End Of The Line

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. . . 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’s

We are two radically different airlines with two very different cultures. . .

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. 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”.