Qantas gives premium economy a boost

Courtesy Qantas

Premium economy is slowly coming into its own as airlines such as Cathay Pacific Airways and Qantas that have introduced the sub-class to retain down-graders and lure up-graders move to add more differentiating features.

Qantas for one has announced it would extend the Select on Q-Eat feature of the upper classes to premium economy. This allows passengers to pre-order their meal prior to flying, anytime between 7 days and 12 hours prior to departure, and take advantage of choices that are available only on-line. The feature will be introduced on all international flights progressively.

Qantas Executive Manager International Customer Experience Alison Webster said: “Our aim is to provide our customers with a personalised experience when they fly with us.” She added, “The Select on Q-Eat offering in Business has been very well received since its introduction last year. Our customers tell us they enjoy the ability to confirm their meal choice prior to their flight, or to advise us in advance that their priority is to maximise their rest on board, and have their bed made up by our Cabin Crew directly after take-off.”

Courtesy AIRBUS

For premium economy to grow in demand, it has to be more than just a few rows of seats ahead of the normal economy class and a more generous checked baggage allowance. It makes sense that airlines will begin to pay this a little more attention for the higher yield that it brings, if the Cathay experience is a yardstick of success. The Hong Kong-based airline said premium economy “is growing in popularity with passengers and has helped to improve economy class yield.” Passenger yield for the first half of the year has increased by 4.4 per cent, and Cathay has plans to introduce premium economy on 85 aircraft by the end of the year, presently available on 68 of them.

That raises yet again a question that has interested aviation watchers for a long time: Will regional and international rival Singapore Airlines (SIA) change its mind and a similar premium economy class? Think it this way: Will SIA instead introduce its own version of “Select SQ-Eat” for economy class? How’s that for competition?

Plunging Cathay profits: What went wrong?

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.

Air Canada introduces premium economy: Is the trend finally catching on?

Photo courtesy Air Canada

IS the premium economy trend slowly catching on? Air Canada becomes the latest airline to announce its introduction as “a new class of travel”, starting with the Montreal-Paris non-stop in July 2013. New, perhaps for the Canadian carrier, but not quite globally.

EVA Air of Taiwan was one of the first carriers to introduce the premium economy, when it launched its operations in 1991. There was a limited number of seats, that boasted more legroom. Since then, a number of airlines have dabbled with the idea and more of them started to introduce an expanded “middle” class particularly when it became clear that the global financial ciriss has taken a toll on business (and first) class travel.

The concept has taken on an international dimension, with many major airlines pushing the trend. They include British Airways, Virgin Atlantic, Air France, United Airlines, American Airlines, Delta Airlines, Cathay Pacific Airways, Japan Airlines, All Nippon Airways, Qantas and Air New Zealand.

There are noticable exceptions. Singapore Airlines introduced the class on non-stop flights between Singapore and Los Angeles but did away with it when it upgraded the flights to an all-business class configuration. Since then the airline has insisted that it has no plans to revisit the concept anywhere in its network. Some analysts think it may be a mistake for SIA to not go with the flow as it banks upon recovery of the business class traffic.

Noticeably too, one may wonder why there is no premium economy on Emirates Airlines which may have prided itself as providing an economy class that is as good as any other airline’s premium economy. In the same way, one may ask: Do you fly legacy economy or budget business class?

Indeed, what makes the premium economy any better than the normal economy? The early model was not that much visibly different, and that probably explained why it was slow in catching on.

Air Canada offers:

• priority check-in with personalized service. It is not clear what “personalized service” entails, but priority check-in can assuage the nerves if the line for the normal economy means an inordinately long wait.
• priority boarding. It means getting to your seat before others and assessing the overhead compartment for your hand luggage before space runs out.
• priority baggage handling, which entails up to two free pieces of checked baggage and amonmg-the-first placement on the arrival belt. While Air Canada restricts free carriage to only one piece for economy, many other airlines such as Cathay, SIA and Emirates still allow up to two pieces (or equivalent). First on the arrival belt? There is no guranatee; much depends on what happens at the airport where you arrive. Reputable Asian airports such as Hong Kong and even Beijing are known for speedy delivery of arriving baggage even for economy, whereas many airports in the west have questionable standards even for priority-tagged baggage.
• wider cabin seat with more recline and legroom. This has been the main selling point for premium economy, offering more comfort for the long-haul. Increasingly, airlines are competing on the comfort factor even for economy.
• a larger screen for in-flight entertainment. This is a good-to-have but not critical feature, especially when you may prefer to squeeze in some hours of sleep and good only if the airline offers a wide range of programs.
• power outlet at the seat for electronic gadgets. Many travellers are already powering their gadgets with portable battery.
• premium meal service served on china dishware with complimentary wine and spirits. Does it really matter the kind of dishware? If you do not know, you get complimentary wine with meals in economy on Air Canada, perhaps not the premium brand.
• hot towel service. No big deal. SIA hands out hot towels in economy as well.
• a larger pillow. Some people do not need pillows. You can get two in economy if you are resourceful enough.
• a handy amenity kit. Some airlines such as Qantas and Cathay boast brand-name amenity kits for their premium economy passengers. You will find even business class passengers leaving behind the kits on disembarkation.
• earn higher mileage. This may be the best deal, depending on how generous is the specific airline’s frequent flyer program.

For the premium economy to sell, downgraders from business and upgraders from economy must be adequately tempted with visible advantages to make the trade-off vis-à-vis the cost, whether it is saving on the otherwise higher fare or paying the difference additionally. As the name suggests, premium economy is more an economy than a business class product. Thisa could be the reason why airlines such as SIA and Emirates probably prefer to market a superior economy and at the same time not be detracted from the truly premium product of the upper classes.

 But it may all be a case of nomenclature. The early days of the business class was really an upgrade of the economy status. Swissair (the predecessor of Swiss International) swore it would not bow to the fad, believing there was no room for a three-class configuration. But it did in the end. In the same way, today’s premium economy looks set to take on an exclusivity of its own, though it is unlikely to evovle to the same degree as the business class which, for some airlines, has in fact replaced the first class product. Quite on the contrary, carriers that susbcribe to the concept may be compelled to do even more for their business class to maintain an enviable difference.

Air Canada and WestJet shake up Canadian skies

THE usual lack of excitement in the Canadian aviation scene is about to change.

Air Canada launches budget carrier Rouge

Courtesy Air Canada

Air Canada’s new low-cost carrier Rouge will take to the skies in July next year. It will start with two Boeing 767s and two Airbus A319s, flying initially from Toronto and Montreal to leisure destinations in Europe and the Caribbean, with plans to expand the fleet to 50 aircraft eventually and to also fly to destinations in Asia.

In a way, Air Canada is re-attempting to do what it failed to achieve with previous budget projects Tango and Zip. The appointment of former chief executive of Thomas Cook North America Michael Friisdahl with expertise in the leisure industry to head the new carrier may be a plus.

Cost is obviously the key driver of the strategy, and Air Canada expects cost savings to be derived 50/50 from lower wages and staff benefits and from the high-density aircraft configuration. Having an independent budget offshoot makes it easier to start with a lower base of staff costs and focus on the price-sensitive niche leisure market. There will be 20 per cent more seats on Rouge than the normal configuration.

For some time now, Air Canada has been struggling with costs and red ink. It faces stiff competition from key rival WestJet and other leisure operators such as Transat A.T. and Sunwing that offer much lower fares. Increasingly, airlines are ditching a one-size-fits-all modus operandi for a separate and more focused niche market strategy.

WestJet launches regional carrier WestJet Encore

Courtesy Wikipedia Commons

WestJet for one is launching a new regional carrier WestJet Encore in the second half next year. The new carrier will offer fares up to 50 per cent lower than normal for short hauls, in direct competition with Air Canada Express. WestJet CEO Gregg Saresky does not anticipate a price war, as he prefers to call it a process of “rational pricing”. It is ironical that short haul flights should cost as much as they are now. Mr Gregg told analysts at a recent briefing: “If you’ve ever tried to buy tickets for a short-haul journey in Canada, you’ve had to open your wallet and dig deep. Short-haul fares in Canada are very, very high.”

Apparently Air Canada president Calin Rovinescu had anticipated WestJet’s regional initiative. A price war it is that has begun and is expected to intensify. Both airlines are looking to expand their network to cover outlying business communities, for example, in the oil exploration region.

WestJet Saresky hoped that by lowering fares, travellers would fly more often and there would be new customers. He said: “When we lower the fares, it’s not carrying the same people at lower fares. It’s lowering the fares so that we can make the market expand.”

WestJet reported a stellar Q3 performance with profit increasing 80 per cent to C$70.6m (US$71.2m). Higher load factors more than made up for the rise in fuel prices. According to Mr Saresky, fuel makes up a third of WestJet’s operating expenses.

Air Canada WestJet plan premium economy

The premium economy concept has been somewhat of an uncertain development in the industry. Not many airlines are quick to embrace it, and Canadian carrers may be said to be latecomers in the game. But really the increased segmentation within the legacy configuration is a reflection of the uncertain demand for premium seats. Is the premium economy an enticement for upgrading, or a safety net to catch any fallout from the upper class – whether intra or inter-airline? At worst, it may be deemed hedging in an uncertain market; at best, a competitive edge in offering options and alternatives amidst the uncertainty.

Air Canada plans to introduce the new in-between class on its new Boeing 777s next year and on its 787 Dreamliners which are expected to join its fleet in 2014.Its Asian competitors such as Cathay Pacific Airways and EVA Air are already in the game. WestJet also has plans to introduce its version of the premium economy next year. Both Canadian airlines are eyeing the growing Canadian business travel market.

Travellers should benefit from an active competition between Air Canada and WestJet, but do not expect drastic differences. The two airlines are apt to stay close to each other’s range. The real competition will play out beyond Canadian borders when Air Canada commences Rouge operations. Budget long haul is not a tested concept although one-hop sun destinations are likely to prove popular. The good news is that analysts are optimistic about Rouge turning in a profit even in its first year. But will this be at the expense of the parent airline’s performance?

Profits plunge 61% but Cathay Pacific remains optimistic

AFTER a record year in 2010, Cathay Pacific Airways’ profit plunged 60.8% to HK$5,501 million (US$710 million) in 2011, from HK$14,048 million. This was recorded on a turnover of HK$98,406 million, up 9.9% from $89,524 million.

It is the same woes as faced by other airlines, blaming the instability and uncertainty in the global economy, aggravated by 44.1% increase in fuel costs amounting to HK$12,455 million. The year’s performance was also affected by natural disasters in Japan and Thailand as well as the political unrest in the Middle East. Both Cathay and subsidiary Dragonair carried a total of 27.6 million passengers, up 2.9%, garnering passenger revenue of HK$67,778 million, an increase of 14.2%. This was against a capacity increase of 9.2%, resulting in a fall of load factor by 3.0 percentage points.

Cargo business suffered from a decline in the Chinese (both Hong Kong and mainland China) export market, with revenue increasing by 0.3% against a capacity increase of 6.9%, resulting in a fall in load factor by 8.5 percentage points to 67.2%.While recognizing the likelihood of the economic uncertainties persisting, Cathay remains cautiously optimistic, encouraged by an apparently strong demand for premium class travel. Cathay chairman Christopher Pratt said: “We faced a number of major challenges in 2011 and we are still operating in a very challenging environment, particularly for our cargo business. However, the Cathay Pacific Group has a clear strategic focus and we are moving ahead with a number of initiatives that will make our airlines stronger and provide a better experience for our customers.”

Those initiatives include the delivery of 19 new aircraft in 2012, the introduction of a new premium economy class product, new long-haul economy class and business class seats, improved lounge facilities, and a new cargo terminal in Hong Kong scheduled to open in early 2013.

The fall in Cathay’s profitability did not come as a surprise, following on the heel of similar reduced profitability (or losses) reported by rival airlines such as Singapore Airlines (SIA), Qantas and Malaysia Airlines. The near-term competition would test the different strategies adopted by various airlines to take on the challenges of the time.

Both Cathay and SIA are banking on the growth of the premium market. Malaysia Airlines and Qantas mull over cutting back on capacity, something that is likely to happen with Cathay and SIA which are acquiring new aircraft that will expand their fleet. SIA is launching a medium range budget carrier named Scoot to protect and grow its low-end business while the parent airline focuses on the higher yield premium market. Cathay is already reporting healthy forward booking for its premium economy class, a concept which SIA has decided is not the right strategy for its operations.

Meantime, Qantas is reviving its dream of an Asia-based premium carrier, the plans for which had been plagued by labor problems at home and abortive talks with possible partners last known to be Malaysia Airlines. There is rumor that both parties are back at the negotiating table, but few observers are ready to bet their last dollar on any sign of a fruitful development at this stage.

In these uncertain economic times, it is not unexpected that the players will flip-flop somewhat, yet ironically it is a time that demands a more focused view of the future to move ahead. It is a gamble. And, of course, it helps when backed by a strong balance sheet.

American Airlines joins upper economy class competition, Singapore Airlines will not fly premium economy

AMERICAN AIRLINES calls it Main Cabin Extra, but it is really a move towards an upper economy class differentiation. The seats in this cabin – installed in its Boeing 777-300ERS aircraft – will boast an extra four to six inches of extra leg room over a regular economy seat. The comfort comes at a price of between US$8 and $108 additional per flight segment. For that extra cost, passengers will be accorded priority boarding.

American’s move is to be expected, after United-Continental’s earlier announcement of Economy Plus seats on long haul flights from Newark to Europe. Delta is also in the process of introducing the upgraded product.

This trend has gained more attention since Cathay Pacific Airways started selling premium economy seats for flights taking off April 1 between Hong Kong and the destinations of Sydney, Toronto, Vancouver and New York. London will be added in May.

However, Singapore Airlines (SIA) which is widely reputed for its premium class service is not convinced that this too is the way for it to go. In a post by Aspire Aviation (Mar 8, 2012), an SIA spokesperson was quoted as saying, “We do study the concept of Premium Economy from time to time, SIA but we have determined that it is not something that we will introduce at this stage.” It looks like the airline would not be distracted from the true-blue premium market.

In the present economic climate, the demand for premium travel has weakened somewhat. There has been a fair amount of seat substitution as travelers downgrade for cheaper alternatives, resulting in the growth of economy travel at the expense of premium travel which is largely hurt by the weaker demand within Europe and from Europe to Asia. Airlines are banking on an upper economy product to capture not only downgraders but also travellers who may want something better than the regular economy product but are not prepared to pay premium class fares.

Will SIA lose market share if more airlines, especially its close rivals, go that way?

The truth is that premium economy has been around for a while without stirring nary a storm even in a teacup. Except for a small measure of additional leg room, it is still very much an economy class product (and the tag that is being used even until today is unfortunate). In fact, full-fare paying economy class passengers of most airlines stand a good chance of being offered these seats gratis sort of. American Airlines has said certain frequent flyers and passengers who pay a full economy fare will receive the Main Cabin Extra product free.

However, if there is one factor that could give the upper economy concept a more vigorous boost, it is how the prolonged sluggish economy has changed travel habits and preferences. And Cathay more than any other airline is likely to set a new benchmark for the product and bring it to the next level. Unless it holds its own as a unique permanent feature and not just as a stop gap alternative between now and when the good times roll back, SIA may be wiser biding its time.

Singapore Airlines’ FY2011/12 unlikely to thrill

IN January 2012, Singapore Airlines recorded 2.9% year-on-year growth in system-wide passenger carriage (measured in revenue passenger kilometres) while capacity (measured in available seat kilometres) grew by 4.2%. As a result, passenger load factor declined by 1.0 percentage point to 78.1%. The number of passengers carried rose by 3.2% over the same month the previous year to 1.44 million.

Overall cargo traffic improved by 12.5% (measured in freight tonne kilometres) while cargo capacity increased by 10.1%. This led to an improvement in cargo load factor of 1.3 percentage points.

This should be an encouraging sign following the FY2011/12Q3 results of a 64% dive in operating profit for the airline to S$137 million (US$108 million) from S$378 million for the same quarter in the previous year, largely because of the high jet fuel cost that rose 34% or by S$316 million. Fuel accounted for about 40% of operating expenditure.

Subsidiaries SilkAir and SIA Cargo also showed a decline in operating profit, respectively by 29% from S$45 million to S$32 million and by 17% from S$48 million to S$40 million.

But is the improved January result a strong enough sign of a stronger Q4 performance to make up for the cumulative decline in net Group profit of the first three quarters, falling 59% from S$921 million to S$374 million? It would seem a long shot, especially when the current quarter is traditionally not its strongest, and in light of no clear signs of a relenting fuel price and a global economy that is finally firmly back on its feet.

Comparing the numbers with the preceding quarter may provide some clue about the trend. The 1.444 million passengers handled in January are still lower than the average 1.452 million passengers in the previous quarter though the difference is insignificant. This is however compensated by an improved performance in terms of revenue passenger kilometres of 1.4% – 7,499.4 million in January compared to the monthly 3Q average of 7,395.1 million. Overall, the trend looks flat in the near term.

The outlook is not a rosy one. SIA has said forward bookings continue to show signs of weakness in Q4. The airline has been particularly affected by the protracted Eurozone debt crisis – passenger load factor (PLF) for Europe fell 3.5 points to 77.8% in January. PLF for the Americas came down 2.9 points to 77.3%. The only region that showed a reasonable PLF growth is East Asia that saw an improvement of 1.5 points to 73.4%. This is expected to improve with renewed increased services to Japan.

In the present climate, managing capacity to be more in tune with market demand will have to be a top priority. The airline has terminated services to Kuwait and reduced frequencies to Riyadh and Cairo. It had also announced plans to cut back on flights to Istanbul, Dubai and Taipei.

In this connection, SIA Cargo too announced a 20% reduction in freighter capacity, citing the continuing weakness in demand and high fuel prices as reasons. In a statement it issued on 22 February, SIA Cargo President Tan Kai Ping said: “The air cargo market has shown weakness for the past nine months, and the depressed demand that we are seeing across all markets gives us little reason to be optimistic about the near-term outlook.” He did not expect any improvement in the first half of the year.

However, the mood is predominantly one of caution with hardly any excitement in the offing. SIA faces stiff competition from low-cost carriers which have captured a sizeable 25% market share at Singapore Changi Airport but the airline is likely to continue to bank on its premium class, which accounts for some 40% of its passenger revenue, for its next big leap. The early optimism about a healthy return of the premium traffic has been somewhat dampened by the stagnant yields in Q3. Against reports by industry sources of the poor load of its A380 Suite, SIA admitted that loads in the Suites have come under pressure as a result of the challenging economic conditions.

While the airline has adjusted capacity to better match demand in recent economic downturns, it firmly believes “there will always be a market for premium travel.” And it is not convinced – not yet, at least – that the premium economy which rival Cathay Pacific Airways has introduced is the way to go. “We do study the concept of Premium Economy from time to time,” said SIA spokesperson, “but we have determined that it is not something that we will introduce at this stage.”

Australian flag carrier Qantas has also embarked on a cost-restructuring programme to keep the flying kangaroo in the air, its immediate priority being a move to cut capital expenditure by A$700 million over the next two years, and considered the delayed delivery of the first three of 15 Boeing 787-8 (Dreamliner) as a blessing in disguise. However, SIA, which is blessed with a strong balance sheet, is less edgy in this connection. The airline has 20 Airbus 350-900s on firm order, scheduled for delivery starting from FY2013/2014, and is in talks with Boeing on the delivery schedule for 20 firm order of the B787-9.

The airline is planning ahead. It has said it is in the business for the long term. Indeed, we have seen how quickly some airlines without that stamina to hold out fall by the wayside. FY2011/12 may not turn out to be as promising as it once was expected to be, and the game belongs to those who can see far enough.

United-Continental offers premium economy as air travel trends upwards

THE competition is moving upwards. As the gap between budget and full-service airlines narrows and as the global economy revives, airlines are betting their dollar on an upward shift in the class of travel. Maybe not quite the big leap yet from economy to premium, but to a sub-class of premium economy.

United–Continental becomes the latest operator to offer premium economy seating. The reconfigured Boeing 757 aircraft will feature 45 Economy Plus seats, making up 30 per cent of economy seats. These are being offered for long haul flights from Newark to Europe.

To be expected, rival Delta is also equipping its aircraft with a similar premium economy (Economy Comfort) product.

In Asia, Cathay Pacific Airways will from March offer new premium economy from Hong Kong to destinations that include New York, Toronto and Vancouver. Cathay’s General Manager for Product Alex McGowan said: “It’s for people in economy who want more space, more exclusivity, and a few details like better catering and wine. It is also about capturing people who may want not to travel in economy but can’t afford to travel in business class.”

The difference lies in trading up instead of down – the confidence reflected even more in rival Hong Kong Airlines’ bold plans to operate all-business class flights to London, a move that some analysts wonder if it is premature, if not unwise, in present times.

Hong Kong Airlines to compete with Cathay Pacific for business travelers

AMONG the initiatives we expect to see in 2012 is the launch by Hong Kong Airlines of all-business class flights from Hong Kong to London Gatwick, in direct competition with Cathay Pacific Airways.

At the same time, Cathay will be introducing a new premium economy class in March 2012, although London is not in the list of initial destinations that named Singapore, Sydney, New York, Toronto and Vancouver. Cathay said London along with Los Angeles and San Francisco will be added subsequently.

Hong Kong Airlines’ initiative is a bold one, considering the state of the European economy. There are reservations about its sustainability. Singapore Airlines (SIA), which introduced all-business class flights to the United States in 2008, went through a rough patch soon after its introduction when the world lapsed into a recession and it had to cut back on the service. But that’s a different story as SIA, with good reputation and a healthy balance sheet to boot, is in a class of its own.

And Cathay most certainly is not going to stand idly by. Its business class fare costs considerably more than the US$2000 indicated by Hong Kong Airlines. However, nomenclature aside, the competition is likely to pit Hong Kong Airlines’ business class against Cathay\s premium economy, although according to Cathay’s General Manager for Product Alex McGowan, “trading down from business class into premium economy is not the game we’re in.”

Mr McGowan added: “It’s for people in economy who want more space, more exclusivity, and a few details like better catering and wine. It is also about capturing people who may want not to travel in economy but can’t afford to travel in business class.”

Hong Kong Airlines too must be eyeing potential upgraders but not excluding possible downgraders, which in the same way may explain why Cathay is axing first class and reducing the number of business class seats to make room for premium economy on its Boeing 777-300 ERs.

It would appear that Hong Kong Airlines’ initiative is ill-timed. There may yet be an ironic twist if the deepening economic woes continue to cause downward shifts of the market – such circumstances that have benefitted UK budget carrier EasyJet in targeting business travelers.

Airlines face new challenges

THE real question is not whether the airlines would survive another recession so soon after the 2008/2009 global economic meltdown. In an industry dominated by national players whose fate goes beyond commercial considerations, willy-nilly the majority of them will pull through, perhaps struggle to stay afloat, and emerge badly bruised.

While experts generally do not foresee a trough as deep as the previous one, the signs aren’t all that encouraging with recent reports of the American economy still floundering, the debt of Greece widening, no letting up of the political unrest in the Middle East, the prospect of the China market contracting, Japan still reeling from the aftermath of natural disasters, stocks across the world plunging, and a sinking oil price that ironically should and yet not completely be good news for the airlines.

According to the International Air Transport Association (IATA), airlines are reporting better than expected passenger demand, but profitability has not kept pace. In a simple profit and loss equation, it can only mean higher costs or lower yield, and for some airlines, perhaps the growth of capacity outpacing the demand. In its latest forecast, IATA expects lower profit for 2012 in a very tough environment, projecting it to fall to US$4.9 billion from US$6.9 billion expected this year even as passenger demand grows by 4.6 per cent compared to 5.9 per cent for the current year.

But it is not all gloom and doom according to IATA Director General and CEO Tony Tyler, who said: “Relatively stronger economic growth will help Asia-Pacific airlines to maintain their 2012 profits close to 2011 levels at $2.3 billion. The rest of the industry will see declining profitability. And the worst hit is expected to be Europe where the economic crisis means the industry is only expected to return a combined profit of $300 million. A long slow struggle lies ahead.”

Indeed, it will be a long, rocky road to recovery for most, if not all, airlines, if the world economy continues to slow down, moving backward as it moves forward. The prolonged volatility of the global market only serves to confirm the lessons of the previous downturn – lest they have been forgotten – and to provide an opportune respite for the airlines to re-strategize, at least for those who have wised up to know that going forward, it cannot be business as usual.

Market shifts

The market has definitely sifted downward. It is worth reiterating how during the 2008/09 financial crisis, the demand for air travel fell and people who must fly were looking at cheaper fares, which explained the flourish of budget carriers and the misfortune of major carriers which thrived on the premium market particularly when corporations downgraded executive travel. We have witnessed how the aviation landscape quickly became dotted with budget upstarts, particularly in Asia-Pacific (understandably so since it is comparatively a new phenomenon here than in Europe and the United States), and more recently how full-service airlines themselves are setting up budget subsidiaries and joint ventures to protect their turf in light of the competition posed by independent carriers and be where the business is heading.

The most anticipated entry into this arena is probably Singapore Airlines (SIA)’s fully-owned yet-to-be-named budget subsidiary which is expected to commence operations in 2012. SIA has indicated that the new offshoot will not be used on routes below the 4-hour duration normally operated by the traditional budget model, as it is eyeing the more lucrative North Asian markets such as Korea. SIA is pushing the evolution of the budget model from a mere no-frills entity in a segregated market to a viable competitor in the total air travel business – something that has already happened in Europe and the US and preceded by budget long haul flights such as the operations of AirAsia under the AirAsia X banner from Kuala Lumpur to Paris and London.

Interestingly, India’s Kingfisher Airlines has decided to exit the budget market – closing down Kingfisher Red – and focus on full-service operations. In spite of India’s booming low-cost traffic which has increased to 50 per cent of the country’s total traffic from 39 per cent two years ago, Kingfisher CEO Sanjay Aggarwal’s decision not to “compete in the low-cost segment” may be a case of foresight of an impending saturation of the no-frills market. He said: “Capacity induction of the LCCs (low cost carriers) has outpaced the demand growth in the domestic market. The induction of so many aircraft in the low cost segment will potentially lead to substantial overcapacity and a price war with declining yields.” But the vacuum vacated by Kingfisher Red is likely to be quickly filled by rivals and new upstarts.

The corollary is one of opportunities offering better returns in a reviving albeit slowly reviving full-service market while others shift their focus away from it. Mr Aggarwal said: “While there are currently five airlines participating in the low-cost carrier segment, there are only three full-service carriers. We believe that competition will be far more intense in the low-fare space than in the full service space.” He was optimistic that full-service yields would far outweigh additional costs on things like global distribution and in-flight catering.

Yet, as the competition flattens across the broad aviation terrain, nomenclature will become less important, even redundant. The demarcation between budget and full-service is beginning to blur. The competition will be decided by the consumer’s perception of value, whether budget or full-service, and less so by image.

The future of premium travel

Just because the market has shifted downward, it would be wrong to assume that premium travel is heading for oblivion. Major airlines such as Singapore Airlines, Cathay Pacific Airways and British Airways (BA) have reported the numbers clawing back. The premium market will continue to constitute an important aspect of the business, considering that, as in the case of SIA, the revenue generated by class has traditionally been 40/60 premium/economy against 16/84 premium/economy by seats offered.

But as the competition becomes heightened by budget carriers shifting upwards, again flattening the playing field and putting pressure on the kind of margins that full-service airlines once enjoyed, full-service airlines face a new challenge of marketing not only intra-airline but also inter-airline class distinction, whatever the nomenclature. The rebranded Virgin Australia, going international, is eyeing the business market. Qantas’ subsidiary Jetstar has long introduced business class. EasyJet of the United Kingdom reported healthy bottom lines derived from the introduction of business class travel.

It may be back to the generic two-class configuration of upper (call it First, Business or whatever) and lower (economy or coach) as more airlines begin to downsize or eliminate First when it becomes more economically profitable to market Business (which could well be First in status) as the upper class difference. Some airlines have done away with First in their configuration, including SIA on certain sectors. Cathay in introducing Premium Economy is making the same move selectively. The in-between class which, as its name suggests is a better Economy package aimed at netting down-graders and luring borderline up-graders, has long been experimented by other airlines including early pioneer EVA Air in a limited way, Air Zealand with its Skycouch and BA with its World Traveller. It has yet to achieve shaker status, and Cathay faces the challenge of unravelling the magic that would make it so.

Geographical positioning

While the rest of the world churns in economic turmoil, Asia has emerged as aviation’s Holy Grail. In the words of Qantas chief Alan Joyce, the Australian flag carrier would “increase our focus on the world’s fastest growing aviation region” to avert an Australian “tragedy”. Qantas had earlier declared setting up a budget joint-venture with Japan Airlines (and Mitsubishi Corporation) and plans for an Asia wide-premium service to be based most likely in either Singapore or Kuala Lumpur. Not to be left out, Virgin Australia is also looking at opportunities in the region. SIA’s new budget subsidiary to reach Asian ports beyond the 4-hour flight time is perhaps also a correctional move to balance its exposure to markets in Europe and the US, which during the financial crisis until now have weighed down its profitability. It is understandable when Europe and the Americas generate 40 per cent of the revenue by routes.

Soothsayers are so overwhelmed by the huge potential of China and India that any possible contraction of the regional economy is unthinkable. But when it happens, it will be a different game. Sufficient to say that survival in aviation competition is a gold rush mentality.

Alliances in times of need

Especially in times of need, having friends helps indeed. Alliances help extend an airline’s reach and improve its visibility, provide transparent transfers between airlines and better flight meshing for the partners’ customers, strengthen the concerned airline’s competitive edge, and garner benefits for the partners in shared costs and opportunities. The recently announced SIA/Virgin Australia alliance would provide seamless transfers between SIA and Virgin flights and allows SIA access to Australian ports outside its network – a move that causes rival Qantas some concern, or, to quote Virgin Australia CEO John Borghetti, “a nightmare for Qantas international operations”. Virgin Australia has been busy shopping to ink strategic partnerships with airlines across the globe.

During the last financial crisis, many airlines were compelled to cut services and exit some routes. It made economic sense to co-operate to utilize excess capacity. Qantas is said to be working out possible extensive code-share arrangements with OneWorld partner BA to exit some stations served by both airlines. Some analysts think this would be a costly mistake for Qantas, which would lose visibility and control over the traffic it feeds into BA. The downside of alliances of this nature is that airlines soon begin to lose their individual distinctness and identity; weaker carriers may be advantaged by leaning on the good name of their more reputable partners, but the latter are less likely to relish the association.

That’s how the aviation landscape has changed consequent to the financial crisis. When you book on a preferred airline but end up flying on another, brand – and the loyalty that comes with it – no longer is an important consideration. Airlines will have to rethink the game as to what now has become more important to the discerning customer and how they can individually preserve their good name and retain customer loyalty.

The irony of a falling fuel price

During the 2008/2009 crisis, the soaring fuel price had often been cited as a key contributor to the woes befallen upon the airlines which until today still warn that this will continue to be a concern in light of the unabated political unrest in the Middle East. Ironically, the unanticipated fall in fuel prices following on the heel of the crisis caused many airlines million-dollar hedging losses. In its current five-year-plan, Qantas did not rule out more rounds of a fuel surcharge hike but recognized there was a limit to how much more an airline could resort to such a measure. The fuel price has fallen from the erstwhile high; by all indications, it should be good news, but if this is a sign of the worsening economic downturn, it does not forebode well for the industry.

Cost and the discerning customer

Most – if not all – airlines reacted to the last crisis by trimming costs. Looking back, rationalizing for consolation, we might attribute the setback to a period of forced correction whereby airlines became conscious of waste, unconscionable runaway costs, and frivolous and unnecessary expenses. At the same time, the customer became more discerning, discriminating and driven by a greater awareness of value relative to his or her needs and propensity for excesses as well as the availability of alternatives.

It was a stitch that might have come too late for the unfortunate few which did not have the strong books of SIA or a ready life-line from white knights. Going forward, the cut would be deeper if airlines forget the lessons learnt in the event of a recurrence of similar or worse circumstances. The new challenge is to seek out cost-savings that go beyond the elimination of an olive in a martini through more efficient equipment and methods of operation without sacrificing service standards, such benefits that will also favour the customer directly.

The pressure of environmental concerns

Whether or not the economic situation improves, there will be added challenges posed by developments in other world arenas. The pressure on airlines to go green will increase. Conscious of this, SIA recently announced its membership of the Sustainable Aviation Fuel Users Group (SAFUG) which pledges to accelerate the development and commercialization of sustainable aviation biofuels. But if airlines – which contribute about 3 per cent of the world’s total carbon dioxide emissions – choose not to heed the call to help the environment, the authorities may regulate to bring them in line.

The writing is on the wall. UK Energy and Climate Change Minister Greg Barker said: “The aviation industry, in the same way as other industries, needs to play its part in reducing emissions.”

The European Union (EU) has plans to include any airline landing or taking off on EU territory in its emission trading scheme, which is being challenged by North American airlines. In response to the American argument that this was a violation of the Open Skies Agreement, European Court of Justice Advocate General Juliane Kokott said: “The inclusion in the EU emissions trading scheme of flights of all airlines from and to European airports is compatible with the principle of fair and equal opportunity laid down in the Open Skies Agreement.” She added: “Indeed, it is precisely that inclusion that establishes equally of opportunity in competition, as airlines holding the nationality of a third country would otherwise obtain an unjustified competitive advantage over their European competitors if the EU legislature had excluded them from the EU emissions trading scheme.”

Australia is the latest country to pass a bill for the controversial carbon tax, to be paid by polluters for each tonne of carbon dioxide emission. Slated for implementation on July 1, 2012, the tax will evolve into an emissions trading scheme in three years like the one in Europe. Airlines then can expect to face the same fate.

Will the defaulted airlines willy-nilly pass on the “penalty” costs to their customers or will this force them to become more efficient? It is not that simple in a competitive environment. The discerning customer is not likely to want to pay a second fuel surcharge, this time for a carrier’s inefficiency.

The cry for innovation

Necessity is the mother of invention. New engines designed to reduce fuel use has been the driving force at aircraft manufacturing facilities, with Airbus and Boeing claiming to be leaders in the field as they rolled out the A380 and B787 Dreamliner respectively. Qantas has just placed a US$9.5 billion order for 110 Airbus aircraft – 32 A320s and 78 A329neos, no doubt to be expected following announcement of its Asian expansion plans. The next-generation A320 neo is said to be 15 per cent more fuel efficient than the original A320.

More than just innovation in the field of hardware, the industry is badly in need of new sparks ine way the business is executed. The problem with the nature of the industry is that ideas often take too long to be realized or implemented while the impact of external events can happen in a flash.

Foggy skies ahead

All said, it’s still foggy skies ahead. Between SIA and Kingfisher as representative of the initiatives across the aviation landscape, it may even be said many of us are far more clueless than we claim to be about what the future holds as we await the next revised forecast by IATA.