The real battle behind Jetstar HK’s rejection

Courtesy Jetstar

Courtesy Jetstar

IT might well have been a technical inquiry. Jetstar Hong Kong (JHK)’s fate was hanging in the balance as the court debated the definition of “principal place of business” (PPB) which Cathay Pacific Airways and other airlines in the opposing camp so successfully narrowed down to as the sole criterion to decide Jetstar’s legitimacy. They contend that “the task before ATLA (Air Transport Licensing Authority) is the determination of whether JHK meets the PPB requirement now, and not whether 25 other airlines met that requirement at any point in the past.”

The objectors submitted that JHK does not have its principal place of business in Hong Kong, so granting it a licence to operate scheduled air services contravenes Article 134 of the Basic Law. If they had attempted to set the direction of the proceedings, they had succeeded, stating that “the common law meaning of PPB, i.e. that the PPB of an entity where the effective exercise of central and ultimate management control of the entity lies, is thus the intended meaning as it best suits the intended purpose of ensuring that only Hong Kong-based airline may be licensed by the HKSAR (Government of Hong Kong Special Administrative Region) authorities.”

It has been two years since JHK set up its intended base in Hong Kong, initially as a joint venture between Qantas and China Eastern Airlines. Cathay and other home-based airlines – Dragonair, Hong Kong Airlines and Hong Kong Express Airways – were quick to protest, and as it became clear that the PPB clause would be the hot issue of contention, local conglomerate Shun Tak Holdings came on board as the majority shareholder (51%), and its managing director Pansy Ho was named the new company’s chairman. The onus then rested on JHK’s shoulders to demonstrate how that composition, the control and decision making machinery as structured by it, would make the airline a Hong Kong company. JHK contends that it “has entered an arrangement with Jetstar Airways Pty Limited (JAPL) as licensor of the ‘Jetstar’ brand and as a service provider.”

In the end, ATLA decided that was not good enough. It said: “In determining whether the principal place of business of an applicant is in Hong Kong, the answer is not confined to where the day-to-day operations are conducted (but) its activities must not be subject to the control of senior management, shareholders or related parties located elsewhere.” It concluded: “The Panel is of the view that JHK cannot make its decisions independently from that of the two foreign shareholders. The Panel does not have to decide whether its nerve centre or whether its principal place of business is in Australia or the mainland China. The Panel needs only to determine whether JHK has its PPB in Hong Kong. We are of the view that it is not and therefore the PPB requirement is not satisfied.”

Naturally both Qantas CEO Alan Joyce and JHK CEO Edward Lau expressed disappointment at the outcome, but one wonders if they were at all surprised even though they had previously expressed confidence that ATLA would eventually approve JHK’s application. The thing is that technically the state of play is not theirs to win, for as much as Mr Lau insisting that “we genuinely believed that Hong Kong is Jetstar Hong Kong’s principal place of business.” JHK as a branch of the main Jetstar entity and Qantas’s vehicle to extend its market reach is more than just implied in the brand’s genesis, which the objectors made capital of, pointing out that “JHK is related to Qantas via Jetstar International Group Holdings Co. Lrd and through Qantas to JAPL.” They contend that it is all part of a Jetstar Pan-Asia Strategy “to create an integrated Jetstar network in which each Jetstar LCC will, far from operating independently, share aircraft, boarding, airport facilities and a further range of unspecified goods and services.” JHK’s rebuttal that JAPL, in spite of the relationship, is but an outsource partner was not convincing.

To some degree, JHK might have felt straitjacketed by the narrow scope for arguing its case. Mr Joyce said ATLA’s ruling was as disappointing for JHK shareholders as it was for travellers: “At a time when aviation markets across Asia are opening up, Hong Kong is going in the opposite direction. Given the importance of aviation to global commerce, shutting the door to new competition can only serve the vested interests already installed in that market.” That is an issue that the Hong Kong government may have to address separately, as a matter of policy unprejudiced by JHK’s application.

As a key aviation hub in the region, Hong Kong International Airport (HKIA) can only benefit from an open policy and more competition.  Throughout the proceedings were timely reminders of the importance of maintaining “the status of Hong Kong as a centre of international and regional aviation.”

However, Qantas had misread the apparent liberalised aviation landscape in Hong Kong, assuming it to be as open as, say, Singapore. When it once considered setting up an Asia-based premium carrier, Hong Kong was an attractive alternative because of the growing traffic from the China hinterland. Qantas had also failed to anticipate the strong opposition from OneWorld partner Cathay and compatriots, considering the relative ease that it had experienced in setting up the Jetstar brand in other locations such as Singapore, Vietnam and Japan. At some point, the advance is apt to draw awareness of the competition it poses.

Across the globe, entering into a joint venture with a local partner provides a convenient channel for a foreign carrier to gain a foothold in the local market, perhaps made easier if the partner were an airline, better still, the national flag carrier. In that connection, Shun Tak might have been viewed by the objectors as a potential local threat to come into its own riding on the back of more experienced operators.

Qantas might also have placed too much weight on the facilitation expected of a name like China Eastern. That became apparent when the court pointed out that “the Central People’s Government (of China) shall give the Government of the Hong Kong Special Administrative Region the authority to issue licences to airlines incorporated in the Hong Kong Special Administrative Region and having their principal place of business in Hong Kong.” It may even be suggested that the relative silence of both Shun Tak and China Eastern in the tussle could only project their passive roles but Qantas’s prime-mover position.

The technicality of Article 134 of the Basic Law as a moot point aside, it cannot be denied that  implicit in the objectors’ presentation is their concern of the competition posed by JHK. They contend that the joint venture aims “to deepen the Qantas Group presence in Asia-Pacific.” Refuting JHK’s claim of “the economic benefits which can be brought by the new airline and its contribution to maintaining Hong Kong as an international aviation hub,” the objectors insist that the Jetstar business model is designed “in the wider interests of all the Jetstar LCCs rather than JHK alone” and that all decisions pertaining to JHK’s operations such as capacity and aircraft purchases “are made with a view to maximising profitability for the Qantas Group.” They argued that through the Jetstar Pan-Asia Strategy, “Qantas is increasing the international competitiveness of a key Australian business by seeking to capitalise on the growth in demand for air travel services in Asia for its own benefit and ultimately the benefit of Australians.”

Indeed, Cathay’s early objection had hinged on the economic aspects of JHK’s proposition, which might have given JHK firmer ground to promote its application. Cathay insisted that unlike other Asian countries, the nature of the Hong Kong market is such that it has no real need of LCCs – that, in spite of the operations of Hong Kong Express and calls made by foreign budget carriers. Why would Cathay, already one of the world’s most successful and profitable carriers, be so threatened by JHK? It is apparent that the rivalry is more specific than general, the wariness of an expanding Jetstar network that is supporting an international competitor.

All’s fair in war as in love even as some observers hint at Cathay’s political sway. What next then for JHK? As at December last year, Qantas has invested some A$10 million (US$7.7 million) in the joint venture. JHK has already sold eight of its nine aircraft. Rather than accept ATLA’s decision as a natural demise of the unborn carrier, Mr Joyce has not ruled out appealing the decision. Consulting experts may already be working at more creative solutions to skirt round the technicality of the Basic Law. Or, as Qantas too had hinted, it might reconsider basing the low-cost carrier in Hong Kong, perhaps elsewhere but close enough where the real market screams loud to be served. No doubt a costly affair, it all depends on how much farther the shareholders are prepared to go.

And as the objectors hailed ATLA’s ruling as “the right decision for Hong Kong” with Cathay corporate affairs director James Tong reiterating that it “ensures that important Hong Kong economic assets, its air traffic rights, are used for the benefit of the people and the economy of Hong Kong,” proponents of more liberal aviation competition may begin to wonder to whom the real victory belongs.

This article was first published in Aspire Aviation.

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Jetstar Hong Kong confident its application to fly will take off

IT has been a long wait for Jetstar Hong Kong since its application, (See Jetstar Hong Kong’s long and costly wait to fly, Nov 21, 2014). Almost two years after its launch, the airline has yet to receive approval from the Hong Hong Kong authorities to fly. But Jetstar HK chief executive officer Edward Lau is confident that the approval will come eventually, now that the partnership has been expanded to include local conglomerate Shun Tak with its managing director Pansy Ho appointed to the chair. Jetstar HK was originally a partnership between Qantas and China Eastern Airlines. The question remains: When?

Courtesy Jetstar Hong Kong

Courtesy Jetstar Hong Kong

In an exclusive interview with Aspire Aviation, Mr Lau said Jetstar HK has been in close dialogue with the regulators. Asked about the objection by Hong Kong airlines, particularly Cathay Pacific, which is a full-service carrier while Jetstar HK is a budget operator, Mr Lau said this was expected “as we propose to bring a very competitive offering to the table.” He added: “Before the announcement of Jetstar Hong Kong’s arrival in March 2012, the existing Hong Kong airlines had no incentives to lower fares or offer low fare options to the Hong Kong travellers. Our arrival forces airlines already in Hong Kong to be more competitive.”

Central to the argument is how Jetstar HK’s entry would benefit the consumer. “The people of Hong Kong deserve a choice,” said Mr Lau, refuting Cathay’s insistence that Hong Kong does not have a market for budget travel. He countered:  “The average global LCC penetration rate is now claiming 27% and growing while in Hong Kong, low cost carriers account for only 8% of travel. There is much room for LCC to grow in Hong Kong.”

The comparison with other Asian markets, particularly Singapore, is inevitable. Mr Lau said: “Hong Kong has a population of 7 million and unlike other major Asian hubs like Singapore and Japan, does not have its own LCC. We see a great opportunity to bring the low fares revolution to Hong Kong. Singapore has a smaller population but has three local LCCs (Jetstar Asia, Tiger and Scoot). The airlines are successful and growing, alongside a large Full Service Airline and its regional subsidiary (Singapore Airlines/SilkAir). There is no reason why that shouldn’t also happen here in Hong Kong.”

So, granted the approval, what are Jetstar HK’s operating plans? Consumers can look forward to flying the airline’s short haul services to destinations within five hours of Hong Kong, in Southeast Asia, Japan, South Korea and Greater China. Jetstar Hong Kong will operate a fleet of Airbus A320-200 aircraft, configured for 180 passengers in a single class. Mr Lau said the carrier plans to grow to a fleet of 18 aircraft.

You can read the full text of my interview of Jetstar HK CEO Edward Lau on aspireaviation.com.

Qantas-China Eastern partnership: Dressing up an old arrangement

qf logocea logoQantas and China Eastern Airlines announced a new agreement that the airlines said will enlarge their existing codeshare arrangement signed in 2008 for a deeper level of commercial cooperation on flights between Australia and China. A statement issued by Qantas referred to the new relationship as a “joint venture”. In the application to the Australian Competition & Consumer Commission (ACCC), it was referenced as a “Joint Coordination Agreement”. Whatever the terminology, one wonders if this agreement is any different from the usual run-of-the-mill alliances that are not much more than a formal handshake.

There is the standard co-ordination and sharing of facilities such as airport lounges. A key feature is the co-location of both carriers’ operations within the same terminal at Shanghai International Airport. This reduces transit times by about an hour to facilitate a wider range of onward connections. Qantas CEO Alan Joyce said: “Coordination means the opportunity to improve schedules and connection times, and to deliver improved products such as a joint lounge and streamlined check-in facilities in Shanghai.” The Australian flag carrier is banking on more of its customers opting to fly to not only Shanghai but also beyond from there, in a region where it is much weaker compared to Asian carriers such as Cathay Pacific and Singapore Airlines (SIA).

Many codeshare partners are already making similar arrangements. Star Alliance airlines, for example, operate out of a dedicated terminal at London Heathrow. So what’s the big deal about the Qantas-China Eastern agreement which, subject to regulatory approval, will commence in the middle of next year and be effective for five years?

According to Qantas, the agreement is designed to complement the Qantas-Emirates partnership for Europe, Middle East and North Africa, and the Qantas-American partnership for the United States. That covers almost the whole world and makes Qantas truly a global airline. But to what avail? Interestingly, Qantas itself has limited operations to some of the regions. It operates to only London in Europe, Dubai in the Middle East, Johannesburg in Africa and Santiago in South America. The airline’s presence in North America is limited to Dallas/Fort Worth, New York, Los Angeles and Honolulu.aa logo

The Qantas-American agreement signed in 2011 is a codeshare arrangement for transpacific flights between the US and Australia to also include New Zealand. It does little more than what the global alliances, in this case OneWorld of which Qantas and American are members, have been set up to achieve. American does not operate to Australia.

emiratesThe Qantas-Emirates alliance caused a stir when it was announced in 2013 because of changes made to the traditional kangaroo route when Qantas shifted its operations hub from Singapore to Dubai. While Qantas is leveraging on Emirates’ extensive networks in Europe, the Middle East and Africa, it looked like the move was aimed at checking the competition posed by SIA. However, the real winner is not Qantas but Emirates, which is aggressively making inroads into the Asia-Pacific market. More than a year after, Qantas continues to make losses. It posted the biggest loss in its history of A$2.84 billion (US$2.66 billion) for the last financial year ending June 30.

How different from these other agreements is the new partnership between Qantas and China Eastern, and how will it play out for Qantas?cathay2

The flying kangaroo has long eyed the growing China market as a way to improve its bottom line. A partnership with a Chinese carrier makes sense for a quick and easy penetration into the large market in addition to its current daily service between Sydney and Shanghai. The agreement is also supposed to complement Qantas’ existing services to mainland China via Hong Kong, competing with Cathay Pacific and Dragonair. In its application to the ACCC, Qantas says it “does not consider the Hong Kong and Shanghai gateways to be mutually exclusive” the way that Dubai has replaced Singapore as the hub for its European flights. Quite clearly, Cathay which has a stake in Air China Cargo is a veritable rival to reckon. The rivalry has heightened in the Jetstar Hong Kong saga. China Eastern’s participation as partner in the budget joint venture does not seem to be able to do much to facilitate its application for approval to fly. After two years of its launch, approval is still pending.

siaThen there is SIA, the other competitor with a strong presence in the region, mentioned in the Qantas-China Eastern application to ACCC. Qantas notes how SIA’s subsidiaries Tigerair and Scoot are flying from Australia to Singapore with onward connections to China. As if pre-emptory to the new agreement, the existing Qantas-China Eastern codeshare already covers flights out of Singapore.

While Qantas will gain wider access across China, so will China Eastern within Australia. Passenger air services between Australia and China have been growing at an average rate of 11% for the four years to April 2014. In the past 12 months to June 2014, passenger numbers grew by 8%. In the application to ACCC, Qantas expresses fear of being “marginalised”. On its own, it says it “will not be able to keep pace with the capacity growth being driven by carriers such as China Southern and Sichuan Airlines.” ACCC will have to decide whether the case is about Qantas or Australia, notwithstanding the former`s status as the country`s flag carrier. Yet Qantas has argued that the proposed agreement is far from being anti-competitive, though clearly that fear has been exacerbated by the growing importance of Chinese carriers if only the competition could be limited to a single but partner airline, other strong regional carriers, and rival Virgin Australia’s reciprocity with Delta, Air New Zealand, Etihad and SIA in the wider network.

As with the American and Emirates alliances, the agreement with China Eastern once again is a case of Qantas needing its partner more than the other way round. The partners continue to retain their distinct identity vis-à-vis brand, product and pricing differences. Qantas runs the risk of its customers switching loyalty to its partner by the lure of lower fare, better facilities and services. Emirates, for example, may offer more than just a convenient hop from Dubai to other destinations for Qantas customers when it also competes on the kangaroo route. Before Emirates, there was speculation that Qantas might form the alliance with Cathay instead. That would make a formidable force, but Qantas would have faced the same risk. Besides, a partnership between giants is apt to be paved with problems unless the advantages to one partner are worth its compliance, if not silence.

Will China Eastern similarly flip the game for Qantas? The China carrier has much to gain. Qantas desperately seeking to check competition and new growth may find its prowess neutralized, dressing up an old arrangement.

This article was first published in Aspire Aviation.

Jetstar Hong Kong’s long and costly wait to fly

Courtesy Jetstar

Courtesy Jetstar


Twenty-one months after Qantas announced the birth of its fifth Jetstar venture in March 2012, initially in partnership with China Eastern Airlines, the airline (Jetstar Hong Kong) has yet to receive approval from the Hong Kong authorities to fly. No doubt it is a costly affair waiting, with three remaining Airbus A320 aircraft sitting in Toulouse after six of the orders have since been sold. But prime mover Qantas is confident that Jetstar HK will eventually take to the sky, expecting its case to be heard some time next year although no firm date has been set.

Qantas chief executive Alan Joyce said: “We are confident that Jetstar Hong Kong’s case is solid for the approvals. The process has taken longer than anyone expected, it’s taken longer than any jurisdiction hat we’ve seen in the world, but this is going to be a good business venture which we believe will make good profits.”

If you detect any hint of frustration at the lumbering approval process, you may be right. Yet could you blame Mr Joyce for running out of patience? Indeed it is surprising that Hong Kong as a thriving air hub is taking so long to reach a decision.

Cathay’s objection

Courtesy AIRBUS

Courtesy AIRBUS

It is widely believed that Cathay Pacific’s objection to Jetstar HK is in no small way attributive to the delay. Cathay remained confident that the Hong Kong authorities would not rule in favour of the budget carrier, the argument being that it is foreign controlled, effectively from Australia. That runs contrary to Hong Kong law. In a move to make the carrier more Hong Kong in character, Qantas and China Eastern inducted a third local partner, Shun Tak, whose managing director Pansy Ho assumed appointment as Jetstar HK chairman. Shun Tak would have the majority 51 per cent shareholder voting rights, reducing that of the other partners to 24.5 per cent each. Presumably the authorities will now have to decide whether that is enough, notwithstanding Mr Joyce now saying that the new airline is more local than Hong Kong’s other airlines.

But is there a bigger issue than one about ownership, which by its legality should be indisputable? Right from the beginning, Cathay has made its objection heard, arguing that such a business model does not have a place in Hong Kong. While many of its rivals such as Singapore Airlines (SIA) and Japan Airlines besides Qantas have spawned budget offshoots, Cathay has pooh-poohed the idea. Cathay may deny it, but its opposition to Jetstar HK is an issue of competition. Though in name a budget carrier, Jetstar HK backed by strong parents with international connections will compete with not only Dragonair but also Cathay, the same pressure that other mainstream airlines such as SIA, Air France and Lufthansa are already experiencing. The likes of Ryanair and easyJet in Europe, Southwest and JetBlue in the United States, and AirAsia and Jetstar in Asia are the new threat to the legacy business as the global economy continues to flounder. The market has become that less clearly demarcated.

Is there a case for Jetstar HK?

To say that budget carriers cannot thrive in Hong Kong is a supposition without much experiential evidence to support it. With the large China market at its doorstep, the potential cannot be overplayed. By comparison, the growth of budget traffic outstrips that of full service traffic in Singapore; the low-cost business makes up 30 per cent of Changi’s throughput. It is higher in Indonesia and India. Asia in particular has seen an increased number of budget carriers in recent years to cater to the growing number of travellers responding to the offer of affordable fares. It is no exception that Cathay together with Dragonair which account for almost half the seats sold out of Hong Kong will want to protect their dominant market share.

So, are Hong Kong air travellers worse off than their counterparts in the region, being denied cheaper alternatives? Jetstar group chief executive Jayne Hrdlicka would like to think so. She said: “The travelling public in Hong Jong have clearly signalled that they are fed up with paying high fares relative to their colleagues around the region.” That at best is an assumption, though not entirely baseless. At the same time it does not mean Cathay and Dragonair will immediately lose chunks of their business to Jetstar.

The onus on Jetstar HK is to show that its entry will not diminish the market size but will instead generate an increase in demand for seats, something that all airport authorities like to hear. Almost always that is the wistful thinking that goads airports to open their doors to more carriers. Then there are the arguments for competition to grow the airport. Hong Kong cannot be the air hub it is today without the competition.

Qantas CEO Alan Joyce/Photo courtesy bloomberg.com

Qantas CEO Alan Joyce/Photo courtesy bloomberg.com

Lest anyone thinks that Jetstar HK would not survive the competition even if given the go-ahead, Mr Joyce cited the success of Singapore-based Jetstar Asia, which had been profitable in the four years before last year. Even though it lost S$40m (US$32m) last year, it outperformed SIA’s Tigerair which lost S$200m. The losses were the result of market overcapacity. However, with Tigerair cutting back, Mr Joyce said: “We see a path through for that business to go back into profit like it was in the previous four years. I’m comfortable it will get there.” Now, is not excess capacity the very apprehension of Cathay and Dragonair? Indeed, many airlines are returning to profitability on the back of reduced capacity, the short supply helping to hold up airfares. It is equally valid to ask if Hong Kong as a major regional hub airport is already facing that issue.

At some point Jetstar HK partners will have to reflect on the worthiness of waiting indefinitely for the sanction to fly. No pun intended, if you think of sanction’s other meaning of being punitive. Questions are being asked if Qantas was putting in money chasing a rainbow that seems too far out of reach. And one is apt to ask too: Is the prolonged delay intended to allow time to resolve the issue, one possibility being a stillbirth?

This article was first published in Aspire Aviation.

The times they are a-changing: Singapore Airlines may reintroduce executive economy

Photo courtesy Singapore Airlines

Photo courtesy Singapore Airlines

THE word goes round that Singapore Airlines (SIA) may be introducing premium economy, or rather reintroducing executive economy, pending the outcome of a secret study. Ever since the Singapore flag carrier did away with the short-lived though allegedly popular executive economy on its non-stop services from Singapore to New York and to Los Angeles when they were converted into exclusive all-business class flights, SIA has been adamant about not going down that road again. The non-stop services to New York and Los Angeles have ceased operating since the end of last year.

However, any turnabout if it happens should not be a surprise. One cannot turn a blind eye to the reality of the changing business landscape, and certainly SIA cannot ignore the apparent success of rival Cathay Pacific’s premium economy. It is quite normal for any business entity, and a visionary one at that, to change course to stay in the competition.

So it was when SIA turned its nose up on the budget travel business, challenged by Singapore’s first budget carrier Valuair which was founded in 2004 by no other than former SIA chairman Lim Chin Beng who together with predecessor J Y Pillay were largely credited for the airline’s astronomical growth in its early days and its reputation as one of the world’s best loved airlines, ranking it amongst the industry’s top earners. Today SIA is a majority stakeholder of Tigerair besides its wholly owned budget subsidiary Scoot. The threat posed by budget carriers has all but broken down the belief that they were different and exclusive markets for legacy and budget operators. SIA could not remain outside the circle when Qantas set up Jetstar Asia based in Singapore itself and as Malaysian carrier AirAsia spread its wings across the region. It could even be said to be a late starter.

When the business class first emerged in Europe, Swissair which was in many ways like SIA having earned the reputation for efficiency and good service, and which some observers might even suggest was an early model that SIA might have tried to emulate, similarly rejected the concept. But it changed its tune when the trend became entrenched. The national carrier of Switzerland ceased operations in 2002, and today’s Swiss International Air Lines is a subsidiary of the Lufthansa Group.

Whether SIA will eventually put premium economy on its flights will depend on how it perceives air travel will trend as befitting its modus operandi and situation of time and place. It would be unfair to suggest that SIA should ape Cathay, in the same way that Cathay cannot be faulted for not jumping on the budget travel bandwagon – at least not for now – although it has expressed dissatisfaction that Qantas and China Eastern Airlines should be given the licence to jointly operate Jetstar Hong Kong in spite of its insistence that Hong Kong cannot sustain budget operations.

Timing has plenty to do with Cathay’s successful implementation of its premium economy. As the global economy continues to wallow in uncertainty but with some signs of recovery, Cathay is catering to hitherto business class travellers who may otherwise downgrade to economy for not wanting to spend as much and to those economy class travellers who may want a better product but are not willing to pay that much more for business class. Yet Cathay is not the only airline that has introduced this sub-class of travel. EVA Air pioneered this in the 1990s on a very limited basis. The difference is that Cathay has made premium economy a different product – and a class of its own – rather than one that is only marginally better more in name than in the actual product that could be nothing more than just slightly wider seats further up front, orange juice served in glasses instead of plastic cups, and on the ground priority check-in and boarding. In a way, Cathay makes the difference visible, something that we can expect SIA to match or do better if it decides to go down that road.

As a leading premium carrier making about 40% or more of its profits from the upper classes of travel, SIA has been banking on the good times returning when the premium economy may well become redundant. The downside is that if premium economy is proven to be too good, it can grow at the expense of the business class and impact the overall yield negatively over the long term. For an airline that wows in the upper classes and provides an adequately impressive economy class service, this may result in dilution and compromises across the classes that will narrow the differentiation so critical in the sale pitch. The question is whether SIA can afford to wait – or has it already waited too long – to see how the landscape pans out while the rest of the industry moves in the direction of premium economy. Historically, the business class has replaced the first class for some airlines and for some routes even for those which generally offer a three-class configuration.

Geographically, there is a place issue. The premium economy is a more likely product for the long-haul routes. It may make sense for an airline like SIA which is largely a long-haul operator although the recent global economic crisis has increased its focus on the mid-range Asian market. With the competition intensifying between Changi Airport and Dubai International Airport for the Europe run, and between Changi Airport and Hong Kong International Airport as an Asian gateway for trans-Pacific traffic, SIA’s modus operandi in this connection may to some extent depend on the fortune of Changi as a hub airport, noting that Changi has in recent years been seeing higher growth presented by budget carriers than by legacy airlines. SIA’s cessation of its non-stop flights to New York and to Los Angeles may be a case in point.

In the end, it all boils down SIA;s vision of the kind of airline it will be in the years ahead against a constantly changing landscape. It seems a superfluous question, but it is a necessary soul-searching exercise. As the airline prepares to announce its full year result ending March 31, with little to celebrate judging by the penultimate quarter performance and the slow take-up in the closing months, SIA may yet excite with announcement of new initiatives moving forward. One of these could be the re-introduction of its executive economy

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.

A hub airport needs a strong home-base carrier – but does it really?

Courtesy Cathay Pacific

Courtesy Cathay Pacific

INCOMING Cathay Pacific Chief Operating Officer Rupert Hogg who will be taking up his new position in March loses no time in marking his presence as one with a voice and views to be heard. At a recent meeting in Vancouver, Canada with officials from Vancouver International Airport (VIA), he offered a piece of advice that might not sit too well with his host but certainly something that Air Canada in its battle to check VIA’s enthusiasm to open its doors to foreign carriers willy-nilly might use to support its case.

Mr Hogg emphasized the need of a strong home-base airline to anchor an airport’s hub operations. He said: “Only a home-base carrier has the wherewithal to create the banks of incoming flights and make them connect to the banks of outgoing flights.”

There is much truth in Mr Hogg’s statement. No one, including Mr Hogg, can resist citing the opposing fate of Dubai and Bahrain as an example. Both airports are quite on par in terms of an advantageous geographical location and the capability to provide good facilities, but Bahrain today is unable to achieve the kind of success that Dubai is enjoying because it lacks a strong home-base carrier like Dubai’s Emirates Airlines. Gulf Air, once the leading airline of the Middle East and which was expanding rapidly in the ‘80s and becoming the first airline from the region to fly to Australia, has succumbed to the competition posed largely by rival Emirates and by other younger airlines such as Etihad Airways (Abu Dhabi) and Qatar Airways (Doha). Gulf Air has since ceased operations to major airports such as Singapore, Hong Kong and Sydney. So too spelt the decline of Bahrain as a major Middle East hub.

There is more to the story of the decline of Bahrain, which did enjoy brisk business in its early days when Dubai and Emirates were relatively little known; it became badly affected when new jets plying the kangaroo and east-west routes no longer needed a technical stop in a city that offered little else and their operators preferred airports in Asian cities such as Bangkok and Singapore. Bangkok offered the shortest route from Sydney to European cities and the additional attraction as a touristy stopover, and Singapore topped the efficiency table for best connectivity and the lowest probability of a costly disruption.

Courtesy Cathay Pacific

Courtesy Cathay Pacific

But Mr Hogg’s advice to VIA, as it appeared to be intended, might be incidental. He was actually talking about Cathay Pacific and Hong Kong International Airport (HKIA), and their symbiotic relationship. Mr Hogg cited the synonymous growth of both Cathay and HKIA in support of his argument. Similarly, as another example, we can look at the relationship between Singapore Airlines (SIA) and Singapore Changi Airport. In fact, in many of the recent surveys such as those conducted by Skytrax, the awards for the best airline and for the best airport seem to go hand-in-hand: SIA/Changi, Cathay/HKIA, Asiana/Incheon and Emirates/Dubai amongst them. Indeed, it is difficult to imagine London Heathrow without British Airways, Frankfurt without Lufthansa, Sydney without Qantas, Tokyo Narita without Japan Airlines or All Nippon Airways, and major American hubs without the spoke patterns of resident American airlines.

Mr Hogg’s argument may therefore come across as being self-serving in the interest of Cathay, which has protested Qantas setting up Jetstar Hong Kong jointly with China Eastern Airlines and a local company. In that respect, his view is one-sided, to think that it is the airline that grows the airport (and not the other way round) although one definitely cannot deny the airline’s contribution to an airport’s success. The question is: Does an airport similarly contribute to the success of its home-base airline (or for that matter a visiting airline)? More specifically, how much of Cathay’s success can be attributed to HKIA’s positioning (and for the sake of comparison that of SIA to Changi’s)?

Mr Hogg said: “As you can see in the case of Dubai, you need geographical location, but if you don’t have a successful home-base carrier, you have nothing,”

Those were strong words, which led us to the next question: Can an airport and its home-base airline succeed independently or one without the other?

While geography is not everything, it cannot be denied that it is an important factor. Mr Hogg would not refute that, as he did say that airports and airlines must leverage their geographical advantages. But as the world shrinks with technological advances, this importance can shift, as when Bahrain lost its geographical advantage with the introduction of modern jets that allows airlines to overfly it. In the same way, Mr Hogg did not think that SIA poses a threat to Cathay in the North American market. He reasoned: “If you look at the Great Circle Route, Hong Kong is directly on the route. The reality is, with current technology, Singapore is too far south to effectively serve North America. If you are travelling to India, you are not going to go all the way south, then come back up north to Delhi.”

Changi has often been cited for its geographical advantage over its regional rivals, and no doubt this advantage has contributed to SIA’s success. But the lesson of Bahrain continues to hold true, in yet another example when Qantas decided to move its hub for European flights from Changi to Dubai. So Mr Hogg was right here to think that geography is not everything but a starter’s advantage. Qantas’ exit from Changi has more to do with a shift in marketing strategy. So in the same way, hypothetically, can SIA do a Qantas on Cathay in the case of Indian traffic, even though logically the shorter flight distance favours Hong Kong but not that much more considering the close proximity of HKIA and Changi to each other?

Indeed, Cathay should be grateful for HKIA’s growing popularity as an Asian gateway, advantaged by its location at the doorstep of the huge Chinese market. That, while not denying Cathay’s contribution, Mr Hogg might accede, has to do with geography too.

We have come round a full circle to recognizing that Mr Hogg’s view cannot be viewed as the definitive scenario of things to come. At best, it was pre-emptive. In spite of the setback caused by the Qantas rerouting of its kangaroo runs, Changi continues to register higher passenger volumes. In 2013, it handled a record 53.7 million passengers, an increase of 5.0% attributed to growth in regional travel, fuelled particularly by the burgeoning budget business. As a hub airport, it is confronted by growth issues of the airport per se vis-à-vis the interest of its home-base carrier. So it is with HKIA and VIA. Changi boasts an open skies policy that may intensify the competition for SIA. HKIA will face the pressure of allowing more airlines to call at its port in view of its proximity to the growing market of the Chinese hinterland and its promotion as an alternative Asian gateway, but this has disturbed Cathay somewhat. VIA sees its future in connecting with more Asian carriers across the Pacific, positioning itself as the western gateway to the rest of North America, the initiative meeting with objection from Air Canada. How then will the airlines figure in their growth plans?

Although it was in Vancouver that Mr Hogg spoke, his message to HKIA on Cathay’s position is clear. His view was hardly a new one, but it was a timely reminder of how as the competition among hub airports and that among airlines begin to move divergently, the concerned parties may increasingly lock horns over whose interests are more important.