Qantas’ Chinese connections

EVERY airline looking east (or westwards or northwards depending on where they are based) wants a foothold in China, that huge market with a growing population of air travellers.

Three years or so ago when Australian flag carrier Qantas announced a transformation program, chief executive Alan Joyce identified Asia, in particular China, as the answer to the airline’s woes in the international arena. The rising wealth of Asia’s most populous country makes good reason for Qantas to consider an Asia-based premium carrier near enough to tap into that market, and to set up a budget carrier in Hong Kong, the gateway to China, jointly with China Eastern Airlines and a local conglomerate owned by casino magnate Stanley Ho. While the former proposal was aborted, the latter is awaiting regulatory approval – against the wishes of Cathay Pacific – with ordered planes parked at the Airbus factory awaiting delivery. That, Mr Joyce had said, was not unusual for start-up airlines.

Courtesy Qantas

Courtesy Qantas

All that did not stop Qantas from building up its Chinese connect ions through codeshare services. In a recent agreement with China Southern Airlines, Qantas customers can gain direct access to four destinations within China including Guangzhou from Sydney, Melbourne, Brisbane and Perth. China Southern customers will similarly gain access to domestic destinations across Australia as well as beign able to fly between Sydney and Auckland.

Qantas International CEO Simon Hickey said: “Partnerships are at the core of our strategy in Asia and together with our airline partners, we’re pleased to now offer customers access to 179 flights to 12 cities in Asia each week, with fares available to over 120 additional Asian cities.” He added: “The Qantas Group has never had a stronger presence in Asia. More than one sixth of our total revenue now comes from flights to and within the region, and we plan to keep opening up new travel opportunities.”

This can only mean high alert for rival airlines, particularly those which by fifth and six freedom rights have been routing travellers through their home bases.

Qantas already has a codeshare arrangement with China Eastern Airlines between Australia and China via Singapore.

None of the mainland China-based airlines are members of the OneWorld alliance to which Qantas belongs. That may be of little consequence, considering that codeshare partners Chna eastern and China Southern are both SkyTeam members. Air China and Shenzhen Airlines are members of the Star Alliance. Out of Hong Kong, Qantas` Jetstar may face stiff competition from Hong Kong Airlines and Hong Kong Express, both carriers owned by the Hainan Airlines Group, besides Cathay’s Dragonair. Note however that Hong Kong Airlines and Dragonair are by definition regional and not budget carriers.

If there is any indication of China’s growing demand for air travel, it is Shandong Airlines’ recent order of 50 Boeing 737 aircraft to the tune of US$4.6 billion. At the same time, however, Air China warned that its first quarter profits would be 65 per cent lower compared with that last year because of the falling yuan. A statement issued by the airline said: “The financial expenses of the company substantially increased as compared with the corresponding period of 2013 due to the exchange losses.” Fellow competitor China Southern issued a similar warning on falling profits. These are but minor blips that will not deter foreign airlines from connecting with the China market.

The race for Chinese connections as Qantas increases Asian presence

Courtesy Qantas

Courtesy Qantas

Qantas took another step forward to increase its presence in the Asian market, which it has recognized as a key strategy in returning the international operations of the airline to profitability. Just last week, it expanded its codeshare agreement with China Eastern Airlines.

“We said we would expand Qantas’ Asian network through our airline partnerships and we’re now delivering on that promise,” said Qantas General Manager Andrew Hogg.

The codeshare will provide greater access to China, offering a choice of 17 direct weekly flights between Australia and mainland China on either airline, and onward connections via Shanghai to 11 other Chinese destinations domestically. Qantas already has a codeshare service with China Eastern between Shanghai and Singapore.

It is inevitable that the competition will zoom in on the rivalry between Qantas and Asia’s leading airlines Singapore Airlines (SIA) and Cathay Pacific Airways. Although Qantas reiterated the importance of Singapore as its Asian hub – after moving its hub for Europe-bound flights to Dubai following a mega-alliance arrangement with Emirates Airlines – it is clear that Qantas will tackle the Asian market in more ways than just relying on transit connections as there will be more direct flight options between Australia and Asian destinations. That reduces the importance of Singapore and Hong Kong as the go-between.

Additionally, Qantas is pushing the low-cost subsidiary brand of Jetstar across the region through Jetstar Asia based in Singapore, Jetstar Hong Kong pending approval, and Jetstar Japan based in Narita.

If China is where the aviation pot of gold is, Qantas is not wasting time. Cathay, though unhappy with Qantas’ proposed Jetstar operations based in Hong Kong, already has a stake close to 19 per cent in Air China and a stake of 49 per cent in Air China Cargo. Its wholly-owned subsidiary Dragonair operates an extensive network connecting Hong Kong and other Chinese destinations.

That leaves Singapore Airlines to work on its Chinese connections. Five years ago, it failed in a bid to buy a stake in China Eastern, but it has not ruled out the possibility of reviving that bid now that it has divested in Virgin Atlantic – a lacklustre acquisition it made more than decade ago. There is also the possibility of it looking at China Southern Airlines.

Chinese carriers’ results attest to industry volatility

Courtesy Wikipedia Commons

Courtesy Wikipedia Commons

MORE dismal results from other Asian carriers only attest to the continuing volatility of the airline industry, and this is reflected in a region said to be the beacon of the business that analysts had predicted to be finally heading back into far healthier numbers.

China’s three major state-owned airlines – Air China, China Eastern Airlines and China Southern Airlines – posted big decline in annual profits because of the weak global economy, higher jet fuel prices and smaller foreign currency gains. Profit plunged by half for China Southern and by a third for Air China and China Eastern.

The results for 2013 may yet show an improvement on the poorer performance reported for 2012, so it is still a wee bit too early to expect the International Air Transport Association (Iata) to revert to downgrading its forecasts as it did ever so often in the past three years. The signs for now though are not all that encouraging.

Plunging Cathay profits: What went wrong?

Photo courtesy Cathay Pacific Airways

Photo courtesy Cathay Pacific Airways

WITH Cathay Pacific Airways – one of the world’s leading airlines – announcing an 83-per-cent plunge in annual profit, one must begin to wonder what went wrong.

Almost five years since the onset of the global economic crisis, the fortunes of the airlines can be best alluded to the unpredictable movements of the yo-yo. It was only at the end of last year that the International Air Transport Association (Iata) could with some confidence finally revise its profit forecasts upwards instead of downwards: from US$4.1 billion to US$6.1 billion for 2012, and from US$7.5 billion to US$l4 billion for the current year.

Could Cathay be an exception to the rule? For all the hype about product improvement all round including the new Premium Economy class and a new regional business class, the Hong Kong-based airline posted a net profit of HK$916 million (US$118 million), down from HK$5.5 billion a year ago.

Cathay has attributed its poorer performance to a number of factors.

First, higher fuel costs. Cathay reported that throughout much of 2012, fuel prices were at sustained high levels and the Cathay Group’s fuel costs increased by 0.8 per cent compared to 2011. What’s new anyway, when this should similarly affect all airlines across the industry? Yet, in spite of that, some airlines such as Japan Airlines are reporting improved performances. The volatility of the fuel price has been an easy target to blame no matter what degree its impact is on performance. It may not apply to Cathay, but in fact the average jet fuel price had been falling from Sep to Dec 2012 before rising again.

What is more of a concern is the reason for the decline in the fuel price, as explained by Iata chief Tony Tyler: “The reduction in fuel prices is a great thing for the airline industry but they are coming down because of concerns over world economic activity. If the world enters an economic slump, that will be even worse for the industry than the higher fuel price was on its own.”

Second, a drop in demand for corporate travel. This is a more cogent argument as the industry continues to be hard hit by the economic stagnation or slow recovery if at all it is happening, particularly in Europe and the United States. Cathay, which banks on its premium product, is naturally affected more than other airlines that thrive on the low-end traffic.

In a statement issued by the airline, Cathay chairman Christopher Pratt said: “Premium class yields were affected by travel restrictions imposed by corporations.”

Again, this is not a new lesson gleaned only yesterday but widely recognized during the global financial crisis which all but favours cheaper alternatives. Cathay is not alone in this predicament; rivals such as Singapore Airlines (SIA) and Qantas face the same threat.

In a counter-move, Cathay introduced the premium economy class to retain downgraders and attract those who are prepared to pay a little more but not that much more to upgrade to enjoy the frills of an in-between class. It is tempting to conclude that this strategy – perhaps to the relief of SIA which has until now snubbed the idea – is not working judging by the results posted by Cathay, but its full impact is yet to be realised. If the global economy continues to weigh down, it may well prove to be Cathay’s lifeline.

That brings us to the third point as to what went wrong then. Cathay attributes it to increased competition. Mr Pratt said: “An increasingly competitive environment added to the difficulties.” That may be true, but when an airline such as Cathay which is among the world’s most successful carriers resigns to that, it comes across as being somewhat less plausible and lame, and smacks of something amiss.

Competition is a given in this industry. So what has Cathay done or is doing to check the competition? To be fair, it has done much more than most airlines. It has rolled out new product improvements and improved its in-flight service. The airline is ranked consistently among the industry’s favourites, particularly its business class, by air travellers. By all account, its strategy should place it in the forefront of the competition, so what is missing that it should ascribe its falling performance to increased competition? If there’s such a thing as a success formula to suit different environments, has it got the equation not quite right?

Fourth, the weak cargo demand in major markets, particularly from Asia to Europe. No doubt this has affected Cathay’s overall profitability. If it is any consolation, close rival SIA is also similarly afflicted. There are no clear signs that the situation will improve substantially in the near term. In light of the weaker outlook, Cathay has cancelled an order for eight Boeing 777-200 freighters but instead placed an order for three Boeing 747-8 freighters which will carry 16 per cent more revenue-producing freight than predecessor Boeing 747-400. Cathay chief executive John Slosar said the larger airplane would result in fuel savings for the revamped fleet.   

Fifth, high operating costs, especially of the long haul routes that according to Mr Pratt were dominated by “older, less fuel-efficient Boeing 747-400 and Airbus A340-300 aircraft”. Last year, the company announced plans to accelerate retirement of the less fuel-efficient 747-400 as it continues with the fleet upgrading programme for both airlines in its fold – Cathay and Dragonair. In January, Cathay ordered 10 Airbus A350-1000 and converted 16 of its existing order for A350-900 to the larger A350-1000. These 350-seaters will ply high-density routes which include non-stop flights to Europe and North America.

The future should look rosier. Mr Slosar said: “This is an important strategic development for Cathay Pacific. The A350-1000 aircraft will bring us world-beating fuel efficiency.” 

Last, incommensurate cost-cutting measures that include offering unpaid leave to crew and reducing capacity on some routes which unfortunately, according to Mr Pratt, “were not enough to offset in full the effects of high fuel prices and weak revenues.”

And we have come one full circle. So what makes one airline more likely to succeed than another when almost every one of them alike ascribes its failed performance to the same factors?

Mr Pratt said: “Our core strengths remain the same ever: a superb team, a strong international network, exceptional standards of customer service, a strong relationship with Air China and our position in Hong Kong. These will help to ensure the success of the Cathay Pacific Group in the long term.”

Sounds familiar, you may say, except for specific references applicable only to Cathay.

Chinese airlines dominate top rankings by net profits

IN the latest world airline rankings by Airline Business, three carriers from mainland China are listed in the top ten airline groups by net profits in 2011. Air China ranked second with a net profit of US$1,095 million, China Southern Airlines third (US$944 million) and China Eastern Airlines ninth (US$689 million). Cathay Pacific Airways, based in Hong Kong, ranked eighth (US$729 million).

An interesting point of note is that these airlines were outside the top ten positions in last year’s rankings: Air China ranked 12th, China Southern 14th, China Eastern 16th and Cathay Pacific 17th. One may quickly point out that while the rest of the world, particularly Europe and North America, suffer the fallout of the global economy, it is Asia that manages best at keeping its nose above the water.

 

 

Courtesy of Airline Business, these are the airlines in the top ten rankings:

  1. Japan Airlines Group, net profits US$2,366 million (previously 11th)
  2. Air China, US$1,095 million (12th)
  3. China Southern Airlines Group, US$944 million (14th)
  4. Delta Airlines, US$854 million (3rd)
  5. United Continental Holdings, US$840 million (2nd)
  6. International Airlines Group, US$776 (7th)
  7. Ryanair, US$774 million (28th)
  8. Cathay Pacific Group, US$729 million (17th)
  9. China Eastern Airlines, US$689 million (16th)
  10. Aeroflot Russian Airlines, US$526 million (32nd)

Sichuan Airlines lands in Vancouver: The Chinese are coming to Canada!

Sichuan Airlines became the fourth Chinese carrier to operate scheduled flights between China and Canada when it landed its inaugural Chengdu-Vancouver flight at the Vancouver International Airport (YVR) on June 22. From then on, it is scheduled to be three times weekly.

The other three Chinese carriers that make scheduled calls at YVR are Air China, China Eastern Airlines and China Southern Airlines.

The Canadians have long been courting the Chinese at the national level, exploring opportunities not just in the field of aviation but also in the wider economic context covering other industries. It is only to be expected that increased trade between the two countries will trigger increased travel as well as the demand for more cargo capacity and flights.

Vancouver Airport Authority (VAA) is wasting no time to position VIA on the Canadian west coast as the gateway to not only Canada but also North America. It is optimistic that passenger traffic from China to Canada will increase considering China’s population of 1.33 people and the growing class of the wealthy, and as China relaxes the rules for Chinese to travel overseas and Canada makes it easier for them to obtain visas to visit.

There is already a healthy trend as according to the British Columbia Ministry of Jobs, Tourism and Innovation, Chinese arrivals increased by 24.9 per cent to 25,598 in Q1 of 2012.

Like any other airport, VAA is keen on enticing more airlines to YVR and sees Chinese carriers as contributing to that growth. According to VAA president and CEO Larry Berg, there are 61 weekly flights between Vancouver and China (including Hong Kong). He said: “That’s probably about the most of any airport in North America.”

Yet there seems to be an implicit fear of YVR’s isolation because of its geographical far-northwest location. As the region grows economically and attracts more tourists, there is also the fear of loss of traffic to competing airports in the region.

Seattle-Tacoma International Airport, which positions itself as America’s gateway to the Pacific northwest, is probably YVR’s closest rival although Chinese carriers have yet to make scheduled calls there. Located just south of the US-Canadian border, it is only a hop away.

However, YVR is also concerned with intra-competition as it keeps a close eye on growing airports in neighbouring provinces, such as Calgary International Airport.

Air Canada goes budget

AS the popular folk ballad ‘Blowing in the Wind’ goes, “When will they ever learn?” In announcing plans to consider launching a long-haul budget carrier, has Air Canada not learnt from the failure of Hong Kong-based Oasis Airlines, which commenced operations first between Hong Kong and London in 2006 and then between Hong Kong and Vancouver in 2007 only to fold up its wings in 2008?

So also is it said that fools rush in where angels fear to tread, but can Air Canada do it any differently in order to succeed where other hopefuls had so quickly failed?

Besides Oasis Airlines, Air Canada could have also considered very carefully the case of defunct fellow carrier Harmony Airways, which started as HMY Airways in 2002 and was renamed in 2004, operating to various destinations within Canada and beyond to the United States, Mexico and United Kingdom. The airline received favourable customer feedback and was eyeing the growing China market, but that was to be an unrealized dream when it ceased operations in 2007.

Harmony Airways preferred to be called a niche player than a low-cost carrier as it took pride in providing good service and serving hot meals on board. But it was hurt by soaring fuel prices in a highly competitive environment. It did not have the muscles to stand up against the larger carriers like Air Canada and WestJet. According to spokesman Peter Bruecking at the time, Harmony Airways had banked its future on gaining access to the China market, but delays in agreement between the two countries inevitably forced it to reshape its course, hence its demise.

Perhaps it was this very disappointment expressed by Harmony Airways then that has given new hope to Air Canada today as both China and Canada relax the rules for more Chinese travellers and carriers to enter Canada. Vancouver International Airport (YVR) has been working hard to promote itself as the gateway to North America and not just Canada. As admitted by President of the airport authorities Larry Berg, “Much of Vancouver Airport Authority’s focus in attracting new routes, passengers and airlines over the past number of years has been on Asia, given the growth potential of markets in the region.”

Three major airlines from China, namely Air China, China Eastern Airlines and China Southern Airlines, are already operating to Vancouver. A fourth airline, Sichuan Airlines, will inaugurate services on 22 Jun. YVR is also well served by other Asian carriers such as Cathay Pacific, China Airlines (Taiwan), EVA Air, Japan Airlines, Korean Air and Philippines Airlines.

How well the new Air Canada carrier will fare against the competition is a real poser, especially when the parent airline itself is highly prone to industrial disruptions and not as highly regarded for service as some of its competitors. However, as a low-cost operator, the new carrier will understandably compete on price, but considering the low fares charged by some of the established carriers, the differential may not be adequately compensatory for the deprivation of creature comforts on a long-haul flight.

Yet again, this raises the question as to whether the budget long-haul is a viable proposition, having seen the dissolution of Oasis Airlines and, lest you cite AirAsia X otherwise, you will note that the Malaysian carrier has ceased its long-haul operations from its home base in Kuala Lumpur to London, Paris and Christchurch, and is refocusing on shorter runs.

All said, Asia is still the Holy Grail that most airlines are after. Interestingly, when Air Canada chief executive officer Calin Rovinescu first mooted the idea of a budget carrier, he was thinking of Europe, But with the economic crisis hanging over Europe, the priority shifted to tapping the potential of Asian destinations instead.

Unfortunately, geographically, Air Canada is not as fortuitously positioned as, say, Qantas, to penetrate the region, which leaves it to either dress up or dress down its operations and to rely on sustaining the flow of long-distance traffic between Asia and North America. That is why China, with its growing nouveau riche, is an attraction. Yet, unlike Qantas, which believes the demographics favour a regional premium carrier (however, understandably so considering the proximity of Australia), Air Canada intends to go low-cost to attract the masses.

Almost paradoxically too, when the Harper government of Canada has been courting businesses in China to connect with Canada, and its successes would boost traffic between the two countries.

 It may be said that Air Canada has been somewhat slow in latching on to the frenzy of budget travel beyond its national borders. Mr Rovinescu has said the launch of a budget carrier is a top priority. In a speech to shareholders, he said: “We need to participate in this segment of the market in one manner or another.”

A more interesting development in the plans allegedly is for Air Canada to eventually operate only domestic flights and flights to the United States, Mexico and the Caribbean. All other flights beyond these countries will be handled by the new budget carrier in which Air Canada will participate as a partner. When that happens, Air Canada will have completed its transformation from full-service to budget status, since its domestic and regional flights are already largely no-frilled. O Canada, can you see that day coming?