All in the mix

What changes?

These factors are of equal consequence today as they were 12 years ago, since, as many observers note, Qantas and Virgin Australia are moving into a competitive duet as full-service carriers. Significantly, both these carriers are now competing on every level – regional, domestic and international – just as was the case prior to July 2001.

Nor has much changed in the low-cost environment. From having Impulse and Virgin Blue competing in this sector up to the point Qantas launched Jetstar from the remains of Impulse in 2004, Australia still has two budget airlines – Jetstar and the recently rebranded Tigerair. While the latter lurched unconvincingly from start-up to being grounded to now what seems at last reasonable certainty of a brighter future, one crucial fact stands out that differentiates low-cost airlines from those that existed prior to Jetstar – both are owned by the major full-service carriers. As such, they will be operated as instruments to fulfill the respective commercial imperatives of the broader group strategies.

What has thus changed in the low-cost segment is the independence offered by Impulse and Virgin Blue as competing carriers to the established full-service airlines. This aspect was a key consideration for Australian competition authorities, which laboured over whether to approve Virgin’s majority acquisition of Tigerair. In the end the preservation of Tiger one out, a likelihood much greater under Virgin majority ownership.

These new dynamics are what are influencing the fleet compositions of Qantas and Virgin Australia. The move towards competitive stability is seeing fleets rationalised towards fewer types to optimise profits – and simplicity is the key.

Simplicity

The simplicity of fleet types has been an overarching strategy for both major carriers. Cost-savings through crew commonality, engineering and airport services are fundamental aspects of the airlines optimising profits, and the removal of older and ‘orphan’ types in the respective fleets has picked up pace in recent years. And it remains an important strategy in forward planning.

As Qantas CEO Alan Joyce explained to Australian Aviation: “We are reshaping our fleet profile and improving the economics of our aircraft through reconfiguration and simplification.
“We believe we have the right fleet strategy to meet our customers’ needs and position us for sustainable growth over the long term, while enabling us to retain flexibility and manage our capital expenditure appropriately,” he added.
The simplification process has been the ‘holy grail’ of all airlines, and with rising competitive pressures between the airlines and internal cost management imperatives biting, standardisation around commonality between aircraft types is increasingly important.

“We are reshaping our fleet and improving the economics of our aircraft through reconfiguration and simplification.” Alan Joyce

It helps to explain why, perhaps, there is very little difference between the domestic full-service fleets of Qantas and Virgin Australia with both using the 737-800 as their principal single-aisle aircraft.

Qantas mainline domestic narrowbody services will be operated solely the 737-800 from the beginning of 2014 when the remaining six -400 series aircraft will have been withdrawn. The Qantas Group will have 75 -800s in the fleet when current outstanding orders are fulfilled by the end of 2014. Similarly, Virgin Australia is concentrating its operations on the 737-800 for narrowbody for services domestically and to regional international destinations, the airline confirming its medium-term plan to remove the three remaining -700s from its fleet. The 737-800s will occupy the position as the staple domestic aircraft for Virgin Australia until the first of the 23 737MAXs on order are delivered in 2019, at which time the airline will begin rotating some of the older 737s out of the fleet.

Both major airlines also deploy the A330 on high-demand domestic routes and where competitive advantage is needed such as is currently the case in on trans-Continental services between the east coast and Western Australia.

The competitive value of Virgin’s A330-200s is well demonstrated by their deployment on east coast to Perth services. On June 6 Virgin Australia matched Qantas’s decision to deploy its A330-200s on all weekday services connecting Perth with Sydney and Melbourne, and on the majority of services between Perth and Brisbane. However, in Virgin’s case it will only be able to do so once its seventh A330 is delivered late in the third quarter of this year.

When Qantas fully retires its fleet of 20 767-300s by mid-2015, the mainline domestic fleets of both carriers will thus be largely equivalent in type – based around the 737-800 and A330, the latter becoming even more numerous in the Qantas domestic fleet as Jetstar transfers out of its fleet as 787s arrive.

In the emerging new low-cost market, Jetstar and Tigerair will compete on domestic services with the A320.

While Jetstar has gradually moved away from the true low-cost airline model to that of a ‘value carrier’, its cost base nonetheless remains significantly lower than that of mainline Qantas. Jetstar has enjoyed significant benefit from fleet simplification benefit since retiring the 717s it acquired from Impulse and concentrating on an all-Airbus fleet where engineering and crew commonality savings are derived.

Jetstar’s A320 fleet will compete head-to-head with a reinvigorated Tigerair, which itself operates an all-A320 fleet, tipped to grow to around 38 aircraft under the chairmanship of Virgin’s CEO, John Borghetti.

With just one fleet type, Tigerair is arguably the truest example of the low-cost philosophy operating in Australia. It is the basis Virgin Australia wishes to maintain for the cost-efficiency it presents.

However, Jetstar has potential to achieve a highly competitive seat-cost and marketing advantage over Tigerair with the deployment of the first of its 14 787-8s from September. While the Qantas subsidiary is yet to confirm routes for the new aircraft, in the nearer-term it has confirmed it will use the 787s for crew familiarisation on principal domestic routes along the east coast. Whether the aircraft remains in the domestic fleet is yet to be confirmed, a decision that will be influenced heavily by the operating economics borne out of the proving and familiarisation flights over the coming 12 months.

At the niche end of the domestic scale, Qantas and Virgin operate smaller 100-seat aircraft on regional and thinner trunk routes.

Qantas, under its arrangement with Cobham, operates 13 717s in a Canberra-centric network as well as in Western Australia, and has a further five on order to bolster competition in the Western Australia market.

Virgin Australia’s 18 Embraer E190s, operated from within its domestic business rather by a third party, have achieved an economy of scale that cost-effectively contributes to commercial performance on secondary city pairs where the 737s would present a capacity burden.

“Qantas’s renewed push into Asia… is as crucial to fleet planning as it is to commercial interests.”

Regional battleground

As much as competition is shaping the domestic fleet structures of both major airlines as they seek to optimise returns, it is the regional sector that is without doubt seeing the greatest change.

Virgin Australia’s recent takeover of Skywest has fundamentally changed the market dynamic and together with Virgin’s previous ATR-based regional network in Queensland, the airline has entered areas that have more recently largely been monopoly environments.

Not surprisingly, then, the battleground is centred on Western Australia and Queensland, where resources-led traffic demand continues to grow at break-neck pace and where plentiful spoils are fuelling frenetic activity from Qantas and Virgin Australia.

In a deft move, Virgin Australia’s regional fleet went virtually overnight to 32 aircraft. Its inherited fleet of Skywest aircraft brings with it flexibility to adjust capacity to demand, with aircraft capacity ranging from 46 seats on the Fokker 50 to the 179 seats on the two A320s. The acquisition of Skywest also brings directly into the Virgin Group fold the fleet of ATR72s that have been operated by Skywest on behalf of Virgin in Queensland and New South Wales since 2011.

Virgin intends to operate the former Skywest business as a standalone entity with its own operators certificate, thus keeping at arm’s length the direct day-to-day responsibility for managing the fleet’s complexity.

At the strategic fleet decision level, though, whether Virgin seeks to replace the Fokkers with the proven and popular E-190s is a decision that will result from the corporate review. Despite the Fokkers’ low capital cost they will require replacement in the medium-term.

The use of E-190s would certainly enhance fleet commonality and flexibility across the Group. Against the purchase of new E-190s is the higher capital cost of the aircraft in a cost-sensitive, contract-based environment such as Western Australia. However, as Embraer explained to Australian Aviation, the number of used airframes coming onto the market is increasing, spelling opportunity for Virgin Australia to acquire the aircraft at a lower cost while retaining the proven operating economics and popularity of the jets.

Qantas, of course, acquired its own regional subsidiary in late 2010 when it added Network Aviation to its already expansive regional portfolio. The operation gave Qantas an ability to charge ahead in the WA resources sector where Network primarily operates, and which was, in essence, the model for Virgin Australia’s interest in Skywest.

Network gives Qantas its own regional flexibility, with the regional carrier’s fleet of Embraer Brasilias and Fokker 100s augmented by the Cobham-operated 717s and mainline aircraft as demand and commercial opportunities dictate. The value of Network to the Qantas Group is demonstrated in the acquisition of another 10 Fokker 100s since the regional airline was purchased nearly three years ago, bringing the total network fleet to 19.

Qantas meanwhile continues its Dash 8-family operations with proven success. The airline and its subsidiary regional carriers flying under the QantasLink banner operate a combined fleet 28 Q400s and 16 -300s and five -200s.

In Queensland, the Q400 and Dash 8-300s are the staple of regional services and with the greater flexibility offered by the 74-seat Q400s and 50-seat -300s, Virgin Australia’s reliance on the 68-seat ATR-72s does not allow the same degree of scaled capacity, a potentially valuable tool in highly cost-sensitive regional operations.

The publicly-expressed view by Virgin Regional Airlines it is eyeing the Queensland market may change that, creating further pressure for Qantas through the inherent flexibility Virgin has acquired in its regional arsenal from Skywest. The mixed Skywest fleet would allow Virgin to deploy aircraft with greater and more immediate flexibility than could Qantas in order to attune capacity to seasonal or longer-term demand whether scheduled or contract.

This is one reason Qantas has ordered another four Q400s, taking delivery before the end of 2013. The aircraft will be deployed in competition hot spots like Western Australia and Queensland. The new airframes will be pitted against another seven ATR-72-600s ordered by Skywest, although the timing of those deliveries has not yet been confirmed.

International

Internationally, the selection of airframes could not be more starkly contrasted between Qantas and Virgin Australia, or indeed the means by which the respective airlines have sought to develop and sustain their networks.

Qantas, while labouring under severe commercial pressures in its international business for many years, has largely maintained its own international fleet on its own networks.

Virgin’s philosophy is wholly different, having created what it calls a ‘virtual’ international network, with the vast majority of the longhaul international destinations it markets being operated by partner airlines Air New Zealand, Delta and Etihad.

It is a strategy that is paying revenue dividends, since Virgin Australia expects its virtual network to increase interline and codeshare revenue to around $150 million each year by the end of the 2015 financial year.

The strategy has also given Virgin Australia a strong cost benefit, but one that is partially offset by the lack of on-ground brand presence brought by operating its own international network.

Qantas has prudently scaled back its international network to focus on key markets such as Asia, the Pacific and the US, and is likely to do so on South America in the coming years as that market expands rapidly.

Qantas’s renewed push into Asia following its Emirates alliance is crucial to fleet planning as much as it is to commercial interests.

As the parent company withdraws the 747-400s progressively through to 2020, its 12 A380s will be the sole very high capacity aircraft remaining in the Qantas fleet. With the 787s and A330s offering nearly equivalent capacity of between 290 and 330 seats per aircraft, a gap exists of potentially 185 seats between those aircraft and the A380.

Some of the answer may rest in the 330-seat 787-9s that together with the 787-8 Qantas holds a total of 50 options for. The airline has not yet committed to any specific number of either model, and has emphasised the inherent flexibility that gives Qantas to enable it to adjust its orders according to demands and market conditions at the time.

With Qantas stating its intention to operate the new aircraft to India and/or Korea, some of the markets where the 787s would likely operate such as Europe, are still not economically stable let alone buoyant. Thus, waiting two years for stability to return to markets, added to the chance for emerging markets to prove their sustainability, means the 2016 target date for 787 deliveries will more likely prove to be a prudent, risk-mitigating move.

The timeframe also gives Qantas sufficient time to ponder whether the 787-10 and/or indeed soon-to-be-launched 777 derivatives may offer a good fit to close the A330/787-A380 capacity gap. While Qantas has thus far shunned the 777, the type’s success with partner airline Emirates, together with the capacity gap may inspire a fresh look at the 410-seat 777-9, which would fit neatly between the A330/787 and A380 capacity levels.

In the meantime, managing that gap under a fleet simplification philosophy means flying aircraft “at the margins of their capability”, as an industry insider explained to Australian Aviation.
“Using aircraft to the margin of their capability is an important strategy and far more cost-effective than operating a small sub-fleet. For example, you could have a small fleet of 777s but with 747-400s capable of doing the same job at the margins is more cost-effective.

“Having the ‘point solution’ doesn’t work – it’s on balance better to aim for simplification and fleet strategies have a bias towards simplification as a result.”

“Using aircraft to the margin of their capability is an important strategy.”

Virgin Australia, however, with its partner airline strategy does not have the same fleet complications. Its investment in a single-type long-range fleet with the five 777-300ERs in its fleet, together with outsourced engineering and engine support, means the comparatively small fleet allows the airline to cost-effectively maintain a strategic foothold in markets where Virgin Australia brand presence is important.

The 737-800s in Virgin’s fleet will also continue to be used to New Zealand and to nearer regional destinations including New Zealand, Fiji and Samoa for the foreseeable future.

Future possibilities

The fleet plans for Qantas, Virgin Australia and Tigerair are seemingly set for at least the next 10 years, offering a welcome period of consolidation after both major airlines have taken on board new aircraft types over the last five years and in Qantas’s case will continue to do so with the 787.

As Alan Joyce explained: “For the first time in approximately 20 years, the Group’s average fleet age was below eight years at 30 June 2013 – putting our fleet up there with the world’s best. Over the past four years we have taken delivery of more than 120 new aircraft.”
Within the next decade Virgin Australia will have based its domestic flying on the 737-800, supported by the E-190 and A330. On longhaul operations, the airline has no current plans to acquire more 777s and the leases for its existing aircraft used on international routes are likely to end about the same time Qantas retires its 747-400s in 2020.

This will present a key decision point for Virgin, whether it retains its own fleet of international aircraft or hands over flying completely to its partner carriers. If the former eventuates, then the replacement for the 777 would potentially see a competition between Airbus and Boeing, with both launching new models onto the market that would suit Virgin’s regional and longhaul requirements.

In addition to the recently-announced new generation 777 variants, Virgin Australia is known to be studying the 787 derivatives and the A350 as part of its fleet review.

Regional markets may also see a new type, with ATR and Bombardier developing concepts for a new generation 90-seat turboprop.

A high-speed 90-seat turboprop, together with the existing Q400 fleet could provide Qantas with added flexibility, matching the capacity of the Fokker 100 and a comfortable fit between the smaller Dash 8s and A320/737-800. As has been proven by the Q400 since its introduction in late 2005, sector time differences between the turboprop and larger jets are negligible.

Qantas is taking “a close interest” in the larger new generation turboprops, while Virgin said it has “no current plans in this regard”.

While there is much still to be played out as equilibrium between Qantas and Virgin Australia is reached, the fleet types for both airlines are largely established for the foreseeable future and a period of welcome consolidation will settle in until the next round of replacements occurs.

“Qantas is taking a close interest in the new generation turboprops.”

Both major airlines now have, through their respective regional, domestic and international fleets, aircraft capacities ranging from 36 seats to 460.

The world’s aircraft manufacturers, however, won’t be content with status quo and will be offering the latest variants to Australia’s primary carriers. For the moment, refinement of the numbers of types already in service will help both airline’s optimise their yields and ensure no let up in the competitive stakes between them.