QANTAS’ will continue to concentrate on Asia and North America while it waits for new ultra long-range “hub-buster” aircraft to give it the ability to offer unique non-stop services between Australia and markets in Europe.
That is the message from the airline’s group chief executive Alan Joyce who is looking to new technology aircraft such as the Boeing 787s it has on order plus either Boeing new 777X or the Airbus A350 to deliver the airline unprecedented non-stop capability.
Those non-stops will likely be London to Perth with the 787 followed later by routes such as Paris to Sydney and Rome to Melbourne.
The airline looked some years ago at using Jetstar to service destinations in Southern Europe Mr Joyce says the low-cost offshoot won’t be joining Scoot and AirAsia X on the “kangaroo route” to Europe any time soon.
“I think Jetstar’s got so many growth opportunities in Asia,’’ Joyce says, pointing to recent announcements that the brand’s Japanese joint venture will grow from 20 to 28 aircraft and Veitnam’s Jetstar Pacific would be adding 10. “I think we have enough growth in this region and … we have a solution to Europe, which is the Emirates partnership.’’
The Emirates partnership gives Qantas 40 destinations in Europe without the need to invest the capital to operate its own services and, says Joyce, gives the Australian carrier a reach it could never have achieved on its own.
But that doesn’t mean the flying kangaroo, famed for its ability to convince aircraft manufacturers to help it conquer long distances, doesn’t see opportunities further down the track.
Joyce says technology is the airline’s friend and he’s keen to see what opportunities Qantas International’s new fleet of Boeing 787-9s can open up. The airline is preparing for the arrival of the first of eight B787s at the end of the next year and plans to start selling Dreamliner flights on its existing network before Christmas.
The planes will replace five older Boeing 747s and will be fitted with luxury business class seats, roomier economy seats and what the carrier describes as “a revolutionary premium economy that is streets ahead of anything out there’’.
Possible new routes include a non-stop service between Perth and London made possible by the 787-9’s 7,635 nm (14,140 km) nominal range.
London remains a destination for Qantas because of the size of the market and the traditionally strong links between Australia and the UK. But with 32 competitors on routes to Europe, Joyce argues the airline currently cannot make other ports on the continent pay, particularly with the one-stop flights that would be required from Australia’s East Coast.
“The dilemma you always have with the Qantas Group is that it is out of an Australian cost base, it is a long distance from your home and the costs are a lot higher as a consequence of that,’’ says Joyce
“So I think our future is the direct flights.’’
The long-term potential is for non-stop premium services to European ports other airlines would struggle to match, including Sydney-London, using planes such as ultra-long range Boeing 777-8X due to enter service at the end of the decade. The 777-8X, which builds on the technological advances made by the 787 program with enhancements such as carbon fibre high-span wings, will be able to carry 350 to 375 passengers up to 8,700 nm (16,110 km) in a wider cabin.
“We’re never going to fly to the 40 destinations Emirates has but you could be flying to a few of those top destinations,’’ Joyce says, noting that the combination of direct and indirect services “gives you a very feasible and economic operation in Europe that works very well”.
For now, however, China and the US are the main game.
“We talk about Europe a lot but people forget how big the US is for Qantas,’’ Joyce says, adding that the airline’s Airbus A380 services to partner American Airlines’ hub in Dallas, Texas, are “booming’’. “We’d love to be able to fly more destinations into the states.’’
The 787-9s open up Melbourne-Dallas and Brisbane-Dallas as potential destinations with daily services to cities such as Vancouver also a possibility.
“And then eventually with the aircraft in the next decade, you’ll have New York direct and that means Chicago direct,’’ Joyce says. “That means a lot of destinations in the US that have the viability to have direct services start coming on to the radar screen.’’
The alliance with American Airlines remains the biggest for Qantas, despite the higher profile of its marriage with Emirates, but that may be set to change.
Australia’s competition regulator recently gave an alliance with China Eastern a green light and Joyce believes that rapid tourism growth out of China will ultimately make this the flying kangaroo’s biggest partnership. The airline is also set to benefit from Chinese tourism growth through partnerships with China Southern and Hong Kong’s Cathay Pacific.
“The stats just blow you away,” Joyce says. “I think we have 1.2 million visitors from China and we get 1 per cent of the worldwide visitor rate of over 100 million that go overseas.
“Some estimates have that growing to over 500 million in the next decades. Even if we stay at just 1 per cent, the total of the Chinese visitors (coming) here nearly gets to the 7 million total visitors that we have now.
“And when they come to Australia, they typically take an average two domestic sectors when they’re travelling, so the benefits to the domestic network, not only the international one, are quite huge.’’
“So the potential to tap into a hugely different market that benefits the whole tourism economy is massive in the Chinese market and that’s quite exciting.’’
While Joyce can see growth in all parts of the business from China, including a Qantas service to Shanghai that now operates from China Eastern’s terminal, he is particularly excited about the price-sensitive end of the market.
He sees a big potential in charter services such as the one recently operated by Jetstar between Australia’s Gold Coast and the Chinese city of Wuhan with the Dalian Wanda Group. The year-long Gold Coast deal to sell combined flight and holiday packages ends on October 1 and the parties are working on new services to Australia to begin in time for the Chinese New Year.
Working in conjunction with travel groups such as Wanda means Qantas or its Jetstar affiliates do not have to incur the expense of setting up a distribution network in China.
“They sell the seats and they actually package it,’’ he says. “So Jetstar Vietnam, Jetstar Singapore and Jetstar Japan all will be participating in that growth as well and they’re all doing various forms of charter activity.’’
Another plus out of China for Qantas is, surprisingly, freight. The group has unique freight traffic rights which allow it to fly a triangular Australia-China-US-Australia route using wet leased freighters (aircraft leased with crew) from Atlas Air. The route has given Qantas Freight about 5 per cent of the China-Us freight market and Joyce says it has been participating well in growth over time.
Australia-China has always been its weakest leg but Joyce says a free trade agreement between the two countries is starting to see this improve with a range of new products.
Of course, Qantas isn’t the only airline with Chinese aspirations.
Virgin Australia’s John Borghetti also sees a big growth potential from the world’s most populous nation and now has two major Chinese groups, Nanshan and Hainan, as major shareholders.
Joyce is unfazed by Virgin’s new shareholders and says he’s happy with Qantas’s position and its partnership with two carriers enjoying strong growth and support.
“I think it’s such a huge market that there’s plenty for everybody on it,’’ he says “ And you know I’d say with the China market I’d rather have the big players as well. I think China Southern for example just reached 700 aircraft, which makes it the fourth largest airline in the world.’’
Another point Joyce makes is that Qantas is a different organisation from the one it was a few years ago.
The airline made a net profit of more than $1 billion in the year ended June 30, 2016, with a 60 per cent rise in underlying pre-tax profit, the best result in the airline’s 95-year history.
It declared its first shareholder dividend since 2009 and saw record earnings from all business units – except freight.
The result was partly driven by a $664 million benefit from lower global fuel prices but also by a transformation program that has unlocked $1.66 billion in permanent cost and revenue benefits since 2014 and expects to see that rise to $2.1 billion by next June.
One result of the changes, according to Joyce, is that airline group well-placed to cope with the often quickly changing aviation environment.
“What’s great, I think, about where you see Qantas today compared to where it was when it had its previous record earnings back in 2007 is they are coming from a bigger variety of things,’’ he says.
“We have a lot bigger frequent flyer program than we had back then, which is making over $300 million. Jetstar made over $400 million, a record profit for Jetstar, but what’s great in the results is that Qantas International and Qantas Domestic also had a record profit.
Joyce is particularly pleased with a billion-dollar turnaround in the international business that prompted the airline to invest in the long-awaited B787s.
“Every business has earned the right to grow and we are now in an enviable position of figuring out what’s the growth opportunities for the businesses going forward — where do we invest the capital, how do we grow to take advantage of the really solid position each of the businesses are in?’’ he says
“And that’s very different from where we were in the past, where usually it’s one component of the business that contributes all the profits and some of the others were underperforming.’’
However, he also acknowledges that low fuel prices have been accompanied by international fares at historic lows in some markets and a global economy that is at best mixed.
He observes that the Australian economy is also going through a transition which saw Qantas drop more than $250m in resource sector revenue, although it managed to redeploy aircraft to the East Coast to take advantage of the property boom and leisure routes have been going well..
“So you’ve definitely got a mixed environment and what I think we’ve changed in our culture here is the ability to be agile and to move things around to take advantage of that,’’ he says.
With the 787s and Airbus A320 neos on the way for Jetstar, the group has a sizeable commitment to new planes but Joyce says it will continue to take a cautious view on capital management.
Investments such as new lounges, new seats on existing aircraft and, increasingly, information technology all clamour for a slice of what will be a $4.5 billion capital expenditure pie over the next three years.
“It’s a lot of money but there are lot demands for growth, there are a lot of demands for new businesses, there are a lot of demands for new seats,’’ he says. “And we have a prioritisation within the organisation for that capital demand and that it’s allocated to the right things.
“I think Qantas is a lot better at doing that than it did before so everything gets done. The pace at which it gets done has to fit into our capital program and the ability, like any business would have, of the business to be able to pay for it.’’
The airline has 15 options and 30 purchase orders for the Dreamliner and Joyce says he wants to see how they perform before ordering more. Even if that happens, further orders are likely to be incremental and Joyce says it could be as little as one at a time under the agreement the airline has with Boeing.
Qantas has yet to determine whether it will order the new Boeing 777-8X as a replacement for its 12 still relatively young A380 superjumbos. When the time comes, it will run a competition between the new Boeing widebody and Airbus’s A350-1000.
“We always run a competition on every aircraft type and there are no certainties on these things,’’ says Joyce. “But what I think is always the case in the airline industry is that you’re always continuously monitoring what’s your potential replacement. So the minute you get a new aircraft you’re thinking about what’s going to be in the future the aircraft that has to replace it.’’
Qantas will not exercise options to take an eight additional A380s but Joyce says the existing fleet has worked well for Qantas on Los Angeles, Dallas, London and, on occasion, Hong Kong.
Asked how the 380s stack up against the new planes, Joyce says they work well on high volume, long distance routes to hub cities.
Qantas has five services that depart Los Angeles within a small window and Joyce says flying smaller aircraft would not be as cost-effective and would mean too many frequencies.
“So you’ve got the A380 which is a very, big efficient vehicle – and it depends on oil prices as well.,’’ he says. “Today the 380s look a lot better than they did with oil prices over $US100 .’’
He adds that oil prices also determine the roll-over or replacement case for aircraft but declines to predict what will happen in that arena, describing picking fuel trends as a “fool’s game’’.
“We always hedge and we are hedging and we’ve communicated our hedging for financial year 17 and we’re hedging into 18,’’ he says. “And the idea is to give you time to cope with whatever the fuel price is and not try to put a bet on where fuel’s going to be.’’
