Leveraging network

“Mining company demand for FIFO air services to transport employees to and from remote sites within the state… cannot be met solely by regular passenger transport (RPT) services,” Joyce explained.
He added poignantly: **********“This is very much a strategic acquisition and an exciting growth opportunity for Qantas.”**********

It was an exciting – and potentially lucrative – opportunity Qantas had seized on. As important to strategic competitive positioning as the investment was, Qantas reported in its 2012 annual report that at that time, full-year revenue contributions from the Network Aviation Group were estimated at $45 million. It was a fair return on a $21 million outlay.

“This very much a strategic acquisition and an exciting growth opportunity for Qantas.”

As the ink was drying on the deal in February 2011, Qantas fulfilled a promise to grow Network Aviation’s fleet, placing an order for 10 more Fokker 100s in February 2011 to add to the two F100s and six Embraer Brasilias. The additional aircraft signalled Qantas’s strong intent to engage the WA market and become actively involved in serving the resources sector, something it had done to this point solely with its own scheduled mainline and regional operations. Importantly, the Network acquisition allowed access to remote regions Qantas could not operate in its own right.

And now nearly three years later, Network continues to deliver the Qantas Group a tangible revenue benefit while bringing with it strategic might in what has become Australia’s most fiercely fought-over market.

Blueprint for battle

Indeed the Qantas acquisition of Network arguably became the model for Virgin’s recent foray into the same market. During its gestation, John Borghetti, responsible for Qantas’s commercial portfolio, would have been instrumental in crafting the Network deal. Having moved to Virgin, the blueprint he earlier had a hand in creating became an appetising prospect to give Virgin its own base from which to launch an offensive on the successes Qantas has derived from Network Aviation.

In nearly every administrative aspect, the arrangements between Network and Qantas, and between the former Skywest and Virgin are identical.

Qantas stated at the outset: “Network Aviation will retain its current management, employees and operating structure, with the business to be aligned with Qantas’ operations in terms of safety, regulatory, people, financial and commercial governance oversight, standards and processes.
Australian Aviation asked John Gissing, Executive Manager, QantasLink, who has oversight of the Network operation on behalf of the group, to describe the business and operational benefits that have been derived from the ownership arrangements.

“There have been significant benefits from the acquisition of Network Aviation, for both Qantas and Network. The acquisition came at a time when the major resource companies were keen to acquire total air transport solutions that better integrate regular passenger transport (RPT) airline services with high capacity air charter services,” Gissing explained, adding that Network Aviation has “enabled the Qantas Group to lift its presence in the growing charter segment through a dedicated fleet of F100 and E120 aircraft, as well as providing the full spectrum of air transport solutions to some of Australia’s largest mining companies.

“The relationship sees Network Aviation continue to operate as a standalone, competitive provider of charter services. However it also allows resource customers the option to select a range of Qantas service options including use of Qantas terminal facilities, booking and check-in technology, Qantas Club lounge and Qantas Frequent Flyer points.”

Network Aviation CEO Hugh Davin, a 45-year veteran of the industry, reinforced the importance of seamless connectivity between RPT and charter services, such as through the use of common terminal facilities, which is proving beneficial for FIFO workers who reside outside Western Australia or other parts of the State.

To ensure Network retains a strongly competitive position in the market, leveraging off the strength of the Qantas Group is fundamentally important to the success of the business, as Davin explained: “Network has just acquired its 12th Fokker 100, making it the largest operator of F100s in Western Australia. Combined with the scale of Qantas’s operations within WA, this provides unmatched flexibility and efficiency for the resource industry, especially during periods of intense activity or operational disruption such as weather events or site shutdowns.”

As important as the relationship between Network and Qantas is from a customer product perspective, the experience and expertise of each airline has contributed to the collective benefit.

“Network has benefitted from access to Qantas safety management systems, commercial and operational governance systems,” Gissing said. “In turn Qantas has been able to leverage Network’s expertise in the closed charter market, as well as its fleet and hangar assets.”

“Hugh Davin governs day-to-day operations, while the commercial strategy is developed to align with the broader QantasLink and Qantas Domestic business,” Gissing added.

From Davin’s perspective, the strengthening of his management team has been important, which he sees will “ensure a firm platform for rapid growth”.

“Network now has one of the most experienced management teams in the business and is well placed to manage the demands of a larger operation.”

With the business relationships now well embedded culturally and in a practical management sense, Gissing said: “As a wholly-owned subsidiary, Network Aviation provides a strong growth opportunity, new revenue stream and further diversification for the Qantas Group. It has also allowed Qantas to further build on its strong position in the mining and resources sector.”

If Qantas sought diversification of its operations through the acquisition of Network Aviation, it has certainly achieved that goal.

“Network is now identified as a major player in the charter sector and provides exclusive high capacity charter services to a number of Australia’s leading mining and resource companies,” Davin said.

In addition to operating dedicated contract charter flights for mining clients, Network also provides freight services and aircraft management. The company also has its own internal engineering organisation, the largest such facility based at Perth Airport, to maintain its fleet of 19 aircraft.

Network Aviation currently has seven Embraer Brasilias offering 30-seat capacity to more remote, lower-density destinations while since the company’s formation in 2008, jet capability has been based exclusively on the 100-seat Fokker 100s. Initially two of the jets were acquired from US Airways, while the additional 10 aircraft ordered immediately after the Qantas buy-out were delivered between December 2011 and January 2012. Each of the 10 Fokker 100s had been operated by American Airlines and Colombia’s Avianca. Prior to delivery to Network, Qantas upgraded the aircraft cabins and installed new navigation systems including ADS-B, which has become a critical asset in optimising the increasingly-congested Western Australia airspace.

At the time of acquisition deal, Network intended to retain the aircraft for around 10 years. The average age of the Fokker 100s was 20.1 years, and like the former Skywest and other FIFO operators, ageing aircraft will become an issue in the medium-term.

But as with the strategic agenda across the Qantas Group, simplification of the fleet will remain an important principle, avoiding the complexity of the Skywest fleet Virgin Australia inherited with its Airbus A320, Fokker 100, Fokker 50 and ATR72-500s and -600s. Network’s reliance on just two aircraft types offers direct operational cost savings through engineering simplicity, crewing and ground handling.

Diversification of aircraft equipment when its required is supplied through alliances Network Aviation has with other operators, allowing rapid access to other fixed-wing aircraft and helicopters, offering between four and 100 seats to meet client requirements.

The way ahead

Qantas continues to exercise Network Aviation as opportunities emerge, most recently introducing closed charter services between Perth and the Roy Hill mine site in the Pilbara. The new service will be operated by the recently-augmented Fokker 100 fleet and “will increase according to project demand”.

The response to the Roy Hill opportunity typifies Network’s position in the competitive WA market. With the weight of Qantas behind it to adjust fleet capacity and give commercial support, $10 billion projects like that at Roy Hill, which is expected to become one the largest iron ore mining projects in Australia, provide valuable revenue benefits for both Network and its parent company.

“The Qantas Group continues to see opportunities as the resources boom moves from the investment phase into a sustained period of production growth from committed projects,” Gissing said.

One of the chief challenges facing all airlines operating in the Western Australia market has been the choke point at Perth Airport. Achieving one of Davin’s primary objectives of offering a seamless service between Qantas mainline services and those operated by Network, the airlines’ services at Perth Airport will benefit from the long-awaited development of terminals there, which will see Network Aviation flights operate from Terminals 3 and 4 from late 2014.

The expansion of Perth terminal facilities, improvements to airfield management and optimising airspace capacity are doing much to alleviate what have been very tangible constraints on growth in the Western Australia market. But it is also outside WA that Network, in conjunction with Qantas, is eyeing opportunities.

“At this stage Network operates in Western Australia only, however there may be future opportunities to support FIFO growth in other markets in tandem with Qantas and QantasLink RPT services,” Davin explained, the feed between the two airlines being the critical success factor for both carriers.

With Virgin Australia having entered the market and driving harder the already frenetic pace of growth, there is a heightened imperative to compete aggressively while maintaining disciplined and safe day-to-day operations.

“There may be future opportunities to support FIFO growth in other markets in tandem with Qantas and QantasLink…”

“While specific details of our commercial strategy remain strictly confidential, we welcome competition in the marketplace while seeking out new business opportunities and servicing our current contracts,” Davin summarised.

“Via the strength of the Qantas ownership and the many synergies that can be capitalised on, Network is well placed to respond to new market opportunities.”

Queensland is calling.