Sydney route