Fleet planning

“The 787 is an excellent aircraft and remains an important part of our future,” Qantas CEO Alan Joyce said at the airline’s AGM in Canberra on November 2. “However, circumstances have changed significantly since our order several years ago. It is vital that we allocate capital carefully across all parts of the Group.”

But given the first 787-9 wasn’t due for delivery until 2014, and the Qantas Group will still have to finance the 15 787-8s on order which will begin entering the Jetstar fleet from the second half of next year, the decision is less about deferring capital outlays and more about banking the financial compensation from Boeing given the 787’s repeated delays.

Qantas says total “cash inflow” – in effect compensation from the 787-9 cancellations is US$433 million, of which it will receive US$355 million in the current 2012-13 financial year.

With the -9 order cancellation Qantas’s commitment for that “excellent aircraft” is just 15 firm 787-8 orders, plus options and purchase rights on 50 787-9s, which would be delivered from 2016 at the earliest.

“Fifty 787-9 options and purchase rights have been retained and brought forward by almost two years, available for delivery from 2016 to align with our International turnaround plan,” Joyce said.

So, if at all, Qantas won’t see the 787 in its own colours until 2016, more than a decade after the original 787 deal was announced.

And what a deal that was.

Qantas’s original 787 order, announced in December 2005, was for up to 115 787s, comprising 45 firm orders (15 of which were for the -8), 20 options and 50 purchase rights. At the time it was planned the first 787s would enter service with Jetstar in 2008. It was a massive order made at a time when the airline was riding high, having made a profit before tax of $1 billion for the 2004/05 financial year (which saw the airline pay a fully franked dividend of 20 cents per share and each employee $1,000 one-off cash bonus).

But then in June 2009, after the global financial crisis put a squeeze on airlines everywhere, Qantas announced it had cancelled orders for 15 787-9s, while the first 787s to be delivered to the group was to be 15 787-9s for Jetstar, with the deliveries of the 787-8s to begin in late 2014.

Then in July 2010 Qantas announced a switch to the delivery order, with the first deliveries changed back to the 787-8, which at that time were due to enter service from mid-2012. Then the first of the 787-9s were due to enter service from late 2014.

What has been a constant through all those changes has been Qantas’s promotion of the 787’s benefits, especially its fuel efficiency.

“The B787 is a game-changer,” Joyce said when Boeing brought a 787 demonstrator to visit Australia for Qantas’s 90th anniversary celebrations in November 2011. “It offers greater fuel efficiency, lower operating costs and a better customer experience than current aircraft of similar size.”

Certainly the promised fuel efficiency savings are sorely needed. At $4.3 billion, the fuel bill accounted for nearly a third of Qantas’s total expenses in 2011-12, and was nearly 20 per cent higher than the previous year.

In that context the 787s can’t come soon enough. But instead Qantas seems cornered in a position where global financial uncertainty, aggressive international competitors with lower cost bases and an astronomical fuel bill means it can’t afford to buy the aircraft it arguably can’t afford not to buy.

Undoubtedly the 15 787s that are definitely on their way will bring benefits to the Group, with the 787-8s allowing Jetstar to release A330-200s back to Qantas for domestic service, which in turn will allow the retirement of the last 767-300s.

As a stopgap Qantas has accelerated the upgrading of 15 767-300ERs with new seat covers and an inflight entertainment offering where content is streamed wirelessly to individual iPads made available to each passenger – a much more cost effective way of providing on-demand video and audio content to passengers compared with refitting an aircraft with seatback IFE.

Interestingly the 767 refresh is seeing the aircraft fitted with new grey leather seat covers with, in business class, orange arm rests. That aesthetic doesn’t match any other Qantas aircraft interior, but instead matches the interiors of the A330s currently in service with Jetstar and that will be returning to Qantas mainline service. Those aircraft too do not feature built-in IFE, so it seems likely the iPad IFE system for the 767s will be transferred to the ex-Jetstar A330s as they come into Qantas service.

“The A330s are perfectly suited to the routes between the east coast of Australia and Perth,” Joyce told the AGM. “The fleet of A330s is young and compared to the B767 they fly faster, burn less fuel and are more reliable. It also provides a premium flying experience for our passengers.”

The 11 Jetstar A330-200s will join eight already in Qantas mainline service, with a ninth due for delivery in November, plus 10 larger A330-300s for a total fleet of 30 A330s by 2015. That will make the A330 the most populous member of the Qantas widebody fleet flying alongside what will by then be just a nine-strong 747-400 fleet (including the six 747-400ERs), plus the 12 A380s.

Qantas does have orders for another eight A380s, but has twice deferred A380 deliveries in the name of postponing capital expenditure – firstly in August 2011 when it announced the delay of the delivery of the last six A380s on order by five to six years to the 2018-21 timeframe, and in May this year announcing that the two A380s that were scheduled to arrive in 2013 have been pushed back to 2016-17. Assuming those A380s are now delivered as currently planned, that will allow for the retirement of the last of the 747-400s/-400ERs through to 2021 when the last A380 is delivered.

If the futures of the A380, A330 and 747 in the Qantas fleet seems clear, where the 787 sits is less so.

Australian Aviation has heard that Qantas in fact considered allocating the 15 787-8s on order to Qantas Domestic rather than Jetstar, but that the decision was made to proceed with allocating the -8s to Jetstar as the 15 787-8s do not offer enough lines of flying to meet Qantas Domestic’s widebody needs. So while Qantas may have passed up the opportunity to take up the fight to Virgin Australia on the product front in pitching 787s against A330s, the 787s’ delivery to Jetstar will at least allow Qantas mainline to rationalise its fleet by removing a whole type, in the 767, from service.

But where the 50 787-9s on option would go is unclear. Ultimately some may be used to begin replacing the A330, but the oldest A330 was delivered in 2000 and so their need for replacement is some years off yet, and so the first -9s then have to be used for capacity growth. Here the picture is a little unclear. Jetstar’s long-haul international operations haven’t grown as rapidly as perhaps first anticipated, and in going from 11 A330-200s to 15 787-8s already represents a 35 per cent increase in capacity. So there seems little need for 787-9s in the Jetstar fleet in the short to medium term.

Clearly Qantas International is struggling and so it too seems an unlikely candidate to take 787-9s unless Qantas’s turnaround plans for its international arm are a resounding success.

Alan Joyce has suggested that the Qantas could use the 787-9s for new services into Europe under the airline’s new alliance structure with Emirates, taking advantage of European traffic rights Qantas has that Emirates doesn’t. Perhaps the 787-9 could also be used for trans-Pacific services to secondary ports such as San Francisco and Vancouver, and more direct flights into Asia, such as to India and China. But it is hard to see just where 50 787-9s could be deployed without replacing at least some of the existing A330 fleet.

Interestingly, Joyce also used the AGM to address the criticism that Qantas should have ordered the Boeing 777.

“As it happens, I wasn’t even around for the decision not to buy B777s. But if I had been, I would have fully supported the decision not to buy,” Joyce said.

“The first B777 was delivered in 1995. At that time we had a fleet of 18 B747s that was sufficient for our long-haul needs. But in any case we would never have ordered those early B777 variants because they did not have sufficient payload or range.”

Joyce also defended the decision in 2000 by Qantas to order the A380, A330 and 747-400ER, with the 777, including in 777-300ER form, again overlooked.

“Undoubtedly these were the right decisions as we began the transition to a simplified, next generation 21st century fleet.

“By the time the first B777-300ER was delivered in 2003 with the payload range to match Qantas B744 operations, we were already committed to the A380s. A good decision, because the A380s have a seven per cent unit cost advantage over the 777-300ER.”

But if much of the interest in the Qantas Group fleet centres around the widebody types, most of the activity of late has been in the narrowbody fleets of both Qantas mainline and Jetstar. Today Qantas has no fewer than 62 Boeing 737-800s in service (with eight more due for delivery through to the end of 2013) across Qantas Domestic and Jetconnect. Jetstar, meanwhile, has about 50 A320s and six A321s in service in Australia and New Zealand (and 28 across Jetstar Asia, Jetstar Pacific and Jetstar Japan).

“By the time the first B777-300ER was delivered in 2003 with the payload range to match Qantas B744 operations, we were already committed to the A380s. A good decision…”

The 737-800s and A320s constitute the bulk of the 122 new aircraft the Qantas Group has taken delivery of since early 2008.

“Qantas has had the bulk of these new aircraft with 75 new aircraft joining the fleet, while Jetstar has received 47 new aircraft,” Joyce said.

But tellingly, most future aircraft deliveries for the Qantas Group will be for Jetstar, with the October 2011 order for 32 A320s and 78 A320neos the clearest indication yet of where the Qantas Group sees its growth prospects. In all, the Qantas Group has ordered no fewer than 179 A320s/A320neos for Jetstar.

In all, as at the time of the AGM in early November, the Qantas Group had 308 aircraft service across Qantas, QantasLink, Qantas Freight/Australian air Express, Jetstar, Jetstar Asia, Jetstar Japan, Jetstar Pacific and Network, with an average fleet age of 8.3 years.

“That makes our fleet younger than the fleets of Delta, Southwest, American, United, Lufthansa, British Airways, Air New Zealand and Cathay Pacific,” Joyce noted.

By comparison, at early November Virgin Australia had an average fleet age of just 3.9 years, with 108 aircraft in service.

Said Joyce: “We are now positioned to stay within our target average fleet age of eight to ten years, and to do so with lower ongoing capital requirements.”