Winds of change are blowing across the aviation landscape as routes are rationalised and new carriers arrive. Sim Kok Chwee takes a hard look at the plans of Qantas and Malaysia Airlines
How the kangaroo lost its bounce
Australia’s location at the bottom of the southern hemisphere meant that Qantas’ flights to most international destinations were medium- to longhaul right from the start. In the 1970s, carriers from the Far East such as Cathay Pacific Airways, Malaysia Airlines, Singapore Airlines (SIA) and Thai Airways International started to gain visibility in the Australian market and soon turned on the heat when they began to receive wide-body equipment. Despite that, Qantas maintained its dominant position on the Kangaroo Route, linking Australia to the UK and on trans-Pacific flights to the US west coast.
However, the arrival of Emirates with three weekly services to Melbourne in 1996 marked the start of a new force that few saw coming. By 2010, Emirates alone operated more than 70 weekly services to Australia and was joined by Etihad Airways and Qatar Airways.
Over time, Qantas’ international network had become rather anaemic as most European destinations except London and Frankfurt were lost. It also shed its intra-Asian routes and elected for point-to-point operations between Australia and key Asian capitals at a time when Asia’s economies and intra-regional trade were booming. Across the Pacific, Qantas was able to argue against the granting of rights to SIA from Sydney to Los Angeles but could do little as V Australia, United and Delta nibbled at its most lucrative route.
Change we must
All was not well for Qantas when its CEO Alan Joyce announced in August sweeping changes and the development of new business in Asia as part of the initial phase of a turnaround plan.
While continuing to sew its domestic services operated by Qantas and its low-cost Jetstar, the group will strengthen its Asian arm, deepen and broaden alliances with oneworld members, upgrade its fleet and advance customer excellence to boost its international operations.
On the deficit side of the equation, Qantas will end services on the Bangkok-London and Hong Kong-London sectors while maintaining operations between Australia and these two points. Complementing this, British Airways will terminate services on the Bangkok-Sydney sector, while adding a third daily London-Hong Kong service and deploying a Boeing 747-400 on the London-Singapore-Sydney route, instead of a B777-200ER. With these changes, Singapore will become the primary stop on the Kangaroo Route. In South America, Qantas will also shift its gateway from Buenos Aires to Santiago to tap into the vast network of oneworld partner, LAN Airlines. Changes above are expected to take effect in early 2012.
On equipment, Qantas will spend A$400 million (US$425 million) to reconfigure six B747-400ERs and three B747-400s to maintain a product offering that is consistent with its Airbus A380 fleet by end-2012. Four of the older B747-400s will be sent into early retirement. It will have a dozen A380s in service by end-2011 but delivery of its final six of 20 A380s ordered will be deferred to 2019 and beyond. Further spending of up to US$4.2 billion for a fleet of 110 A320s has also been committed.
To reward its important clients, Qantas will invest in its premium lounges in Los Angeles, Hong Kong and Singapore, as well as revamp its loyalty programme with a new tier – Platinum One – and higher mileage awards for premium class travel.
Advancing into Asia
It is in Asia that Qantas is investing most heavily, with the establishment of two new airlines. Low-cost Jetstar Japan will be based at Tokyo’s Narita Airport to operate domestic and international services. It is expected to have a need for up to 24 A320s within a few years of its start-up, slated for the end of 2012.
In addition, a new premium airline – based in either Singapore or Kuala Lumpur – will also have “business class and economy class cabins that are better than the A380s’”, Joyce was quoted as saying. The unnamed airline will carry neither the Qantas nor Jetstar branding, and Qantas will be a minority owner. It will be modelled after British Airways’ exclusive business-class-only A318 that brings high net-worth bankers across the Atlantic on a daily trip between London and New York.
Singapore is considered to be the forerunner in the race to locate this new airline as Qantas already operates a massive hub operation at Changi Airport. The airline will have a need for up to 11 A320s, and as Boeing 787 Dreamliners join the fleet in 2012/2013, services to European destinations can be expected.
As part of the turnaround plan, Qantas also hopes to offer one-stop service from Australia to cities such as Amsterdam, Rome and Istanbul in conjunction with Malaysia Airlines.
While Qantas’ road map appears to trim some loss-making routes, consolidate its hub in Singapore, grow its share of the intra-Asian economic pie and alter its fleet mix, it does little to tackle the competition from Middle East carriers.
With its emphasis on operating A380 services to London alongside a B747-400 service to Frankfurt, passengers travelling to much of the UK and continental Europe continue to endure a two-stop journey including a transit through over-crowded and increasingly unpopular Heathrow Airport.
Furthermore, the changes announced by Qantas will trim its workforce by 1,000 jobs, meaning that it also has to deal with the ire of unions in Australia.
With these challenges plus Virgin Australia’s new tie-ups with Etihad Airways and SIA, Qantas indeed has its work cut out for it.
Multiple challenges on the horizon
When news leaked that Malaysia Airlines (MAS) and AirAsia were negotiating an equity swap, it was clear that Malaysia’s aviation industry would be in for an upheaval. Relations between the two carriers could be described as frosty, with periodic quibbles over traffic rights.
On August 9, Khazanah Nasional (which owns 69 per cent of MAS) and Tune Air (which holds a 26 per cent stake in the AirAsia Group) inked a Comprehensive Collaboration Framework (CCF). Through this, Khazanah now owns 10 per cent of AirAsia while Tune Air owns 20.5 per cent of MAS, clearly indicating that AirAsia is worth more than twice its flag carrier rival.
In addition, with AirAsia’s Tony Fernandes and Kamarudin Meranun sitting on the MAS board, the low-cost carrier would be privy to all the strategic thinking going on in MAS and its subsidiaries, including Firefly and MASwings.
Indeed, MAS’ position seemed weak when it announced a massive haemorrhage in the form of a RM527 million (US$176 million) loss in its second quarter financial report, just weeks after the deal was sealed.
Ironically, during that quarter, its subsidiary Firefly had taken on a fleet of Boeing 737-400s and B737-800s that looked set to challenge AirAsia on various domestic routes. However, in the aftermath of the CCF, Firefly’s wings were clipped as the decision was taken to transform it from a low-cost regional airline into a full-service turboprop operator with bases in Subang (Kuala Lumpur) and Penang.
According to an industry analyst, discussions are ongoing under the auspices of Project Sapphire for the establishment of a new super-premium all-business-class airline using Firefly’s B737-400 and B737-800 fleet.
Playing it premium
Various parties described Malaysia’s aviation industry as increasingly leaning towards rationalisation, reform and consolidation. The result is a gamut of airlines, each seemingly guarding its own turf (see sidebar).
It remains to be seen if the size and genetic make-up of the Malaysian market are capable of supporting this line-up of airlines, especially those offering premium and super-premium products.
In 1999/2000, British Airways and Qantas terminated their operations at Kuala Lumpur International Airport due to poor yield and cut-throat low fares offered by MAS. At the height of the competition with AirAsia and AirAsia X, MAS’ offers of zero-ringgit fares took it into the once exclusive territory of LCCs. Further expansion by AirAsia X on longhaul flights to Australia and Europe would also exert downward pressure on yield.
Tickets to rise?
With Firefly’s jet operations heading into oblivion, some of Malaysia’s tourism stakeholders worry that the lack of competition will drive airfares up and air capacity down.
Sarawak Tourism Board CEO Rashid Khan, a former MAS director, said: “When there is rationalisation or reform, something will inevitably have to go. It is a concern for stakeholders like us. While countries are liberalising their aviation industries, it seems that we may be heading towards a monopoly.
“Sarawak is highly dependent on air travel as we are on an island. It is a strategic issue for us, especially since our (tourism) numbers have been growing positively. There will be a lot of work to be done in terms of lobbying.”
The changes also coincide with the latest round of increases in international passenger service charge and landing and parking fees implemented by Malaysia Airports Holdings, causing concern among travellers that overall cost of air travel could shift upwards.
Acting on consumers’ concern of monopolistic behaviour is the Malaysian Competition Commission (MyCC), which is initiating a study ahead of the Competition Act 2010 that comes into force next January.
MyCC CEO Shila Dorai Raj said: “Once we have done market research, we will advise Malaysia Airlines and AirAsia on areas where they may end up crossing the line.”
Survival of the flag carrier
Beyond its shores, MAS and Kuala Lumpur are sandwiched by more-than-worthy competitors to the north (Thai Airways International and Suvarnabhumi Airport) and south (Singapore Airlines and Changi Airport). Confirmation that both carriers are looking to establish new subsidiary airlines could not have come at a more inopportune moment as MAS stares at the potential of yet another full-year loss.
What’s more, Qantas’ new premium full-service carrier in Asia, which could be based in Kuala Lumpur, further clouds the picture (see story above). In June, the Australian airline had sponsored MAS’ entry into the oneworld alliance and planned to offer one-stop services between Australia and Amsterdam, Rome and Istanbul in conjunction with MAS.
Through much of the last two decades, MAS’ profitability has gone on a roller-coaster ride and the carrier has been taken through a series of turnaround plans, bailouts and other doses of bitter medicine. It is also counting the costs of initiating Airbus A380 operations and joining oneworld alliance in 2012.
However, the CCF may just end up being the right prescription for both sides. According to the Centre for Asia Pacific Aviation, a strong Qantas-MAS and Jetstar-AirAsia relationship with the possibility of an equity tie-up later would change the dynamics of the entire Asian marketplace and could potentially compel other airline groups in the region to make
similar moves.
Dividing up Malaysia’s airspace
• Malaysia Airlines – premium medium- and longhaul carrier
• Airline under Project Sapphire – super-premium all-business-class carrier
• Firefly – full-service turboprop carrier for domestic and regional services
• MASwings – low-cost carrier operating turboprop aircraft on domestic routes
• AirAsia – low-cost carrier offering domestic and shorthaul routes
• AirAsia X – low-cost medium- and longhaul carrier
-TTG Asia.
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