Which Asian airlines might be interested to buy into Virgin America?

Photo courtesy Virgin America

Photo courtesy Virgin America

UP for sale, Virgin America has some suitors lining up. It has received takeover bids from JetBlue Airways Corp and Alaska Air Group Inc. In this era of the mega carriers (consider the mergers of United Airlines and Continental Airlines, Delta Air Lines and Northwest Airlines, and American Airlines and USAir), a tie-up with another carrier strengthen Virgin’s competitive ability. And while it is almost certain that the merger would be with another American carrier, with analysts placing bets on JetBlue as the best fit, apparently some unidentified Asian carriers have also expressed interest. Still, be that as a remote possibility, one cannot help but be curious and speculate who the likely candidates might be.

Two big names come to mind immediately because of their successes, networks and financial capability, namely Cathay Pacific Airways and Singapore Airlines. Both airlines are keen on expanding their US market. Cathay flies to Boston, Chicago, Los Angeles, New York and San Francisco while Singapore Airlines (SIA) operates to Houston, Los Angeles, New York and San Francisco. Both airlines have codeshare access to several other destinations. Cathay’s codeshare partners include Alaska Airlines and American Airlines while SIA already codeshares with Virgin and with JetBlue.

So it looks like SIA more than Cathay would be favoured on relationships alone. Since foreign ownership rules governing US airlines require the bid to be submitted jointly with a US partner. It would be convenient for SIA to join hands with JetBlue. Of course, Cathay may partner Alaska Airways, but historically Cathay is not quite interested in equity participation. Although it has a 20.3% stake in Air China and 49% in Air China Cargo, that could be a matter of expedience to secure its market in the growing China mainland market.

SIA on the other hand, limited by a hinterland market, tried in its early years to grow through acquisitions. In 1999, it bought 49% of Virgin Atlantic and subsequently 25% of Air New Zealand. Although both buys subsequently proved to be lemons, resulting in heavy losses, the misstep might be less strategic than circumstantial. Unfortunately that has hurt SIA deeply more psychologically than financially as the airline became more cautious about such moves. In subsequent years it failed in its seemingly reluctant bid for a stake in China Eastern Airlines, and the SIA Group was plagued by the poor decisions of its budget subsidiary Tigerair in joint ventures in Indonesia and the Philippines. In Oct 2012 SIA bought a 10% stake in Virgin Australia, joining tow other foreign partners namely Air New Zealand and Etihad Airways. In much the same way that Cathay needed to secure its market in China partnering with Air China, SIA needed to secure its Australian market against the competition by Qantas. Six months after, SIA increased its stake to 19.9%.

But is SIA even interested in a stake in Virgin when its codeshare partnership with JetBlue already places it in an advantageous position to benefit from a JetBlue takeover of Virgin? Would a bid jointly with an Asian partner jeopardise JetBlue’s chances if the powers that be preferred an all-American merger a la the big three of United, Delta and American?

Besides Cathay and SIA, one should not ignore the voracious appetite of the China carriers in the national trend to acquire foreign assets. And why must it be premised on full-service carriers that are already serving destinations in the US? What about a budget carrier with dreams of new frontiers? Maverick AirAsia chief Tony Fernandes who models himself after Virgin guru Richard Branson and who had been where others were hesitant, even afraid, to go may yet surprise with an expression of interest even if it is no more than just that. He is one of the few airline chiefs who, like Ryanair’s Michael O’Leary and Qantas’ Alan Joyce, understood what an opportune good dose of publicity could do.

All this, of course, is speculative. Asian carriers are likely to be less concerned this time than when the mergers of the American big three took place. Together with Southwest Airlines, the big three control 80% of the American market. Virgin and its alleged interested parties JetBlue and Alaska are all largely domestic carriers. Even if Southwest throws in a bid (but for its size that may not pass the antitrust law as easily), it is still the same scenario. SIA’s connections with JetBlue and Virgin will continue to stand it in good stead, but if it’s Alaska that carries the day, then it is Cathay that stands to benefit from the new, extended connection. Or does it really matter when there are already subset agreements across partnership lines that allow you to fly an airline of one alliance and connect on another in a rival group? That’s how complex today’s aviation has become.

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Changi boosts capacity to combat competition

Courtesy CAG

Courtesy CAG

Singapore Changi Airport does not hide its ambition to be the region’s hub airport, and it is not sparing any effort including spending lots in holding on to that dream. Works are in progress for a fourth terminal, costing S$1.3 billion (US$949 million), to be completed by the last quarter of 2017, and this will be followed by the construction of a fifth terminal to be fully operational by 2025.

As competition among regional airports intensifies – the region being redefined in this age of long range aircraft to include Middle East airports such as Dubai International – it looks like creating capacity within impressive architectural structures complete with the ultimate in creature comfort and distractions (or attractions, so to speak) is the answer to staying ahead of the competition. That has been evidenced to a degree by Changi consistently winning awards as one of the world’s best airports.

Indeed, no airport is more passionately engaged in continually expanding and upgrading its facilities than Changi. Terminal 4 will add another 16 million passengers per year to existing capacity at three terminals of 66 million passengers. With the planned capacity of Terminal 5 to handle up to 50 million passengers, this will give Changi a total capacity of 132 million passengers by 2020. Terminal 5, according to Changi Airport Group (CAG), is set to be one of the largest terminals in the world if not third after Dubai and Beijing. And it looks like the project does not end there in land scarce Singapore. CAG said in its statement: “There will be land for subsequent expansion.”

There’s a lot of conviction there, and optimism no less. Last year Changi handled 55.4 million passengers, which means the airport was operating under capacity of close to 20 per cent. But that is not an issue of concern; viewed positively, Changi is well equipped to assimilate any unprecedented growth surge without bursting at its seams. The numbers for December looked good, and it is an optimistic 2016 ahead. Not having enough capacity to net the growth would be the greater evil. Besides, planning ahead, the extra room is to be expected. Then again there is the argument that capacity creates growth, and considering the lead time in airport development, Changi will not be caught short on supply. Of no lesser influence are the plans of competing airports such as Dubai to increase its capacity from 80 million to 250 million passengers, and Korea’s Incheon Airport similarly from 80 million to 145 million passengers.

The real issue, however, is whether the excess capacity is realistic vis-à-vis without creating uneconomical white elephant space. Historical data show Changi growing at an average rate of 2.85 per cent from 2011 to 2015.
Of course, convenient straight line extrapolation can be off the mark when the near term is expected to perform above average. Going forward, Changi’s growth is likely to be higher as demand for seats rises on the back of an improved global economy. According to the International Air Transport Association (IATA), air travel will continue to accelerate and expand by an average of 5.3 per cent this year, which is higher than Changi’s best year in recent times. Asia-Pacific along with Latin America and the Middle East will see the strongest passenger growth, with China leading the field, growing above the global average. Changi will need to target an annual growth rate of about nine per cent over the next two years to maintain its current level of overcapacity by the time Terminal 4 is operational. Whether that is a reasonable buffer is a different issue and dependent upon how CAG visualises the competition, but consider how Terminal 5 will add another 50 million passengers less than a decade down the road.

By comparison, close rival Hong Kong International Airport (HKIA) grew 8.1 per cent last year to reach 68.5 million passengers, which is 23.6 per cent higher than Changi’s number. HKIA is expected to continue to grow at the same rate, particularly with the rising demand for air travel in China, which, according to IATA, will account for 193 million (of which 34 million will be travelling internationally) or nearly a quarter of the 831 million new passengers in its forecast. Situated at the doorstep of mainland China, HKIA has the edge over Changi, which will also benefit from the Chinese yen to travel abroad with Singapore as an attractive destination and a convenient stopover hop to other destinations. What has become more challenging for Changi is HKIA’s increased positioning as the gateway to Asia for trans-Pacific traffic.

The Asia-Pacific region itself is expected to add some 380 million passengers both domestically and internationally. Changi, which has experienced double-digit growth in budget traffic in recent years that outperformed full-service airlines, will benefit from regional traffic particularly with the long overdue full implementation of the Asean Open Skies. Connections with secondary airports will boost the number through Changi, whose top ten city links by passenger traffic in 2015 were all within Asia with the exception of Sydney at the bottom of the list (unless as some Australian politicians would have preferred it to be considered more appropriately aligned to the Asian economic bloc). Jakarta, Bangkok, Kuala Lumpur, Hong Kong and Manila are ranked the top five in that order.

However, as a hub airport which is highly dependent on connecting traffic, Changi is challenged by increased non-stop flights between destinations for the long haul and by alternative hubs, its most notable loss being the shift in 2013 by Qantas for its Kangaroo Route flights to stop at Dubai instead of Changi. Dubai has gained significant hub status for connections to not only Gulf destinations but also airports in Europe, Africa and the Americas. Changi’s competition used to be limited to nearby airports such as Bangkok Suvarnabhumi (since Don Muang) and Kuala Lumpur International (since Subang), not even including then Hong Kong Kai Tak (before its successor at chap lap Kok), the competition has widened to as far away as Dubai, which has emerged as Changi’s biggest threat. The Middle East airport, which is home to Emirates Airlines, boasted to have surpassed London Heathrow when it reported 11-month passenger traffic of 70.96 million passengers last year. That feat embraced an earlier victory in surpassing Changi. Notably, both HKIA and Dubai are handling more passengers than Changi.

To meet the challenges, Changi announced it has launched several initiatives to boost air traffic management capabilities and capacity. Indeed, as Singapore Senior Minister of State for Transport said, “It is not going to be enough just to build airport capacity and have lots of room for airlines to move in and out, because if you don’t have the air traffic management capabilities, you won’t be able to deal with the capacity.”As an example, Changi reduces the separation between airlines to allow more flights to land and take off. By the end of the next decade, Changi could handle 700, 000 flights a year, twice as many as it is handling presently.

CAG chief executive Lee Seow Hiang said: “2015 was a year of two halves for Changi Airport. Following 2014, which saw a number of airline incidents in the region and depressed yields for many regional carriers, we had a relatively weak first six months with flat growth for the period. Nevertheless, we pressed on to actively woo new airlines and seek growth opportunities with existing ones, and our efforts have yielded some positive outcomes.”

Last year Changi welcomed eight new carriers which are largely regional and no-frill operators, including Batik Air, Thai Lion Air and Myanmar National Airlines. Ten new points including Lucknow in India and Luang Prabang in Laos were also added to its network. More links including Nadi by Fiji Airways and Dusseldorf by Singapore Airlines are in the offing.

Mr Lee added: “Changi Airport is well placed to capture future growth with our expanding network, including many secondary cities, to key markets like China, India and Indonesia. We will continue to work closely with our airline partners to establish new connections to develop the Singapore air hub and better serve our passengers.”

So much for the optimism and with the industry blessed with favourable economic factors such as the low fuel price and the region’s growing affluence and its untapped tourism potential, this year and the next leading to the opening of the new Terminal 4 certainly look like exciting times of expectations for Changi. With so much money sunk into the projects, naturally there will be concerns about costs among users. Budget carrier Jetstar Asia CEO Barathan Pasupathi said: In 2016, even though fuel prices have come off in the market, our paramount challenge in Singapore is cost relative to Southeast Asia. For Singapore which is putting so much of investment in capital expenditure and in investments into airports – with Terminal 4, Terminal 5 (and) Runway 3, it’s going to be very important to find a model where Singapore is cost competitive as a hub.”

However you view Changi’s ambition, the airport will be an aviation jewel of showcase reputation. Not difficult to figure out if that in itself is a significant driver in the race to be the world’s best.

Optimism and more good news

IT’s been a long time coming, the optimism and good news that the industry badly misses as more airlines report better, even record, performances as fuel prices show no certainty of bottoming out. From Chicago to London, Singapore and Sydney, the mood is celebratory.

American carriers were the first to celebrate. The US big three– American Airlines, United Airlines and Delta Air Lines – all reported record recovery last year, and are reintroducing snacks on domestic services (instead of lowering the fuel surcharge) as a way of giving back to their customers. (As the price of crude oil plummets, fuel surcharge holds sway, Jan 23 2016)

This article takes a look at four major airlines in three other different regions (Australia, Europe and Asia) that recently posted their report cards, and see how they measure up to the mood.

Courtesy Bloomberg

Courtesy Bloomberg

Qantas

The good run continues with Australian flag carrier Qantas’ record performance for the first half of its current financial year (Jun-Dec 2015). The airline reported an underlying profit before tax of A$921 million (US$685 million), which is A$554 million more than last year’s first half. Revenue was up 5 per cent. Chief executive officer Alan Joyce announced that every part of the Qantas Group contributed strongly to the result, with record profits reported by Qantas Domestic and the Jetstar Group.

Qantas Domestic reported earnings of A$387 million, compared to A$227 million last year, maintaining a strong market share of 80 per cent. The Jetstar Group’s earnings were A$262 million, compared to A$81 million last year. Revenue for the Australian market went up 10 per cent, and for the first time, Jetstar Japan contributed positively to the profit of the Asian network since its start-up in 2012.

Qantas International which used to be the bleeding arm of the Qantas Group reported earnings of A$279 million, compared to $59 million last year. This was its best performance since before the global financial crisis. The airline has benefitted from the weak Australian dollar which has helped boost inbound tourism for Australia. Qantas’ cornerstone alliance partnership with Emirates, American Airlines and China Eastern has strategically strengthened its global network, overcoming an apparent geographical disadvantage of its home base in a far corner of the world.

All this, Mr Joyce would be the first to tell anyone, is not a matter of luck or necessarily a given in today’s more favourable economic climate. He said: “This record result reflects a stronger, leaner, more agile Qantas. Without a focus on revenue, costs and balance sheet strength, today’s result would not have been possible. Both globally and domestically, the aviation industry is intensely competitive. That’s why it’s so important that we maintain our cost discipline, invest to grow revenue, and continue innovating with new ventures and technology.”

Give credit where it’s due. Sceptics may finally admit that Mr Joyce’s “transformation program” is not only bearing fruit but producing a good crop and reshaping Qantas into a more agile and innovative business. “Our transformation program has allowed us to save significant costs,” said Mr Joyce. “It’s never been a simple cost cutting agenda.”

Qantas expects to increase domestic capacity by 2 per cent, international by 9 per cent and Jetstar International by 12 per cent in the second half, averaging 5 per cent for the full year for the Group.

Courtesy Bloomberg

Courtesy Bloomberg

International Airlines Group

At the other end of the Kangaroo route is the unmatched success of the International Airlines Group (IAG) of which British Airways is a partner along with Iberia, Vueling and, more recently, Aer Lingus. IAG’s profits increased by almost 65 per cent to €1.8bn (US$1.98 billion) in 2015, which IAG chief Willie Walsh said had “undoubtedly been a good year”. The Group carried 88.3 million passengers last year, an increase of 14 per cent, overtaking Lufthansa to become second only to Air France-KLM in Europe.

In very much the same way that Mr Joyce was able to turn round the loss-making international division of Qantas, Mr Walsh could pride himself as the man who steered Iberia into profitability following its merger with BA in 2011. The Spanish carrier underwent a painful restructuring but it has paid off. . Unlike Qantas which prefers commercial alliances, IAG adopts a more aggressive strategy of acquisitions. The consortium of BA, Iberia and Aer Lingus stands the Group in good stead to grow trans-Atlantic traffic which forms the largest part of its business.

IAG expects similar growth next year, targeting an operating profit of €3.2bn

Courtesy Airbus

Courtesy Airbus

Singapore Airlines

In Asia
, Singapore Airlines (SIA) Group reported a third quarter (Oct-Dec 2015) profit of S$275 million (US$200 million), 35 per cent higher than that of last year’s third quarter. However Group revenue declined by 4 per cent to S3.9 billion because of lower passenger yields and the continuing lacklustre performance of its cargo operations. Parent airline SIA faces stiff competition from Middle East carriers, and its subsidiaries SilkAir, Scoot and Tigerair are not spared the rivalry from regional budget carriers. Still it is good news that falling oil prices had resulted in a reduction of the fuel costs by S$354 million, a drop of more than 40 per cent.

Characteristically diffident and not as confident as either Qantas or BA, SIA said it expects travel demand to remain volatile, citing the increased competition and the pressure that it will continue to exert on yields and loads. But all three airline groups have experienced increased loads, driven by discounted fares as a result of of intense competition and made possible by the lower fuel costs. According to International Air Transport Association (IATA), breakeven load factors are highest in Europe because of low yields from the open competition and high regulatory costs, yet the region is achieving the second highest load factor after North America and generating solid growth.

It is going to be a rosier 2016. IATA forecast air travel to grow 6.9 per cent, the best since 2010 and well above the 5.5 per cent of the past 20 years. Demand is fueled by stronger economic growth and made attractive by lower fares. It is unlikely that the oil price will rise and airlines may even expect smaller fuel bills, making up 20 per cent of an airline’s total operating costs compared to what it used to be at 40 per cent. This will be further enhanced by the acquisition of new aircraft that are more fuel efficient.

In this connection, SIA has something to crow about as it took delivery last week of the first of 63 Airbus A350 firm orders after a long wait of 10 years. The first tranche of ten aircraft which it hopes to take complete delivery by the end of the year have a seat configuration of 42 business, 24 premium economy and 187 economy. An ultra-long range version of the model will be used to resume SIA’s non-stop services from Singapore to Los Angeles and New York in 2017. The modified A350 is said to be more fuel efficient than the A340 previously used. It will be configured premium-bias.

SIA chief executive officer Goh Choon Phong said: “The A350 will be a game-changer for us, allowing for flights to more long-haul destinations on a non-stop basis, which will help us boost our network competitiveness and further develop the important Singapore hub.”

Opinions are divided as to whether SIA has moved a little too slowly and as a result is playing catch up when once it used to lead the field. By all indications of the good times finally rolling back for the industry, it is not too late to leapfrog the competition to make up for lost time. SIA is banking on the rejuvenation of the demand for premium travel, the product it has always been reputed for.

The IATA forecast points to weak markets in South America and Africa – two regions that are of little interest to SIA – but continuing robust growth for North America which has been a key market for SIA since it commenced operations thereBut the competition will be tough, particularly from Middle East carriers tapping traffic in Asia-Pacific and redirecting it through their Gulf hubs. Already United Airlines has announced its launch of a non-stop flight between San Francisco and Singapore in June this year, ahead of SIA. (United Airliens steals a march on Singapore Airlines, Feb 15 2016)

According to IATA, consumers will see a substantial increase in the value they derive from air transport this year. Indeed, air travellers will benefit from the optimism as airlines become more inclined to improve their product, and the increased competition will likely see the airlines introducing more creature comforts beyond the snacks and peanuts. Qantas for one is upgrading its airport lounge at London Heathrow as part of a program to create a flagship global lounge at important destinations started three years ago. Hong Kong, Singapore and Los Angeles are already enjoying the new facility. Qantas is also developing across its domestic network an industry-leading wi-fi service that has the ability to deliver the same speeds in flight that people expect on the ground.

Mr Joyce said: “Our record performance is the platform to keep investing in the experiences that matter to our customers and take Qantas’ service to new levels.”

Courtesy Airbus

Courtesy Airbus

Thai Airways International

Positive signs of the times are best presented by the performance of Thai Airways which posted a quarterly profit of 5.1 billion (US$141.7 million) baht ending Dec 31, 2015 reversing a loss-making trend. This compared to a 6.4 billion baht a year ago, and softened the full year’s loss to 13.05 billion baht, 16 per cent lower than 15.57 billion baht last year, partly attributed to a decrease in fuel costs of 20 per cent. The airline introduced a program “to stop the bleeding” last year aimed at introducing cost-saving measures, cutting unprofitable routes and down-sizing the fleet.

Plagued by political problems at home and safety concerns based on the findings of the International Civil Aviation Organization (ICAO), Thai Airways has been struggling to stay afloat amidst increased competition from regional carriers. It is to be expected that stronger-muscled airlines such as Qantas, British Airways and SIA are likely to rise faster with improved economic conditions, but when things are beginning to look up for the more troubled carriers while noting that in good times as in bad the fortunes of various airlines can be widely diverse, the industry can at last be a little more confidently optimistic.

United Airlines steals a march on Singapore Airlines

Courtesy Alamy

Courtesy Alamy

United Airlines has stolen a march on Singapore Airlines (SIA) when it announced its launch of a non-stop service between San Francisco and Singapore in June. This will be the first non-stop service between Singapore and the United States after SIA terminated its services to Los Angeles and New York in 2013. United`s announcement came soon after SIA made known its plans to resume non-stop services in 2018, if not earlier in 2017.

You may wonder why United has moved so quickly to fill the void left by SIA when the poor loads experienced by the latter contributed to its suspension of the non-stop services. Apparently the passenger traffic between the two markets has since improved and is growing by an average of 4 per cent annually. Of course, this is good news for Singapore Changi Airport, which is hoping that United could potentially bring more tourists to Singapore. Understandably, it does not matter which airline brings in the load. And since it is believed that capacity will help grow the traffic, then United has made the right move while SIA waits. The business climate changes so fast that the right time is as good as anybody`s guess.

For SIA, it is an opportunity cost. Or, an opportunity lost. When it terminated its non-stop services to New York, regional rival Cathay Pacific moved in quickly to fill up the void, flying non-stop between Hong Kong and New York. That also pits Hong Kong International Airport, which is only some four hours away from Changi, as an Asian gateway for onward connections. It also provides opportunities for Middle Eastern airlines, notably Emirates, Qatar Airways and Etihad Airways, to better compete to carry more traffic through their Gulf hubs as they expand their connections within Asia and services direct to the US.

Changi`s euphoria over United`s decision is understandable, since connections are key to hub operations. With a non-stop link between Singapore and San Francisco, it will mean more regional traffic feeding into Changi to take advantage of the trans-Pacific connection and the support of United`s extensive network within the US. United vice-president of Atlantic and Pacific sales Marcel Fuchs said: “Those arriving in San Francisco will have dozens of options to connect to other cities across the Americas.” Changi Airport Group senior vice-president for market development Lim Ching Kiat echoed the same sentiment, adding that it will strengthen Changi’s position as the preferred gateway between South=east Asia and North America.

United’s domestic network may be its edge over SIA when the time comes for the latter to mount its planned non-stop services. But SIA can always rely on its partnership links with US carriers such as JetBlue, not excluding too United which is a Star Alliance partner. And SIA has always competed on the strength of its superior service. For the long haul, especially for one that flies such a great distance, it is an important customer consideration.

United’s non-stop flight from San Francisco to Singapore is an estimated 16-hour-20-minute journey. Singapore’s erstwhile non-stop flight in the same direction but from Los Angeles to Singapore clocked 17 hours 30 minutes, and from New York (Newark) non-stop to Singapore, 18 hours or longer. United will be flying the B787 Dreamliner for the new non-stop route. In the past, SIA was operating the Airbus A349-500 but will be converting seven of 63 A350-900s on order to the A350-900ULR variant for the resumed services – the reason for the delayed plan. Referring to the new variant aircraft at the time of its announcement to resume the services, SIA chief executive Goh Choon Phong said: “We are pleased that Airbus was able to offer the right aircraft to do so in a commercially viable manner.”

Perhaps too, little did SIA suspect that United would spring ahead to operate its service using the Dreamliner. According to travel magazine Conde Nast, the Boeing 787 could possibly be the most comfortable aircraft by far to travel the ultra-long distance of 8,446 miles, said to be designed to limit jet lag. Among the reasons cited: the 787 has a better air filtration system and more humidity than comparable planes, so you’re less likely to land with chapped lips or dried skin and nasal passages; the windows are larger so the cabin looks brighter and roomier; and the ride is promised to be smoother and quieter. United vice-president Ron Baur said: “Our passengers will arrive less fatigued, and most experience a significant reduction in jet lag,”

We will have to wait to see what SIA has up its sleeves. There may be surprises yet. SIA’s previous services were configured as an all-business-class flight, and while the target market is still very much corporate and business travellers, SIA is not revealing details about how many seats the new business class cabin will have. However, weight limitations are likely to suggest more leg room, if not fewer seats.

High fuel costs were a major reason why SIA suspended its previous non-stop operations. Fortunately for United, today`s low oil price favours its early move and affords the American carrier precious lead time to consolidate its market. Until SIA resumes its non-stop operations, the game belongs to United.

This article was first published in Aspire Aviation titled “United Airlines vs Singapore Airlines: The race for non-stop US-Singapore connections”.

Enter the ultra-budget airline

Courtesy NewLeaf

Courtesy NewLeaf

LESS than a month after Canada’s latest carrier Airlines revealed plans to offer ultra-low fares operating from its base in Winnipeg to six cities within the country, namely Abbotsford, Halifax, Hamilton, Kelowna, Regina, and Saskatoon, it announced it was “temporarily postponing service” and would refund all transactions already made. The first service was to be launched in February.

Newleaf’s fate now rests in the hands of the Canadian Transportation Agency (CTA) which is reviewing the carrier’s aviation licence. Apparently Newleaf was selling seats through a charter arrangement with Kelowna-based Flair Airlines Ltd which held the CTA operating licence. The question is whether the indirect Newleaf should itself be holding a licence directly.

Newleaf CEO Jim Young’s reaction was one of optimism. He said: “We welcome a regulatory system in which businesses like ours can thrive in Canada as they do in other countries.”

That aside, the ultra-budget airline that is sometimes referred to as a discount airline is not an entirely new phenomenon. In his somewhat premature announcement of the launch of the airline, Young said: “Lower landing fees mean we have savings we can pass on to you.” The key word is “affordability”. According to him, “Ultra low-cost carriers are some of the most financially successful airlines in the world today.”

Young may be referring to operators such as Iceland’s WOW Air and the longer haul Norwegian Air Shuttle. WOW Air, for example, is offering US$99 fares connecting Boston and San Francisco in the US with the Icelandic capital Reykjavik. It is next looking at connecting with Montreal and Toronto in Canada.

While you might remind Young of how as many airlines so-called budget too have come and gone, Newleaf is already expressing interest to expand its operations to other destinations within Canada and in the United States.

Young, who was at one time CEO of Frontier Airlines, explained: “By unbundling the entire service you get to choose what you want.” That basically is the budget model, and one that is further trimmed down on costs. As an example, he cited how NewLeaf would be able to save money in part because it does not offer its seats on any third-party travel websites, which charge airlines a fee to post and make sales there. Considering the nature of its operations, that makes economic sense. After all, Young did not see Canada’s two other major carriers – Air Canada and Westjet – as Newleaf’s competitors. He said: “If I had a competitor, it would be the airlines that Canadians are driving across the border for.” He was referring to Canada’s loss of market share to US airlines such as Allegiant Air operating out of airports south of the border, close enough for Canadians to drive across to take advantage of the lower fares.

Young added: “We’re looking to create a new market and stimulate people who aren’t flying today. What I’m going after are people that will make the three-and-a-half hour drive in the middle of winter to go to Grand Forks because they’ve got to get to some place warm or can’t afford to fly from here.”

That argument about developing new market has been the slogan of many a budget upstart, and which has contributed to the success of some of them to go where the full service airlines would not go. Newleaf is therefore targeting a limited but niche leisure market on the back of a strategy that focuses on second-tier airports. It can count on that as a strength to drive its growth, particularly at a time when it could take advantage of the current low fuel costs. Too many no-frill operators in the past had been hit badly by soaring oil prices. The challenge for Newleaf will come when other upstarts similarly motivated jump into the same arena, or when one of the legacy airlines decide that the market has grown big enough for them to join the competition most probably through a subsidiary offshoot such as Rouge, the budget arm of Air Canada.

Legacy airlines across the world have become increasingly wary of the growth of the budget carriers, particularly after the 2008 global economic crisis when air travel trended downwards to cheaper fares. Budget carriers are now competing in the same market, not only for seats in the traditional economy class but also for travellers who want some perks but at lower fares as they introduce their version of business class. North American domestic operations by the major airlines are already adopting the budget model to charge for meals and baggage among a slew of chargeable.

The temptation of growing bigger than intended is always present. This unbridled ambition has led to the downfall of many operators in aviation history, perhaps the reason why the doyen of the budget model Ryanair remains undecided whether it should launch long haul services across the Atlantic, and why some discount carriers such as Allegiant have stayed small. Will Newleaf, when granted the licence to operate, given its ambition to expand far and wide, go down this same road?

Perhaps not, as it would appear that the current budget model exemplified by carriers such as Ryanair and easyJet is not trim enough, and if lower cost will stimulate demand, there is room for Newleaf to grow. Yet one begins to wonder how much lower you can go.

This article was first published in Aspire Aviation.

Can Emirates tie-up save Malaysia Airlines?

Courtesy Wikipedia Commons

Courtesy Wikipedia Commons

Malaysia Airlines (MAS) has signed a mega codeshare deal with Emirates Airlines. The commercial partnership will allow the former access to more than 90 locations in the United States, Europe, the Middle-East and Africa via Emirates’ Dubai hub. MAS will terminate its own direct flights to Paris and Amsterdam along with codeshare agreements with existing partners. In exchange, Emirates passengers can connect MAS flights within the Asia Pacific region.

Sounds familiar? Indeed, this looks like new man Christoph Mueller at the helm of the loss-making Malaysian flag carrier doing what Qantas chief Alan Joyce did in 2013 when a mega alliance with Emirates allows Qantas passengers similar extensive access to a host of destinations out of Dubai. Hired to makeover and turn MAS around, Mr Mueller said of the Emirates tie-up: “Our network architecture is largely complete with this move. It’s a very, very big and important piece in our puzzle.”

But can the tie-up replicate the success of Qantas and contribute immensely to saving MAS? Lest we be too hasty here, it should be noted that though the move is similar, the circumstances aren’t exactly the same.

Mr Mueller’s task is focused largely on cutting costs for a tighter ship, and he has since becoming chief executive in March this year cut thousands of jobs. Another measure involves cutting back on unprofitable routes, and the carrier has so far trimmed capacity by 30 per cent. Mr Mueller was set to shift the focus from operating long haul routes to beefing up regional routes, literally downsizing the carrier; routes that had been dropped include flights to Istanbul and Frankfurt, a precursor of its withdrawal from continental Europe with the exception to London (as in the case of Qantas). This creates a gap in its network which Mr Mueller hopes will be compensated by its tie-up with Emirates, moving away from what he referred to as the traditional ‘kangaroo-route-centric approach”.

The codeshare makes sense since MAS is not making money on its long haul flights. Cost aside, in truth, MAS is just not able to measure up to the competition of regional rivals that ply the same routes, most notably its closest rival Singapore Airlines (SIA). Kuala Lumpur International Airport (KLIA) where MAS is based and Singapore Changi Airport are less than an hour apart, but Changi outperforms KLIA in attracting hub traffic. Here lies the difference between Qantas and MAS. The Australian flag carrier’s move involves a critical shift of its kangaroo route hub from Changi to Dubai, advantaging the latter in the hub competition. Unlike Qantas, MAS does not enjoy a similar base market out of KLIA. Qantas’ shift is also an attempt to lure more traffic away from its rival SIA to connect through Dubai. It is unlikely that MAS will be able to lure hub traffic away from Changi to fly out of KLIA and connect onward from Dubai. MAS’ tie-up with Emirates is best seen as a necessary cost-cutting measure.

Quite clearly Mr Mueller who is often credited as the man who turned around Aer Lingus before joining MAS understands the criticality of the beleaguered carrier recovering strength before competing. He is building a strong regional network which can at the same time feed the longer routes. But the competition in this arena is just as tough. Besides legacy airline competitors such as SIA and Cathay Pacific, there is also an array of budget carriers that are becoming a real threat to full-service airlines. On home ground, MAS faces challenges from AirAsia, which is Asia’s largest budget carrier. The competition will intensify as Asean moves towards a more liberal open skies policy. (See The Elusive Asean Open Skies Dream. Dec 17, 2015).

When Qantas and Emirates inked their agreement, some sceptics cast doubt about its benefits to the former and in fact believed that the latter would gain more by it. But it was Qantas that needed it more as it introduced a transformation program to turn round its bleeding international arm, which Mr Joyce had said in subsequent reports of the airline’s financial performance that the arrangement has boosted the flying kangaroo’s bottom line.

If the Emirates tie-up was a lifeline thrown to Qantas, surely it is all the more so to MAS. In exchange for allowing MAS access to 38 destinations in Europe, 15 in the US and 38 in the Gulf region, Africa and Indian Ocean, Emirates will gain access to some 300 daily MAS flights in its Asian network. The question is: Does Emirates really need it? Perhaps selectively, to tap into the growing markets in countries such as China and Vietnam.

In the bigger picture, Emirates has been forging codeshare agreements around the world. In Asia, besides MAS it already has arrangements with Bangkok Airways, Japan Airlines, Jet Airways, Jetstar Asia, Korean Air and Thai Airways International. Outside that region, it has entered into codeshare agreements with Air Malta, Air Mauritius, Alaska Airlines (pending government approval), Flybe, Jetblue Airways, Jetstar Airways, Oman Air, Qantas, South African Airways and TAP Portugal. Although there appears to be a low count of codesharing with European carriers, Emirates being strong in the competition provides good connections to the region. While the withdrawal of airlines of Qantas and MAS from Europe may be welcome news as seeming reduced competition for European carriers (and other international carriers as well), the feed from those partner airlines into Emirates will actually further strengthen Emirates’ position.

As far as MAS is concerned, riding on the back of another strong carrier may yet be its best bet for recovery.

This is a version of an article that was first published in Aspire Aviation.

AirAsia woes

Photo: Mohd Rasfan/AFP

Photo: Mohd Rasfan/AFP

On Dec 28 last year, AirAsia suffered the loss of an Airbus A320-200 jet which crashed after taking off from Surabaya in Indonesia for Singapore, killing 162 people on board. Then there was talk about the weather being a factor and allegations about the lack of adequate measures governing flying permits.

A report by Indonesia’s National Transportation Safety Committee (KNKT) now points a finger at “the maintenance regime of AirAsia, as well as the actions of the pilots at the controls of Flight QZ8501 when it crashed.” The KNKT found inadequacies in the plane’s maintenance system, which may have overlooked the worrying trend of a recurring technical fault with the Rudder Travel Limiter, an inflight system that helps pilots control the aircraft rudder. Apparently the ill-fated aircraft showed a fault in the system 23 times in 12 months. And the recovered flight data recorder showed that the fault occurred four times within 40 minutes of take-off.

According to KNKT, the pilots managed to deal with all but the last warning alert, after which they apparently tried to reboot the system manually against protocol, causing a power trip that disengaged the autopilot and sending the aircraft into a violent roll or “upset condition”.

In response, AirAsia said its line maintenance crew had “rectified the fault messages at the time of occurrence in accordance with the Airbus maintenance manual and troubleshooting manual, which is why it never qualified as a repetitive fault.” But the KNTK said the carrier’s maintenance systems “did not optimise the post-flight reports.”

There is a second issue – the suspicion that the pilots of Flight QZ8501 might not have been trained to handle the A320-300 in “upset conditions”, such training that might even be considered not required because of the unlikely event of it happening. But Mr Jean-Paul Troadec, former director of France’s aviation authority BEA, said AirAsia had not followed the agency’s rules on training.

The KNKT report has opened the floodgates for potential legal suits by families of the victims. Already 11 families – and others are expected to join them – have filed a collective lawsuit against Airbus. US-based aviation lawyer Floyd Wisner who is representing them told The Straits Times: “We believe the recent report by the Indonesian authorities confirms our position that this tragic crash was caused, at least in part, by a mechanical defect in the aircraft and certain of its components.” The claims alleged that aircraft concerned was “defectively and unreasonably dangerous” in part because Airbus had “negligently breached its duty of care” in the design, manufacturing and assembling of the plane.

Mr Wisner is expected to make hay of the fact that Airbus was aware of the recurring problem, yet took no action to check the trend despite its many reported incidents.

AirAsia too may not be spared. Mr Wisner has lampooned AirAsia for “not handling the claims of its passengers pursuant to international standards.” He added, “Despite the promises of AirAsia’s owner, Tony Fernandes, that the victims’ families would be treated fairly, AirAsia is proving that it is a low fare, low compensation airline.”

Any air disaster of this magnitude is bad news for the carrier concerned. For as long as the memory stays fresh in the mind of would-be travellers, demand for seats to fly that same carrier is likely to suffer. It takes time to heal as the airline repairs its image. Between the time of Flight QZ8501’s fatal accident and the KNKT report, AirAsia might have regained some ground with Mr Fernandes himself spearheading the road to recovery. At the time of the incident, Mr Fernandes was quick to offer his sympathies and assistance to families of the victims. He was personally present to take charge of the situation and manage the media publicity. One year later responding to the KNKT report, Mr Fernandes graciously thanked the KNKT for its “very thorough investigations” and reiterated that his thoughts were with the families and crew of the ill-fated flight. He tweeted: “These are scars that are left on me forever but I remain committed to make Airasia the very best.”

However, as much as Mr Fernandes understands the business, the KNKT report is reopening the wounds of the fatal accident and setting the recovery back a few steps. At the time that the KNKT report was released, AirAsia experienced several flight delays out of Kuala Lumpur International Airport (budget terminal) that left hundreds of passengers stranded and angry. Call it a coincidence. Eleven pilots (some reports had the number as 13) called in sick and while there was speculation that this looked like a revolt by pilots unhappy with working hours and conditions, Mr Fernandes dismissed it as a “freak day” when a new rostering system was introduced. Echoing him, an AirAsia spokesman said: “We have over a thousand pilots. 13 is a small number.”

Sure, a small number per se but not in the context of what happened. If that response was not uttered in jest, it smacked of arrogance. Right now, AirAsia can do with a little less disruption but a little more positive reinforcement. Even in small doses.

This article was first published in Aspire Aviation, titled “Air Asia loses altitude”.