US & UK ban laptops on board: Will this become the security standard?

Courtesy Emirates

SOON after the United States bars passengers on foreign airlines taking off at ten airports in Africa and the Middle East from carrying electronic devices larger than a cellphone, the United Kingdom announced a similar ban although the list of airlines and airports may be different.

The ban will affect items such as laptops, tablets, e-readers, cameras, printers, electronic games and portable DVD players. However, these articles may be carried in checked baggage.

Affected airlines and airports

The US restriction affects nine airlines: EgyptAir, Kuwait Airways, Royal Air Maroc, Royal Jordanian Airlines, Saudi Arabian Airlines, Turkish Airlines, and the Gulf big three of Emirates, Etihad Airways and Qatar Airways. The airports affected are sited in Amman (Jordan), Cairo (Egypt), Casablanca (Morocco), Doha (Qatar), Dubai and Abu Dhabi (United Arab Emirates), Istanbul (Turkey), Jeddah and Riyadh (Saudi Arabia), and Kuwait City (Kuwait). It is estimated about 50 flights daily would be affected.

The British ban affects 14 airlines arriving from Egypt, Jordan, Lebanon,Saudi Arabia, Tunisia and Turkey. While the US ruling exempts US carriers flying from the listed airports, the British restriction applies as well to home-based airlines British Airways and EasyJet.

Why the restrictions?

The reason for the bans is of course one of security, aimed at preventing terrorist attacks on commercial airlines. The US Department of Homeland Security said: “Terrorist groups continue to target commercial aviation and are aggressively pursuing innovative methods to undertake their attacks, to include smuggling explosive devices in various consumer items.”

The British government said it recognised the inconvenience these measures may cause but “our top priority will always be to maintain the safety of British nationals.”

Few air travellers, if any, will take issue with enhanced security measures since it means a safe flight. Any averse reaction is to be expected, as when full-body x-ray and search became mandatory at US airports. The inordinately long wait to clear security at US airports has since then become an accepted practice.

However, it will do well not to ignore the arguments put forth by experts who may not yet be fully convinced. Technology experts have questioned the premises which in their mind appear to be at odds with basic computer science.

What goes with the ban?

The ban on laptops means no one will be able to work during a flight, something that businessmen and women will sorely miss. Keeping yourself or your kids entertained with electronic games of your personal selection will be a thing of the past if you do not like what the airline offers in its system. What about that novel you thought you might at last be reading during the long journey, having loaded it in your e-book?

Sure, you can pack these (and your camera) in your checked baggage to loaded in the aircraft hold, but it defeats the purpose if they are intended for use during the flight. Also, if these are expensive equipment, passengers are often reluctant to pack them in checked baggage for fear of losing them or having them damaged. Some observers are predicting a rise in incidents of theft in the baggage holding area and cargo hold, and airlines will be confronted with the messy business of handling claims. Apparently baggage theft skyrocketed when Britain imposed a similar ban in 2006.

Laptops, tablets, cellphones and cameras are among the items that are already being subjected to additional security checks before they are cleared as carry-ons. It can only point to the suspicion that the current procedures are not robust enough.

Looking at the bigger picture, some experts fear the ban seems lopsided. First, if a laptop as an example may be used as an incendiary device, it is equally dangerous in the cabin as it is stowed in the baggage hold. Second, the ban targets named originating airports, but a terrorist suspect could always connect a flight from a presumed safe airport or fly on a presumed safe airline. Third, in the case of the US, to make exceptions for flights originating in the US is turning a blind eye to the possibility that mischief could also be traced to a home source.

Some airlines may benefit from the ban

It looks like an unexpected turn of events for the US big three of American Airlines, Delta Air Lines and United Airlines in their quest to get the US government to act against the perceived unfair competition by the Gulf big three (Emirates, Etihad and Qatar). The ban may well benefit the American trio as travellers are likely to want to travel with their electronic devices on board than to have them stowed in the baggage hold. A pertinent question would be how the US carriers would ensure the devices brought on board are safe the way that other carriers may not be able to do so?

Similarly, in the case of the UK ruling which covers also budget carriers, legacy airlines will have the edge if, unlike budget carriers, they do not charge for checked baggage. Easyjet, for example, will be challenged to think up an innovative approach to this issue.

And will airlines across the industry introduce loans of security-screened laptops on board for a fee?

The future

Although the ban is said to be temporary (as indicated by the US), will there be a change of mind to make it permanent, like the ban on liquid obtained before security clearance? Amuse yourself about a future when all you are allowed to bring on board are the clothes you are wearing and a wallet. Everything else needed or desired for the journey as determined by the authorities and the airlines may be purchased after take-off.

For now, some airlines may mull over the use or disuse of a happy passenger working on his or her laptop in their ads.

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.

Qantas’ stellar turnaround: To whom is the credit due?

qantas- courtesy qantasQantas reported a stellar half-year performance (June to December 2014) which may have surprised some observers. To whom is the credit due? Or, is this willy-nilly a matter of rolling back on a favourable global economic tide?

The Australian carrier made an underlying profit of A$367 million (US$289 million), its best in four years. This was all the more impressive following on a record annual loss of A$2.48 billion ending in June last year. Plus, the international arm made a profit of A$50 million for the first time ever since the global financial crisis, during which long period it was bleeding the airline at the expense of domestic earnings and which led Qantas to decide on splitting its operations into separate autonomous divisions. The domestic market continues to be profitable, with Qantas and low-cost subsidiary Jetstar reporting earnings close to A$300 million.

Courtesy Qantas

Courtesy Qantas


Once again, Qantas’ success reads like an Alan Joyce story. Chief executive Joyce faced pressure to resign following the “shocking” dismal result last year, but was now able to say, “We will be a company able to withstand tough times, capitalise on the good times, and deliver sustainable and attractive long term returns to our shareholders… And today we can see a bright future for this great Australian company.” (Qantas’ performance: Is it about the singer or the song? 15 Sep 2014)

Mr Joyce attributed Qantas’ turnaround to “the impact of transformation”, without which he said the airline would not be profitable. The restructuring started in 2011 when Mr Joyce took action to avert what he called an Australian “tragedy”; among the proposals was an expanded thrust into Asia that would include setting up a premium airline in the region and plans to lift its international operations out of the red. It has been a long and rough road riddled with industrial disputes and staff strikes, Mr Joyce in 2012 blaming the unions for damaging the Qantas brand and driving away customers. He said then: “We continue to work towards returning Qantas’ performance to profitability in the short term.” The Asia-based premium carrier never took off, but international operations are finally making a profit in 2015. Has it taken too long? It depends on how you define the short term. In fact, Mr Joyce reminded his distracters that “we expect to achieve that goal this year, on target.”

For an industry that is highly capitalised, competitive and weighed down by long implementation lead times, up to five years may not be considered that long a time to expect sustainable results. But investors are apt to be impatient people. Mr Joyce’s problem may have to do with the lack of certainty in the direction towards recovery from 2011 till now. In June 2011, Qantas expected deeper losses for its international division for the financial year in question, affecting group’s profits with a forecast dip by as much as 90%. The red ink was later confirmed with the carrier posting a net loss of A$244 million, largely because of the deepening loss of A$450 incurred by international operations. The much hyped Qantas-Emirates tie-up could not save the Australian carrier.

The following year, Qantas bounced back with improved results for the first half (July to December 2012), helped by reduced losses for the international division. A pleased Mr Joyce, said then: “We are now beginning to realise the benefits of the tough decisions we have made over the past 18 months.” This was a direct reference to the transformation programme that includes additionally the restructure of the airline operations into autonomous domestic and international divisions. Full year results showed that losses for international operations shrunk by half to A$246 million. Mr Joyce pointed to the strategic alliance with Emirates as contributory. He said: “The Qantas-Emirates partnership gives the group a strengthened position on routes to Europe, the Middle East and North Africa, via the global hub of Dubai.” Few observers would dispute that.

Then came another setback as Qantas announced at the end of 2013 it was expecting a half-year loss of up to A$300 million for the Group, so much so that Standard & Poor downgraded its credit rating to below-investment level. The only way forward was more drastic cost-cutting measures that would include shedding 1,000 jobs. Mr Joyce said: “We will focus relentlessly on cutting costs and improving productivity, while maintaining our competitive advantages as a business.” The confirmed loss later of A$252 million was worse than the loss of A$91 million a year ago. What much more new could Mr Joyce say but the promise of more “tough decisions” ahead? Was the transformation package really working? One thing that it may have failed to adequately anticipate or address is the growing competition posed by rival Virgin Australia. At that material time, Virgin CEO John Borghetti was quick to point out that although both airlines lost money, Virgin outperformed its rival in key measures of growth such as yield and load factor.

What happened next was the carrier’s biggest loss in Qantas’ history – A$2.84 billion for the year ending June 30, 2014. The uncertainty that has marked its road to recovery might cast doubt on its future even as its most recent report card showed yet again a turnaround. Will history repeat itself? Given that the original transformation programme is running out its five-year course, are the positive results finally here to stay, attesting to its success? One may be cheeky to ask if indeed Mr Joyce had been forced out following the dismal performance last year, would Qantas have achieved the same result any way in a year helped by the recovery of the global economy and the unprecedented fall in the oil price that has benefitted not just Qantas but other airlines as well?

But all’s well that ends well, and give credit where it is due. Qantas’ transformation success, according to Mr Joyce, may be quantified by a: lower cost base; free cash flow and revenue growth; an improved fleet, product and service; strengthened customer satisfaction; reduced debt and strengthened balance sheet; improved return on invested capital, the youngest fleet age in more than 20 years; and fleet simplification from eleven to nine aircraft types, aiming for seven. He said: “What sets this program apart is that we are reducing costs permanently, while at the same time delivering Qantas’ best ever fleet, product and service.”

Moving forward, the real test must be performance consistency to instill confidence. Mr Joyce added: “We now have a strong foundation for sustainable growth.” For that, popping the champagne is in order.

This article was first published in Aspire Aviation.

Emirates’ Airbus order cancellation raises questions

Courtesy Airbus

Courtesy Airbus


THE cancellation of an order for 70 Airbus A350 aircraft amounting to US$16 billion (based on 2007 list prices) by Emirates Airlines has turned the focus on the Airbus company. In an obvious attempt to play down the drama, Airbus chief operating officer (customers) John Leahy said: “It is not the world’s greatest news.” That did not check Airbus shares from falling 3.7 per cent and engine maker Rolls-Royce by 1.7 per cent on the back of Emirates’ decision. Mr Leahy even brushed it aside as if it was something to be expected, adding that Emirates president Tim Clark “does change his mind from time to time.”

In truth, airlines do change their mind about aircraft orders. In 2012, Qantas cancelled orders for 35 Boeing Dreamliner jets worth US$8 billion following a net loss of US$256 million – its first annual loss since 1995 when it was privatised – and expected lower growth requirements. The Australian flag carrier is keeping its fleet options open. Qantas CEO Alan Joyce said: “We will maintain complete flexibility over the fleet.” He explained: “In this business there is always potential for great headwinds and tailwinds… there is no intention that every aircraft is guaranteed to come or that it’s not going to come.”

Only very recently did budget carrier Tigerair – which is 40-per-cent owned by Singapore Airlines – also cancel orders for nine Airbus A320 aircraft in light of perceived overcapacity in the region of its operations.

But a decision by Emirates which is not in the same financial straits as Qantas and Tigerair must raise questions even as Mr Leahy insisted that he was “not particularly worried at all.” To suggest that it was a whim of Mr Clark was quite unwarranted. But Airbus did express its disappointment. Apparently, Emirates’ decision followed ongoing discussions between the two parties as the airline reviewed its fleet requirement. In fact, Emirates has ordered an additional 50 A380 aircraft.

Courtesy Airbus

Courtesy Airbus

So, naturally, we ask the big “Why?” and speculate on the ramifications of that decision.

Is Emirates dissatisfied with the aircraft model?

Allegedly Emirates is unhappy with particularly the performance of the A350-1000 model, which makes up 20 of the 70 aircraft orders, the others being the A350-900 model. Even as Airbus said Rolls-Royce was working on the upgrade, the writing was already on the wall when in November 2012, Mr Clark told Aviation Week that Emirates’ order for the aircraft was in limbo, and that the A350-900 “is starting to look a bit marginal to us because of its size.” That provided another perspective to the issue – one of suitability. Mr Clark explained: “Gauge is the way we grow, you cannot get any more aircraft into the Dubai hub.”

Has Emirates over-estimated its growth capacity?

The focus is so much on Airbus that it has become convenient to not ask any question that may suggest that Emirates’ decision is driven by more an internal than an external situation, or at least in part due to it. It is almost unthinkable in light of Emirates’ sterling performance when it posted a 43-per-cent increase in profit to Dh3.3 billion (US) for financial year 2013-14. According to Emirates chairman and chief executive officer Shaikh Ahmad Bin Saeed Al Maktoum, the airline’s profit margin was more than double that of the industry, the result of flying 44.5 million passengers – up 13 per cent – and close to a 80-per-cent load factor. It was a year of expansion as the airline increased its capacity for both passenger and cargo, and as it added new destinations across the globe.

By all accounts it does not look like Emirates is about to stop expanding, or even slowing down, despite the revised forecast by the International Air Transport Association (IATA) that showed astagnation in profitability for the industry in Africa and a dip for all the other regions with the exception of North America. Of course, the state of the industry does not necessarily reflect the fortune of Emirates, which in the past year has experienced healthy growth in all the regions that it operates. Still, the question must be asked: Has Emirates over-estimated its growth capacity, noting too the limitations of Dubai Airport? To be sure, the airline will continue to expand, having announced plans to add five new routes to Abuja, Brussels, Chicago, Kano and Oslo, but perhaps at a slower rate. It could be in this context that Shaikh Ahmad recognized the need for “efficient new aircraft” amongst other things to sustain profitability,

Will Emirates’ decision affect other airlines’ orders?

Courtesy Airbus

Courtesy Airbus

Emirates’ decision raises questions on the impact it may have on other airlines with similar orders, more notably the Gulf carriers namely Etihad Airways (with an order for 40 A350-900s + 22 A350-1000s) and Qatar Airways (43 + 37). Besides Etihad and Qatar, airlines that have placed orders include Air France-KLM (25 A350-900s), Aer Lingus (9 A350-900s + 9 A350-1000s), Aeroflot (14 + 22), Air China (10 + 10), AirAsia X (10 + 10), Asiana Airlines (12 +10), Cathay Pacific (20 + 26) and Japan Airlines (18 + 13). But Mr Leahy of Airbus was confident that other airlines would take up the slots vacated by Emirates. He maintained that there would “no hole in production” and therefore no impact financially since the first deliveries were only planned for 2019 and spanned out to 2034.

Is Emirates setting the stage for heightened competition between Airbus and Boeing?

This is not a new story about the rivalry between Airbus and Boeing, but more a reminder of it. It is all the more significant when Emirates is the world’s largest operator of the Boeing 777 and Airbus A380 in a fleet of 217 aircraft. In 2013-14, it received 24 new aircraft including 16 A380s, six Boeing 777-300ERs and two Boeing 777Fs. If there is a customer that both manufacturers want to please most, it has to be Emirates. Airbus is unlikely to let Emirates’ concerns go unattended even though the latter had cancelled its order; that will become history. For Airbus, it is more than just about losing an order. More importantly, it is about the competition with Boeing. Clearly, he who pays the piper calls the tune.

It was by the size of Emirates’ order a big deal after all, and Emirates is one of the world’s leading airlines. Mr Tim Clark may well have the last laugh.

Premium economy: Singapore Airlines catches up, at last

Courtesy Reuters

Courtesy Reuters

JOHNNY come lately. Was it pride or misplaced hope that took Singapore Airlines (SIA) that long to finally decide it would introduce – or, rather, re-introduce – premium economy in its fleet? The Singapore flag carrier announced last week it would offer the sub-class next year as part of a S$347 million (US$325 million) cabin retrofitting project. Many major airlines including regional rivals Cathay Pacific, Qantas and Japan Airlines are already offering this sub-class of travel, and judging by the increased popularity of the product across the industry, it will be to SIA’s disadvantage not to follow suit.

But, of course, for an airline with the reputation for top-rate service, it is never too late. There is no doubt that SIA will be able to offer a product to match the best in the industry as it plays catching up – that may even pose some threat to airlines such as Qantas on the kangaroo route – and any further delay could mean a heftier opportunity cost. In a post published last month, Aspire Aviation heralded the forthcoming announcement by SIA as not surprising, as one cannot ignore the the reality of the aviation landscape, granting that it is normal to change course to stay in the competition even if it means having to swallow one’s words spilled all too often to the contrary. (See The times they are a-changing: Singapore Airlines may re-introduce executive economy, Apr 4, 2014)

It was a gamble that SIA was not prepared to risk, going down that road, as it continud to bank on the return of the upmarket traffic to its pre-2009 level. However, while the premium economy product can swing the door both ways – trade-up from coach vs trade-down from business – Cathay for one has shown that its business model is working and it continues to expand and enhance the product. What started out as a long-haul offering has caught on with even regional travellers.

It looks like SIA’s entry into the premium economy market is attributable to the push more than the pull factor. Notwithstanding having made the decision, the airline remains cautious. SIA executive vice-president (Commercial) Mak Swee Wah stressed that the initiative would not dilute the airline’s branding, the obvious reference to the elitist upper class image and reputation, and was quick to add that SIA would also be upgrading its front-end product. Of the premium economy decision, Mr Mak said: “It’s something that we have been watching and reviewing for a couple of years… I think the market has matured in a way and it is ripe for us to embark on this now.” This is not quite reminiscent of the days when the airline used to be the leader in innovation. Even more uncharacteristic is that reference to a “mature” market.

So, SIA has been “pushed” forward. Its performance continues to be lacklustre as it posted a plunge in Q4 profit of 60 per cent. Net profit was S$27 million compared to S$68.3 million a year ago. Yield declined for the third straight year. This latest result could be the trigger for an overdue strategic change. Continuing to blame the high fuel price, floundering in an uncertain global economy and lacking a concrete counter-competitive move in the face of aggression by rival airlines will not help. At the low end, SIA feels the pressure from regional and low-cost carriers; its own mix of SilkAir/Scoot/Tigerair regional and budget operations is similarly challenged. At the high end, Middle east carriers in particular, such as Emirates, ETD Airways and Qatar Airways, have raised the ante.

SIA has waited too long. It must by now have a pretty good feel of how the aviation market has settled, noting the persistent weakness in high-end demand. SIA too cannot ignore the emerging premium economy trend, and it has seen how rival Cathay and other airlines have benefited from the introduction of the sub-class. Without offering a similar product, SIA risks losing both potential downgraders and upgraders to the competition. With such an offering, it may recover some lost business that has switched in its absence. More than that, the rising middle class in the populous countries of China, India and Indonesia offers a new market potential that SIA is well positioned to take advantage of, an opportunity in time that it will be ill-advised to miss, considering how the business is continually shifting.

This article first appeared in Aspire Aviation.

Qantas’ dismal performance: The singer or the song?

Courtesy Getty Images

Courtesy Getty Images


QANTAS reported a loss of A$252 million (US$225) for the half year (July-December 2013) which was worse than the loss of A$91 million last year. At the same time the Australian flag carrier announced it would cut 5,000 jobs as part of a three-year plan to reduce costs by A$2 billion. Other measures include deferring delivery of eight Airbus A380 for the parent airline and three Boeing B787 Dreamliner aircraft for budget subsidiary Jetstar as well as relinquishing some of the routes.

Qantas CEO Alan Joyce said: “We must take actions that are unprecedented in scope and depth to strengthen the core of the Qantas Group business.” He added: “We have already made tough decisions and nobody should doubt that there are more ahead.” So what’s new? One may then wonder if the dismal performance of Qantas is more about the singer than the song.

Mr Joyce attributed the poorer results to competition, high fuel prices and unfavourable foreign exchange rates – all the stock answers you can expect from any airline in a similar situation, not that they were in any way invalid but that they were definitely not the unusual suspects. The unions, naturally disenchanted by the announced staff cuts, had suggested that this might have been in part due to creative accounting in recent years.

It does not bode well for Qantas when the global economy is on the road to recovery with some major airlines already reporting profitable performances in sync with the optimistic outlook forecast by the International Air Transport Association. The flying kangaroo has been struggling to regain profitability on the back of a major restructuring initiative filled with such promise that would have observers believe in its certain recovery although not everyone was convinced. Something seemed to have gone amiss along the way.

A major thrust of Mr Joyce’s “transformation” strategy was to capitalize on the growth in Asia, which saw Qantas mounting more direct services in the region. But the flying kangaroo suffered from an image problem that even Australians preferred to book with competitor airlines such as Singapore Airlines (SIA) and Cathay. According to Mr Joyce, “82 out of every 100 people flying out of Australia are choosing to fly with an airline other than Qantas, not including Jetstar.” That might still hold true considering the airline’s latest results. The Asia plan to avert what Mr Joyce then referred to as an Australian “tragedy” was to launch a premier regional carrier based in Asia code-named RedQ, which never took off, and to promote Jetstar aggressively across the region. Jetstar Japan was launched in 2012 jointly with Japan Airlines, and Jetstar Hong Kong was established with China Eastern Airlines much to the displeasure of Cathay. But even Jetstar, once the star performer, was reporting a loss. Did Mr Joyce misread Asia and underestimate the competition? Was there a mismatch between his enthusiasm and the reality? Or did the fault lie in the execution?

Today Mr Joyce is reiterating the call for renewal he made two years ago when, announcing a 52% dip in first half profits, he said: “The highly competitive markets and tough global economy in which we operate mean that we must change.” At that time, 500 jobs were axed consequently. Then Cathay also reported a plunge of more than 60% in full-year profits (2011) and the results for SIA were just as lacklustre. The airline industry was suffering. To avert further losses largely incurred by its international arm, Qantas split its international and domestic operations into separate autonomous units in May 2012. Mr Joyce could be right that international and domestic operations faced different demands and challenges, and an independent Qantas International would have a freer hand in pursuing the Asia dream and other channels of growth. He said then, “We have begun the process of restoring Qantas International to a sustainable position.” Then as higher losses were expected for the full year came the glimmer of hope when the mega alliance with Emirates Airlines was announced, an initiative that looked likely to hurt rival SIA with the shift of Qantas’ hub for the kangaroo route from Singapore to Dubai that expands its accessibility to Europe, the Middle-East and Africa through Emirates. While Mr Joyce admitted that the alliance had cushioned the losses, the impact was far below expectations.

Only last year did Qantas send out signals that it was back on course, reporting a reduced loss for the first half. Mr Joyce, pleased with the turnaround, said: “We are now beginning to realise the benefits of the tough decisions that we have made over the past 18 months.” The improved performance of international operations was encouraging. It turned out to be a lull before the perfect storm. To be fair to Mr Joyce, one has to take a long term view of the strategy and recognize that external and unexpected events can affect the initial plans adversely and avert the desired results, and that under the circumstances a change of course would be expected of any dynamic organization. So one should cut Mr Joyce some slack lest one becomes too hasty in one’s judgement of the supposed “Qantas transformation program” which he would now accelerate to achieve a cost reduction of A$2 billion by 2016-17.

But the future looms large with uncertainty. It is not quite clear how Qantas would move ahead as the added measures appear to be short term and expedient, which may decelerate the growth of the airline and open up more room for the competition. A press release issued by the pilots’ association stated: “Qantas management has today outlined a demolition of jobs, but failed to follow through with a strategy for how it will grow the business and serve the national interest.” As if in preparation to ameliorate the negative impact of the devastating results, Mr Joyce has been harping on the Australian government’s unfair treatment of Qantas compared to Virgin Australia. The rules limiting foreign ownership have apparently put it at a disadvantage; rival Virgin on the other hand enjoys the investment that comes from partial ownership by Air New Zealand, Etihad Airways and SIA. Mr Joyce asserted: “The Australian domestic market has been distorted by current aviation policy.”

That restriction might be a hurdle to Qantas’ expansion, but it did not explain satisfactorily the failure of the airline to perform in progression with Mr Joyce’s grand restructuring plan. Above the sound and fury, as Australian Prime Minister Tony Abbott had commented, Qantas would have to first put its house in order.

Qatar Airways takes on Singapore Airlines

Photo courtesy AisaOne

Photo courtesy AisaOne

IN an interview with the Straits Times at the Singapore Air Show, Qatar Airways chief Akbar al-Baker said: “I don’t think that there is any airline operating into Singapore, including Singapore Airlines (SIA), that offers this (Qatar’s) high standard of product.” (The Straits Times, Feb 13, 2014)

If anyone were to refute Mr al-Baker’s claim, he would probably point you to the 2013 Skytrax survey, which placed Qatar second after Emirates Airlines in the best airlines category. SIA was third.

Indeed, SIA should be flattered that many airlines have over the years used it as the benchmark for excellence. But it should be concerned that a number of them are now moving ahead, the competition coming strong from Middle East carriers that besides Qatar, include Emirates and Etihad Airways. In fact, Emirates which modelled itself on SIA could claim it has beaten the master at its game.

It is now up to SIA to show it is still the leader in the field when it looks like the Middle East carriers have brought the battle to its home ground. Of the three rivals, SIA may have found a friend in Etihad. Both airlines have stakes in Virgin Australia. Etihad chief James Hogan has said there is room for the two airlines to cooperate. Emirates has entered into a non-equity mega alliance with Qantas, and its impact on the kangaroo route competition cannot be underestimated.

Mr al-Baker however does not believe in the “smaller” alliances and chose to be a part of OneWorld instead. Referring to the Etihad strategy of picking up stakes in several airlines that include Virgin Australia, airberlin, Aer Lingus and Air Seychelles, Mr al-baker said: “We feel that joining a larger alliance serves the same purpose without those huge investments.” (See Etihad Airways on a roll picking up stakes in other airlines, Feb 4, 2014) Whatever the strategy, SIA is up against not one but three equally aggressive rivals from the same region.