It is back to the future. In the movie the protagonist goes back to
the past to seek guidance for the future. The same holds true for the
Australian aviation market. Since the collapse of Ansett Australia in
2001, coupled with the proposed acquisition of Tiger Airways Australia
by Virgin Australia, which is still subject to the regulatory approval
from the Australian Competition and Consumer Commission (ACCC) whose
final decision is due 14 March, the domestic aviation market has never
been such dynamic, competitive and virtually returned to the duopoly era
predating the Melbourne-based carrier’s liquidation.
As the fierce competition between Australia’s largest carrier, Qantas Airways and the aspiring Brisbane-based Virgin Australia gets underway, the domestic Australian market is being flooded with capacity, of which the highest total market capacity growth since Jetstar’s inception in 2004 stood at 10.1% in the first half of FY2012/13, according to the Bureau of Infrastructure, Transportation and Regional Economics (BITRE) figures; as a result, the domestic business class airfares have slumped to unprecedented multi-year lows.
The consequential dent in the airlines’ profitability in the domestic market was stark, with Qantas Domestic’s underlying earnings before interest and tax (EBIT) declining significantly by 34% from A$328 million in the first half of FY2011/12 to A$218 million in FY2012/13 first-half and group yield excluding foreign exchange impact slumping by 2.9% from 10.77 Australian cents per revenue passenger kilometre (RPK) in the prior year period to 10.46 Australian cents this year. Jetstar’s underlying EBIT also plummeted by 13% from A$147 million in FY2011/12 first-half to A$128 million in FY2012/13 first-half primarily owing to stiff domestic competition and the start-up losses recorded at its Jetstar Japan and Jetstar Hong Kong units.
The picture is not any rosier at Virgin Australia, whose 43.3% plunge in the earnings before interest and tax (EBIT) at its domestic business to A$49.3 million in the first-half FY2012/13 from A$87 million recorded a year earlier largely attributable for a 36.5% drop in the airline group’s underlying profit before tax (PBT) to A$61 million for the first six months of this financial year.
Qantas passes ‘turning point’
The challenge facing Qantas’ domestic business units overshadowed the progress being made in turning around its international unit, whose A$91 million loss in the FY2012/13 loss was a 65% year-over-year improvement over the A$262 million loss recorded in the prior fiscal year.
Revenue at a group level rose by 2% from A$8.05 billion in FY2011/12 first-half to A$8.24 billion in FY2012/13 first-half, matching a 2% increase in expense from A$7.77 billion last year to A$7.9 billion this year. A stagnant fuel cost at A$2.18 billion which the airline attributed to its fuel efficiency improvement initiative also helped produce a 12% increase in underlying earnings before interest and tax (EBIT) from A$277 million in the first-half of the last fiscal year to A$310 million this fiscal year. Underlying profit before tax (PBT), which took into account the effect of net finance costs for the group and stood at A$87 million this fiscal first-half, surged by 10% from A$202 million in FY11/12 first-half to A$223 million in FY12/13 first-half.
The key financials of the group continued to improve, with the group repaying US$450 million of debt due June 2013 early and launching a A$100 million share buyback programme. Cancelling a US$8.5 billion order for 35 Boeing 787-9 Dreamliners and selling its non-core assets such as its 50% stake in StarTrack Express and its Riverside and Cairns catering facilities have collectively reduced capital expenditure by a staggering 62% from A$1.5 billion in FY11/12 first-half to A$575 million in FY12/13 first-half. This in turn outweighed a 5% plunge in the group’s operating cash flow (OCF) from A$842 million last fiscal first-half to A$780 million this year, thereby producing a net free cash flow (FCF) of A$205 million, swung from the A$678 million net cash outflow a year earlier.
Net debt decreased by 5% from A$3.56 billion in FY2011/12 first-half to A$3.36 billion in FY12/13 first-half whereas net debt including operating lease plummeted by 8% from A$5.4 billion last year to A$5 billion this year, while adjusted shareholders’ equity increased by 8% to A$5.7 billion compared to the A$5.56 billion at 30 June 2012, thereby leading to a 7% improvement in the net debt-to-equity ratio from 0.96 times 6 months earlier to 0.89 times at the end of last year.
Qantas Group carried 4.3% more passengers to 24.7 million in the first-half of FY2012/13, up from 23.7 million a year earlier, though a 1.7% increase in capacity, measured in available seat kilometres (ASKs), from 70 billion in FY11/12 first-half to 71.4 billion in FY12/13 first-half, outpaced a proportionately less 0.7% increase in traffic, measured in revenue passenger kilometres (RPKs) to 57 billion from 56.7 billion in the corresponding period. As a result, the load factor slumped by 0.7 percentage point to 80% from 80.7% in the year-earlier period.
The airline also improved unit cost excluding fuel, measured in cost per available seat kilometre (CASK), from 5.38 Australian cents in FY11/12 first-half to 5.04 Australian cents in FY12/13 first-half. Factoring in the A$125 million Boeing settlement which provided a 0.18 Australian cents tailwind and the 0.08 Australian cents impact resulting from the carbon tax, the comparable unit cost declined by 3.4% from 5.24 Australian cents in the year-ago period to 5.06 Australian cents this year. This was partly attributable to Qantas’ fleet renewal programme, which saw 1 Boeing 747-400, 1 767-300ER and 3 737-400s being retired during the period in addition to the 2 747-400s and 1 Jetstar A320 being returned to lessors, leaving a fuel-guzzling fleet of 18 747-400s, down from 21 just six months earlier.
“We have now passed a turning point as we continue to deliver the transformation of Qantas,” Qantas chief executive Alan Joyce declared.
Yet these figures have masked the immense challenge facing Qantas going forward, especially on the lucrative domestic front.
First of all, the A$125 million settlement from Boeing over the cancellation of 35 firm 787-9 orders has significantly distorted the financial performance of the company, with the underlying earnings before interest and tax (EBIT) being A$95 million, a 66% slump than the year-earlier EBIT of A$277 million, had there not been the non-recurring compensation. By the same token, the underlying profit before tax (PBT) would have slumped by a staggering 96% to a mere A$8 million for FY2012/13 first-half, with the statutory profit before tax (PBT) bleeding red ink at a A$64 million loss and a A$104 million statutory profit after tax loss.
Most importantly, Qantas could no longer rely on its traditional profit powerhouse – Qantas Domestic to provide the bulk of the lift to the group alone. While successfully defending an 84% corporate market share and renewed 40 corporate accounts in addition to winning 39 new ones, including 4 won back from Virgin Australia. But the cost of doing so is taking its toll on Qantas with a 3% decline in domestic load factor from 79.6% a year ago to 76.6% despite a 2% increase in revenue to A$3.2 billion in FY12/13 first-half from A$3.1 billion in the prior year period. This was the primary culprit behind Qantas Group’s 2.9% decline in yield, measured in revenue per revenue passenger kilometre (RPK), to 10.46 Australian cents this year from 10.77 Australian cents a year earlier.
Looking ahead, Qantas will have to work extra hard to differentiate itself from the transcontinental A330 service offered by Virgin Australia in order to earn every dime of the domestic business. It has already announced to upgrade 20 domestic Airbus A330-200 aircraft with lie-flat business class seat, a new economy class design and a new in-flight entertainment (IFE) system, an additional order for 5 Boeing 737-800s in addition to the earlier announcements of ordering 5 extra 717s and 3 Bombardier Q400 NextGen turboprop aircraft for the lucrative fly-in fly-out (FIFO) market.
As the fierce competition between Australia’s largest carrier, Qantas Airways and the aspiring Brisbane-based Virgin Australia gets underway, the domestic Australian market is being flooded with capacity, of which the highest total market capacity growth since Jetstar’s inception in 2004 stood at 10.1% in the first half of FY2012/13, according to the Bureau of Infrastructure, Transportation and Regional Economics (BITRE) figures; as a result, the domestic business class airfares have slumped to unprecedented multi-year lows.
The consequential dent in the airlines’ profitability in the domestic market was stark, with Qantas Domestic’s underlying earnings before interest and tax (EBIT) declining significantly by 34% from A$328 million in the first half of FY2011/12 to A$218 million in FY2012/13 first-half and group yield excluding foreign exchange impact slumping by 2.9% from 10.77 Australian cents per revenue passenger kilometre (RPK) in the prior year period to 10.46 Australian cents this year. Jetstar’s underlying EBIT also plummeted by 13% from A$147 million in FY2011/12 first-half to A$128 million in FY2012/13 first-half primarily owing to stiff domestic competition and the start-up losses recorded at its Jetstar Japan and Jetstar Hong Kong units.
The picture is not any rosier at Virgin Australia, whose 43.3% plunge in the earnings before interest and tax (EBIT) at its domestic business to A$49.3 million in the first-half FY2012/13 from A$87 million recorded a year earlier largely attributable for a 36.5% drop in the airline group’s underlying profit before tax (PBT) to A$61 million for the first six months of this financial year.
Image Courtesy of John Absolon
The challenge facing Qantas’ domestic business units overshadowed the progress being made in turning around its international unit, whose A$91 million loss in the FY2012/13 loss was a 65% year-over-year improvement over the A$262 million loss recorded in the prior fiscal year.
Revenue at a group level rose by 2% from A$8.05 billion in FY2011/12 first-half to A$8.24 billion in FY2012/13 first-half, matching a 2% increase in expense from A$7.77 billion last year to A$7.9 billion this year. A stagnant fuel cost at A$2.18 billion which the airline attributed to its fuel efficiency improvement initiative also helped produce a 12% increase in underlying earnings before interest and tax (EBIT) from A$277 million in the first-half of the last fiscal year to A$310 million this fiscal year. Underlying profit before tax (PBT), which took into account the effect of net finance costs for the group and stood at A$87 million this fiscal first-half, surged by 10% from A$202 million in FY11/12 first-half to A$223 million in FY12/13 first-half.
The key financials of the group continued to improve, with the group repaying US$450 million of debt due June 2013 early and launching a A$100 million share buyback programme. Cancelling a US$8.5 billion order for 35 Boeing 787-9 Dreamliners and selling its non-core assets such as its 50% stake in StarTrack Express and its Riverside and Cairns catering facilities have collectively reduced capital expenditure by a staggering 62% from A$1.5 billion in FY11/12 first-half to A$575 million in FY12/13 first-half. This in turn outweighed a 5% plunge in the group’s operating cash flow (OCF) from A$842 million last fiscal first-half to A$780 million this year, thereby producing a net free cash flow (FCF) of A$205 million, swung from the A$678 million net cash outflow a year earlier.
Net debt decreased by 5% from A$3.56 billion in FY2011/12 first-half to A$3.36 billion in FY12/13 first-half whereas net debt including operating lease plummeted by 8% from A$5.4 billion last year to A$5 billion this year, while adjusted shareholders’ equity increased by 8% to A$5.7 billion compared to the A$5.56 billion at 30 June 2012, thereby leading to a 7% improvement in the net debt-to-equity ratio from 0.96 times 6 months earlier to 0.89 times at the end of last year.
Qantas Group carried 4.3% more passengers to 24.7 million in the first-half of FY2012/13, up from 23.7 million a year earlier, though a 1.7% increase in capacity, measured in available seat kilometres (ASKs), from 70 billion in FY11/12 first-half to 71.4 billion in FY12/13 first-half, outpaced a proportionately less 0.7% increase in traffic, measured in revenue passenger kilometres (RPKs) to 57 billion from 56.7 billion in the corresponding period. As a result, the load factor slumped by 0.7 percentage point to 80% from 80.7% in the year-earlier period.
The airline also improved unit cost excluding fuel, measured in cost per available seat kilometre (CASK), from 5.38 Australian cents in FY11/12 first-half to 5.04 Australian cents in FY12/13 first-half. Factoring in the A$125 million Boeing settlement which provided a 0.18 Australian cents tailwind and the 0.08 Australian cents impact resulting from the carbon tax, the comparable unit cost declined by 3.4% from 5.24 Australian cents in the year-ago period to 5.06 Australian cents this year. This was partly attributable to Qantas’ fleet renewal programme, which saw 1 Boeing 747-400, 1 767-300ER and 3 737-400s being retired during the period in addition to the 2 747-400s and 1 Jetstar A320 being returned to lessors, leaving a fuel-guzzling fleet of 18 747-400s, down from 21 just six months earlier.
“We have now passed a turning point as we continue to deliver the transformation of Qantas,” Qantas chief executive Alan Joyce declared.
Yet these figures have masked the immense challenge facing Qantas going forward, especially on the lucrative domestic front.
First of all, the A$125 million settlement from Boeing over the cancellation of 35 firm 787-9 orders has significantly distorted the financial performance of the company, with the underlying earnings before interest and tax (EBIT) being A$95 million, a 66% slump than the year-earlier EBIT of A$277 million, had there not been the non-recurring compensation. By the same token, the underlying profit before tax (PBT) would have slumped by a staggering 96% to a mere A$8 million for FY2012/13 first-half, with the statutory profit before tax (PBT) bleeding red ink at a A$64 million loss and a A$104 million statutory profit after tax loss.
Most importantly, Qantas could no longer rely on its traditional profit powerhouse – Qantas Domestic to provide the bulk of the lift to the group alone. While successfully defending an 84% corporate market share and renewed 40 corporate accounts in addition to winning 39 new ones, including 4 won back from Virgin Australia. But the cost of doing so is taking its toll on Qantas with a 3% decline in domestic load factor from 79.6% a year ago to 76.6% despite a 2% increase in revenue to A$3.2 billion in FY12/13 first-half from A$3.1 billion in the prior year period. This was the primary culprit behind Qantas Group’s 2.9% decline in yield, measured in revenue per revenue passenger kilometre (RPK), to 10.46 Australian cents this year from 10.77 Australian cents a year earlier.
Looking ahead, Qantas will have to work extra hard to differentiate itself from the transcontinental A330 service offered by Virgin Australia in order to earn every dime of the domestic business. It has already announced to upgrade 20 domestic Airbus A330-200 aircraft with lie-flat business class seat, a new economy class design and a new in-flight entertainment (IFE) system, an additional order for 5 Boeing 737-800s in addition to the earlier announcements of ordering 5 extra 717s and 3 Bombardier Q400 NextGen turboprop aircraft for the lucrative fly-in fly-out (FIFO) market.
“The upgraded A330-200s will be joined by more next-generation Boeing
737-800s for domestic short haul operations. With five additional
orders, our B737-800 fleet will ultimately grow to 75 aircraft. Older
narrowbody Boeing 737-400s will be phased out by the end of 2013 and
Boeing 767s by mid-2015. We are simplifying our fleet and making better
use of the greater flexibility and higher frequencies that the B737-800s
provide, while investing in what will be the best domestic onboard
product anywhere in the world with the A330s,” Qantas chief executive
Alan Joyce said.
One way to achieve further differentiation lies in its strong frequent flyer programme under Qantas Loyalty, which remains Qantas Group’s second-most profitable unit with an earnings before interest and tax (EBIT) of A$137 million, up 15% from the year-earlier result of A$119 million. Its member base has grown from 7.9 million in FY11 and 8.6 million in FY12 to 9.0 million in FY13 and has recently launched Qantas Cash, a pre-loaded frequent flyer card with up to 9 currencies that enables its bronze frequent flyer to check-in at airports and use the new card as a boarding pass.
Qantas must put meat on the bones in its Asia strategy
When the APA Mark II, a consortium led by investor Mark Carnegie, former Qantas chief executive Geoff Dixon and his fellow former chief financial officer (CFO) Peter Gregg and advertising magnate Jon Singleton, sold its 1.5% stake and netted A$18 million in profit, this has enabled Qantas to refocus on turning around its loss-making international operation instead of fending off a “destabilisation” strategy in pursuit of an alternative vision for Qantas to expand into Asia aggressively.
The centrepiece of the turnaround strategy is the Qantas/Emirates alliance (“Qantas/Emirates alliance to reshape competitive landscape“, 10 Sep, 12), of which the Australian Competition and Consumer Commission (ACCC) has given its interim authorisation this January.
“In its draft determination issued in December the ACCC formed the preliminary view, after conducting a detailed assessment, that the public benefits resulting from the alliance are likely to outweigh the public detriment which may result through its effect on competition where Qantas and Emirates offer overlapping services. In most regions, this detriment is likely to be mitigated by a number of factors, including continued competition from a number of established airlines,” ACCC chairman Rod Sims said in a statement.
“The ACCC raised concerns about the potential impact of the alliance on the overlapping routes between Australia and New Zealand. The ACCC is concerned that the alliance may have an increased ability and incentive to reduce or limit growth in its capacity in order to raise airfares. Therefore, the ACCC is granting interim authorisation on the condition that the applicants do not engage in the conduct for which authorisation is sought in relation to services between Australia and New Zealand,” Sims cautioned.
In a 20 February submission to the ACCC, Qantas has clearly explained that the Qantas/Emirates partnership, which entails the flying kangaroo ditching its hub in Singapore for European traffic in favour of Emirates Airline’s base in Dubai and grants access to 33 new one-stop European and 31 Middle Eastern/African destinations for Qantas passengers, is adopting a model of splitting routes under the “trunk routes” and “non-trunk routes” categories.
The Master Co-ordination Agreement (MCA) stipulates that Qantas flights via and to/from Dubai as well as Emirates from Dubai via/to Australia, including trans-Tasman services to Auckland, New Zealand will be categorised as “trunk routes”, for which a “benefit transfer” model will be adopted. The “benefit transfer” model will equally share the incremental profits gained as a result of the Qantas/Emirates partnership between both carriers, ensure that the partnership is on a “metal neutral” basis where none of a particular party’s aircraft is favoured or prioritised and enable both carriers to jointly manage yields and inventories.
For “non-trunk routes”, which include domestic Qantas and Jetstar flights, Jetstar New Zealand and Jetstar flights in Asia, a commission-based model will be adopted, whereby a commission payment will be made as a determined percentage of passenger revenue to the non-operating carrier.
“It’s off to a great start. It’s only been three weeks and there’s probably been some pent-up demand but the combination of Qantas and Emirates together is, I think, a killer combination,” Qantas chief executive Alan Joyce said in a Bloomberg interview, in which he noted the bookings to Milan and Barcelona, routes which are under the “non-trunk” and covered by the commission-based model, are up 17 times and 10 times, respectively.
Meanwhile, Qantas’ announcement of improving its Asia service offering is insufficient to securing a stranglehold in Asia profitably while the flying kangaroo may be unduly reliant on Emirates and Jetstar, which may prove to be a retrench in the interim in the world’s fastest-growing aviation market before the 787-9 arrives in 2016.
The first phase of the Asia expansion involves improving the QF29 Melbourne-Hong Kong flights by 3 hours and 55 minutes to improve connection times, QF77 Perth-Singapore flights by 2 hours and 5 minutes, QF51 Brisbane-Singapore flights by 3 hours and 20 minutes, QF23 Sydney-Bangkok flights by 3 hours and 35 minutes and Melbourne-Singapore flights by 4 hours and 35 minutes.
In doing so, there will be 10% and 40% more dedicated seats to Hong Kong and Singapore, respectively, where the latter will also see 25 net additional connections. Coupled with the reconfiguration of 10 Airbus A330-300s deployed to Asia with lie-flat beds, a new economy class and a new in-flight entertainment (IFE) system beginning late 2014, as well as the addition of Kuala Lumpur as an Emirates codeshare destination, Qantas claims its Asia services have been significantly improved.
One way to achieve further differentiation lies in its strong frequent flyer programme under Qantas Loyalty, which remains Qantas Group’s second-most profitable unit with an earnings before interest and tax (EBIT) of A$137 million, up 15% from the year-earlier result of A$119 million. Its member base has grown from 7.9 million in FY11 and 8.6 million in FY12 to 9.0 million in FY13 and has recently launched Qantas Cash, a pre-loaded frequent flyer card with up to 9 currencies that enables its bronze frequent flyer to check-in at airports and use the new card as a boarding pass.
Image Courtesy of Keith McInnes
When the APA Mark II, a consortium led by investor Mark Carnegie, former Qantas chief executive Geoff Dixon and his fellow former chief financial officer (CFO) Peter Gregg and advertising magnate Jon Singleton, sold its 1.5% stake and netted A$18 million in profit, this has enabled Qantas to refocus on turning around its loss-making international operation instead of fending off a “destabilisation” strategy in pursuit of an alternative vision for Qantas to expand into Asia aggressively.
The centrepiece of the turnaround strategy is the Qantas/Emirates alliance (“Qantas/Emirates alliance to reshape competitive landscape“, 10 Sep, 12), of which the Australian Competition and Consumer Commission (ACCC) has given its interim authorisation this January.
“In its draft determination issued in December the ACCC formed the preliminary view, after conducting a detailed assessment, that the public benefits resulting from the alliance are likely to outweigh the public detriment which may result through its effect on competition where Qantas and Emirates offer overlapping services. In most regions, this detriment is likely to be mitigated by a number of factors, including continued competition from a number of established airlines,” ACCC chairman Rod Sims said in a statement.
“The ACCC raised concerns about the potential impact of the alliance on the overlapping routes between Australia and New Zealand. The ACCC is concerned that the alliance may have an increased ability and incentive to reduce or limit growth in its capacity in order to raise airfares. Therefore, the ACCC is granting interim authorisation on the condition that the applicants do not engage in the conduct for which authorisation is sought in relation to services between Australia and New Zealand,” Sims cautioned.
In a 20 February submission to the ACCC, Qantas has clearly explained that the Qantas/Emirates partnership, which entails the flying kangaroo ditching its hub in Singapore for European traffic in favour of Emirates Airline’s base in Dubai and grants access to 33 new one-stop European and 31 Middle Eastern/African destinations for Qantas passengers, is adopting a model of splitting routes under the “trunk routes” and “non-trunk routes” categories.
The Master Co-ordination Agreement (MCA) stipulates that Qantas flights via and to/from Dubai as well as Emirates from Dubai via/to Australia, including trans-Tasman services to Auckland, New Zealand will be categorised as “trunk routes”, for which a “benefit transfer” model will be adopted. The “benefit transfer” model will equally share the incremental profits gained as a result of the Qantas/Emirates partnership between both carriers, ensure that the partnership is on a “metal neutral” basis where none of a particular party’s aircraft is favoured or prioritised and enable both carriers to jointly manage yields and inventories.
For “non-trunk routes”, which include domestic Qantas and Jetstar flights, Jetstar New Zealand and Jetstar flights in Asia, a commission-based model will be adopted, whereby a commission payment will be made as a determined percentage of passenger revenue to the non-operating carrier.
“It’s off to a great start. It’s only been three weeks and there’s probably been some pent-up demand but the combination of Qantas and Emirates together is, I think, a killer combination,” Qantas chief executive Alan Joyce said in a Bloomberg interview, in which he noted the bookings to Milan and Barcelona, routes which are under the “non-trunk” and covered by the commission-based model, are up 17 times and 10 times, respectively.
Meanwhile, Qantas’ announcement of improving its Asia service offering is insufficient to securing a stranglehold in Asia profitably while the flying kangaroo may be unduly reliant on Emirates and Jetstar, which may prove to be a retrench in the interim in the world’s fastest-growing aviation market before the 787-9 arrives in 2016.
The first phase of the Asia expansion involves improving the QF29 Melbourne-Hong Kong flights by 3 hours and 55 minutes to improve connection times, QF77 Perth-Singapore flights by 2 hours and 5 minutes, QF51 Brisbane-Singapore flights by 3 hours and 20 minutes, QF23 Sydney-Bangkok flights by 3 hours and 35 minutes and Melbourne-Singapore flights by 4 hours and 35 minutes.
In doing so, there will be 10% and 40% more dedicated seats to Hong Kong and Singapore, respectively, where the latter will also see 25 net additional connections. Coupled with the reconfiguration of 10 Airbus A330-300s deployed to Asia with lie-flat beds, a new economy class and a new in-flight entertainment (IFE) system beginning late 2014, as well as the addition of Kuala Lumpur as an Emirates codeshare destination, Qantas claims its Asia services have been significantly improved.
“Through a combination of Qantas, Jetstar and our partners we aim to
provide the best travel options between Australia and Asia, all linked
to one of the world’s leading frequent flyer programmes. Our first step
has been to restructure existing services to Asia now that they are no
longer tied to onward links to Europe. The number of dedicated seats on
Qantas services to Hong Kong and Singapore is increasing significantly,
because capacity previously set aside for customers going to Europe via
these hubs can be freed up,” Qantas International chief executive Simon
Hickey contends.
“The refurbished aircraft will give Qantas International a truly world-class product in global aviation’s most dynamic and competitive market. Growing with Asia is a major priority for the Qantas Group and this investment underpins our commitment to the region,” Qantas chief executive Alan Joyce asserts.
However, this Asia improvement plan conveniently ignores the fact
that Qantas will become increasingly dependent on Emirates and its
Jetstar subsidiaries in Singapore, Japan, Vietnam, Hong Kong and
Australia of which the Australian Competition and Consumer Commission
(ACCC) last December approved its joint venture co-ordination agreement (JVCA) to expand internationally.
This is highlighted by the fact that Qantas International will suspend its Perth-Hong Kong and Adelaide-Singapore routes by the end of March and 14th April, respectively and reducing the flight frequencies on the Sydney-Hong Kong route from 11 to 7 per week.
In comparison, Hong Kong-based Cathay Pacific Airways offers 4 daily flights on the route, with the earliest arrival at 05:25 in the early morning, enabling passengers for onward connections to any destination in Asia/Pacific without compromising the flexibility in scheduling business meetings. In addition, Cathay Pacific also operates triple-daily flights to Melbourne with the earliest arrival in Hong Kong at 07:20 in the morning. Notwithstanding Qantas’ improved arrival times from Melbourne into Hong Kong at 1710 in the evening, which is better than the previous night arrival, are incompatible and uncompetitive in terms of accommodating business meetings and onward connections, let alone the 1725 arrival time for Qantas flights from Sydney.
The phenomenon is commonplace, with Singapore Airlines’ 4-daily flights between Singapore Changi and Sydney having an earliest arrival at 1300 against Qantas’ 1600; SIA’s Brisbane-Singapore flights have an earliest arrival at 0530 in the early morning against Qantas’ 1605 arrival; whereas SIA’s Perth-Singapore flights have an earliest arrival of 0635 in the morning compared to Qantas’ 1520 arrival time.
Should Qantas seek to leverage its strong brand and secure a firm hold in Asia, it should fast-track its Asian expansion and launch destinations to Beijing, Seoul, Mumbai, Delhi and Tokyo Haneda before the 2016 arrival of its first 787-9 Dreamliner, whose order has yet to be firmed.
While launching these new destinations may deem to be premature and risk jeopardising returning Qantas International to the black by FY2014/15 to financial analysts, the marginal benefit in doing so arguably outweighs the marginal cost and the risk involved provided these service/price offerings be timed and priced properly.
This is vital to enhancing the Qantas proposition to business travellers as neither Emirates and Jetstar Asia could serve these North Asian destinations as effective as Qantas International could since Qantas International passengers currently have to either board a Jetstar Asia onward flight from Singapore to Beijing or transit at Shanghai Pudong International Airport on China Eastern Airlines’ (CEA) connecting flights to Beijing, whereas Singapore Airlines (SIA) and Cathay Pacific offer consistent and superior in-flight products via their respective hubs at Singapore and Hong Kong.
Moreover, by no means are other competitors going to stand still for the next 2-3 years and not capitalise on the growing air travel market connecting the world’s fastest-growing region, especially the manufacturing powerhouse China which is targeting a 7.5% gross domestic product (GDP) growth for 2013, Indonesia where the World Bank forecasts its 2013 GDP growth at 6.5%; and the resource-rich country which will be feeding Asia/Pacific’s burgeoning economy.
Both Singapore Airlines and Cathay Pacific have already added 5th daily flight to London which are meant to capture the spill-over demand from those travellers who wish to transit at Asian stop-over destinations. SilkAir, a wholly-owned subsidiary of Singapore Airlines (SIA), will more than double its fleet from 15 Airbus A320s and 6 A319s to 23 Boeing 737-800s and 31 re-engined 737 MAX 8s in order to tap into rising regional demand, whereas Cathay Pacific’s wholly-owned subsidiary Dragonair has launched numerous new destinations in the past few months aimed at improving its network to burgeoning economies, such as Yangon in Myanmar, Zhengzhou, Wenzhou in China, Kolkata and Cathay Pacific’s new flights to Hyderabad, India (“Cathay Pacific to be a smarter & leaner airline in 2013“, 3rd Jan, 13).
Others, especially those Chinese carriers, have been quick to seize this market potential. Guangzhou-based China Southern Airlines, which intends to establish Guangzhou Baiyun International Airport as the hub on the “Canton Route”, has carried 24.6% more passengers in 2012 from 515,370 passengers in 2011 to 642,210 last year, according to the Bureau of Infrastructure, Transportation and Regional Economics (BITRE) figures compiled by Aspire Aviation. Shanghai-based China Eastern Airlines (CEA), meanwhile, carried 26.6% more passengers to 346,690 in 2012 from 273,905 in the prior year, whereas Air China carried 5.7% more passengers in 2012 to 297,954 from 282,025 in 2011.
Similarly, Singapore Airlines (SIA) carried 7.4% more passengers last year to 2.72 million, up from 2.53 million in 2011, while its wholly-owned long-haul low-cost subsidiary Scoot Airlines and SilkAir carried 233,013 and 24,271 passengers last year, respectively. A noteworthy point is the gap between SIA and Dubai-based Emirates over the number of passengers carried and their shares’ of Australia’s international traffic is closing, with Emirates transporting 2.496 million passengers in 2012, a 12.9% year-over-year growth from 2.21 million passengers carried in 2011, which leads to an 8.4% international share, compared to SIA’s 9.2% share for 2012. On the other hand, Abu Dhabi-based Etihad Airways flew 7.6% more passengers last year compared to 2011, from 505,345 in 2011 to 543,896 a year later.
On the contrary, Qantas has been growing its China operation sluggishly, registering only a 0.6% growth in the number of passengers carried from 140,944 in 2011 to 141,860 in 2012 while its overall international operation grew by 2.3% from 2011′s 5.13 million passengers to 5.25 million passengers and its international share has shrunk to just 17.7% from 33.5% in 2002, a 47.2% shrinkage which was an astonishing tale of contrast when considering Emirates only accounted for 2% of international traffic in 2002.
Having said that, Aspire Aviation predicts that Qantas is unlikely to see a reversal in trend while focusing on returning the international operation to profitability as its first priority before any “premature” international growth by Qantas International from management’s perspective; and adopting a “capital-lite” model that relies on its multiple Jetstar subsidiaries, Emirates, Japan Airlines (JAL) and China Eastern Airlines (CEA), which may ultimately see the Qantas/Emirates partnership extending to Jetstar Asia.
Aspire Aviation believes while it is a prudent practice to be backed by a strengthened balance sheet with a reduced capital expenditure of A$1.6 billion in FY2012/13 and A$1.5 billion in FY2013/14 and a newer group fleet with 3 Boeing 747-400s, 1 767-300, 3 737-400s and 1 Jetstar A320 being withdrawn in the second half of FY12/13, doing so would invariably pose a significant strategic risk since other Asian carriers would have firmly established their footholds and started reaping the rewards from an Asian growth model which would be very difficult for Qantas International to break.
Virgin Australia remains a work in progress
Having added 8.9% of capacity, measured in available seat kilometres (ASKs), to its domestic business and being locked in a dogfight with Qantas Domestic which has itself added 5% of ASKs in FY2012/13 first-half, Virgin Australia is undoubtedly feeling the heat on its bottom line despite significant underlying progress being achieved.
Group revenue rose by 5.4% from A$1.997 billion in FY2011/12 first-half to A$2.1 billion in FY12/13 first-half while net operating expense rose at a proportionately faster pace of 7.99% from A$1.91 billion in the prior fiscal period to A$2.1 billion in FY12/13 first-half, including an 8.4% increase in fuel expense to A$576 million from A$531.6 million a year ago, thereby producing a 51% fall in operating profit from A$99.4 million in the prior fiscal year period to A$48.7 million this year.
Underlying profit before tax (PBT) fell by 36.5% year-over-year to A$61 million from A$96.1 million, while a more than tripling in its business transformation cost from A$10.5 million in FY2011/12 first-half to A$36 million due to the migration to a Sabre reservation system this January, weighed down its statutory profit before tax (PBT), which slumped significantly by 63.5% to A$28.2 million in FY12/13 first-half from A$77.3 million in the corresponding period last year, partly due to the A$24.4 million carbon tax. Statutory profit after tax similarly collapsed by 55.6% to A$23 million in FY12/13 first-half from A$51.8 million a year ago.
The carrier transported a record 10.1 million passengers during the six-month period, up from 9.9 million a year ago, albeit the 6.5% increase in group capacity, measured in available seat kilometres (ASKs), to 21.2 billion from 19.9 billion outpaced traffic growth, which, coupling with a stiff domestic competition, led to a 1% decline in group passenger yield to 12.16 Australian cents per revenue passenger kilometre (RPK) from 12.28 Australian cents in the year-ago period.
“The refurbished aircraft will give Qantas International a truly world-class product in global aviation’s most dynamic and competitive market. Growing with Asia is a major priority for the Qantas Group and this investment underpins our commitment to the region,” Qantas chief executive Alan Joyce asserts.
Source: BITRE
This is highlighted by the fact that Qantas International will suspend its Perth-Hong Kong and Adelaide-Singapore routes by the end of March and 14th April, respectively and reducing the flight frequencies on the Sydney-Hong Kong route from 11 to 7 per week.
In comparison, Hong Kong-based Cathay Pacific Airways offers 4 daily flights on the route, with the earliest arrival at 05:25 in the early morning, enabling passengers for onward connections to any destination in Asia/Pacific without compromising the flexibility in scheduling business meetings. In addition, Cathay Pacific also operates triple-daily flights to Melbourne with the earliest arrival in Hong Kong at 07:20 in the morning. Notwithstanding Qantas’ improved arrival times from Melbourne into Hong Kong at 1710 in the evening, which is better than the previous night arrival, are incompatible and uncompetitive in terms of accommodating business meetings and onward connections, let alone the 1725 arrival time for Qantas flights from Sydney.
The phenomenon is commonplace, with Singapore Airlines’ 4-daily flights between Singapore Changi and Sydney having an earliest arrival at 1300 against Qantas’ 1600; SIA’s Brisbane-Singapore flights have an earliest arrival at 0530 in the early morning against Qantas’ 1605 arrival; whereas SIA’s Perth-Singapore flights have an earliest arrival of 0635 in the morning compared to Qantas’ 1520 arrival time.
Should Qantas seek to leverage its strong brand and secure a firm hold in Asia, it should fast-track its Asian expansion and launch destinations to Beijing, Seoul, Mumbai, Delhi and Tokyo Haneda before the 2016 arrival of its first 787-9 Dreamliner, whose order has yet to be firmed.
While launching these new destinations may deem to be premature and risk jeopardising returning Qantas International to the black by FY2014/15 to financial analysts, the marginal benefit in doing so arguably outweighs the marginal cost and the risk involved provided these service/price offerings be timed and priced properly.
This is vital to enhancing the Qantas proposition to business travellers as neither Emirates and Jetstar Asia could serve these North Asian destinations as effective as Qantas International could since Qantas International passengers currently have to either board a Jetstar Asia onward flight from Singapore to Beijing or transit at Shanghai Pudong International Airport on China Eastern Airlines’ (CEA) connecting flights to Beijing, whereas Singapore Airlines (SIA) and Cathay Pacific offer consistent and superior in-flight products via their respective hubs at Singapore and Hong Kong.
Moreover, by no means are other competitors going to stand still for the next 2-3 years and not capitalise on the growing air travel market connecting the world’s fastest-growing region, especially the manufacturing powerhouse China which is targeting a 7.5% gross domestic product (GDP) growth for 2013, Indonesia where the World Bank forecasts its 2013 GDP growth at 6.5%; and the resource-rich country which will be feeding Asia/Pacific’s burgeoning economy.
Both Singapore Airlines and Cathay Pacific have already added 5th daily flight to London which are meant to capture the spill-over demand from those travellers who wish to transit at Asian stop-over destinations. SilkAir, a wholly-owned subsidiary of Singapore Airlines (SIA), will more than double its fleet from 15 Airbus A320s and 6 A319s to 23 Boeing 737-800s and 31 re-engined 737 MAX 8s in order to tap into rising regional demand, whereas Cathay Pacific’s wholly-owned subsidiary Dragonair has launched numerous new destinations in the past few months aimed at improving its network to burgeoning economies, such as Yangon in Myanmar, Zhengzhou, Wenzhou in China, Kolkata and Cathay Pacific’s new flights to Hyderabad, India (“Cathay Pacific to be a smarter & leaner airline in 2013“, 3rd Jan, 13).
Others, especially those Chinese carriers, have been quick to seize this market potential. Guangzhou-based China Southern Airlines, which intends to establish Guangzhou Baiyun International Airport as the hub on the “Canton Route”, has carried 24.6% more passengers in 2012 from 515,370 passengers in 2011 to 642,210 last year, according to the Bureau of Infrastructure, Transportation and Regional Economics (BITRE) figures compiled by Aspire Aviation. Shanghai-based China Eastern Airlines (CEA), meanwhile, carried 26.6% more passengers to 346,690 in 2012 from 273,905 in the prior year, whereas Air China carried 5.7% more passengers in 2012 to 297,954 from 282,025 in 2011.
Similarly, Singapore Airlines (SIA) carried 7.4% more passengers last year to 2.72 million, up from 2.53 million in 2011, while its wholly-owned long-haul low-cost subsidiary Scoot Airlines and SilkAir carried 233,013 and 24,271 passengers last year, respectively. A noteworthy point is the gap between SIA and Dubai-based Emirates over the number of passengers carried and their shares’ of Australia’s international traffic is closing, with Emirates transporting 2.496 million passengers in 2012, a 12.9% year-over-year growth from 2.21 million passengers carried in 2011, which leads to an 8.4% international share, compared to SIA’s 9.2% share for 2012. On the other hand, Abu Dhabi-based Etihad Airways flew 7.6% more passengers last year compared to 2011, from 505,345 in 2011 to 543,896 a year later.
On the contrary, Qantas has been growing its China operation sluggishly, registering only a 0.6% growth in the number of passengers carried from 140,944 in 2011 to 141,860 in 2012 while its overall international operation grew by 2.3% from 2011′s 5.13 million passengers to 5.25 million passengers and its international share has shrunk to just 17.7% from 33.5% in 2002, a 47.2% shrinkage which was an astonishing tale of contrast when considering Emirates only accounted for 2% of international traffic in 2002.
Having said that, Aspire Aviation predicts that Qantas is unlikely to see a reversal in trend while focusing on returning the international operation to profitability as its first priority before any “premature” international growth by Qantas International from management’s perspective; and adopting a “capital-lite” model that relies on its multiple Jetstar subsidiaries, Emirates, Japan Airlines (JAL) and China Eastern Airlines (CEA), which may ultimately see the Qantas/Emirates partnership extending to Jetstar Asia.
Aspire Aviation believes while it is a prudent practice to be backed by a strengthened balance sheet with a reduced capital expenditure of A$1.6 billion in FY2012/13 and A$1.5 billion in FY2013/14 and a newer group fleet with 3 Boeing 747-400s, 1 767-300, 3 737-400s and 1 Jetstar A320 being withdrawn in the second half of FY12/13, doing so would invariably pose a significant strategic risk since other Asian carriers would have firmly established their footholds and started reaping the rewards from an Asian growth model which would be very difficult for Qantas International to break.
Image Courtesy of Bloomberg
Having added 8.9% of capacity, measured in available seat kilometres (ASKs), to its domestic business and being locked in a dogfight with Qantas Domestic which has itself added 5% of ASKs in FY2012/13 first-half, Virgin Australia is undoubtedly feeling the heat on its bottom line despite significant underlying progress being achieved.
Group revenue rose by 5.4% from A$1.997 billion in FY2011/12 first-half to A$2.1 billion in FY12/13 first-half while net operating expense rose at a proportionately faster pace of 7.99% from A$1.91 billion in the prior fiscal period to A$2.1 billion in FY12/13 first-half, including an 8.4% increase in fuel expense to A$576 million from A$531.6 million a year ago, thereby producing a 51% fall in operating profit from A$99.4 million in the prior fiscal year period to A$48.7 million this year.
Underlying profit before tax (PBT) fell by 36.5% year-over-year to A$61 million from A$96.1 million, while a more than tripling in its business transformation cost from A$10.5 million in FY2011/12 first-half to A$36 million due to the migration to a Sabre reservation system this January, weighed down its statutory profit before tax (PBT), which slumped significantly by 63.5% to A$28.2 million in FY12/13 first-half from A$77.3 million in the corresponding period last year, partly due to the A$24.4 million carbon tax. Statutory profit after tax similarly collapsed by 55.6% to A$23 million in FY12/13 first-half from A$51.8 million a year ago.
The carrier transported a record 10.1 million passengers during the six-month period, up from 9.9 million a year ago, albeit the 6.5% increase in group capacity, measured in available seat kilometres (ASKs), to 21.2 billion from 19.9 billion outpaced traffic growth, which, coupling with a stiff domestic competition, led to a 1% decline in group passenger yield to 12.16 Australian cents per revenue passenger kilometre (RPK) from 12.28 Australian cents in the year-ago period.
“The Group has delivered a solid result in a difficult operating and
economic environment, reflecting the significant progress we have made
in diversifying our revenue base and improving cost control, while
continuing to enhance the customer experience. We have continued to grow
our corporate and government revenue and maintained the new norm in
which more than 20% of our domestic revenue comes from this higher
yielding market,” Virgin Australia chief executive John Borghetti said.
Virgin Australia’s operating cash flow (OCF) dwindled to A$42.6 million for FY2012/13 first-half, down 83.2% from FY11/12 first-half’s A$253.5 million, as the Sabre migration impacted forward bookings, while the Brisbane-based carrier witnessed a net cash outflow of A$118.6 million, swung from a net cash inflow of A$126.4 million last fiscal first-half. Total liabilities decreased by 2.8% to A$2.98 billion in FY12/13 first-half from A$3.07 billion in the prior fiscal period while total equities improved by 16.8% to A$1.09 billion from A$929.7 million in the year-earlier period, thus resulting in a drastic improvement in debt-to-equity ratio from 3.297 times to 2.745 times.
Virtually every part of Virgin Australia remains a work in progress and the ‘Game On’ phase of its “Game Change” programme as well as its cost-cutting programme must start to yield benefits to the business and create shareholder value, however.
For its domestic business, its earnings before interest and tax (EBIT) slumped by 43.3% to A$49.3 million in FY2012/13 first-half from A$87 million the prior fiscal period despite a 3.96% increase in domestic revenue to A$1.51 billion against the A$1.45 billion posted in FY11/12 first-half and more passengers being carried at 8.7 million, up from year earlier’s 8.6 million.
Importantly, successfully acquiring 100% of Skywest Airlines and 60% of Tiger Airways Australia will be the pre-requisite for Virgin Australia to compete effectively against Qantas and Jetstar in the domestic market, of which the former acquisition was cleared by the Australian Competition and Consumer Commission (ACCC) on 31 January.
“The ACCC’s view is that this acquisition is unlikely to lead to a substantial lessening of competition in any relevant market, primarily because the direct overlap between Virgin Australia and Skywest’s services is limited to a single route between Perth and Broome,” ACCC chairman Rod Sims said in a statement.
Virgin Australia’s operating cash flow (OCF) dwindled to A$42.6 million for FY2012/13 first-half, down 83.2% from FY11/12 first-half’s A$253.5 million, as the Sabre migration impacted forward bookings, while the Brisbane-based carrier witnessed a net cash outflow of A$118.6 million, swung from a net cash inflow of A$126.4 million last fiscal first-half. Total liabilities decreased by 2.8% to A$2.98 billion in FY12/13 first-half from A$3.07 billion in the prior fiscal period while total equities improved by 16.8% to A$1.09 billion from A$929.7 million in the year-earlier period, thus resulting in a drastic improvement in debt-to-equity ratio from 3.297 times to 2.745 times.
Virtually every part of Virgin Australia remains a work in progress and the ‘Game On’ phase of its “Game Change” programme as well as its cost-cutting programme must start to yield benefits to the business and create shareholder value, however.
For its domestic business, its earnings before interest and tax (EBIT) slumped by 43.3% to A$49.3 million in FY2012/13 first-half from A$87 million the prior fiscal period despite a 3.96% increase in domestic revenue to A$1.51 billion against the A$1.45 billion posted in FY11/12 first-half and more passengers being carried at 8.7 million, up from year earlier’s 8.6 million.
Importantly, successfully acquiring 100% of Skywest Airlines and 60% of Tiger Airways Australia will be the pre-requisite for Virgin Australia to compete effectively against Qantas and Jetstar in the domestic market, of which the former acquisition was cleared by the Australian Competition and Consumer Commission (ACCC) on 31 January.
“The ACCC’s view is that this acquisition is unlikely to lead to a substantial lessening of competition in any relevant market, primarily because the direct overlap between Virgin Australia and Skywest’s services is limited to a single route between Perth and Broome,” ACCC chairman Rod Sims said in a statement.
“This acquisition will enable us to accelerate our expansion in the
high growth fly-in-fly-out (FIFO) and regional markets, increasing
competition in these important segments and bringing new benefits to
customers. It will also be very positive for business and tourism,
particularly for regional Australia, as we will invest to support the
growth of Skywest,” Virgin Australia chief executive John Borghetti
said.
Though the ACCC has raised competition concerns regarding Virgin Australia’s acquisition of 60% of Tiger Airways, fearing the merger will “remove all competition between Virgin Australia and Tiger Australia”.
Aspire Aviation believes the ACCC’s assumption of a removal in competition between Virgin Australia and Tiger Airways Australia is categorically incorrect and misleading, as low-cost carriers (LCCs) do compete with their parents in the low-end segment for price-elastic or price-sensitive passengers who would otherwise not have flown on the domestic Australian routes and used bus or train travel instead.
For example, on where Virgin Australia and Tiger Airways Australia have overlapping routes, i.e. virtually all Tiger Australia routes except Melbourne-Perth, Melbourne-Alice Springs and Sydney-Alice Springs, the ACCC could establish a baseline of capacity which Virgin/Tiger must maintain as a condition of approval and ensure that the lowest fare offered by Virgin Australia would be competitive with those offered by Tiger Australia, although Virgin Australia should remain free to manage the number of such heavily discounted seats being sold.
Most importantly, allowing Tiger Australia to merge with Virgin Australia is essential for the wounded Tiger’s survival, whose S$13 million third-quarter FY2012 loss was a 49.6% deterioration from FY11′s S$9 million loss and its parent company Tiger Airways, with a weak balance sheet and a 345% debt-to-equity ratio and a 0.297 current ratio, has already issued S$297 million rights issue and preferential offering in order to repay debts (“Singapore Airlines at a crossroads“, 29th Jan, 13).
On the contrary to the notion that a Virgin Australia/Tiger Australia
merger will weaken competition, it in fact ensures a wounded Tiger
Airways to make a full financial recovery and enables Virgin/Tiger to
compete effectively with the former further differentiating its products
offering and targeting price-inelastic, lucrative last-minute business
travellers and the latter focusing on offering the lowest airfares at
which profitability could be achieved. Absent a Virgin Australia
acquisition and its A$35 million (US$36.2 million) payment and another
A$5 million one for meeting certain specified financial targets within
the next 5 years, Tiger Airways Australia is unlikely to survive in its
current form, which is unsustainable financially (“Virgin Australia’s acquisition spree strengthens foundation for growth“, 12th Nov, 12).
Despite Virgin Australia chief executive John Borghetti’s reluctance to make a firm commitment to growing Tiger Australia’s fleet from 11 planes to 35 by 2018, Tiger Australia’s dire financial straits render such commitment non-sense commercially should it be unable to return to profitability and compete head-to-head with Jetstar Australia.
“You can’t give an iron-clad guarantee on something like that because you just don’t know what’s around the corner. No airline in the world would give a capacity commitment for five years,” Virgin Australia chief executive John Borghetti asserts.
But should Virgin Australia be allowed to use its insights behind the rising costs of Virgin Blue and pre-emptively prevent repeating the same mistake again while gaining economies of scale, the Australian consumers would be the ultimate beneficiary for a strong and thriving duopoly.
For instance, Qantas Domestic currently has a capacity share of 42.8% whereas Jetstar has another 18% share while Virgin Australia, Tiger Australia and Skywest Airlines have 29.9%, 4.2% and 0.7% shares, respectively, according to a Centre for Aviation (CAPA) report. Assuming an average annual capacity growth of 5% at Virgin Australia over the next 5 years, the combined Virgin Group will only control 47.9% capacity share, very close to a duopoly with Qantas Group by then at the expense of Jetstar and Qantas Domestic’s shares, Aspire Aviation forecasts.
‘We have seen the competitor change the strategy multiple times, and we have successfully introduced our two-brand strategy no matter what the competitor has done. Virgin has given up the low-cost end of the market and gone to the premium end. The performance of Tiger clearly shows that Jetstar is significantly outperforming Tiger at the leisure end,” Qantas chief executive Alan Joyce quips.
“We strongly believe the proposed acquisition will increase competition in the market to the benefit of Australian consumers. By partnering with Tiger Airways, we can use our expertise to leverage Tiger Australia’s low cost base and build a competitive and sustainable budget carrier. We are committed to maintaining the Tiger Australia business model and brand, and we look forward to growing the Tiger Airways business,” Virgin Australia chief executive John Borghetti counters.
An example case would be the Sydney-Melbourne route where Jetstar and Qantas have heightened capacity by 57% and 11% in FY13 first-half, respectively, while Virgin Australia only upped capacity by 3%. Had Tiger been a Virgin Australia subsidiary, the Brisbane-based carrier would have been able to respond to the market more effectively.
Internationally, Virgin Australia transported 7.7% more passengers
during FY2012/13 first-half, with revenue soaring proportionately faster
at 7.9% from A$551.7 million in FY11/12 first-half to A$595.4 million
in FY12/13 first-half. Earnings before interest and tax (EBIT) at the
unit surged by 9.9% to A$35.4 million, up from A$32.2 million in the
prior fiscal period. Load factor decreased by 0.5% to 79.9% from 80.4%
in the same period last fiscal year.
This robust result stems from the strong codeshare partnership with Singapore Airlines (SIA), which added 73 new codeshare destinations in the first 6 months of FY2012/13, such as Virgin Australia’s codeshare to Europe via Singapore from Adelaide, Perth and Darwin, with 24 more due to be added in the second half, including SIA codeshare flights to Europe from Sydney, Melbourne and Brisbane in the fiscal third-quarter.
As Virgin Australia has already set the platform for international expansion properly with a “capital-lite” model, with a 56.1% increase in interline and codeshare revenues which will rise further with the Sabre implementation, the future challenge facing its international unit lies in how to best serve Asian destinations without compromising its strengthening balance sheet and how to fund this growth.
With Qantas International highly unlikely to grow again before 2016 on the as-yet-firmed 787-9 Dreamliners, leveraging this strategic advantage created by its arch-rival could yield Virgin Australia significant profits such as deploying its yet-to-be-delivered A330-200s to Tokyo Haneda, Seoul, etc., while better serving North Asia and China by forging a codeshare partnership with Hong Kong-based Cathay Pacific Airways and its wholly-owned subsidiary Dragonair.
Indeed, Singapore Airlines is a 10% shareholder of Virgin Australia and is an important partner for Asian growth. There is no denial that it makes business sense for Virgin Australia to rely on Singapore Airlines and SilkAir to serve the Southeast Asia and Indian subcontinent via a strong origin and destination (O&D) hub for Indian traffic in Singapore, such as Coinbatore, Kochi, Thiruvananthapuram and Visakhapatnam in India; Bandung, Balikpapan, Lombok, Manado, Medan, Palembang, Pekanbaru and Solo in Indonesia that neither Cathay Pacific nor Dragonair serves in the medium term.
In terms of North Asian and Chinese network, though, Virgin Australia should forge a close pact with Cathay Pacific for a comprehensive network that features destinations such as Haikou, Sanya, Guilin, Hangzhou, Xi’an, Nanjing, Ningbo, Fuzhou and Qingdao in China, Busan, Taichung, Kaohsiung which SIA and SilkAir do not serve, in addition to the 3-4 hours time advantage Hong Kong has over Singapore on flights to Chinese destinations such as Beijing and Shanghai while having a roughly identical flight time from Australian ports.
Furthermore, Virgin Australia could feasibly co-ordinate with its sibling Virgin Atlantic, in which the United Kingdom-based Virgin Group has a 26% stake in Australia’s second-largest carrier, to take over the Hong Kong-Sydney leg of Virgin Atlantic’s flight. In doing so, not only could Virgin Atlantic avoid cannibalising its yields to fill up its last leg on the kangaroo route, a typical phenomenon given it is an end-of-point carrier, Virgin Australia could also gain more feeder traffic to its regional network and vice versa – providing more feeder traffic to its Hong Kong flight than the existing codeshare, thereby improving loads and yields in one fell swoop.
For Virgin Australia, this would be an attractive proposition for business travellers who will gain instant access to more Chinese and North Asian cities, while Cathay Pacific and Dragonair passengers could gain similar access to more than a dozen of smaller Australian cities with improved Dragonair feed.
Interestingly, this will bode well from a capacity perspective too as Virgin Australia’s new A330-200s, of which 1 will be received in FY2012/13 second-half and another 2 between June 2013 and June 2015, will be deployed internationally instead of domestically, thereby partially alleviating the overcapacity issue plaguing the domestic market.
Over the longer term, Virgin Australia could order 787-9s which are smaller than the A350s but are ideal for thin, long-haul routes to open up new destinations in Asia, China and India in particular, whose 20% fuel burn saving makes the previously economically unfeasible routes now workable. A maintenance and crew training partnership with Air New Zealand (ANZ), which owns 19.9% of Virgin Australia and is the 787-9 launch customer, or one with the 10% shareholder Abu Dhabi-based Etihad Airways, will slash the induction costs while minimising risks and possibly gaining early 787-9 delivery slots.
All in all, much remains to be done as Virgin Australia is still an ongoing project. Domestically it must continue to improve its products to differentiate itself from the competition and improve its yields, which currently includes rolling out the business class on its regional E190 fleet, equipping wireless in-flight entertainment on 80 aircraft before the end of 2013, new Cairns lounge and revamped lounges at Sydney and Melbourne, a new pier in Sydney and a new terminal in Canberra this March. The carrier is also going to introduce coast-to-coast A330 with 24 leather business class seats at a 60-inch seat pitch on the Brisbane-Perth route for the first time beginning 15 May 2013.
After all, continuously improving its product, as well as enhancing its Velocity frequent flyer programme (FFP) whose membership base grew by 500,000 to 3.5 million in addition to a better regional network which sees the entry of Virgin Australia into existing monopoly routes Brisbane-Moranbah and Brisbane-Bundaberg are the few means left to improve its domestic profitability in a market where business fares have slumped by 17.3% in February 2013 compared to a year ago and continued to bump along the bottom set in December 2011 which have never recovered since, according to the Bureau of Infrastructure, Transportation and Regional Economics (BITRE) figures. Restricted economy fares are not faring particularly well either, whose index, albeit recovering moderately since a February 2012 bottom of 63.5 and rose to 71.7 in February 2013, are still markedly lower than pre-May 2011 levels.
Factoring in Virgin Australia’s planned 5-7% domestic capacity growth in the FY12/13 second-half, it is apparent that driving the growth in high-yield traffic is paramount to mending its bottom line.
“We are very pleased with the increasing take up of Business Class, with passenger traffic in the Business Class cabin growing by 91.6% compared to the first half of financial year 2012,” Virgin Australia chief executive John Borghetti commented.
“Our new Sabre booking and check-in system will be key to driving future revenue growth. As a result of the new system, travel agents around the world now have far greater visibility of Virgin Australia, enabling them to book our flights with more ease using a system that aligns with global standards. In fact, we are already seeing the benefits of the system, with our proportion of bookings through the global distribution system (GDS) increasing five-fold since its launch in mid-January. It is also important to note that bookings through GDS channels typically have a 10% yield premium to average bookings.
Though the ACCC has raised competition concerns regarding Virgin Australia’s acquisition of 60% of Tiger Airways, fearing the merger will “remove all competition between Virgin Australia and Tiger Australia”.
Aspire Aviation believes the ACCC’s assumption of a removal in competition between Virgin Australia and Tiger Airways Australia is categorically incorrect and misleading, as low-cost carriers (LCCs) do compete with their parents in the low-end segment for price-elastic or price-sensitive passengers who would otherwise not have flown on the domestic Australian routes and used bus or train travel instead.
For example, on where Virgin Australia and Tiger Airways Australia have overlapping routes, i.e. virtually all Tiger Australia routes except Melbourne-Perth, Melbourne-Alice Springs and Sydney-Alice Springs, the ACCC could establish a baseline of capacity which Virgin/Tiger must maintain as a condition of approval and ensure that the lowest fare offered by Virgin Australia would be competitive with those offered by Tiger Australia, although Virgin Australia should remain free to manage the number of such heavily discounted seats being sold.
Most importantly, allowing Tiger Australia to merge with Virgin Australia is essential for the wounded Tiger’s survival, whose S$13 million third-quarter FY2012 loss was a 49.6% deterioration from FY11′s S$9 million loss and its parent company Tiger Airways, with a weak balance sheet and a 345% debt-to-equity ratio and a 0.297 current ratio, has already issued S$297 million rights issue and preferential offering in order to repay debts (“Singapore Airlines at a crossroads“, 29th Jan, 13).
Image Courtesy of Virgin Australia
Despite Virgin Australia chief executive John Borghetti’s reluctance to make a firm commitment to growing Tiger Australia’s fleet from 11 planes to 35 by 2018, Tiger Australia’s dire financial straits render such commitment non-sense commercially should it be unable to return to profitability and compete head-to-head with Jetstar Australia.
“You can’t give an iron-clad guarantee on something like that because you just don’t know what’s around the corner. No airline in the world would give a capacity commitment for five years,” Virgin Australia chief executive John Borghetti asserts.
But should Virgin Australia be allowed to use its insights behind the rising costs of Virgin Blue and pre-emptively prevent repeating the same mistake again while gaining economies of scale, the Australian consumers would be the ultimate beneficiary for a strong and thriving duopoly.
For instance, Qantas Domestic currently has a capacity share of 42.8% whereas Jetstar has another 18% share while Virgin Australia, Tiger Australia and Skywest Airlines have 29.9%, 4.2% and 0.7% shares, respectively, according to a Centre for Aviation (CAPA) report. Assuming an average annual capacity growth of 5% at Virgin Australia over the next 5 years, the combined Virgin Group will only control 47.9% capacity share, very close to a duopoly with Qantas Group by then at the expense of Jetstar and Qantas Domestic’s shares, Aspire Aviation forecasts.
‘We have seen the competitor change the strategy multiple times, and we have successfully introduced our two-brand strategy no matter what the competitor has done. Virgin has given up the low-cost end of the market and gone to the premium end. The performance of Tiger clearly shows that Jetstar is significantly outperforming Tiger at the leisure end,” Qantas chief executive Alan Joyce quips.
“We strongly believe the proposed acquisition will increase competition in the market to the benefit of Australian consumers. By partnering with Tiger Airways, we can use our expertise to leverage Tiger Australia’s low cost base and build a competitive and sustainable budget carrier. We are committed to maintaining the Tiger Australia business model and brand, and we look forward to growing the Tiger Airways business,” Virgin Australia chief executive John Borghetti counters.
An example case would be the Sydney-Melbourne route where Jetstar and Qantas have heightened capacity by 57% and 11% in FY13 first-half, respectively, while Virgin Australia only upped capacity by 3%. Had Tiger been a Virgin Australia subsidiary, the Brisbane-based carrier would have been able to respond to the market more effectively.
Image Courtesy of Virgin Australia
This robust result stems from the strong codeshare partnership with Singapore Airlines (SIA), which added 73 new codeshare destinations in the first 6 months of FY2012/13, such as Virgin Australia’s codeshare to Europe via Singapore from Adelaide, Perth and Darwin, with 24 more due to be added in the second half, including SIA codeshare flights to Europe from Sydney, Melbourne and Brisbane in the fiscal third-quarter.
As Virgin Australia has already set the platform for international expansion properly with a “capital-lite” model, with a 56.1% increase in interline and codeshare revenues which will rise further with the Sabre implementation, the future challenge facing its international unit lies in how to best serve Asian destinations without compromising its strengthening balance sheet and how to fund this growth.
With Qantas International highly unlikely to grow again before 2016 on the as-yet-firmed 787-9 Dreamliners, leveraging this strategic advantage created by its arch-rival could yield Virgin Australia significant profits such as deploying its yet-to-be-delivered A330-200s to Tokyo Haneda, Seoul, etc., while better serving North Asia and China by forging a codeshare partnership with Hong Kong-based Cathay Pacific Airways and its wholly-owned subsidiary Dragonair.
Indeed, Singapore Airlines is a 10% shareholder of Virgin Australia and is an important partner for Asian growth. There is no denial that it makes business sense for Virgin Australia to rely on Singapore Airlines and SilkAir to serve the Southeast Asia and Indian subcontinent via a strong origin and destination (O&D) hub for Indian traffic in Singapore, such as Coinbatore, Kochi, Thiruvananthapuram and Visakhapatnam in India; Bandung, Balikpapan, Lombok, Manado, Medan, Palembang, Pekanbaru and Solo in Indonesia that neither Cathay Pacific nor Dragonair serves in the medium term.
In terms of North Asian and Chinese network, though, Virgin Australia should forge a close pact with Cathay Pacific for a comprehensive network that features destinations such as Haikou, Sanya, Guilin, Hangzhou, Xi’an, Nanjing, Ningbo, Fuzhou and Qingdao in China, Busan, Taichung, Kaohsiung which SIA and SilkAir do not serve, in addition to the 3-4 hours time advantage Hong Kong has over Singapore on flights to Chinese destinations such as Beijing and Shanghai while having a roughly identical flight time from Australian ports.
Furthermore, Virgin Australia could feasibly co-ordinate with its sibling Virgin Atlantic, in which the United Kingdom-based Virgin Group has a 26% stake in Australia’s second-largest carrier, to take over the Hong Kong-Sydney leg of Virgin Atlantic’s flight. In doing so, not only could Virgin Atlantic avoid cannibalising its yields to fill up its last leg on the kangaroo route, a typical phenomenon given it is an end-of-point carrier, Virgin Australia could also gain more feeder traffic to its regional network and vice versa – providing more feeder traffic to its Hong Kong flight than the existing codeshare, thereby improving loads and yields in one fell swoop.
For Virgin Australia, this would be an attractive proposition for business travellers who will gain instant access to more Chinese and North Asian cities, while Cathay Pacific and Dragonair passengers could gain similar access to more than a dozen of smaller Australian cities with improved Dragonair feed.
Interestingly, this will bode well from a capacity perspective too as Virgin Australia’s new A330-200s, of which 1 will be received in FY2012/13 second-half and another 2 between June 2013 and June 2015, will be deployed internationally instead of domestically, thereby partially alleviating the overcapacity issue plaguing the domestic market.
Over the longer term, Virgin Australia could order 787-9s which are smaller than the A350s but are ideal for thin, long-haul routes to open up new destinations in Asia, China and India in particular, whose 20% fuel burn saving makes the previously economically unfeasible routes now workable. A maintenance and crew training partnership with Air New Zealand (ANZ), which owns 19.9% of Virgin Australia and is the 787-9 launch customer, or one with the 10% shareholder Abu Dhabi-based Etihad Airways, will slash the induction costs while minimising risks and possibly gaining early 787-9 delivery slots.
All in all, much remains to be done as Virgin Australia is still an ongoing project. Domestically it must continue to improve its products to differentiate itself from the competition and improve its yields, which currently includes rolling out the business class on its regional E190 fleet, equipping wireless in-flight entertainment on 80 aircraft before the end of 2013, new Cairns lounge and revamped lounges at Sydney and Melbourne, a new pier in Sydney and a new terminal in Canberra this March. The carrier is also going to introduce coast-to-coast A330 with 24 leather business class seats at a 60-inch seat pitch on the Brisbane-Perth route for the first time beginning 15 May 2013.
After all, continuously improving its product, as well as enhancing its Velocity frequent flyer programme (FFP) whose membership base grew by 500,000 to 3.5 million in addition to a better regional network which sees the entry of Virgin Australia into existing monopoly routes Brisbane-Moranbah and Brisbane-Bundaberg are the few means left to improve its domestic profitability in a market where business fares have slumped by 17.3% in February 2013 compared to a year ago and continued to bump along the bottom set in December 2011 which have never recovered since, according to the Bureau of Infrastructure, Transportation and Regional Economics (BITRE) figures. Restricted economy fares are not faring particularly well either, whose index, albeit recovering moderately since a February 2012 bottom of 63.5 and rose to 71.7 in February 2013, are still markedly lower than pre-May 2011 levels.
Factoring in Virgin Australia’s planned 5-7% domestic capacity growth in the FY12/13 second-half, it is apparent that driving the growth in high-yield traffic is paramount to mending its bottom line.
“We are very pleased with the increasing take up of Business Class, with passenger traffic in the Business Class cabin growing by 91.6% compared to the first half of financial year 2012,” Virgin Australia chief executive John Borghetti commented.
“Our new Sabre booking and check-in system will be key to driving future revenue growth. As a result of the new system, travel agents around the world now have far greater visibility of Virgin Australia, enabling them to book our flights with more ease using a system that aligns with global standards. In fact, we are already seeing the benefits of the system, with our proportion of bookings through the global distribution system (GDS) increasing five-fold since its launch in mid-January. It is also important to note that bookings through GDS channels typically have a 10% yield premium to average bookings.
“The Sabre system will accelerate our growth in the corporate,
government and high yield markets. With the stabilisation of load
factors following the change in our business model and further growth in
higher yield markets, we anticipate improved RASK [revenue per
available seat kilometre] performance going forward,” Borghetti said.
In conclusion, Virgin Australia has a strong foundation from which to grow and there are plenty of international expansion opportunities awaiting the carrier, which is the ultimate revenge for its chief executive John Borghetti, a former Qantas chief financial officer (CFO) when the board of directors of the flying kangaroo opted to promote then Jetstar chief executive Alan Joyce instead. With the game having already changed, the game is now on to deliver the benefits of the “Game Change” repositioning programme and successfully integrate and turn around the Tiger Airways Australia operation, while realising gains to the bottom line with A$60 million of cost reduction for FY2012/13, A$120 million for FY14 and A$200 million for FY15 after A$25 million of cost was taken out in the first-half.
In conclusion, Virgin Australia has a strong foundation from which to grow and there are plenty of international expansion opportunities awaiting the carrier, which is the ultimate revenge for its chief executive John Borghetti, a former Qantas chief financial officer (CFO) when the board of directors of the flying kangaroo opted to promote then Jetstar chief executive Alan Joyce instead. With the game having already changed, the game is now on to deliver the benefits of the “Game Change” repositioning programme and successfully integrate and turn around the Tiger Airways Australia operation, while realising gains to the bottom line with A$60 million of cost reduction for FY2012/13, A$120 million for FY14 and A$200 million for FY15 after A$25 million of cost was taken out in the first-half.
Image Courtesy of JUBES747
http://www.aspireaviation.com/2013/03/06/qantas-virgin-australia-face-new-industry-normal/
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