All In

While they still face numerous issues, being a major player in the global aviation game may not be such a problem after all… at least for some.

Almost exactly two years ago, in February 2011, Qantas chief executive Alan Joyce told a Melbourne Press Club lunch there was “a real question mark over the viability of Qantas International” if it kept going the way it was.

“We face severe limits to growth,” he claimed, saying Qantas was an “end-of-the-line” carrier serving a market of only 22 million people, “in a marketplace flooded with so much capacity that our competitors aren’t even using their quota”.

He set up a taskforce to explore options that would invigorate the business, generate new and profitable markets, and protect jobs and assets.

Twenty-four months later little has changed and Joyce was last month (February) waiting for the findings of another structural review.

After flagging a loss of up to $300 millionzealandfor its first half ending December (as well as cutting his own salary by 38 per cent) and announcing Qantas will axe 1,000 jobs as it faced “immense” challenges, he declared: “All options are on the table in terms of the structural review, we’re not ruling anything in or anything out.

” Yet across the Tasman in Auckland, arguably even more end-of-the-line than Sydney, rival Air New Zealand has just announced its best interim profit in five years – up from NZ$38 million in the 2012/13 six months to NZ$100 million in the latest period – and is on track to more than double annual profit, following a turnaround in its international long-haul service and increased demand on domestic routes.

“This result,” chief executive Christopher Luxon told Australian Aviation, “is because every aspect of our business is actually firing on all cylinders” and the carrier has made some “smart fleet decisions” as well as optimising its networks and international alliances.

Why the dramatic difference? While New Zealand and Australia are certainly markets that differ in size and Air NZ doesn’t face the challenge of a boisterous domestic competitor as Qantas does with Virgin Australia, theyare both confronted with intense international competition and share the challenges of operating from a remote part of the world.

In the view of industry experts it may all come down to critical past decisions on fleet.

Given Auckland’s geographical position in the global scheme of airline operations, the response by Luxon to the suggestion the Kiwi flag is a true end-of-the-line carrier may come as a surprise to some.

“We don’t actually think of ourselves as an end-of-line carrier,” he insists.

“We actually think of ourselves as being smack in the middle of the Pacific Rim and as we are seeing a once in a generational shift of power from the Atlantic to the Pacific our focus is just purely on point-to-point flying throughout that Pacific Rim region.

” The trick for any airline whose hub lies in a remote location, according to Luxon and other industry experts, lies in mastering several key areas, including fleet selection, service frequency, having a strong brand and, perhaps most important of all, strong partnerships.

In today’s world, with new, fuel efficient aircraft taking the industry closer to a time whenany two points on the globe can be connected non-stop, the chill of isolation is fast losing its impact on airline operations.

Even remotely situated carriers like Air New Zealand, Qantas and South African Airways can play a leading role on the global stage… as long as they have the right partners to dance with and the right jets to serve their markets.

“Think of it in terms of a dumbbell,” says Andrew Drysdale, former chief executive of Fiji’s Air Pacific (now Fiji Airways) and later the Singapore-based Asia Pacific director of the International Air Transport Association (IATA).

“You’re providing the heavy weight at this end and you absolutely must have the heavy weight at the other end.

Without both ends of that dumbbell being there you are going to struggle dramatically.

It comes back to the fact that without that distribution at the other end you are simply not going have the frequency and are not going to have the clout in the marketplace.

That’s why it isabsolutely essential for companies like Qantas to have alliances to feed into that network at the other end.

” Drysdale, who is executive director of Mentor Aviation Services, an aviation and tourism consulting firm and also runs an aviation business course at the University of New South Wales, agrees the issues end-of-the-line airlines face are pretty much the same as any other airline but with a change of emphasis.

“Probably the most important strategic issue for an end-of-the-line carrier is building frequency on your international services.

Unless you’re daily you’re not in business.

One flight a day would be kind of minimum.

Two a day would be optimum and once you get above two it’s just a capacity game.

When you have your back to Antarctica, as in our case and the Kiwis’ case, it’s very difficult to build frequency unless you’ve got a large domestic and regional base which is of course what Qantas already has and Air New Zealand has in their own market as well.

So I would say that their top priority is frequency.

You can do that either on your own metal which in manyways is preferred if your cost base is low enough, or by way of codeshare with other people and that’s what Qantas and Virgin and Air New Zealand are doing.

” Ron Rosalky, a former senior executive with Qantas and the defunct Ansett, now a senior advisor with aviation consultancy L.

E.

K.

, agrees end-of-the-line carriers must have strong partners at key hubs.

“They are needed for any airline but they are really critical for end-of-line carriers.

Qantas’s recent partnership with Emirates and with China Southern Airlines still have to be tested over the long term but Qantas has sacrificed a huge part of its long-haul presence in its deal with Emirates.

Virgin on the other hand is developing a virtual international network.

Some work better than others and branding can be very challenging.

But strong partnerships are a key element and absolutely critical.

” Luxon says realising how important partnerships are has been one of the big learning curves Air NZ has gone through over the past few years.

“We can fly aircraft operationally anywhere in the world but we canlose tens of millions of dollars doing it.

And we can fly into big competitor hubs across the Pacific Rim but if we actually don’t have partnerships and alliance agreements with them in place there is a problem.

“I think it is very clear that in the past a lot of cities that we actually pulled out of, it was because we had very good sales and distribution here in New Zealand for outbound travel but actually we would fly into someone else’s competitive hub and we didn’t have the support on the ground there.

That’s what’s changed completely.

Now, we can do a revenue share with Cathay Pacific going to Hong Kong that is really about southern China.

We’ve got our two cornerstone agreements now which is Virgin for Australasia but we’ve also now got Singapore Airlines for South-East Asia, Europe, India and South Africa.

And then we have relationships with ANA in Japan and United Airlines for the other hubs of the Pacific Rim.

“So having a partner is absolutely critical where you can drive and bring your sales and distribution strength to bear at both ends of the route.

” What is also clear is that these partnerships are pragmatic.

No airline chief believes in absolute loyalty to a global alliance.

When it needed the link Qantas, a member of oneworld, had a major codeshare with Air France, a member of SkyTeam.

Air New Zealand, a member of Star, has a major agreement with Cathay, a member of oneworld.

Virgin Australia’s partners are Singapore Airlines (Star), Air NZ (Star), Delta (SkyTeam) and Etihad Airways (no alliance).

In all cases these arrangements give customers of the so-called end-of-the-line operators access to a worldwide network of destinations.

Luxon is convinced the latest alliance with Singapore Airlines,announced in January, puts Air New Zealand in an even stronger position than Qantas with its Emirates deal.

“We are working with SIA who are an absolutely fantastic partner.

What you’ve got to remember for us is that the story between Qantas and Air NZ couldn’t have been more different.

We are two radically different airlines with two very different cultures, very different management styles, very different propositions on cost, very different strategies, very different fleet decisions.

We have very different home markets in terms of our relative positions and strengths.

So there are quite different stories between those two organisations.

“For us, what are we trying to do? We want to be really focused on the Pacific Rim only.

We genuinely buy into the fact that the power has moved from the Atlantic to the Pacific so Europe is certainly of lot less importance to us.

“We’re focused on the Americas, we’re focused on Asia and Australasia, the three As.

If you think about Singapore the arrangement we have done with them is we now have 58 new destinations.

So you can go from Moscow to Singapore to Auckland all on an Air New Zealand ticket.

You can go to Switzerland and all around Europe and it’s the best way in which we can work because that alliance is very complementary and we are not competing with SIA.

We are partnering with them and we can leverage and build their scale and their hub in Singapore and know that our customers are being incredibly well served to 58 new destinations that weren’t there last week.

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I think we’ve got a really compelling proposition for customers out of Australasia to the world and certainly from the world to New Zealand.

” Some analysts point to the ongoing losses of Qantas’sWe are two radically different airlines with two very different cultures.

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international arm as evidence it has failed to meet the challenges of an end-of-line carrier, was late in recognising the threat of mounting competition, particularly from the Middle East, and took wrong fleet decisions.

It has seen its share of international passengers to and from Australia plunge from 32.

7 per cent in 2003 to just 17. I am going to fight to the death to protect the F-35 because I truly believe the only way we will make it through the next decade is with a sufficient fleet of F-35s. ” Clearly, if those comments by the head of Air Combat Command, Gen Michael Hostage, are representative, the US Air Force is ‘all-in’ behind the F-35 program.

“I am fighting to the end, to the death, to keep the F-35 program on track,” Gen Hostage told Air Force News in a interview published in early February. “For me, that means not a single airplane cut from the program, because every time our allies and our partners see the United States Air Force back away, they get weak in the knees. ” The directly-spoken General’s comments come at a critical time for the F-35, which over the next few years moves from a development program to a production program, and the F-35’s US and partner nations begin to commit significant sums to acquire the aircraft with a planned tripling in production rates from 30 or so jets to 100 a year.

Certainly the US Air Force does not seem weak at the knees in committing to the F-35 (its ‘program of record’ is for 1,763 jets), given reports the service is prepared to drop its Combat Avionics Programmed Extension Suite (CAPES) program that would have seen about 300 late build F-16C/ Ds upgraded with AESA radars, new weapons and other service life and capability enhancements, and to completely retire it’s A-10 ‘Warthogs’ from service.

“I have to provide an Air Force that in the middle of the next decade has sufficient fifth-generation capability that whatever residual fourth-generation capability I still have is viable and tactically useful. I am willing to trade the refurbishment of the fourth-gen toensure that I continue to get that fifth-gen capability. ” Gen Hostages comments also came after a leaked copy of the draft annual report from the Pentagon’s Director of Operational Test & Evaluation (DOT&E), Dr Michael Gilmore, warned that continuing software and hardware development issues on the F-35 program could delay the US Marine Corps’ efforts to achieve initial operational capability (IOC) in late 2015.

The subsequently publicly-released 20-page final report is a detailed critique of the F-35’s development through to October 2013 and in particular highlighted performance issues with the jet’s software.

“A considerable amount of testing was necessarily devoted to completing development of prior-block capabilities, attempting to complete fixes to known problems,and regression testing of new versions of software. As a result, through October 2013, little progress was made in completing flight testing required by the baseline Block 2B joint test plan. ” Other issues highlighted include ongoing development problems with the aircraft’s revolutionary helmet mounted display (HMD), weapons testing delays, difficulties in starting the jet, and problems with the development of the ALIS [Autonomic Logistics Information System] support system (which has been fielded with “significant deficiencies”).

The report also highlights the fact that, while the program appears to be meeting its revised test flight schedule which was reset in early 2011, “mission systems and weapons integration testing made little progress and continued to fall behind test point execution goals driven by upcoming fleet release

We recognise risks still exist. . . but they are understood and manageable. LTGEN BOGDAN

and services’ initial operational capability plans. ” Not surprisingly, the reports have given fresh ammunition to the F-35’s detractors. “All this means that even if the JSF manages to meet its 2015 deployment deadline, it could fly into combat unreliable, confused, defenceless, toothless and vulnerable,” the ‘War is Boring’ blog concluded.

But commentary on the report was not all one-way.

“The reality of the F-35 program is that it is making steady progress in retiring risk and reducing costs; that Pentagon officials are increasingly pleased with its performance; and that most of America’s key allies have signed up to buy the plane despite the availability of impressive alternatives (most recently Japan and South Korea),” wrote analyst Loren Thompson.

And JSF program executive officer LtGen Christopher Bogdan – who has a track record for speaking critically of the program when he feels he needs to – was quick to come to the program’s defence.

“The basic design of the F-35 is sound, and test results underscore our confidence in the ultimate performance that the United States and its international partners and allies value so highly,” he said in response to the leaked draft report. “Of course, we recognise risks still exist in the program, but they are understood and manageable. ” In earlier comments that pre-dated the DOT&E report’s leaked release but were made after the report’s review period, Frank Kendall, Pentagon undersecretary for acquisition, technology and logistics, told Defense News in a mid-December interview. “We’re not done. We’ve still got plenty to do. But we’re way, way ahead of where we were a couple of years ago. ” Kendall said that the F-35’s airframe was “making reasonableprogress through its test program,” but that he is “concerned about the software, the operational software. I’m concerned about reliability, which is going to be an important driver for future cost and sustainment. And I’m concerned about the ALIS, that is another software system, basically that will provide the logistics support to the systems. And making sure that all of those pieces are moving forward together, not just the airframe, but the other things as well. ” Certainly Australia is watching the program closely, ahead of an expected government decision due in the coming months for a second tranche of jets beyond the 14 it has so far committed to, due in the second quarter.

“Australia is a partner in the F-35 program and Defence has good access to information as a result,” a Defence spokesperson told AA sister magazine Australian Defence Business Review recently. “The government understands that the F-35 program is a developmental program and there are issues that will emerge over time during the test program. These issues are being fixed or have planned fixes, and the necessary changes will be included in subsequent production aircraft. At this time, the program has a realistic developmental schedule that has the time and resources necessary to address these issues. ” For Australia the critical software milestone in the F-35’s development is the completion of the Block 3F software release, an evolution of the Block 2B and Block 3I (I = interim) software loads that the US Marines and US Air Force will declare F-35 IOC with, due in late 2015 and late 2016 respectively. Blocks 2B and 3I (3I is essentially the same as 2B but hosted on newer avionics hardware) gives the F-35 an “initial warfighting” capability, including the ability to launch AIM-120 air-to-

IOC for this aircraft is 2020. It needs to be, the classic Hornet needs to go out of service. AIRCDRE ROBERTS

airROBERTSair missiles and drop GBU-12 laser-guided and GBU‑32 JDAM bombs. Block 3F will add further weapon capabilities (including AIM-9X and AGM-154) and expanded sensor capabilities and is due for completion in 2017.

The former Labor government approved the purchase of the first batch of 14 F-35As in 2009, and the first two RAAF jets (AU-1 and AU-2) are set to be delivered in July and August respectively, ready to transfer to Luke Air Force Base in Arizona, which will be the USAF’s main F-35 training base.

With the Labor government subsequently delaying the acquisition of the next 12 jets by two years in 2012, these aircraft are scheduled for delivery in 2018 and 2019, and will also to be based at Luke before ferrying to Australia in 2020 ahead of declaring a planned IOC in 2021. So the RAAF is comfortable that it would not, if necessary, need its jets loaded with the Block 3F software until 2020 when the first squadron returns to Australia, affording something like a two-year buffer. By that stage too, on current planning some 700 F-35s will have been built (the 100th F-35 rolled off Lockheed Martin’s Fort Worth production line in December).

“I think progressing with the F-35 is a fairly comfortable decision to make. The F-35 hardware and software is developing well; and so the real challenge for the Air Force is how we are going to integrate it into the RAAF,” Deputy Chief of Air Force Air Vice-Marshal Leo Davies told Australian Aviation in a recent interview (see elsewhere this issue).

So it seems likely the new Coalition government will make a decision to go ahead with another batch of F-35s for the RAAF, but yet to be determined is how many, the full 58 as called for to fulfill the remainder of AIR 6000’s Phase 2B/C, or a staged approach with a commitment to another batch of 12 to establish a second operational squadron with the type. (Under current plans the first squadron to equip with F-35s will be 3SQN, followed by 2OCU, 77SQN and 75SQN. ) The decision on whether a final batch of up to 28 jets will be ordered to replace 1 and 6SQN’snear-new Super Hornets won’t be made until next decade now.

For now the focus is on replacing the ageing classic Hornets.

“IOC for this aircraft is 2020. It needs to be, the classic Hornet needs to go out of service,” Air Commodore Cath Roberts, director general for NACC (and acting program manager with the completion of AVM Kym Osley’s tour in December and pending the announcement of a successor to Osley), said in mid-December.

Much has to occur before 2020 beyond the delivery of airframes to reach IOC as well.

“This is a really complex program, we have a set path we need to go on,” AIRCDRE Roberts remarked. “We’ve got to get all the facilities built at Williamtown, we’ve got a weapons program, we’ve got to get sustainment in place, we have to get Australian industry up and running to do that sustainment, we have to get our training school established as well. So there is a lot of pieces that have to come together.

“I need a capability, I don’t just need planes. ” Part of that capability is thesupporting infrastructure (such as maintenance and squadron facilities) to support the jet, with a $1. 6 billion F-35 infrastructure plan set to go before Parliament’s public works committee for approval this October.

Development of Australian support arrangements is also progressing ahead of 3SQN returning to Williamtown in 2020.

“We’ve already defined what our sovereign requirements are. We’ve already said we’re going to have a deeper maintenance facility in Australia. We’ve already said we are going to have a level of operational and deeper maintenance, as well as some supply chain management functions and probably a low observability [maintenance] capability in Australia as well.

“But what we would like to do is to get a bigger regional capability and perhaps be there to support US forces that are operating in our region. ” But that lies ahead for now. Key decisions await on Australia’s commitment to the program, which is definitely progressing, and is evidently flying in smoother air, but has much turbulence to navigate yet.

2 per cent last year.

And the Australian carrier is not alone in that regard.

South African Airways, lumbered like Qantas with long inbred work practices, has cumulative losses over the past decade approaching $2 billion.

Like Qantas it is currently about to announce a new blueprint for recovery which is expected to concentrate on increased efficiency and cost savings.

Focus on regional flying and increased co-operative arrangements with other airlines will also be part of the plan.

Analysts agree that fleet decisions are a critical component end-of-line carriers must get right… and they point to starkdifferences between Air New Zealand and Qantas.

“There’s a real big issue around the aircraft type,” says Rosalky.

“I mean Qantas ordered 787s and give them to Jetstar for God’s sake.

That has to be one of the most stupid decisions ever made.

The gold standard for interline carriers is really the 777 but the 787 is going to offer real opportunities.

You can imagine a 787-9 flying into places like Chicago or Atlanta with a non-stop service.

They can get to a whole lot of places in the U.

S.

non-stop and then tie up with a key partner at a key hub.

It’s wonderful stuff.

They can keep on exploring real opportunities with these aircraft, new route opportunities.

” Rosalky says Air New Zealand, which will begin taking delivery of 787-9s later this year, is doing it exactly as it should be done.

“They are a really good exampleof how to do it.

That opens up opportunities for them to do things and reach destinations non-stop they couldn’t do before with the right size aircraft.

The 777-300 (not ordered by Qantas) has become the gold standard for long-haul international fleets.

It’s got great efficiency and high levels of flexibility.

Air NZ has adopted the 777 for Pacific operations and the 787-9 for Asian operations so it simplifies its fleet mix and has a highly competitive product.

When Qantas introduced the A380 it also selected the wrong configuration and had to reconfigure the whole 12 new aircraft… and has also had to invest in the reconfiguration of the 747 fleet.

” He says hub carriers such as SIA have really strong advantages in the way they operate.

“They approach a market in two different ways, one end-to-end and one over the hub and the hub works beautifully because they suck in business from anywhere.

They can afford to operate great big planesand then feed them out on single aisle planes.

But for long-haul international 777, 787, A350s are the way of the future and it’s what Qantas doesn’t have.

” Drysdale is also not convinced the A380 was the right aircraft for Qantas.

“Certainly it brought an enormous brand value in being amongst the launch customers for that aircraft.

But if you go back to my argument about the absolute necessity for frequency it flies in the face of that.

It’s a large bus travelling to the major metropolitan centres of the world.

In that respect it has a low cost per seat basis and all of that’s very good but the world is changing around us and direct services are becoming more and more important.

“I’m one of the believers in the 777 for Qantas.

I think they could have gone that way.

I think [chief executive of Emirates Airline] Tim Clark has demonstrated for Emirates that’s what it needed.

Cathay’s gone the same way and Air New Zealand.

No disrespect to that aeroplane [the A380], it’s a marvelous piece of engineering, but I think direct services and frequency will win out in the longer term over the big bus.

Regarding the decision on the 787s, I think they’ll come to regret that in the future when they come back into the market again and I believe they will.

They will have lost that early pricing advantage.

” Luxon is certainly more than happy with his fleet plans.

“A lot of airlines talk about fleet simplification but when you see new orders it doesn’t look like a lot of simplification to me,” he comments.

“We are ruthlessly focused on that and we are not just talking in theory and not having it in practice.

We feel really, really good about the fleet we are going to have very shortly, from July onwards.

“In the second half of this year we will have five new widebodies coming in, two 777-300s and three 787-9s.

I think we have made very smart fleet decisions and managed the process incredibly well.

We will have seven 777-300s that are really pointed towards North America.

We will have eight completely refurbished 777-200s – most of these are 2006 age – but they are being completely gutted this year.

There’s $120 million being spent on that process and they will look and feel very similar to our -300s.

And then we’ve got 10 787-9 Dreamliners coming.

Of course they are all one type rating.

That’s a huge and significant operational benefit from that.

“Every time we replace a 747 with a 777 or a 767 with a 787 that transforms our business economics as well.

We will end up with a 25 widebodied fleet that will have a consistent look and feel for our customers.

We will point the 787‑9s into Asia and have configured them as such and likewise the 777-300sinto North America and the 777-200s can actually straddle both.

” Air NZ’s first 787 will operate to Perth, followed by Tokyo and Shanghai.

“Obviously the fleet expansion – we have 21 new aircraft coming in the next three years, an investment of just over $2 billion – is enabling us to actually look at our network and say ‘right, where do we need to deepen up and strengthen where we fly to today and where can we go to next?’ The first announcement this year has obviously been Air New Zealand flying from Auckland into Singapore again and that gives us the opportunity to access South-East Asia through Singapore, making the Singapore alliance really work once it’s been authorised by the authorities.

” Yet another disadvantage faced by end-of-the-line operators is that they are heavily reliant on their domestic markets.

“If Australia went into any form of a serious recession the impact on Qantas and Virgin would be magnified relative to the rest of the world,” says Drysdale.

And Rosalky: “The hub carriers like SIA have an edge because they can operate into their hubs from anywhere so they can operate aircraft and fill them up.

The end of line carriers have some interesting challenges as opposed to the hub carriers.

It has to have a strong home market whereas the hub carriers can suck traffic from everywhere into Singapore, into Guangzhou and the Gulf and the likes.

The end of the line carrier depends more on its home market than hub carriers for business.

They have to have a really strong brand with the preference of having the status of being the national carrier.

Qantas, Air NZ and SAA have all benefited over the years with strong nationally-based brands.

“Virgin on the other hand is exploring new territory as it is building virtual international operations with Australia being an integral part of its brand.

It is really filling the holes as Qantas recedes from the international market.

With a strong domestic market it needs a good long-haul international network and networking is the key for end-of-the-line carriers.

They have got to be able to reach key markets.

So end-of-the-line carriers have to adopt a virtual network strategy through its partners so it can feed its passengers from the end of line onto an international network to make it possible for them to serve a wider audience.

” There is another warning for Qantas from Drysdale, commenting on recent reports the airline may consider selling off its frequent flyer program.

“FF is very important to them in that respect, although the problem with it is that a lot of these FF points are generated domestically and burnt on international services.

It’s not really adding to the revenue base of the international services.

But it is so important to them I think I would tread very carefully about touching it.

They’ve built it up very carefully and vested a huge amount of time and effort over the years.

It is an enormously powerful tool.

Tread with care on that one.

” As for the main reason Qantas International isn’t making money, apart from past fleet decisions, Drysdale is also adamant.

“Their cost base is too high.

They’re a third higher than Virgin.

It’s not only salaries but work practices.

They are the longest operating airline.

They have been through periods of featherbedding with the unions.

Joyce has to deal with trying to dismantle that”.