Issue 309: Critical Link

Hope or resignation

“The federal election represents a watershed. Compared to other industries, aviation is so weighed down by over-regulation, red tape and bloated bureaucracy it is something of a miracle that it survives at all. ” The words of RAAA CEO, Paul Tyrrell, aptly reflect the frustrations of the industry over recent years.

“More of the same is not an option. ” Tyrrell and his colleagues in the industry may now not have to suffer further years of indifference. The coalition’s aviation policy, released a week before the election, contained nothing new and certainly nothing revolutionary. But what it did spell out resoundingly was that the new government wants to engage – something industry leaders have been at pains to achieve after six years of evident indifference. And it was telling that the now previous government waRegional Express’s Lim noted: “The Coalition’s policy addresses critical areas that have been devastating to aviation especially in the regional aviation sector, and responds to some issues raised in the aviation policy papers presented by the Regional Aviation Association of Australia, The Australian Aviation Associations’ Forum and Rex over the last two years.

“Aviation has been decimated by bad policies and neglect for the best part of the last decade and today it is on its knees with Virgin Australia, Tiger and the Qantas Group all bleeding heavily and in a dangerous tailspin.

“I trust that (Truss) will keep his election promises and faithfully carry out the agenda set out in his aviation policy,” Lim continued. “Regional aviation has suffered too much in recent times from broken promises and neglect and deserves better going forward. ” Aside from the subject of politics, which is sometimes hard to divert industry leaders away from, many other issues continue to dog the regional industry. the number of passengers travelling on regional services declined by 3. 7 per cent, or nearly 500,000 passengers.

Traffic figures for last financial year show a worrying trend emerging, particularly in Queensland, where every airport in the state except Hamilton Island saw a decline in regional passengers.

Australia-wide, the number of passengers travelling on regional services declined by 3. 7 per cent, or nearly 500,000 passengers.

However, Rockhampton suffered a more than 35 per cent drop, while Mackay reported a 33 per cent decrease in regional traffic. Brisbane Airport reported it was down more than 15 per cent and Gold Coast down more than 13 per cent.

However, not all centres’ regional traffic declined. Darwin reported a 15 per cent gain, Perth 12. 5 per cent and Launceston 12. 7 per cent, according to the BITRE data.

The performance of regional routes is closely tied to the fortunes of the resources and tourism sectors. Regional carriers will be watching closely the new government’s policies in these critical areas for the influence they will have on passenger traffic.

While the renewed aviation policies give a ray of hope that some of the essential framework issues may at last be resolved, systemic operational challenges and entrenched mindsets will offer plenty of opportunity to test the regional sector’s resolve over the coming years. s silent on its views on regional aviation policy, just as it largely had been for the six years prior to the election.

Not surprisingly, then, the RAAA welcomed the policies, stating “they are a good start and show that the Coalition has at least been listening to industry concerns, concerns that have been shared with the then shadow Minister over a number of years. ” The Coalition’s promise to return the subsidy scheme for en route charges to encourage the survival of marginal routes has been warmly welcomed by the regional aviation industry, though as the RAAA said, “It is $2. 5 million less than an earlier scheme, but better than nothing, which has been the case since July 2012. ”

Opportunity

As much as has stayed the same in recent years, arguably more has changed. QantasLink and Virgin Australia’s rapidly developing regional operations have entrenched their positions as essential vehicles in the respective group businesses, while Rex and other independent carriers ply their services with some renewed optimism.

“This is an important time for Virgin Australia’s regional operation,” said Merren McArthur, the company’s group executive for Virgin Australia Regional Airlines, who has been pivotal in executing the Virgin Group’s most audacious drive into a new market.

“In the last 12 months we have brought the Skywest operation into the Virgin Australia business following completion of our acquisition in April.

“The most recent milestone was transitioning our regional operation onto the Virgin Australia Sabre system which was successfully completed in August,” McArthur said. This will significantly improve the ticketing experience from regional Australia, through metropolitan ports and on to international destinations.

“In Western Australia we have increased regional capacity with additional services on the resource-driven Perth-Karratha route and the introduction of F100 services into the oil and gas hub of Onslow. We have also introduced Virgin Australia’s business-friendly Embraer aircraft onto the Perth-Kalgoorlie route and transferred all our Kalgoorlie services to Terminal 3 at Perth airport to enable same-terminal transfers for this important market.

Via Skywest Virgin Australia has added 16 key regional and charter routes to its network including inbound and outbound flights between Perth and Albany, Busselton, Derby, Esperance, Geraldton, Kalgoorlie, Exmouth, Kununurra and Ravensthorpe.

Said McArthur: “In the few months since acquiring Skywest we have launched services to Moranbah and Bundaberg in regional Queensland, bringing long awaited competition to these communities “Our regional operation now has 32 aircraft operating more than 800 flights a week to 41 different regional areas around Australia. Combined we now have the widest RPT network in Western Australia, flying to more WA destinations than any other airline,” she added, noting these changes represent the beginning of a chapter in regional aviation that has already been momentous for the new dynamics it has introduced to the market.

Strategically, developments at QantasLink are building on an established, but now increasingly competitive framework. Not only is this in response to Virgin’s entry into markets once dominated by the Qantas Group, but also in response to what it see as a growing appetite for travel between regional and major metropolitan centres.

“As markets grow we are seeing the opportunity to introduce new services such as direct flights between Sydney and Gladstone,” said John Gissing, executive general manager for QantasLink.

“We continue to invest in our regional airline group with fleet growth

Combined we now have the widest RPT network in Western Australia. MERREN MCARTHUR – VIRGIN

in 717, Fokker 100 and Q400 aircraft, as well as new interiors and business class in our five new 717 aircraft arriving later this year. We recently announced we will be introducing the five 717s to service Canberra-Sydney, Canberra-Melbourne and Canberra- Brisbane. ” One factor that has been hampering optimising the connectivity between QantasLink and mainline Qantas services has been the geographical dislocation in Sydney. Earlier this year QantasLink substantially improved its customer proposition by moving its operations to Terminal 3, bringing transfers between regional and major domestic destinations under one roof for the first time since Australian Airlines vacated the original TAA terminal.

“Operating QantasLink and Qantas domestic flights from the same terminal is delivering huge benefits to business and leisure travellers,” Gissing said. “Terminal 3’s faster, smarter check-in services significantly reduces check-in times for QantasLink customers, which is a huge benefit for the growing number of business travellers between regional areas and Sydney. ” QantasLink passengers are also able to use the airline’s lounges, which are much better equipped than the sole facility in Terminal 2. An extra 80 seats have been added to the Qantas Club to accommodate the additional demand.

Importantly, however: “Customers can expect smoother connections between regional, domestic and international services, and will no longer have to transfer between terminals to connect to their domestic Qantas flight. ” The international transfer is an under-stated massive improvement for regional passengers, obviating the need to transfer from Terminal 2 to Terminal 3 and then onto a bus to the international terminal. It also aligns regional travel products with Qantas international alliance partners, notably Emirates, a point not lost on Gissing.

“QantasLink customers benefit from access to our partner airlines, including the Emirates network. A great example would be a customer travelling from Dubbo to Milan checking bags at Dubbo and picking them up in Milan. As a result of our partnership with Emirates, our regional travelers now only have two stops to the heart of Europe, whereas previously they had at least three stop-overs. We will also continue to develop codeshare relationships in our regional markets that benefit our customers and maximises our network offering for them. ” As the parallels between Qantas and Virgin draw ever-closer together in terms of the seamless proposition between regional, domestic and international services, passengers of the two major airline groups are more spoilt for choice now that at any time in the last 12 years.

Fleet plans

One of the chief issues facing regional carriers is fleet planning, as airlines wrestle with optimising competitive strategies and for some a medium-term replacement strategy for ageing aircraft, especially for those that have inherited older (but economical) types.

But belying what is said about the depressed state of the regional industry from some quarters, during the 2013 financial year regional and FIFO carriers took delivery of some 30 aircraft.

Between July 2012 and the end of June this year, significant deliveries in the FIFO sector’s fleets included five Fokker 100s to Network Aviation, five Fokker 70s and one Fokker 50 to Alliance, two Embraer EMB-145s to JETGO and one Fokker 100 to Skippers Aviation. Elsewhere, two BAe 146s were added to fleets, while two were withdrawn.

During the same period, the delivery of aircraft to scheduled regional airlines reflected both fleet re-equipment strategies and the addition of capacity in increasingly competitive markets. QantasLink accepted three Q400s as new capacity and Virgin Australia six ATR 72-600s for fleet expansion.

“We are just about to welcome our 29th and 30th Q400s into our fleet, which are really exciting additions to our turboprop fleet that already includes 21 36-seat Q200s and Q300 50-seat aircraft,” Gissing said.

“We recently added capacity in the growing WA and Queensland markets due to demand from our corporate customers, mainly in the resource industry. ” Scale is very much on QantasLink’s side. “We have the fleet scale and flexibility to meet demand where needed. For example, a couple of months ago in WA we introduced larger aircraft and improved the frequency on a number of routes, and in March this year we introduced the larger Q400 to the Dubbo market for the first time, with exceptional feedback from our customers. ” QantasLink intends to retain its mix of Dash 8-200s, -300s and the Q400, Gissing saying: “Our network still requires a mix of types and the -300s and -200s continue to meet our needs. For example, the -200 is required for Lord Howe Island services. But the Q400s are very much our lead aircraft for regional flying. ” On Virgin’s future fleet plans, McArthur said decisions will stem from the company-wide fleet plan that is being developed over the next 12 months. “Virgin Australia has a commitment to maintaining one of the youngest and most fuel efficient fleets in the region. ” The former Skywest fleet has brought with it a range of aircraft to the group that offers suitability to the mixed operations the regional business undertakes. “The Skywest acquisition brought into our fleet a range of aircraft, including Airbus A320, Fokker 100 and Fokker 50 aircraft. These aircraft are ideally suited to the charter market due to their low capital cost and high reliability,” McArthur said. But the variety of aircraft – from new A320s to Fokker 100s and 50s has brought its own challenges on how to integrate fleet types into an asset that drives efficiencies through commonality within the regional fleet and arguably within the group.

These are the considerations now underway. While the Fokkers are highly dependable and well-suited to the variety of tasks within the FIFO and scheduled markets Virgin now flies in, a remaining shelf-life of five to 10 years can be expected before ageing aircraft issues begin to bite. Bringing replacements forward would give rise to improved efficiencies, but would also more than likely cruel the low capital cost philosophy that is the balancing consideration of the fleet plan. Woe betide the government if it fails the regional industry this time. Ahead of the broader fleet review, Virgin has announced it will order more ATR 72s.

“We currently have 12 ATR aircraft operating on the east coast and we will be growing this to 19 by June 2015, which will enable us to expand our regional regular public transport network,” McArthur told Australian Aviation, in a signal that where commercial potential is immediately apparent, the airline will respond deftly while its makes broader strategic choices.

For Virgin, the principle of maintaining a young but cost-effective fleet is both optimum to drive operational efficiency and customer satisfaction, but it remains an aspiration for many other carriers that simply can’t afford re-equipment in the cash-starved environment in which they operate.

As Australia’s largest independent regional carrier, Regional Express announced in early July it had purchased the seven Saab 340B+ aircraft it had originally operated in the fleet under lease, as part of its total Saab 340 fleet of 51.

Rex chief operating officer Garry Filmer explained that the seven aircraft acquired “are part of the 25 advanced 34-seat Saab 340B+ aircraft that Rex committed to leasing from Saab Aircraft Leasing in late 2006 as part of its fleet modernisation and expansion program. With a remaining useful life of at least another 15 years, the Saab 340s with their low operating cost and fuel-efficient engines will continue to provide sterling service on the Rex network. ” With another 15 years in service and the 340 no longer in production, Rex has protected its future operations by purchasing the entire Saab 340 spare parts holdings from Pinnacle Airlines in the US. The more than 215,000 items include engines, propellers and undercarriages as well as tooling and ground support equipment.

Given the recent 45 per cent drop in operating profit, the $50 million move to fund the aircraft and spares from cash flow was a bold step, but one that signifies both the importance the airline puts in the future of the market and its position in it, but so too the need to replace ageing types.

At the time of converting the lease to direct ownership, Rex stated it intends “to purchase the remaining 18 aircraft when they come off lease in March 2014. ”

The airport chestnut

The perennial – and perennially disappointing – love-hate relationship between airlines and airports is sometimes never felt more strongly than at the regional level.

In his interview with Australian Aviation in July, former Tamair owner and now senior executive at JETGO, Paul Brederck said: “Council and airport owners just don’t get how sensitive these markets are. ” In a succession of depositions made by industry over recent years, cries about the need for sympathetic charging regimes for regional carriers at regional airports have been

We have the fleet scale and flexibility to meet demand where needed. JOHN GISSING – QANTASLINK

resounding – as have the responses been deafeningly quiet in some areas.

As an example of the stand-off between regional carriers and council-run airports, the charging at Dubbo airport of security screening charges has enraged Regional Express, which has been forced by the council to contribute to screening charges that have been introduced to facilitate QantasLink Q400s even though the independent carrier’s Saab 340s do not require screening.

Rex said: “Dubbo City Council’s decision to charge Rex passengers about $9 per departure for security screening charges that are not required by law. . . will go towards subsidising QantasLink’s flights, which are required by law to be screened, to the tune of $300,000 per year. ” In July the council was ordered by the courts to deliver a statement of reasons for its decision to enforce fees – and the level of the fee itself – on Regional Express. Dubbo council is due to give replies imminently.

At the other end of the spectrum, Virgin Australia’s entry to the wider regional market has seen it welcomed by airports around the country, particularly in Western Australia.

“We work closely with airport owners around the country, providing input into and sharing our assessment of the short, medium and long-term demand so as to ensure that services and infrastructure keep pace with market trends,” McArthur explained, adding: “ We have a productive relationship with governments at all levels, including joint marketing agreements with tourism bodies.

QantasLink enjoys similarly strong relationships with regional airports, Gissing saying: “We have a great relationship with all the councils in the ports we serve. ” At the federal level, Rex gave rare applause to the former government earlier this year when regulatory oversight of access and pricing for regional carriers at Sydney Airport was extended through to 2016.

In a statement at the time, Warrick Lodge, Rex general manager for network strategy & sales, praised Minister Anthony Albanese’s proactive leadership on this matter.

“This regulatory safety net for regional air services recognises Sydney Airport is an essential transport hub for regional New South Wales and that its continued access to the nation’s busiest airport cannot be left purely to the commercial dictates of the private owners of the airport. We applaud the government’s firm and unequivocal intention to deliver on its commitments to regional NSW as outlined in the 2009 aviation White Paper. ” Rex operates around 28,000 flights a year through Sydney Airport.

Opening up

Relationships between regional airlines and partner or affiliated carriers have always been core to strategies for success in price-sensitive and increasingly competitive markets. The on-carriage that can be provided between mainline carriers and regional operators, whether within a larger group structure or independent, has become even more important in recent years.

Network Aviation and Qantas, since the deal was announced in 2010 to bring the regional FIFO carrier into the Qantas Group as a wholly-owned subsidiary, have enjoyed strong on-carriage benefits in the key Western Australia market. Flows from mainline domestic and international services operated by Qantas – and indeed now its alliance partner Emirates – are being experienced at an increasing rate, particularly as FIFO workers now live increasingly further away from their places of work in remote areas.

For Virgin Australia and its Skywest-based operation, the same principles apply. But earlier this year the airline moved its global sales distribution

The Saab 340 will continue to provide sterling service on the Rex network. GARRY FILMER – REX

system to Sabre, a decision that has yielded much higher exposure across domestic and international markets, and which has seen Virgin seamlessly align with partner airline Etihad, which also uses the same system.

“This now opens up the regional network to Virgin Australia’s global distribution channels and the distribution channels of Virgin Australia’s alliance partners,” said McArthur.

Similarly, Virgin’s shareholding arrangements are also influencing its competitive position within the regional market.

“We are currently in the approval process with the WA Department of Transport to expand our codeshare partnerships for Singapore Airlines, Air New Zealand and Etihad Airways to key destinations on the West Australian network. ” These strategies are part of a broader ambition by Virgin to extend its competitive influence across all sectors of the market.

“We continue to examine growth opportunities across regional Australia. FIFO remains a growth market in Australia as the mining cycle moves from construction to production,” McArthur said, adding: “We can now leverage the strengths of Skywest’s very successful charter business model to expand our presence in this market segment, particularly on the east coast where we currently have limited charter presence. ” This will continue to see Virgin up against Network in the FIFO market not only in Western Australia but potentially in other domestic markets. Network is known to also be looking at growth opportunities, telling Australian Aviation in early August “there may be opportunities to support FIFO growth in other markets in tandem with Qantas and QantasLink”.

Gissing, who has responsibility on behalf of the Qantas Group for Network Aviation, said: “Network has just received its 12th Fokker 100 aircraft and is providing a fantastic and reliable charter service to our customers in WA, predominately in the resource sector. In addition to our growing services with Fortesque Metals Group, we recently announced we had secured the contract for Roy Hill, providing charter services for its mine in the Pilbara. We commenced flights to its purpose-built airstrip, Ginbata, last month. ” The level of activity and energy that pervades the regional market remains as strong as the pace of change is dynamic. The investments made by all regional carriers, despite the frustrations of regulatory cost and bureaucratic imposition, reflect ongoing optimism about the importance of the sector to Australia and the airlines’ commercial interests.

Woe betide the government if it fails the regional aviation industry this time.

The sector is at a turning point. It either continues to work from the shaky platform from which it has proved it can continue clawing along providing lifeline services to communities and nothing more, or it enjoys the potential that a supportive and conducive environment in which it can not only provide air services, but restore the dynamism that has helped build and support regional communities hand-in-hand with mutual success.

Regardless, the industry retains the same resolve to serve regional and remote communities as viably as possible. It’s simply a matter of how that is achieved.