Fleet strategies built on multiple factors

The global aviation industry is expected to reduce losses from US$11 billion in 2009 to US$5.6 billion in 2010, according to the International Air Transport Association (IATA).

One of the highlights of this forecast is that the loss reduction is being led by Asia-Pacific’s carriers.

Carriers from this region are expected to see their losses shrink from US$3.4 billion in 2009 to US$700 million in 2010.

Significantly, IATA is clear that Asia-Pacific’s prospects are improving faster than other regions. In fact, in 2009 intra-Asia-Pacific travel eclipsed the number of travellers in North America as the world’s largest aviation market.

 

Positive sentiments

Amidst such projections, the Asia Pacific region has also seen quite a few encouraging developments, be it for aircraft acquisition or fleet development plans.

The airlines have been in the news for aircraft deals, be it for replacement of the existing fleet or for deployment on new routes or boosting frequency.

In early April, Virgin Blue Group formally signed an agreement with aircraft manufacturer Boeing for up to 105 brand new 737 aircraft. The deal marked the biggest aircraft order in Virgin Blue’s 10-year history and the Boeing Aircraft Company’s largest order in the past 18 months. The agreement includes 50 firm B737-800NG aircraft (with flexibility to convert to either B737-700or B737-900), 25 additional firm delivery positions secured as options and 30 future purchase rights. Delivery is scheduled from June 2011 through to 2017.

Qantas, too, has been in the news for its investment. In February this year, while sharing the group’s half-year results, Qantas CEO Alan Joyce, said that, while the global aviation industry remained in loss, the Qantas Group had been profitable. He added that despite the challenging business environment, over the last 12 months, the Qantas Group continued to invest, or plan for investment where it was needed. The group remained committed to a long term fleet renewal, backed by one of the world’s largest aircraft order books, with more than 160 new aircraft to be delivered over the next 10 years.

This will result in new aircraft such as the B787 and more A380s. During the half-year, the Group took delivery of 13 new aircraft – two A380s, one A330, three B737-800s, two A320s and five Q400s.

Chong Phit Lian, CEO of Jetstar Asia/ Valuair told Aviation Business Asia Pacific that over the last 12 months, Jetstar from Singapore has expanded its A320 fleet by 46 per cent, increasing its network by over 25 per cent.

In the last year, new routes from Singapore to Haikou, Shantou in China, Phuket and Penang have been added and additional services have been added to strong network performers – Ho Chi Minh City, Bangkok and Manila.

The fleet expansion came after Jetstar announced closer alignment between its Australian and Singapore businesses following Jetstar Asia’s ownership re-structure in April 2009. Jetstar Asia is 51 per cent owned by Singapore company Westbrook Investments Pte Ltd and 49 per cent owned by Qantas.

“This closer alignment allows the Jetstar Group to best allocate new fleet as they are received throughout key markets throughout the Southeast Asian and Pacific region. The Jetstar Group has an order of more than 60 A320 family aircraft over the next five years,” said Phit Lian.

Phit Lian added that the closer alignment of the Jetstar networks allows leveraging of the Group’s assets of A320 family aircraft. With an order book of 60 aircraft over the next five years, the Jetstar strategy is to asses all market opportunities within the different Jetstar networks.

“This order is part of a long term vision Jetstar has to build short haul flying in the Southeast Asian region. Jetstar anticipates to receive its first Dreamliner in either late 2013 or early 2014 in line with ongoing updates provided by Boeing. In the interim Jetstar will continue to grow its A330-200 fleet which may expand from an existing seven up to a potential 12 aircraft by 2012. Jetstar is scheduled to receive a future fleet of up to 15 B787s,” said Phit Lian.

 

Varied approach

Airlines have been looking at progressively making their fleet younger, greener, more efficient and easier-to-maintain, and also offer latest generation in-flight product.

AirAsia X, according to its CEO Azran Osman-Rani, sees new aircraft as a key strategic advantage for the group in terms of better fuel efficiency, lower maintenance costs and better passenger experience.

“Our fleetwide fuel consumption is an industry leading 2.4 litres per seat per 100km and our total operating cost per ASK was 2.7 US cents in 2009. We are scheduled to take delivery of 20 more new A330-300s from 2010 to 2015. We have also taken a decision to upgrade the quality of our seats onboard our aircraft, with better economy seats, and a world’s first for an LCC – lie-flat bed seats. We believe seats are the most critical in-flight equipment that affects customer’s satisfaction,” said Osman-Rani.

Cathay Pacific currently has adopted a cautious approach. It took a number of measures last year to help address the steep downturn in business, including reducing capacity for both Cathay Pacific and Dragonair, and requesting a deferral of new deliveries from aircraft manufacturers.

A spokesperson from Cathay Pacific said, “During the global economic downturn in 2009, we deferred new deliveries and parked six passenger aircraft, four A340-300s (on leases) and two 747-400s, and five Boeing 747-400BCF in the first half of 2009. A sixth BCF has been wet-leased to Air Hong Kong. We have no immediate timeline for un-parking the passenger aircraft.”

In 2009, the company took delivery of five Boeing 777-300ERs. In 2010, it has taken delivery of three Boeing 777-300ERs and will take delivery of one Boeing 777-300ER and one Airbus A330.

“Our new passenger aircraft deliveries at the end of 2009 and in 2010 are enabling us to meet the recovering passenger traffic. For example, new aircraft deliveries allowed us to add back three flights per week to Toronto, three flights per week to Los Angeles, and re-establish a regular four per day flights to London. The new aircraft has also allowed us to add Milan and in July Moscow to our network,” shared the spokesperson.

“The first two freighters have been returned to operations earlier this year to release two aircraft for transfer to the Air China Cargo joint venture after the joint venture receives the necessary approvals and commences operations in second half of 2010. The three remaining aircraft will return from the desert in June and July of this year. All three aircraft and their engines require heavy maintenance of one form or another and so their return to operations will be gradual and phased in during second half of 2010, preferably to coincide with the seasonal peak from Hong Kong,” added the spokesperson.

A further two aircraft will leave the Cathay Pacific fleet in the first quarter of 2011 to be prepared for transfer to Air China Cargo Co Ltd in the first half of 2011. Therefore, over the course of 2010 and first half of 2011, Cathay Pacific will have a net gain of one aircraft for Cathay Pacific operations.

“The longer term fleet development plan hasn’t changed much. We are keeping an eye on the development of the new generation aircraft to understand: what are the efficiency improvements, what the payload range capabilities, and when the aircraft will become available,” said the spokesperson.

In India, it has been reported that discount airline IndiGo has sought in-principle approval from the civil aviation ministry for a possible future order of 150 aircraft. The airline had ordered 100 Airbus A320 jets in 2005, deliveries for which will run till 2015.

 

Innovation

AirAsia X’s Osman-Rani says one major change in which the airline’s fleet development plans have evolved is related to in-flight entertainment.

“We started with in-seat IFE units but are now phasing them out, opting for portable media players instead. For an LCC, we don’t look at IFE as a bundled service but a revenue generating opportunity. The take-up rates are not commensurate with the capital and content costs to supply it to every seat. It works much better with portable units that we can tailor quantities based on different flight profiles,” said Osman-Rani.

AirAsia X has also been in news for its plans to introduce business-class flatbeds on its London flights. Commenting on improvisations from strategy and business environment perspective, Osman-Rani said, “Constantly being in touch with customers, listening to feedback, and most importantly, discerning which are the most important issues to prioritise out of the many issues received. Then, having the organisational nimbleness to move fast and execute (are very important). Also, not being afraid of change is the key. For example, we took a call to move away from traditional black leather for our new A330 seats (easy maintenance advantage) because in a 380-seater A330, the black creates constrictive cabin spatial optics. We opted for brighter shades of AirAsia Red and Tan to create a livelier cabin atmosphere.”

Even groups, which target several segments, have come up with interesting moves.

For instance, in late April, India’s Jet Airways Konnect, Jet Airways’ all-economy service, decided to introduce the all new ‘Konnect Select’, a premium cabin on several domestic routes. The group, which took such initiative in order to target those travellers who desire more flexibility, comfort and benefits, was buoyed by the improvement in the global economic environment and the resultant upswing in air travel demand, particularly business travel.

The new Jet Airways Konnect Select features wider and more comfortable seats similar to Jet Airways Business Class seats with a 40-inch seat pitch, in a front cabin separated from the all-economy cabin by a divider offering enhanced privacy on Jet Airways Konnect Boeing 737 flights.

Earlier this year when Qantas’ second new A330-200 aircraft operated its first commercial service between Sydney and Melbourne as QF415, the group said the aircraft represents a new era of flying for the Qantas domestic customer.

According to the airline, the new fleet offers passengers enhanced levels of comfort and state-of-the-art entertainment in every seat. The A330-200 fleet features new seating collaboratively designed with Qantas Creative Director Marc Newson. Also on offer is the on-demand in-flight entertainment system. For business passengers, there is an exclusive wide seatback design, an extra wide seat width of 22 inches, cocktail table and other new features.

In February this year, Qantas also chose to invest A$400 million to upgrade seats and inflight entertainment on nine Boeing 747-400 aircraft, and reconfigure its Airbus A380 fleet. The upgrade and reconfiguration program will commence at the end of 2011 and is scheduled for completion by the end of 2013.

In the case of Virgin Blue, as per its agreement with Boeing, the deal includes aircraft with the latest technology under the Boeing Performance Improvement Plan, which will also help the carrier maintain its commitment to reducing its carbon footprint, via initiatives including engine improvement and enhanced aerodynamics. The aircraft will be delivered with Boeing’s new sky interiors with inclusions such as newly designed seats and IFE which will complement Virgin Blue’s ‘Airline of the Future’ initiative to be rolled out during 2011.

 

Operating costs

While announcing its order in April, Virgin Blue Group stated that the group is not only preparing for steady future growth as domestic and short haul markets recover, but it will also ensure a turnover of aircraft to maintain the youngest fleet of modern aircraft. This is crucial for sustaining on-time performance and the lowest cost base possible.

Through such new aircraft deals, airlines are looking at further reduction in operating costs.

For its part, as it did in 2001, Virgin Blue Group chose the current environment to secure long term future supply of aircraft on “attractive commercial terms”. Even though, the group didn’t share the value of the deal, it did mention that net pricing has improved from 2001 levels, allowing for a lowering of the fleet’s cost base.

For its part, the Qantas Group has also undertaken an exhaustive review of where it believes international demand is heading, and how Qantas’ B747 and A380 fleets should be best configured to meet that demand. The Group is also changing its estimated fleet residual values based on the introduction of ‘next generation’ aircraft and a reduction in secondary market demand increasing pressure on residual aircraft values. From 1 January 2010, all passenger aircraft will be depreciated to a residual value of 10 per cent at 20 years, compared to the previous policy of 12.5 or 20 per cent at 20 years, depending on aircraft type.

AirAsia X’s Osman-Rani said, “With our planned four new aircraft entering into service in 2010, we expect to get a further 18 per cent reduction in non-fuel operating cost.”

 

Early adoption

AirAsia X’s Osman-Rani believes that the early adoption of new technology aircraft, such as the B787 and A350, is very significant.

“These aircraft will become game changers. We’ve already seen how we’ve derived significant cost advantages using our A330-300s Vs other airlines using older B747-400s. The same step change in performance will come from the next generation aircraft. That’s why we’re signed up as an early adopter of the A350, with our order of 10 aircraft,” Osman-Rani said.

A few months ago AirAsia and Jetstar came up with a non-equity partnership. The primary focus on this alliance is on narrow-body aircraft purchases and parts/services pooling. Jetstar Asia/Valuair’s Phit Lian spoke about the potential benefits.

“New technology, particularly when it comes to fuel efficiency and positive customer impact is always a priority,” she said. “Our recent announcement of an alliance with AirAsia will allow both our airlines to jointly explore working with airline manufactures on an aircraft specification that would specifically suit the value carrier operating services in this Southeast Asian region. This presents us with the ultimate opportunity to take advantage of the latest technologies.”

However, Cathay Pacific’s spokesperson said that the focus is “not on early adoption”.

“As flight tests for the B787 are being conducted and as Airbus begins to build the A350, the focus is on understanding what performance improvements the new technology will actually deliver. Speed of bringing this technology into service should be less important than establishing the improved efficiency, reliability and safety of the new technology aircraft,” said the spokesperson.

Average age

As of 31 March 2010, the average age of Cathay Pacific’s passenger aircraft was 10.7 years.

On the significance of this figure, be it from the company’s strategy or business environment perspective, Cathay Pacific’s spokesperson said, “As long as the airframe and engines are well maintained, aircraft can be operated safely and profitably for a long time. Brand new aircraft, if poorly maintained, can be less efficient than older aircraft. The aircraft type and the technology behind the aircraft are more important than age. A late production B747-400 may be a similar age to an early production B777 but because the design and the engine technology are different, their operating efficiencies will be different. So from a business and strategy point of view, the type of aircraft and how it fits the traffic demand of the network may be more important than the age of the aircraft.”

Jetstar Asia/Valuair’s Phit Lian said the average age of the fleet is five years.

“Maintaining a young fleet of same family type across our short haul businesses enables us to maintain the high levels of aircraft utilisation we employ across our network. New aircraft also resounds positively amongst our travellers,” she said.

 

Outlook

While a group like Virgin Blue intends to finalise its funding arrangements for its aircraft sooner than later, a group like Cathay Pacific says as business picks up and becomes profitable to operate the parked aircraft, the group will bring them back into service.

“Currently, the view is that the freight business will be strong enough to bring back the freighters. The recovering passenger demand can currently be met by our new aircraft deliveries. We have 10 Boeing 747-8F on order and we plan to take delivery of six in 2011. The additional aircraft will be deployed on our existing network, consistent with our plan to re-instate frequencies trimmed during the 2009 downturn,” said Cathay Pacific’s spokesperson.

Considering the fact that the approach of the carriers across the region varies as per their strategy and assessment of the market, it is not surprising to find that the aircraft acquisition and utilisation plans, too, differ. It is clear that the industry is looking at the short-term growth being driven by higher aircraft utilisation, and ensuring that existing aircraft are either producing returns or are invested in markets with significant strategic potential. Also, the airlines continue to work with their respective aircraft manufacturers to reduce their capital expenditures.

Other than the approach of the businesses, there are several external factors which impact the decision pertaining to aircraft. For instance, according to IATA, the region’s governments provided over US$10 billion in government bailouts to airlines in the first quarter of the year. The region’s two biggest growth markets—India and China—face completely different circumstances. India’s challenge is to reduce costs and improve infrastructure, while China is adjusting to new global trade patterns. In India, the operating environment is improving, with airports and airspace gradually being upgraded, and ground access being developed, which will not only enhance the passenger experience, but should allow airlines to achieve faster turnarounds and higher aircraft utilisation.