Cost & Opportunities

“Rex warns Australia is facing a “looming catastrophic shortage of pilots”, and that the shortage “will turn into a severe crisis in 12 months”

Bureau of Transport and Regional Economics (BTRE) figures show regional airline passenger numbers grew by 8. 2 per cent in 2006 over 2005. Australia’s second largest regional airline, Regional Express, posted a 50 per cent increase in net profit for the 2006/07 financial year of over $23 million. And the mining boom is driving big growth in contract charter flying work in Queensland and especially WA.

But there are big challenges too. The drought is likely impacting services in some regional areas. Airport and security costs continue to rise. Slow CASA processes hinder business growth.

There is no medium term viable replacement aircraft for smaller aircraft like the 19-seat Metro and even larger types like the 30-seat Saab 340. Maintenance engineers are becoming harder to find, while for some airlines pilot turn-over is at crisis point, even leading to flight cancellations due to a lack of crews.

“One of the key observations I would make is that we have two streams of regional aviation,” says Terry Wesley- Smith, CEO of industry lobby group the Regional Aviation Association of Australia (RAAA).

“There are those servicing rural and remote communities not getting an advantage from the minerals boom, where the long term outlook is reducing services as costs increase, populations decrease, and ageing aircraft are retired without replacement. Then there is the second stream riding the resources boom, which will continue to do well while the boom lasts, provided that they can retain sufficient crews to service the market. ” Even discounting contract charter mine flying the regional airline industry as a 25 whole appears to be growing.

BTRE figures for 2006 show regional airlines carried 5. 25 million passengers. But the BTRE defines regional passenger numbers as RPT services between metropolitan areas and regional areas; and between regional areas – so includes a limited number of Qantas Group and Virgin Blue 737/A320 jet services.

Thus a the picture for ‘true’ regional aviation activity is harder to find.

What is clearer is the trend towards a fewer number of larger operators flying to a smaller number of regional centres. The BTRE’s last detailed survey of regional aviation was released in November 2005. It found that the 240 regional ports served in 1988 had fallen to around 190, a net loss of 19 airlines since 1984, and an increase in average aircraft size with around 87 per cent of passengers now carried on aircraft seating from 30 to 100.

“Operating without the advantage of economies of scale, regional carriers tend to face the challenge of high capital and operational costs and low returns,” the BTRE’s 2005 report says. “Regional carriers that are facing continuing cost pressures and financial losses will often minimise cost by either reducing or terminating air services on unprofitable routes. Most of these routes are to remote or thinly populated communities. ” This is driving the consolidation of the industry, which does see Australia’s bigger regional operators performing strongly. Rex, which operates over 30 Saab 340s, made its $23. 6 million profit on revenues of $225 million, giving it a profit margin more than twice that of Qantas’s.

While Qantas does not publish profit figures for its regional airline arm QantasLink, it says it too has been performing strongly.

“The demand for regional air travel continues to grow across all market segments, driven in part by Australia’s buoyant economy and theresource and industry sector in WA and Queensland – but also increasingly strong tourism numbers,” says QantasLink boss Narendra Kumar, Qantas’s group general manager regional airlines.

QantasLink and Rex compete on Australia’s busiest competitive regional airline turboprop routes: Sydney to Dubbo, Wagga Wagga and Albury, and Melbourne- Mildura, which in the 12 months to June 30 2007 have grown by 11. 6, 17. 4, 6. 1 and 9. 8 per cent respectively (total Australian domestic airline market passenger growth was 7. 7 per cent in the same period).

“We have grown capacity by 16 per cent in the last financial year, with a corresponding increase in passenger numbers,” says Kumar.

“QantasLink works closely with local tourism bodies and has added extra capacity, sale fare initiatives and offered a wider range of fares to help stimulate demand across our network. ” Regional Express (Rex) too attributes its growing traffic numbers to its ability to keep ticket prices low, with an average fare across its network of about $140. Rex reported traffic growth of 18 per cent in 2006/07, to 1,416,250 passengers.

It’s harder to quantify the growth in the mine contract charter area of the industry, as figures are not published publicly, but it appears this segment in Queensland and WA in particular is doing even stronger than the ‘trunk’ regional RPT routes.

“Regional aviation in Western Australia is passing through what is arguably the most buoyant period in its history, characterised by increasing passenger numbers and steady yields,” explains Skywest Airlines managing director Hugh Davin.

“The mining boom is overwhelmingly the key driver behind the current growth and prosperity within both the airline and contract charter sectors of the industry in WA,” Davin says.

In Queensland, “Mining is having a positive effect, of course,” says MacAir managing director Randal McFarlane, “however, it is not a bonanza like the mining itself as there are competitive pressures as well as significant increases in costs and a lack of staff. ” Davin agrees about the competitive nature of mine flying. “The open market nature of the charter sector gives rise to fierce competition as the opportunities to service the expanding needs of the mining giants emerge, and we are seeing an increasing presence of east coast based operators such as Alliance and OzJet in Perth adding additional capacity into the local market. ” Certainly bigger, more efficient aircraft are being brought in to service mine charter flying, as the mining companies need to move larger numbers of people around, and look to provide greater amenities to their precious staff.

“The quality of the air service connection to the mine may be the final decider for an employee in regard to choice of employer and a trend towards carrying greater passenger numbers on services involving reduced flight times and higher levels of comfort has come of age in the West,” says Skywest’s Davin.

“The major charter companies now operate high capacity jets in the 100-seat plus category, aircraft such as the Fokker 100, BAe 146-300 and Boeing 737, as mining companies reduce their dependence on smaller jets and slower turboprop solutions.

In 1994 a 36-seat Dash 8 was the big end of town in the Perth charter market, today a 100-seat jet is the sought after solution. ” This growth in aircraft sizes and numbers, plus growth in the wider Australian and international aviation industries, is now really starting to bite some regional operators who are struggling to recruit and retain suitably experienced pilots and maintenance engineers.

Indeed in an October 9 media release Rex says Australia is facing a “looming catastrophic shortage of pilots”, warning that the shortage “will turn into a severe crisis in 12 months” due to increasing demand for pilots from larger airlines.

“Already some airlines are struggling to find enough pilots to crew their regular schedules and many are resorting to cancelling flights to cope with the situation,” says Rex chief of staff, Jim Davis, in the extraordinary release.

“The Rex cancellation rate, for example, is now running at four times historical levels. ” That’s not surprising when Rex says that it has lost 20 per cent of its pilots in the last three months alone, “poached” by Qantas, Jetstar and Virgin Blue.

In calling for government support for pilot training Davis warned, “We foresee the possibility that many smaller regional cities of below 30,000 passengers per annum will no longer have an air service as regional airlinesare forced to concentrate on the bigger and more profitable routes. ” Rex is not alone in its assessment of the pilot shortage. “Pilot and engineer retention and skill levels are at breaking point,” notes one airline executive. “The growth in the majors is vacuuming this resource. ” “Pilot and engineer shortages are certainly hurting the regionals,” says MacAir’s McFarlane. “We are again being used as a ‘training ground’ with no compensation. I can’t see this changing much. Cadet programs etc are to a degree band-aids. ” Says Skywest’s Davin, “These are pivotal issues of concern for the industry – they are potential ‘show stoppers’ for ongoing service delivery and future growth. ” The bigger the operator the better they are able to offer a stable career path.

“On the pilot availability issue, Skywest is doing well as the company offers a career opportunity from entry level first officer on the Fokker 50 with transition right through to captaincy on a 100-seat jet and a secure Perth based lifestyle,” says Davin.

“Our issue will be pilot availability to service our growth plans as the average entry experience levels available to service our Fokker 50 requirements reduces.

“The company is looking into a number of ways of coping with this situation and particular emphasis will be placed upon our ability to train less experienced pilots to the required standards as distinct from the traditional assumption that a competent pilot must be substantially experienced.

“Our experience shows that in many cases a well trained lower time pilot may in fact offer a higher standard outcome than a higher time pilot who has not been given the opportunity to develop within a highly supervisedstrict training and ongoing checking regime, and this is where our future focus will lie as we plan for an increasing scarcity of pilots. ” Certainly Rex’s recent announcement of a cadet pilot scheme is indicative of the pressures facing regional airlines to find pilots.

“Rex is fortunate in being able to attract a sufficient number of applicants to join our ranks,” says Jim Davis.

“Furthermore, our very healthy financial situation has allowed us to implement a cadet scheme whereby 40 cadets annually will be sheltered from most of the cost of the pilot training in return for a five year commitment. We are also in discussions with several parties to run our own flying school so that we can be assured of a regular supply of pilots of the high standard that Rex requires. ” Pilots on the infamous Pprune bulletin board website have a simpler solution. “How about trying to spend some of the huge profits on retaining some of the excellent aviators instead of these hair brained schemes. . . ,” says one anonymous poster identifying as a former Rex pilot. “Like I have said before, PAY THE PILOTS MORE MONEY. ” However, Davis states in the release, “The smaller operators have no defence against such massive recruitment as they are in no position to match the salaries and conditions of the large carriers. ” But not even Qantas is immune from these pressures.

“The increasing demand for pilots locally and globally will place increased pressure on regional carriers,” says QantasLink head Kumar.

“We continue to develop and implement strategies to meet our operational requirements, such as including Qantas pilot cadets in QantasLink’s operation.

“The Qantas Group has also established its own pilot training business, with the aimof training 3000 new pilots for the group over the next 10 years. ” There’s no doubt pilot employment prospects now look better than they have in a generation, with the ready supply of GA trained pilots prepared to work their way through GA and regional aviation on their way to the majors apparently drying up.

The drought, meanwhile, is having an impact on regional aviation, but perhaps not to a disastrous extent, mainly as most services are to the larger regional centres that can sustain healthy traffic volumes.

The drought’s impact “is difficult to measure, given all of our routes have continued to experience growth,” says Qantas’s Kumar. “This does not mean that the drought is not having an impact, however our extra capacity and fare initiatives across the network have offset any negative impacts of the drought. ” Offering the MacAir perspective, Randal McFarlane notes, “Regional aviation is still tough outside of the main coastal centres due to drought. ” A war of words between the principals of Rex and South Australian independent regional O’Connor Airlines over competition on the Adelaide to Whyalla route highlights that for some operators times can be tough, and the evolutionary battle of the survival of the fittest continues.

O’Connor Airlines managing director Leigh O’Connor,told ‘Southern Cross Broadcasting’ on September 25 that Rex was competing unfairly and had initiated a price war on the route. In a September 27 release, Rex CEO Geoff Breust responded by calling upon O’Connor to substantiate or withdraw the claims, and threatened legal action.

“Rex does not interfere in the internal affairs of other airlines but we will not accept being made a convenient scapegoat for covering up the inadequacies of others,” Breust said in the statement.

“It is common knowledge that O’Connor Airlines’s Cessna Conquest was grounded permanently by the Civil Aviation Safety Authority (CASA) last month because of airworthiness concerns with that aircraft type. Prior to that O’Connor Airlines had to ground and permanently write off another aircraft due to corrosion found during an inspection. It is understood O’Connor’s remaining two aircraft are due for the same corrosion inspections in a few months’ time.

“With half its fleet grounded and no replacement aircraft in sight, it is obvious to all why O’Connor Airlines has had to withdraw from half of its routes. ” O’Connor Airlines has struggled with a CASA grounding of Cessna Conquests with more than 22,500 flying hours and the discovery of corrosion probof QantasLink’s regional fleet – including the introduction of the newer and larger B717 jets and Q400 aircraft – is confirmation of the Qantas Group’s ongoing commitment to its regional operations, and confidence in the continued growth of the regional aviation market,” says Qantas’s Kumar.

It’s in that space below the majors that the biggest questions remain.

“The ageing Australian charter and regional RPT fleet and the consequent need to introduce the next generation of aircraft, coupled with increasing DOTARS security screening costs, environmental considerations and increasing fuel prices will add significantly to the cost of air transport going forward,” notes Davin of Skywest.

Airport and security costs are of a concern to MacAir’s McFarlane too. “Airport and security costs are still rising.

The biggest issue here is that requirements and returns are being made on non-growing markets. The major airports are seeing growth and therefore throughput that regional centres are not. This obviously impacts on the passenger charges and hence the airfare and therefore demand. ” And then there are issues involved with dealing with CASA. “CASA is undergoing change and hopefully this will have a positive effect on outcomes going forward,” McFarlane notes. “Issues of staffing and experience are creating headaches, however. ” And in the golden west, there’s an awareness that today’s mining led good times won’t last forever.

“While the resource sector boom seems set to continue for many years to come, it will eventually plateau and long term plans need to consider the shape of the industry when the magic mining dollar is less able to support its ongoing needs,” says Davin.

“The regional industry really needs to consolidate and unite in its approach to handling many of these significant issues,” said the unnamed regional airline executive. “The likes of the RAAA are going to play a major part of our continued success and it is incumbent on every operator to contribute to the overall health of the industry through united support and contribution to bodies such as this. ” o lems in one of its Jetstreams, but ultimately all regional operators will struggle with fleet replacement issues. Apart from a handful of ATR 42s and Dash 8 Q200s, almost no new aircraft are being built with fewer than 50-seats.

In time this will likely mean further rationalisation as operators are forced to operate larger aircraft. But that will take time, as few operators are in the position to finance brand new aeroplanes.

Apart from QantasLink there is one other airline that can afford to invest in new ‘regional’ aircraft – Virgin Blue. The arrival of Virgin Blue’s E-Jets (see overleaf) could see some choice QantasLink and Regional Express turboprop routes the targets of Virgin Blue’s first real forays into regional markets with its 78-seat E-170s and 104-seat E-190s.

In the meantime, the “investment in, and expansion