Gaining Altitude

According to CEO Merren McArthur VARA is flying into blue skies operationally and commercially.

“VARA is going very well, we are adding more aircraft and our charter business is up 30 per cent over the past two years” McArthur told Australian Aviation. “And weare forecasting continued growth – both organic and competitively. ” The Skywest staff has embraced the takeover along with the security and new opportunities it presents.

Virgin Australia’s involvement with Skywest dates back to 2010 when the two airlines forged codeshare agreements on some internal WA routes.

That was followed in a 2011 deal for a 10 per cent equity stake in Skywest Airlines worth $8 million as part of efforts to take advantage of surging demand for regional travel spurred by the mining boom.

It was also seen as a stabilising move for Skywest.

The agreement signed in January 2011 also allowed Skywest to

By acquiring Skywest we have inherited the DNA of Western Australia. MERREN MCARTHUR

operate 18 new Virgin-branded ATR 72 aircraft on Queensland and NSW/ACT routes.

This deal came a month after Qantas purchased FIFO-focused operator and WA’s then third-biggest regional carrier, Network Aviation, in a deal worth a reported $30 million.

In its first investment in a listed company, Virgin spent $8 million on gaining “skin in the game” in Skywest, just weeks after the competition regulator approved an alliance between the two airlines.

However, in late October 2011 Virgin Australia announced it would spend $98. 7 million to buy 100 per cent of Skywest.

At the time Virgin Australia chief executive John Borghetti said the deal was good for Western Australians.

“We will be able to provide a one-stop shop for the fly-in/fly-out industry and improve the services to regional WA,” he said. “While we will rebrand with the Virgin name, we will retain the Skywest head office and expand its operations. ”Borghetti also boasted that “every time Virgin has entered a new market, fares have dropped on average between 20 and 30 per cent. ” The move appeared to finally end WA’s fragmented and often chaotic airline industry with 48 airlines merged, failed to get off the ground or gone bankrupt since 1960.

Expansion has been the name of the game across all aspects of the

The E190 is a great RPT aircraft but is too expensive on capital cost for charter. MERREN MCARTHUR

VARA operation.

According to McArthur two more Fokker 100s have been added to the fleet which now numbers 12 and all these aircraft are fully engaged Monday to Friday.

McArthur explains that while there has been an overall slowdown in resource activity the move from construction to production means an increase in fly-in/fly-out work with shorter shifts meaning more flights.

“Construction is driven by typically four-week shifts, whereas production shifts may be half that. ” McArthur also adds that the “mining slowdown” is mixed across the different areas.

VARA plans to grow its charter business nationally.

“We don’t have a large presence outside Western Australia and that is something we are addressing. ” McArthur says that the Fokker 100 has good availability and “there are plenty flying around and there is a good turnover. ” However, she concedes that with Fokker being a very client-orientatedcompany, getting aircraft with similar configurations is a challenge.

The airline’s current fleet average age is 20 years, but the Fokker 100s still have plenty of economic life left in them.

“We have had some analysis done and the airframes for us have another 10 years, although we are currently looking at five years for support. ” Ms McArthur says the low capital cost of a Fokker 100 (between $4 million and $6 million) makes it ideally suited to low utilisation charter flying, while Virgin Australia’s modern Embraer fleet is perfectly suited to high utilisation RPT flying. ” Orphans of the VARA fleet are two Airbus A320s but they are much-loved, says McArthur.

“We are looking at expanding the A320 fleet. It’s a good aircraft with great uplift in the heat and for thetype of runways we have to use. We may increase the number of A320s depending on contracts and it takes us about six months to get the asset. ” When asked why the A320 was selected, Ms McArthur explained: “The A320 is ideally suited to the operating conditions of our charter network as low pressure tyres can easily be fitted, enabling the aircraft to operate on runways with lower pavement concession requirements. The A320 also performs well in high temperatures, with greater passenger uplift capability than most other aircraft types. ” New kid on the block is the ATR 72 operation with 13 in service and a 14th about to join the fleet. The original commitment was for 18, although a few have been deferred.

The fleet is used in New South Wales, the ACT and Queensland on RPT services and for a few charters. “Passengers’ acceptance is high,” says McArthur. “We have had excellent feedback from passengers that they don’t feel as if they are in a turboprop. They have a real jet feel about them; they are airy and open. And they are performing very well. OTP has been very strong. ” During 2014, the ATRs achieved OTP of 86. 4 per cent on all markets in which they are utilised which is fractionally better than the QantasLink OTP of 86. 1 per cent.

In the key Sydney-Canberra market, ATRs achieved OTP of 89. 1 per cent in 2014.

The ATR 72 fleet is deployed on 11 routes and connect Brisbane to Bundaberg, Emerald, Gladstone, Moranbah, Port Macquarie and Rockhampton. They are also used on Sydney to Canberra, Albury and Port Macquarie and Canberra to Melbourne as well as Launcestonto Melbourne.

Veteran of the fleet and perhaps a poor relation alongside the gleaming new ATR 72 is the fleet of seven Fokker 50s.

Not quite so fast says McArthur.

“They have good life, perform well and are a good low-cost aircraft,” she says. “In fact we are putting two Fokker 50s in Queensland as part of our push for more charter work.

These aircraft have another five years at least. ” And it is over the next five years that the future of the Fokker 50s, which are mainly utilised on shorthaul intra-WA regional routes, will crystallise.

Last year VARA with the approval of the WA state government cut its monopoly services to Albany and Esperance which are loss makers.

VARA holds the contract awarded to Skywest to serve these town because the towns cannot sustain competition.

The airline cut back daily services from three a day to two a day in November.

Local Eyre MP Graham Jacobs retaliated claiming that the high cost of air fares had been a major constraint on the town’s growth, particularly for its tourism sector.

“My proposal would be to introduce another carrier at different times to Virgin flights now to do the heavy lifting later in the day,” he told the Kalgoorlie Miner. “Say Monday, Wednesday and Friday, which would be more sociable for families, tourists and people not on regular business schedules. ” However, McArthur says that “over the last four years, we have reduced the average fares on these routes by around 20 per cent and participated in local marketing and community initiatives to drive demand for these services. ” But despite those fare cuts and initiatives passenger numbers have only risen by 1. 1 per cent.

Aviation services for non-mining towns are under strain. KALGOORLIE MINER

“This performance is not sustainable and we believe these frequency changes are necessary to ensure we can continue to provide the air services to the Albany and Esperance communities. ” According to the WA Department of Transport regulated routes review position paper, Albany passenger movements in 2012-13 were 57,919 and for Esperance 44,813.

Services to non-mining towns continues to be a major problem in WA with a lack of understanding of airline economics and short-haul fare structures clouding the issue.

Tourism Council WA chief executive Evan Hall has expressed concern about the ongoing viability of regional aviation services.

“Aviation services for nonmining towns are under strain,” he told the Kalgoorlie Miner. “We are seeing less competition and reduced number of flights. ” Hall has called on the WA government to ensure that minimum air services were guaranteed for regional towns.

“Government should look at proper regulation and subsidies to ensure minimum services are maintained,” he said last year.

Last year the state government called for public comment for a review of intra-WA air routes with a proposal to reduce regulation and encourage competition.

In the position paper Transport Minister Dean Nalder said that the state government’s position is to take a light‑handed approach to air route regulation in the future.

“Less regulation of air routes, where feasible, increases the opportunity for competition, reduced airfares, greater diversity in air services, and more choice for travellers and reduces administrative ‘red tape’ costs. This, in turn, could open up new opportunities for local communities, the aviation sector and the tourism industry,” said Nalder.

“Reduced regulation could increase travel in our state by national and international travellers.

Regional air routes in other parts of Australia sustain regular air services with much lower traffic volumes, without government regulation or subsidy. On the other hand, the state government’s position is also to protect vulnerable air services for remote and regional towns within the state. In such circumstances regulation of air routes can ensure continued air access for communities. ” Since 2011, three airlines – Skippers Aviation, QantasLink and Virgin Australia Regional Airlines – have been operating on the protected air routes in WA under deed arrangements with the state government (except the Perth‑Derby route, which is protected under an exclusive aircraft licence). The deeds are in place until February 27 2016 and have an option for an extension of up to five years.

The state government’s starting position is not to regulate RPT air routes where feasible.

The position paper states that “Government intervention is only required when there is an unacceptable risk of market failure that would threaten thesustainability of RPT services on certain regional routes. ” It adds that “market failure occurs when an adequate level of air services on which local communities rely ceases to exist, in terms of frequency, reliability, quality or affordability, thereby having a detrimental impact on the life standards and wellbeing of regional populations. ” However, many in the regional areas do not want small turboprops from a comfort perspective.

Industry observers fear that in a deregulated environment the likes of Qantas and VARA will quit smaller towns like Albany and Esperance.

One route not at risk is Perth- Learmonth (Exmouth). Over the past few years there has been dramatic growth with approximately 86,000 passengers flying in 2012‑13.

It was partially regulated in 2011 by allowing two airlines – QantasLink and VARA – to operate on the route in competition, but VARA quit the route due to its competitor securing corporate contracts.

But the government’s position is that there is an opportunity for such demand to be potentially met again by two operators in the future.

One route that will be a big question mark is Perth to Albany.

With nearly 58,000 passengers per year, Perth‑Albany is the second busiest regulated air route in WA and the government points out that regional air routes in other states of Australia sustain regular air services with much lower traffic volumes and without government regulation or subsidy.

But there are mixed messages.

On one hand the government states that airfares on the route are high and amongst the highest in Australia at $233 one-way, but concedes that one of the reasons for this is the level of taxes and fees, including security screeningcharges which amount to $65 per passenger each way. It states that “these taxes make up a considerable percentage of the total fare and are paid by the consumer. ” While VARA will not be drawn for commercial reasons what its response will be to the deregulation of the Albany and Esperance routes, it is likely it would give them away and with Qantas withdrawing its Q400s from WA it is not likely it would enter that market.

It is widely considered that all these marginal routes will be taken up by Skippers Aviation.

But while VARA may have reduced its services on these particular routes, overall the business is growing.

Since the takeover of Skywest, McArthur said that staff numbers had grown by 10 per cent to 840.

“We have fully integrated the commercial RPT with Virgin Australia as well as network planning and revenue,” said McArthur. “And we have merged Skywest management with Virgin Australia plus made some external appointments. Staff have really

Since the takeover of Skywest, staff numbers had grown by 10 per cent. EVAN HALL

embraced the merger as they see the upside with opportunities and growth. ” McArthur reflects on the WA market as the “most aviation dependent in the world. ” “We [Virgin Australia] didn’t have a base here to fully understand the special market needs of WA,” she concedes. “By acquiring Skywest we have inherited the DNA of Western Australia. The market is far different with longer distances and thinner routes and the remoteness of many destinations. ” One of the aspects is the lack of ground support. “We had to borrow an air start truck from Darwin and truck it to Derby and it took three days to get there,” she explains. And the down side to that is lost production for a mining client. “Everyone knows it can be $3 million a day in lost production so we just have to find a way to get an aircraft up there. ” VARA operates out of Perth Airport’s new low-cost Terminal 2 on the eastern side of the airport.

And while that terminal is functioning well the construction of the adjacent Virgin Domestic Pier has been delayed four times and will not now open til around August this year – about 15 months late.

This has caused major headaches for VARA and Virgin Australia for transiting passengers.

Currently Virgin Australia operates out of Terminal 3 on the western side of the airport.

Last year Borghetti said that the delay was costing the group tens of millions of dollars. “There is no question the long delay has cost the airline money in lost revenue and operational inefficiencies,” Borghetti told Australian Aviation last year.

“I know it’s a complex job but there are far more complex terminals than this one. ” Borghetti said that while the airline’s facilities in Perth weregood, they were nowhere near what the airline had planned for the new Virgin Pier as an extension of the international terminal.

However, when the new Virgin Pier is opened it will give the Group a significant lift in WA and completes its journey of airline acquisitions and the Game Change Program.

The Virgin Pier as it is known will be a showpiece for the latest in airport technology, says Virgin.

The airline will have the largest lounge in WA, although Qantas is building a second in its terminal complex.

Perth Airport says the Virgin Pier will be world’s best practice.

The airports CEO Brad Geatches said that the airport is “paying special attention to customer service and will introduce specially trained staff to assist passengersthrough the security process. ” “There will be a whole new level of services for passengers such as power to over half the seats in the terminal,” he said.

“We have done extensive studies into what passengers need, want and expect, and have looked at world’s best practice. ” The Virgin Domestic Pier will have 14 check-in counters, the latest self-check and bag-drop options, and 12 aerobridge gates.

Some of those aerobridge gates are “swing gates” and can also be used for international flights, maximising operational flexibility for the airport.

The new terminal is 200m long and covers an area double the size of the MCG.

The Virgin Domestic Pier is an extension of T1, which is having a $100 million makeover, and is linked to the regional terminal T2 by an enclosed walkway.

The final phase of that upgrade will finish about the same time as the Virgin Domestic Pier.

Rounding off the upgrades, the airport has just approved a $45 million revamp and expansion of the forecourt, including a 27m-wide plaza and new pick-up and drop-off lanes to ease congestion. Finishing about the same time will be the first stage of the Gateway WA project – the Leach Highway interchange that will become the main entrance to Perth Airport.

When all these new works and upgrades are open around mid-year Virgin and VARA will have the premier home at Perth Airport which will lift business and cut inefficiencies significantly.