Any company that uses capital equipment is faced with the inevitability that one day the equipment will have to be replaced. Capital investment is a fact of business life whether the company is making cars, selling pink flamingoes or, indeed, flying passengers around the world.
The trick with capital investment is to buy the right equipment to match the company's market strategy, and for Australasia's airlines that means planning an aircraft fleet that will make them a serious player in one of the region's most competitive industries.
Compounding fleet strategy is the vast number of aircraft/route combinations that must be juggled in a way that enables an airline to hit their future projections, maintain or increase market share and keep their competitors at bay. Further complexity is added by the range of aircraft on offer; each one promises advantages in some areas, and disadvantages in others.
For the strategists, the primary job is to match the best aircraft to the airline's existing routes and expansion plans. As Vice President Airline Market – Asia Pacific, Embraer's Alex Glock knows the decision is rarely cut-and-dried.
"The Asia Pacific market has a lot of diversity in fleet requirements and mission applications can be vastly different," he explained to Aviation Business. "The universal factors in fleet planning are traffic demand, competition, distance, comfort, performance and payload.
"Of course these vary widely between international and domestic routes. The requirements of individual routes and the airline's strategy are generally what drive fleet planning.
"There is no perfect aircraft for any route. An aircraft manufacturer has to decide which set of compromises to design toward. Embraer conducts advisory board meeting with the airlines worldwide to outline what the best compromise is. For example, the average stage length around the world is actually getting shorter. So is more range a good thing or a bad thing? Only the airline can answer that."
In the recovery years after 2001-2004 slump, Boeing forecast that passengers wanted safe, reliable aircraft that could fly point-to-point in the shortest time. Their response was to announce the project that would become the B787.
By contrast, Airbus predicted that passenger numbers would increase beyond the capacity of existing airports, and that the answer would be larger aircraft that could land more passengers per landing slot. They started work on the A380, which has proven an economic winner right out of the box.
And into the mix you can add the emergence of long-range twin-engined aircraft like the B777, A330 and A350, thanks to the introduction of the extended twin-engine operations (ETOPS) rules that enable long-distance flights over water. The damage done to this traditional market of the B747 is blatant: with only 33 passenger versions of the 747-8 on order, we may be seeing the end of the line for Boeing's flagship.
On domestic routes, the issue is just as complex as the international services. Alex Glock:
"The Australian market is dominated by the requirements of the top five routes, which are all in the east. Airlines need to plan to optimize these routes, which means that using the same aircraft on routes outside the top five becomes a compromise."
Boeing maintains the standard with the B767 and B737, but Airbus' A330 and A320 are proving competitive on certain routes. At the time of writing, no Australasian airline has committed to the new A320 NEO (new engine option), but with projected fuel savings of 15-20%, it is hard to see why they would not take them on board in the future.
One of the wildcards is the Airbus A350XWB. With legs out past 8000 nm and three capacity models ranging from 270-440 seats, the aircraft is right up there with the B787-8 and B777-200. An EADS spokesperson said at Avalon that they are confident their product can do the job of both of the Boeings, and are expecting some good things from the Australasian market. However, interest from the local airlines has been cursory so far.
Having made the big decision to ditch the faithful B747 from the wide-body inventory in favour of the Airbus A380 and Boeing 787, delays with both these programs have sent Qantas back to their whiteboards to rethink the immediate future. The effective collapse of the international strategy has delivered a blow to Qantas as they try to recover market share that has plunged from 35% to 20%.
A380s being drip-fed from Toulouse are marked to replace the B747-400s on the high-density international services, such as London and Los Angeles. With the oldest of the Boeings having been delivered in 1989, it is understandable that Qantas is keen to start a retirement program, and reap the economic benefits from running the A380s in their place. As at the end of 2010, they had 21 -400s and six -400ERs on the books.
Over the next five years, the A380 fleet is expected to grow from the current six airframes to 20, which will shoulder the bulk of the long-range international load. As QF has not ordered any 747-8s, it is easy to imagine that four-engined Boeings may one day not be seen in Qantas livery. In 2011, the airline will implement a program to reconfigure B747-400s to the "ultra-premium A380 standard" to better match them to demand for travel class options.
The short-term future for some the B747s is to be operated domestically on the Perth-Sydney run. With Virgin Group attacking the domestic business class market with their 300-seat A330s, QF has responded by deploying their big guns.
If proven successful, Perth could provide gainful employment for the 747s for a few years after they are slated for retirement. That depends on the availability of the B787.
Qantas' first 15 deliveries of the Dreamliner were not down to be painted in red; they were to get big orange stars on the tail instead, and spearhead Jetstar's thrust into Europe and Asia. In turn, the low-cost arm was to transfer its A330s to Qantas for high-density domestic routes. But troubles with the 787 have put that on the backburner, and the 50 on order are now expected sometime between 2012 and 2018.
The Dreamliner was also to take over from the B767 fleet on medium-density point-to-point duties. Obviously the Boeing planes will be around a bit longer now, and the word is that some of them are getting avionics upgrades; not something you do to an aircraft you are about to quit.
Qantas has no such woes with decisions in the medium-to-short haul business, with the A320 and B737 performing well enough to warrant further investment. The group has a total of 33 B737s on order for the QF flag and is securing leases on 21 A320s for Jetstar. The only small cloud over the B737 is CASA's move to ban them from operations on 30-metre wide runways, which will restrict them from use at some larger regional airports, the most obvious being
Maroochy/Sunshine Coast, Ballina/Byron and Ayers Rock/Uluru.
Maroochy and Ballina are no problem because the group runs Jetstar's A320s into both, but QF will have to come up with a solution for Ayers Rock. Options could be to leave the service to Jetstar, or use Qantaslink B717s instead. If CASA eventually extends the restriction to the A320 and B717, everyone has a problem.
Qantaslink's strategy looks very settled with another two leased 717s due before the end of next year to add to the 11 already operating, but the bulk of the work will again fall on the turbo-prop Dash-8s and Q400s. The regional carrier will add another four Q400s before the close of 2012. At the time of writing, they have 21 Q400s and 21 Dash-8s on charge.
The main question for Qantaslink is which routes to run jets, and which routes to run TPs. According to Embraer's Alex Glock, it is hard to compare the performances of the two.
"You can't really compare the regional jets with turbo-props generally. They have to be assessed within the total route system of each carrier. For example, a very short segment like Sydney-Canberra doesn't work out so well for jets, but suits turbo-props better. There are other dynamics on short-haul routes as well. If the airport "hassle factor" becomes too great, passengers will migrate to surface modes such as driving or train travel.
"[Embraer is] hopeful for the regional jet market in Australia. There are factors such as turbo-prop avoidance that need to be taken into account, airport
capabilities and the need to connect long and thin routes nonstop."
Under the guidance of the dynamic John Borghetti, Virgin is not only revising its fleet, but also its name and business strategy. The group comprises the domestic Virgin Blue, the international V Australia and the pacific subsidiaries Polynesian Blue and Pacific Blue. Predictions are that the new name will make greater use of the Virgin brand.
Borghetti's vision will see them go toe-to-toe with Qantas over the domestic business class market. This is a major step-up for an airline that has its origins as a low-cost carrier, and signals their intent to elevate themselves beyond the cheap-seat market position.
Accompanying this is a massive aircraft acquisition program, primarily for the domestic routes. The first of four luxury A330s is due into service in May on the Sydney-Perth city pairing, up against Qantas' B747 initiative. Virgin looks to be in the box seat here: it can be hard to make four engines run as economically as two.
In announcing the new service, Borghetti added: "Our new designer business and economy class product marks another step forward in our Game Change Program, which aims to position Virgin Blue as the airline of choice for both the corporate and the leisure markets."
The group is being just as aggressive in the medium-to-short haul market, placing orders 12 months ago for 50 B737-800NGs, with options on another 25 positions and purchase rights for 30 more. Most of these are thought to be for fleet replacement for the 88 in service now, but there is room for planned expansion in the numbers. Virgin will have to tackle the 30 m-wide runway issue as they operate B737s into both Maroochydore and Ballina. One option could be to replace them on those services with Embraer E-190s, which they already have in their fleet. That would mean fewer seats per landing.
The little brother E-170s, however, are marked for retirement before the year is out, to be replaced with ATR72s. Operated by Skywest in Virgin livery, the European turbo-props will take over the regional and fly-in fly-out duties in Western Australia. Although the capacity will be down 10 seats per flight, the ATRs consume less than half the fuel of the E-170s and pump-out half the amount of CO2.
V Australia has been making B777s work for them on some international routes, and has recently launched them on a new service to Abu Dhabi, linking with Etihad flights into Europe. The aircraft are young and doing the job, so it is not likely Virgin will be looking to supersede them with A350s or B787s in the near future. Should the 777s become uncompetitive with Qantas' Dreamliners (after they eventually arrive), Virgin may need to rethink.
According to Borghetti, the group has seen positive results from swapping short-haul international routes from 777s to 737s.
Air New Zealand
Like market rivals Qantas, Air NZ is also tapping its feet sternly at the tardiness of the B787. As the launch customer for the 787-9, they are no doubt keen to take delivery of the first of their eight on order. In the meantime, the B767s in the inventory will likely have to remain there until the Dreamliners can take over. The average age of Air NZ's 767s is 15 years, so there is still a bit of use left in them.
Also similar to QF, they plan to remove the iconic B747-400s from their fleet, but this time to replace them with B777s. The eight -200ERs in service are to be supplemented with five -300ERs, two of which have already arrived in New Zealand. Rather than opt for increased density on the aircraft, the -300ERs will offer
three classes of travel and include the revolutionary Skycouch option, where economy passengers will be able to lie down without paying for business class
tickets. This will restrict the aircraft to 338 seats. By contrast, V Australia has theirs configured for over 350.
It is a different story in the medium-haul market, where Airbus has had a big win over Boeing. Air NZ will replace all their B737s with A320s as the leases expire going out to 2016. The airline expects the A320s will enable them to increase services to destination airports that are beginning to face capacity issues. The 14 A320s on order will supplement the 12 airframes already in service, and will likely be configured for around 170 seats, 40 or so more than the B737s. It will be interesting to see if some of the A320s yet to be delivered turn out to have one of the new engine options (NEO), either the CFM LeapX or P&W Geared Turbo-fan (GTF). And that's where the strategy stops. At the time of writing, Air NZ is not showing much interest in replacing any of their turbo-props, sticking
with the ATR72s, Q300s and Beech 1900Ds they already have. There are none on order to supplement or replace any of the fleet.
Regional Express looks very settled with the SAAB 340s and a smattering of Metros that have served them and their predecessor airlines very well over the years. Trusty or not, many of the 45 340s they operate were first registered in the late 1980s or early 1990s. Two of them go back as far as 1984. As ageing pressurised commercial aircraft, they are exactly the type that CASA will target with their ageing aircraft program.
So one day, perhaps sooner than they would like, Rex may be faced with the prospect of retiring some of their fleet, or at least very heavy bills for inspection and ongoing maintenance programs. With the 340s out of production, Rex may have to look more closely at what Embraer, ATR and Bombardier have on offer.
The Big Finish
To a certain extent, fleet strategy has long been a black science. The airlines are understandably tight-lipped about their plans lest the competition gazump them when they're not looking, forcing the industry to do a lot of speculating about who will be operating what.
Nowadays there is another player in the game that is having a bigger say in fleet planning: public expectation. Until now, fleet strategists have expended most of their energy on capacity, flight times, fuel loads, ease of maintenance and efficiency. Now they have to consider CO2 emissions, fossil fuel consumption and noise.
The A350 was born to address some of these issues, and it has not been without its suitors: Cathay Pacific being one. Yet largely it has been spurned in Australia and New Zealand. For Airbus it may simply be a matter of timing; the big airlines having been seduced by the allure of the B787. However, if the Dreamliner doesn't come to the party soon, the A350 might start to look attractive.
There is a lot at stake in fleet planning; few other industries outlay capital investment on the level that airlines do. Not surprisingly, product differentiation is employed as a method of trying to get one over the opposition. Is it co-incidence that Virgin Blue has no A320s on charge and Jetstar has no B737s? What is the better option: Qantaslink's B717s or Virgin's Embraer E-190s?
As the man said at the beginning, it's all a compromise.