Low-cost But Not So Long-haul

Come September this year, as Jetstar took delivery of its 11th and last 335-seat, two-class 787‑8 – three others on order have been converted to 787-9 orders for Qantas mainline – management lips are sealed on whether there is the remotest chance any of them will be used for really long-haul flying. It may still be in the plan but for now, it appears, they are sitting securely on the shelf. And Jetstar isn’t alone. The region’s other budget long-haul operators – Malaysia’s AirAsia X, Cebu Pacific in the Philippines, and Scoot in Singapore – are taking an extremely cautious approach to the potential to mix it with the big boys on traditional long-haul routes. There is very good reason why Jetstar need not make any hasty decisions on entering the intercontinental fray. Insiders point to the impressive stable of partnerships with full-service carriers it has built up that are more than capable of feeding traffic into its Asian and Australian networks. It has a codeshare with American Airlines and interline agreements in Europe with British Airways, Air France, Turkish Airlines, Finnair, Lufthansa and Swiss. The days of low-cost carriers operating in isolation, unable to link up with legacy operators and grab their feed, are well and truly over.

In the meantime, Jetstar remains focused on getting the most out of its all-787 fleet within the Asia Pacific, where they now fly 15 international routes to 12 destinations. Since the first 787 was introduced to passengers in November 2013, Jetstar has operated more than 7,500 passenger services with the type and has boosted utilisation to an average of 13 hours a day while also improving dispatch reliability in line with world fleet standards. It will push utilisation beyond 15 hours during the peak this summer, explained Jetstar group executive, operations, Mark Dal Pra.

“I remember the sense of pride we felt right across the business when we delivered our first 787 from Seattle to Melbourne and subsequently became the first low fares airline in the Asia Pacific region to fly the 787 in November 2013,” Dal Pra says. “We held open days up and down the east coast of Australia to showcase the 787 to our teams and their families before entering the aircraft into passenger service. We had thousands come out to those open days and it was amazing to see the excitement as people queued up just to get a glimpse inside the cabin. Two years on, with our long-haul fleet transformation now complete, we remain excited about the 787 and what it’s delivering for our customers and our business. ” Dal Pra said that with 10 per cent extra seat capacity and fuel savings in the order of 20 per cent, the 787 has changed the economics of Jetstar’s long-haul flying and helped deliver a record financial result for the budget group’s international business in FY15.

“Additionally, the 787 is helping us seize new opportunities across the region, like the soon to be launched direct service between Wuhan (China) and the Gold Coast in partnership with the Wanda Group (China’s largest commercial property company, the world’s largest cinema chain operator and an operator of luxury hotels). This is a big opportunity for Jetstar to get a foothold in the Chinese market, and we’re able to do it in large part because of the 787’s cost efficiency and capability to fly the route without payload restrictions. ” As program director for the 787 he saw first-hand how much planning and effort went into the aircraft’s entry into service over many years. “It really is a testament to the professionalism of those teams that we’ve been able to introduce this new aircraft type, train up more than a thousand employees and transform our long haul business in just under two years. As I look back to the times when we had our patience tested awaiting the first delivery, I think it’s fair to say now that the 787 was well and truly worth the wait. ” Overall, it has been a busy year for the 787. In February it was deployed on six weekly flights between Sydney and Honolulu (replacing A330 services). In July it was rolled out on the Melbourne-Tokyo Narita route and in August between Melbourne and Singapore. The expansion concluded in September, when Jetstar deployed the 787 on

It’s fair to say now that the 787 was well and truly worth the wait. MARK DAL PRA

six other weekly flights to Honolulu, three from Melbourne and three from Brisbane.

Today’s long-haul LCC operators appear reluctant to stretch their sight beyond a range of nine to 10 hours. The actual maximum range of a 787-8 is 7,355nm. Jetstar’s longer routes are nowhere near that. Its Sydney-Honolulu service is a flight of around 10-and-a-half hours and the distance 4,400nm. The Gold Coast to Wuhan is 4,180nm, or a flight of around 10 hours. An LCC operating from Singapore to London – 5,880nm and around 14 hours – would still be well within its range.

But history tells us it’s a little more complex than that and attempts by budget airlines to venture into the really long-haul domain haven’t been entirely successful. Oasis Hong Kong Airlines, which operated elderly 747s to Canada and the UK, was liquidated in 2008, mainly because the high cost of fuel made its operations totally uneconomic. Viva Macau also ran out of money in 2010 and closed down. In more recent times AirAsia X halted its A340 flights to London and Paris in early 2012 in the wake of the global financial crisis and during a period when the price of fuel skyrocketed.

Another prospective long-haul player, Japan’s Skymark, also arrived with ambitious plans and an order for six Airbus A380s. It wanted to go long-haul with a low-cost base but all-premium offering despite not having a premium product or any international experience at its short-haul operation. It collapsed financially and is currently in the process of being rescued by All Nippon Airways… minus the A380s.

Now that economic conditions have calmed and the price of fuel appears to have stabilised at a far lower level and with new fuel efficient aircraft, there is certainly evidence some operators are reconsidering theiroptions. Scoot, wholly-owned by Singapore Airlines, became the first airline in the world to operate an all‑Dreamliner fleet when its seventh 787 entered scheduled service just four weeks before Jetstar International did the same. It had previously operated 777-200s.

Chief executive Campbell Wilson recently confirmed the airline was “sizing up new destinations” across the Middle East and Europe to serve from its Singapore hub, although the aircraft currently lacks the crew rest bunks typically found on flights of this length. But he said services to Europe and the Gulf states were “definitely on our cards” and the airline was “exploring some options at the moment… we haven’t finalised our decision on an announcement yet but it is not too far away”.

Scoot has a firm order for 20 787s, split equally between 335-seat 787‑8s and 375-seat 787-9s. Starting operations in June 2012, it has already carried 5 million passengers on medium and long-haul no-frills flights between Singapore and Sydney, Gold Coast, Bangkok, Taipei, Tokyo, Tianjin, Shenyang, Nanjing, Qingdao, Seoul, Hong Kong, Perth, Osaka, Kaohsiung and soon to Hangzhou and Melbourne. In Australia it links with Virgin Australia to take its passengers on to other destinations. Wilson has said the carrier is comfortable and optimistic within its chosen space of non-stop routes of up to around nine hours flight time from Changi Airport.

“We have a watching brief on possibilities beyond that nine hours reach, although we are not about to rush into them. ” Life hasn’t been quite so rosy for Malaysia’s AirAsia X, which has been losing serious amounts of money over the past two years. It blames some of the problem on “irrational competition”, a referenceto local full-service rival Malaysia Airlines which it accuses of dumping cheap seats on the market as a way of attracting customers back after its twin tragedies, the disappearance of MH370 and the shoot-down of MH17. AirAsia X shares have plunged to record lows and the airline is in talks to defer some deliveries of new aircraft. It has received four A330s this year with four more on order.

Chief executive Benyamin Ismail said AirAsia X would like to rework the schedule for these four and others due in 2017 and 2018. “We just want to make sure Airbus assists us in helping manage our capacity moving forward. We are not saying that we are not going to take it; what we are saying is give us a bit more time to take it later. ” Nevertheless, Ismail expects to return to operational profit by the end of this year. It has cut capacity as part of an overhaul, including dropping loss-making routes to Adelaide, and to Nagoya and Tokyo Narita in Japan. It did, however, launch a new route to Sapporo in Japan last month (October) and plans flights to Honolulu this month (November). Ismail, who was educated in Perth at Christ Church Grammar School and at Curtin University, took charge at AirAsia X earlier this year. He sees “fascinating possibilities” ahead for the airline, including a return to London, which will depend on delivery of a new, more capable, more fuel efficient version of the A330. Two will arrive late next year.

The AirAsia X picture becomes a little confused because it also has two offshore clones, Indonesia AirAsia X (IAX) and Thai AirAsia X (TAAX). On the one hand the Indonesian operation is even more of a disaster zone than its Malaysian parent. Operating with negative equity, Jakarta’s Transportation Ministry has served

True long-haul flying adds complexity to the business that LCCs don’t really want.

notice its operating licence will be withdrawn if it doesn’t convert its equity to positive. It is understood the owners plan to get round this by merging IAX with AirAsia X, in which case it will officially cease to exist. The merged operation will, however, still have to submit new business plans and arrange new flight permits to allow it to use the routes currently operated to and from Indonesia.

The Thai offshoot is performing far better, although it too has been experiencing some speed bumps. It began flying to Sapporo in May but had to withdraw in August over Japan’s concerns about Thailand’s aviation safety systems. Japan placed restrictions on Thai carriers after the International Civil Aviation Organization (ICAO) posted a red flag against Thailand in June.

It hasn’t put the brakes on TAAX expansion. In October it made its first foray into Mainland China with services from Bangkok to Shanghai, a 10 hour flight. In sharp contrast to Tokyo, Chinese authorities apparently had no concerns about Thai safety. That represented a shift in the carrier’s network expansion, which has largely focused on Japan. Its key strategy has been to expand its coverage over North Asia, defined as Japan, South Korea and China. It still serves Tokyo Narita and Osaka Kansai airports in Japan and South Korea’s Incheon. Also last month TAAX started a second daily flight between Bangkok and Incheon.

Another carrier set to launch to Honolulu is the Filippines Cebu Pacific which until now has mainly focused its long haul operations on the Middle East. It uses six A330‑300s with 436 seats, just short of the 440 seat certified maximum and it is the only budget long haulernot to have a business class section. Currently it flies from Manila to Sydney, Dubai, Kuwait, Riyadh and Doha. This concentration on the Gulf is because of the million or so Philippino workers who are employed in the region.

Cebu is also looking at opening services to Sharjah and is keen to get clearance for more Australian destinations.

Data from the airline reveals just how challenging it has been for Cebu. In its presentation on the carrier’s fourth quarter results (October – December 2014) five of its long-haul routes had an average load factor of just 53 per cent. For the full 2014 year long-haul load factors were a mere 61 per cent, well below what is required to turn in good profits. Indeed last year its long-haul operations lost nearly A$30 million. While the carrier appears confident there will be ongoing improvement a recently forged new air services agreement between the Philippines and the United Arab Emirates (UAE) which allows increases in capacity to the likes of Emirates Airline and Etihad Airways promise to make the going even tougher.

In Korea another addition to the growing list of long-haul LCCs is Jin Air, which is affiliated with Korean Air. It is currently a traditional short-haul budget operator but has acquired a 355-seat 777-200 from parent Korean to start flights from Incheon to Haiwaii next month (December). It plans to add two more 777s. Analysts anticipate that more of South Korea’s budget carriers will apply to operate long-haul routes. That suggests that for no-frills flying, with its additional complexity, it may become increasingly importantthat they have strong parents with deep pockets and the will to stick with it, such as Qantas with Jetstar, Singapore Airlines with Scoot or Korean with Jin. “We are seeing this trend of diversification emerging in the industry and it permits a parent airline to offer a wider range of products,” says Geoffrey Tudor, an analyst at Japan Aviation Management Research.

While Hawaii has become an attractive target for these long-haul LCCs, mainly because of its popularity as a leisure destination for Asians and Australians, it is clear that they remain extremely cautious about taking the step beyond to Mainland North America or Europe. While new aircraft such as the 787 dramatically improve the economics true long-haul flying adds complexity to the business that LCCs don’t really want. Even with a lower fuel price the fact is that the further you fly the more fuel you use. Then you have significant additional costs such as crew stop-overs and the infrastructure you need at the far end, such as ground handling, other services and additional staff. It all makes achieving the yields required to remain profitable harder to achieve in a budget business where yields are already pretty narrow.

Then there is the competition from full-service carriers, members of big alliances with powerful networks that today are actually coming pretty close to matching LCC fares on many routes for their economy passengers. It seems certain that the likes of AirAsia X will venture into Europe again and at some stage Jetstar and Scoot will probably follow. But it’s a risk they won’t take without an awful lot of careful study.