The silver bullet?

However some question about the longer term role Qantas will play through Dubai remain.

Will it really deploy 787s in Dubai and will they be staffed by Australian crews based in Dubai or will they operate from Australian ports and if the former strategy is adopted what will be the basis of their employment?

Structural challenges

Giving context to the challenges facing Qantas International the airline’s CEO Alan Joyce in his speech to the National Press Club in Canberra Qantas CEO Alan Joyce warned about the high dollar and fuel and increased lower cost competition.

“We are living in complex times. By ‘we’ I mean every Australian individual, company and institution,” said Mr Joyce.

“The times are marked by uncertainty in everything from the value of the Australian dollar, to fuel and iron ore prices, to equity and property markets. That is challenge enough. But we are also dealing with permanent structural change.

Demand for minerals and energy has transformed Australia to a high currency economy, just as technology and globalisation have heightened competition from offshore providers of shopping, tourism, manufacturing and services. We have great assets and capabilities in this country. We should have high expectations of our ability to prosper.”

But Mr Joyce warned that “if we are to compete in this new environment – if we are to preserve and create jobs for young Australians and build sustained economic success for Australia – the reality is we need to respond comprehensively to this permanent transition.”

Again Mr Joyce warned that “adapting to change is never easy. It requires wisdom not to over‐react to the short term volatility. It demands courage to accept that there can be no return to the good old days. And it takes an effort of will to effect the transformation that is required. It’s not just about change it is also about the pace of change.”

The analogy Mr Joyce provided resonated with everyone in the aviation Industry.

“The world is speeding up, while here in Australia we still take too long to do almost everything. Take one example from the aviation world. As part of their revised five‐year plan, the Chinese are now in the process of building 82 new airports. That’s a new airport every 23 days. Here in Australia we’ve been talking about a second airport for Sydney for more than 23 years,” said Mr Joyce.

When Mr Joyce took over at Qantas in 2008 the Aussie dollar had averaged 73 cents for prior six years. Since 2009 it has averaged 93 cents and its now sits over $1. And before the GFC oil was around $87 a barrel buts since it has averaged over $100.

Compounding these problems Mr Joyce said that airlines main competitors have four attributes in their favour – their geographic location which allows them to aggregate passengers from multiple sources and disperse them efficiently; government‐backed infrastructure, especially 24/7 hub airports; low or no‐tax regimes for airlines and their employees; and a lower cost of labour.

Great airline poor business

In a variation on Sir Road Eddington’s famous “great airline lousy business” assessment of Ansett Mr Joyce told the National Press Club that a year earlier he said that Qantas International was a great airline, but a poor business.

On that occasion he set out the four pillars that would shape our transformation plan for Qantas International: partnerships and gateways; being best for global travellers; growing with Asia; and building a strong and viable business.

Since then Mr Joyce said that airline had been hard at work taking the hard but necessary steps to make our business more efficient and to determine our own destiny.

“We have put together the right plan,” he said.

“We are now at an inflection point, and I hope and believe the curve is set to turn upwards. Last month I announced a ground‐breaking ten‐year partnership with Emirates Airways, which is now under consideration by the regulators.”

Mr Joyce said that the partnership will extend the airline’s reach, while restraining our Costs and Dubai will become a one‐stop gateway to 33 destinations in Europe and 28 in the Middle East or North Africa.

“Dubai will complement Los Angeles and Dallas, the gateways to North America; Santiago for South America; Johannesburg for Southern Africa; and Singapore and Hong Kong for Asia.”

Initially Qantas will operates its A380s from Melbourne and Sydney to Dubai and then onto to London, with passengers from all other Australian major ports such as Perth, Brisbane and Adelaide travelling on Emirates to Dubai.

The airline and Emirates president Tim Clark have talked about “expanding Qantas metal over Dubai” but what that means is open to interpretation.

Dubai and 787

Mr Joyce has given some hints as to how the 787-9s – if they are confirmed – will operate from 2016. After his address to the National Press Club in the Q&A Mr Joyce said that he expected to operate 787-9s from Canberra to Dubai, flagging that the aircraft may be used to open up direct services from smaller Australian cities.

These might also include Darwin, Cairns, Hobart and Broome.

While those routes would make sense it is harder to see how the airline will deploy the 787-9s into Europe beside Emirates.

However Mr Joyce told the national Press Club that while he could never see Qantas returning to Europe in the circumstances that currently apply “I can see us returning to Europe because Tim Clark said he could see us returning to Europe in our own right.”

With Emirates operating to every major European port with either 777s or A380s, it begs the question however of where would you fit the smaller 787-9?

Would Qantas operate additional daily flights to key destinations possibly at off-peak times or open up new destinations, which would have never been served by the airline or perhaps help Emirates replace its ageing A330s with 787s?

Emirates operates some of its 26 strong 278-seat fleet of A330s to a number of smaller European cities such as Dublin.
And what is the status of Qantas’s two Heathrow slots leased to BA?

Asia a major focus

While it is clear as Mr Joyce said that to be part of Asia is to be part of the future, Asia has been a huge challenge for Qantas because of its significantly higher labour costs.

Mr Joyce is focused on Singapore and Hong Kong as primary hubs and notes that these are the bases for Jetstar Asia and Jetstar Hong Kong but transferring to Jetstar is not going to wash with premium flyers, who will find Singapore Airlines and Cathay Pacific far more appealing.

Mr Joyce does also flag connections with DragonAir into China from Hong Kong and China Eastern from Shanghai.

He also adds that Qantas will offer 40 per cent more dedicated capacity to Singapore and 25 per cent more same day connections onward across the region through.

But one is left wondering what the strategy will be for instance from Perth –the centre of the massive resource boom – where the airline operates just daylight three flights a week to Hong Kong and none to mainland China the biggest resource customer.

While Qantas operates double daily to Singapore from Perth and there is a code-share onto Shanghai with China Eastern, virtually all other options are Jetstar, which will not cut it with premium classes.

Cathay Pacific operates 10 weekly services from Perth and rumour has it that will climb to double daily next year. It is a great shame that competition regulators excluded collaboration.

It will be fascinating to see how Qantas can rebuild its Asia strategy and network and one would think the 787-9 will be pivotal asset from a customer appeal perspective – not to mention the economics.

In the shorter term – from April 1 next year – according to the Centre for Asia Pacific Aviation Qantas will deploy a daily 747-400 between Melbourne and Singapore, maintaining the sole mainline service between the two cities.

For Sydney to Singapore Qantas will replace the current daily A380 that goes onto London with a four times weekly A330 which will supplement the existing 3 times weekly Sydney-Adelaide-Singapore service.

“The Sydney-Singapore flights will also be retimed to support more Asia connections. Currently both the London-bound and Frankfurt-bound Sydney-originating flights land in Singapore within 30mins of each other in the late evening, making same day connections within Southeast Asia impossible,” says CAPA.

“The 747-400 Frankfurt service will operate until 26-Oct-2013, after which point Qantas will have to again re-adjust its Sydney-Singapore services. It could maintain the 747-400 service but terminate it in Singapore instead of continuing to Frankfurt or consider other options such as also down gauging the flight to an A330,” says CAPA.

Adelaide and Brisbane frequencies will remain the same but will be retimed.

The net effect of all the changes says CAPA will be an approximately 7 per cent decrease in Qantas seats between Australia and Singapore.
“But because about half of existing Australia-Singapore traffic transfers to Europe, Qantas claims it is increasing by about 40 per cent the number of seats terminating in Asia. This will give Qantas an opportunity to compete more effectively against Asian carriers, including Singapore Airlines, in the fast-growing Australia-Asia market.”

CAPA adds that if “the Emirates-Qantas partnership is approved, Qantas will also start code sharing on Emirates’ Melbourne-Singapore and Brisbane-Singapore services, increasing frequency as well as giving access to first class seats. Emirates currently has daily flights with 777-300ERs on Melbourne-Singapore and Brisbane-Singapore, both of which continue to Dubai. This will essentially give Emirates and Qantas two daily frequencies on both routes although a portion of the capacity on the Emirates flights does not get off in Singapore. The Emirates Brisbane-Singapore flight arrives in Singapore early in the morning, which is ideal for connections throughout Asia but the Emirates Melbourne-Singapore flight arrives in Singapore late at night.”

CAPA also warns on Qantas’s intention to put onwards Asian customers onto Jetstar.

“Qantas must undertake a significant structural change in how it sells and markets its Singapore services. Intra-Asia connecting opportunities will be available on Singapore-based Jetstar Asia, however it remains to be seen how willing the market will be to maintain loyalty to Qantas for Asian services if it means passengers must transfer from full service Qantas to low-cost Jetstar .”

This is particularly the case “when Qantas competitor Virgin Australia has a partnership with Singapore Airlines, enabling full service carrier (on either SIA mainline or its regional subsidiary SilkAir) flights from Australia to around Asia. Singapore Airlines also has far greater frequency between Australia and Singapore,” says CAPA.

In an interesting twist CAPA sees the exit of Qantas from Singapore for its London route as smoothing the way for the airline to revisit its RedQ premium operation based at Changi.

“For Changi, the loss of the Qantas Australia-Europe hub is relatively small and the potential gain of a Qantas Group Australia-Asia hub is relatively large. But ultimately Singapore may need to re-think its stance on a possible new regional full service carrier from Qantas if it is to fully exploit its potential as a Australia-Asia hub. With a full service regional carrier based in Singapore, Qantas would able to maintain and grow its Singapore operation as it would have a connecting product for both budget and premium passengers.”

CAPA ads that the Qantas Group is important to Singapore and Changi as its two brands now account for about 11 per cent of total capacity in the Singapore market. This makes Qantas the second largest player after SIA, which as a group accounts for almost 50 per cent of total capacity in Singapore (includes wholly owned subsidiaries SilkAir and Scoot and partially owned affiliate Tiger). Changi will want to make sure that Qantas maintains its position in the Singapore market.”

Trans Pacific options

Qantas talks to its two hub strategy in the US of Los Angeles from Sydney, Melbourne and Brisbane and Dallas Fort Worth from Sydney.
This is built around the A380 and 747-400ER.

Two questions beg answers going forward.

Will Emirates work with Qantas across the Pacific and will Qantas deploy the 787-9 as a hub-buster to destinations such as San Francisco, Seattle and Vancouver.

Perhaps it may use 787-9s to fly to Dallas Fort Worth from more Australian cities?

It must be considered likely that a rejuvenated United Airlines with 787s will increase its South Pacific presence possibly with flights from Denver or Houston to Sydney and Melbourne.

However, at the earliest the 787-9 for Qantas is disappointingly 2016 and that is the 50 options are firmed up.

The Emirates alliance going ahead will make that almost a certainty as it will assure the international division’s long term viability.