neville_nobody
6th Apr 2012, 23:51
Sounds alot like Geoff trying to justify the LCC/Jetstar rationale at Qantas. Even though a LCC strategy as a whole is somewhat questionable as a business model as very few pure LCC actually go the distance as a business. Jetstar itself cannot be considered a pure LCC as it is heavily subsidised/propped up by QF.
Anyways Geoff thinks that LCC's are the way of the future.
The growth of low-cost carriers underlines an astonishing change in the nature of modern aviation.
It was hatched over a few beers in an Italian restaurant in East Sydney. At Beppi's in March 2001, months before the collapse of Ansett, Qantas's then chief executive Geoff Dixon made entrepreneur Gerry McGowan an offer to buy Impulse Airlines he could not refuse.
The ''little Aussie battler'' was to become the genesis for Jetstar.
''We went very aggressively to get Impulse when we knew it was in trouble,'' Dixon reflects over a glass of pinot noir at a hotel just a short walk from his office overlooking Darling Harbour.
Advertisement: Story continues below
Impulse gave Qantas the building blocks for a budget offshoot with a cost base rivalling Virgin Blue's, which itself had been born on the back of beer coasters in a London pub several years earlier.
''We faced a real battle in losing market share because [Virgin's] cost base was 35 per cent to 45 per cent lower than ours in a two-horse race. We should buy Gerry McGowan a few beers,'' Dixon laughs.
''The reason Jetstar is here now and the reason Qantas is so successful relatively is because we bought Impulse and we kept all the industrial agreements in place.''
More than 11 years after that deal to buy Impulse was sealed, Jetstar has grown from a handful of planes to a fleet of about 80, with operations stretching from Australia and New Zealand to Singapore, Vietnam and shortly Japan. And, after Qantas signed a deal with China Eastern last week, a Jetstar affiliate will be set up in Hong Kong next year, on the doorstep of an emerging superpower.
The story of Jetstar is symbolic of how the aviation industry has been turned on its head in Australia and throughout the rest of the Asia-Pacific region in just over a decade.
Where full-service airlines once dominated the skies, budget airlines such as Jetstar and Malaysia's AirAsia have made major inroads and created their own market segment.
''It has democratised aviation,'' Dixon says. ''What you are going to have is a lot of carriers - and I mean a lot of carriers - set up, and more and more people will head to low-cost operations.''
More than a decade ago a regular overseas holiday was mostly the preserve of the well-off. Today, many people treat a sojourn to an exotic destination as an annual family ritual rather than a luxury.
Australians are travelling overseas in record numbers, which travel agents such as Flight Centre attribute more to cheap fares brought about by the advent of low-cost carriers and the rise of Middle Eastern and Chinese airlines rather than the strong Australian dollar.
The budget airlines are at the front line of the battle for the skies in Asia. While Western economies labour under a mountain of debt, China and its neighbours are undergoing unprecedented urbanisation, turning hundreds of millions of people into the world's new consumers.
Airlines are desperate to tap into the emergence of this large middle class in Asia - people who want the same luxuries such as air travel enjoyed by those in the West.
Budget airlines' share of the aviation market in Asia has grown from almost nothing to about 25 per cent over the last decade, the Centre for Asia Pacific Aviation says. By year's end, it expects 50 budget airlines in the region with orders for more than 1000 aircraft (mostly short-haul Airbus A320s and Boeing 737s).
''You are going to have a massive increase in intra-Asia-Pacific operations [by low-cost carriers], including India. China still doesn't sanction low-cost carriers, but once they start … it will be explosive,'' says Peter Harbison, the chairman of the Centre for Asia Pacific Aviation.
''It is an amazing combination of events at a time when you have this explosive economic growth.''
Harbison says the competition from low-cost carriers is partly why full-service airlines are struggling - even those regarded as successful, such as Cathay Pacific and Singapore Airlines. They are chipping away at the premium airlines' businesses, he says, forcing them to set up low-cost subsidiaries such as Singapore Airlines' new offshoot, Scoot.
In recent weeks Europe's biggest airline, Air France-KLM, has also been rumoured to be mulling a low-cost carrier to help arrest big losses.
Put simply, low-cost carriers are about flying high volumes of passengers, whereas full-service airlines are a margin game, giving the well-heeled superior products but charging them for it.
Conor McCarthy, an Irishman regarded as the operational brains behind AirAsia, says analysts were sceptical a decade ago of low-cost airlines breaking into the Asian market because the incumbent airlines operated on low unit costs compared with their peers elsewhere in the world.
''But what happened with AirAsia, and subsequently a number of other copycats, was that we discovered by applying the vigorous low-cost model in Asia we could very much explode the short-haul travel market and found we could compete with these big guys,'' he says.
McCarthy says low-cost carriers have built profitable businesses on short-haul routes in Asia, which legacy airlines have traditionally seen as ''loss-making feeders for their profitable long-haul networks''.
Large incumbent airlines often flew bigger aircraft such as Airbus A330s on routes that were three- or four-hour trips, McCarthy says. In contrast, AirAsia deployed smaller Boeing 737 and A320s, which allowed it to fly more times each day because the planes were quicker to turn around at airports.
''Now what you are seeing is the fragmentation of the market. So for us to compete on service we want to really up the ante in terms of what we are giving on board,'' says McCarthy, who worked alongside Qantas's chief executive, Alan Joyce, at Ireland's flag carrier Aer Lingus in the 1980s.
Joyce has been eager to shift the company's centre of gravity much closer to Asia, but suffered a setback when he was forced to ditch plans for a new premium airline in Asia last month.
The preferred base in Singapore was scuttled because Qantas was denied the traffic rights needed for a new airline, while the second option of Kuala Lumpur came unstuck after talks with Malaysia Airlines over a joint venture broke down.
It has left Jetstar as the main vehicle for tapping the unprecedented growth in Asia, while its parent scales back its long-haul international network.
Jetstar's plans to push into Hong Kong as part of a 50:50 joint venture with China Eastern has been widely credited as a breakthrough.
''Not only is this a good move strategically for Jetstar, it is about the only move open to them at the moment because the pace of regulatory reform is so slow,'' says an aviation insider who works in Asia. ''But it further relegates Qantas to the back seat.''
Hong Kong has long been on the radar for the airline. In 2008, a paper to Qantas management recommended the Asian financial centre as a base for the so-called North Asia ''mega region'', encompassing China, Japan and Korea.
It was seen as a logical spot because most of the biggest cities in Asia are within five hours flying time - about the maximum flying distances for Jetstar's workhorse A320s.
Although it will be operating out of what is regarded as an expensive city, Jetstar Hong Kong will be able to keep costs down by basing some of its pilots and cabin crew in China.
Setting up a base in Hong Kong will not be without its challenges. Top of the list is the likelihood of an aggressive response from Cathay Pacific and its offshoot, Dragonair.
Insiders also question whether Jetstar runs the risk of gifting its joint venture partner China Eastern its intellectual property, only to see the Chinese replicate its model on its own on domestic routes in China.
But Jetstar's chief executive, Bruce Buchanan, says the airline and its partners ''enter alliances with a long-term view, where the joint focus is on success of the franchise''.
After a focus on south-east Asia in recent years, Jetstar's foray into Hong Kong emphasises that the attention of airlines is increasingly turning to north Asia. In the coming months Jetstar and AirAsia will butt heads on domestic routes in Japan following an opening up of that market.
''The low-cost carrier environment will just intensify - it is where a lot of the structural growth is,'' says Andrew Orchard, an aviation analyst in Hong Kong at Royal Bank of Scotland.
''What you will probably get is further incursions by the low-cost carriers into second-tier cities as most of the key cities are already served. At the same time, because you do have an emerging appetite for travel, we will get more competitors wanting to come into Asia, and it will have an impact on [ticket] prices.''
But domestic routes in China remain the final frontier. Foreign low-cost carriers can fly to destinations in China but are still denied the chance to operate on domestic routes, even if they were able to form joint venture operations with the country's incumbent airlines.
Orchard believes it will be at least a decade before China's domestic market will be opened up to competition from foreign interests. ''Right now the Chinese government seems more keen to promote domestic-based carriers,'' he says.
An Australian aviation watcher based in China adds: ''China is a funny place because things appear to happen quickly but they don't. Change comes but it comes in baby steps.''
While travellers celebrate cheap fares, the stiffer competition and high fuel prices will put pressure on airlines to squeeze costs and search for new revenue streams.
Asia is littered with failed airlines, and Australia is no exception.
The most recent casualty, Air Australia, collapsed in February owing more than $80 million. It joins a long list of failed Australian airlines including Ansett, Compass and minor players such as Kendall and Hazelton, SkyAirWorld and MacAir (otherwise known as Slack Air). After all, this is in an industry well known for sudden shocks. Aside from spikes in fuel prices, who can forget ash clouds, midair engine explosions and industrial disputes?
Last month the International Air Transport Association reduced its forecasts for airline profits worldwide this year by $US500 million ($477 million) to $US3 billion due to high fuel prices. The peak airline body did, however, forecast that airlines in the Asia-Pacific region will post higher combined profits this year than previously expected.
The chief executive of Emirates, Tim Clark, also warned recently that more airlines will go bust this year as fuel costs and weak European and US economies blunt profitability.
Low-cost airlines might be enjoying growth in passengers in Asia, but it still a challenge for them to make a buck. That's because fuel is a bigger proportion of a budget carrier's costs.
Tiger Airways and Malaysia's AirAsia X - in which Virgin's Richard Branson has a 10 per cent stake - are cases in point. The long-haul affiliate of AirAsia blamed high jet fuel prices and weakening demand for air travel for its recent decision to abandon flights to Europe and India. It has since reoriented itself to its primary Asian markets after learning not to ''stretch ourselves too thin''.
Asia has its pitfalls. As Australian executives know well, it is not an easy place to do business due to political, cultural, economic and regulatory hurdles. Jetstar, too, has found Vietnam a difficult place to operate, while its Singaporean operations took years to turn a profit.
The low-cost carriers and high Australian dollar are also exacerbating the shift of Australians and their hard-earned money overseas, which is creating a headache for domestic tourism operators.
Historically, passenger traffic in and out of Australia was evenly split, but in recent years about 60 per cent of traffic is on flights to overseas destinations. Industry veterans say airlines increasingly see more value flying routes such as between Perth and Bali than Melbourne to the Gold Coast.
''The growth of low-cost carriers are very vital for Australia. The downside is that it takes a lot of people out of the country but it has potential to bring a lot of people in as well,'' says Dixon, who is now the chairman of Tourism Australia
''But what can you do about the dollar? We can all go on about it but what we need to do is make sure our product in Australia is attractive because we are at the moment a high-cost destination. And you cannot do anything about the fact that the dollar takes you a long way [overseas].''
As growth slows to a crawl in the West, airlines will increasingly turn to Asia, and low-cost offshoots as their best hopes. ''Jetstar does have first-mover advantage. The others are now going to be challenger brands, and that is a difficult position to come from,'' Dixon says.
Read more: Sky's the limit for new breed of budget airlines (http://www.smh.com.au/business/skys-the-limit-for-new-breed-of-budget-airlines-20120406-1wgov.html#ixzz1rJ6dGo5k)
Anyways Geoff thinks that LCC's are the way of the future.
The growth of low-cost carriers underlines an astonishing change in the nature of modern aviation.
It was hatched over a few beers in an Italian restaurant in East Sydney. At Beppi's in March 2001, months before the collapse of Ansett, Qantas's then chief executive Geoff Dixon made entrepreneur Gerry McGowan an offer to buy Impulse Airlines he could not refuse.
The ''little Aussie battler'' was to become the genesis for Jetstar.
''We went very aggressively to get Impulse when we knew it was in trouble,'' Dixon reflects over a glass of pinot noir at a hotel just a short walk from his office overlooking Darling Harbour.
Advertisement: Story continues below
Impulse gave Qantas the building blocks for a budget offshoot with a cost base rivalling Virgin Blue's, which itself had been born on the back of beer coasters in a London pub several years earlier.
''We faced a real battle in losing market share because [Virgin's] cost base was 35 per cent to 45 per cent lower than ours in a two-horse race. We should buy Gerry McGowan a few beers,'' Dixon laughs.
''The reason Jetstar is here now and the reason Qantas is so successful relatively is because we bought Impulse and we kept all the industrial agreements in place.''
More than 11 years after that deal to buy Impulse was sealed, Jetstar has grown from a handful of planes to a fleet of about 80, with operations stretching from Australia and New Zealand to Singapore, Vietnam and shortly Japan. And, after Qantas signed a deal with China Eastern last week, a Jetstar affiliate will be set up in Hong Kong next year, on the doorstep of an emerging superpower.
The story of Jetstar is symbolic of how the aviation industry has been turned on its head in Australia and throughout the rest of the Asia-Pacific region in just over a decade.
Where full-service airlines once dominated the skies, budget airlines such as Jetstar and Malaysia's AirAsia have made major inroads and created their own market segment.
''It has democratised aviation,'' Dixon says. ''What you are going to have is a lot of carriers - and I mean a lot of carriers - set up, and more and more people will head to low-cost operations.''
More than a decade ago a regular overseas holiday was mostly the preserve of the well-off. Today, many people treat a sojourn to an exotic destination as an annual family ritual rather than a luxury.
Australians are travelling overseas in record numbers, which travel agents such as Flight Centre attribute more to cheap fares brought about by the advent of low-cost carriers and the rise of Middle Eastern and Chinese airlines rather than the strong Australian dollar.
The budget airlines are at the front line of the battle for the skies in Asia. While Western economies labour under a mountain of debt, China and its neighbours are undergoing unprecedented urbanisation, turning hundreds of millions of people into the world's new consumers.
Airlines are desperate to tap into the emergence of this large middle class in Asia - people who want the same luxuries such as air travel enjoyed by those in the West.
Budget airlines' share of the aviation market in Asia has grown from almost nothing to about 25 per cent over the last decade, the Centre for Asia Pacific Aviation says. By year's end, it expects 50 budget airlines in the region with orders for more than 1000 aircraft (mostly short-haul Airbus A320s and Boeing 737s).
''You are going to have a massive increase in intra-Asia-Pacific operations [by low-cost carriers], including India. China still doesn't sanction low-cost carriers, but once they start … it will be explosive,'' says Peter Harbison, the chairman of the Centre for Asia Pacific Aviation.
''It is an amazing combination of events at a time when you have this explosive economic growth.''
Harbison says the competition from low-cost carriers is partly why full-service airlines are struggling - even those regarded as successful, such as Cathay Pacific and Singapore Airlines. They are chipping away at the premium airlines' businesses, he says, forcing them to set up low-cost subsidiaries such as Singapore Airlines' new offshoot, Scoot.
In recent weeks Europe's biggest airline, Air France-KLM, has also been rumoured to be mulling a low-cost carrier to help arrest big losses.
Put simply, low-cost carriers are about flying high volumes of passengers, whereas full-service airlines are a margin game, giving the well-heeled superior products but charging them for it.
Conor McCarthy, an Irishman regarded as the operational brains behind AirAsia, says analysts were sceptical a decade ago of low-cost airlines breaking into the Asian market because the incumbent airlines operated on low unit costs compared with their peers elsewhere in the world.
''But what happened with AirAsia, and subsequently a number of other copycats, was that we discovered by applying the vigorous low-cost model in Asia we could very much explode the short-haul travel market and found we could compete with these big guys,'' he says.
McCarthy says low-cost carriers have built profitable businesses on short-haul routes in Asia, which legacy airlines have traditionally seen as ''loss-making feeders for their profitable long-haul networks''.
Large incumbent airlines often flew bigger aircraft such as Airbus A330s on routes that were three- or four-hour trips, McCarthy says. In contrast, AirAsia deployed smaller Boeing 737 and A320s, which allowed it to fly more times each day because the planes were quicker to turn around at airports.
''Now what you are seeing is the fragmentation of the market. So for us to compete on service we want to really up the ante in terms of what we are giving on board,'' says McCarthy, who worked alongside Qantas's chief executive, Alan Joyce, at Ireland's flag carrier Aer Lingus in the 1980s.
Joyce has been eager to shift the company's centre of gravity much closer to Asia, but suffered a setback when he was forced to ditch plans for a new premium airline in Asia last month.
The preferred base in Singapore was scuttled because Qantas was denied the traffic rights needed for a new airline, while the second option of Kuala Lumpur came unstuck after talks with Malaysia Airlines over a joint venture broke down.
It has left Jetstar as the main vehicle for tapping the unprecedented growth in Asia, while its parent scales back its long-haul international network.
Jetstar's plans to push into Hong Kong as part of a 50:50 joint venture with China Eastern has been widely credited as a breakthrough.
''Not only is this a good move strategically for Jetstar, it is about the only move open to them at the moment because the pace of regulatory reform is so slow,'' says an aviation insider who works in Asia. ''But it further relegates Qantas to the back seat.''
Hong Kong has long been on the radar for the airline. In 2008, a paper to Qantas management recommended the Asian financial centre as a base for the so-called North Asia ''mega region'', encompassing China, Japan and Korea.
It was seen as a logical spot because most of the biggest cities in Asia are within five hours flying time - about the maximum flying distances for Jetstar's workhorse A320s.
Although it will be operating out of what is regarded as an expensive city, Jetstar Hong Kong will be able to keep costs down by basing some of its pilots and cabin crew in China.
Setting up a base in Hong Kong will not be without its challenges. Top of the list is the likelihood of an aggressive response from Cathay Pacific and its offshoot, Dragonair.
Insiders also question whether Jetstar runs the risk of gifting its joint venture partner China Eastern its intellectual property, only to see the Chinese replicate its model on its own on domestic routes in China.
But Jetstar's chief executive, Bruce Buchanan, says the airline and its partners ''enter alliances with a long-term view, where the joint focus is on success of the franchise''.
After a focus on south-east Asia in recent years, Jetstar's foray into Hong Kong emphasises that the attention of airlines is increasingly turning to north Asia. In the coming months Jetstar and AirAsia will butt heads on domestic routes in Japan following an opening up of that market.
''The low-cost carrier environment will just intensify - it is where a lot of the structural growth is,'' says Andrew Orchard, an aviation analyst in Hong Kong at Royal Bank of Scotland.
''What you will probably get is further incursions by the low-cost carriers into second-tier cities as most of the key cities are already served. At the same time, because you do have an emerging appetite for travel, we will get more competitors wanting to come into Asia, and it will have an impact on [ticket] prices.''
But domestic routes in China remain the final frontier. Foreign low-cost carriers can fly to destinations in China but are still denied the chance to operate on domestic routes, even if they were able to form joint venture operations with the country's incumbent airlines.
Orchard believes it will be at least a decade before China's domestic market will be opened up to competition from foreign interests. ''Right now the Chinese government seems more keen to promote domestic-based carriers,'' he says.
An Australian aviation watcher based in China adds: ''China is a funny place because things appear to happen quickly but they don't. Change comes but it comes in baby steps.''
While travellers celebrate cheap fares, the stiffer competition and high fuel prices will put pressure on airlines to squeeze costs and search for new revenue streams.
Asia is littered with failed airlines, and Australia is no exception.
The most recent casualty, Air Australia, collapsed in February owing more than $80 million. It joins a long list of failed Australian airlines including Ansett, Compass and minor players such as Kendall and Hazelton, SkyAirWorld and MacAir (otherwise known as Slack Air). After all, this is in an industry well known for sudden shocks. Aside from spikes in fuel prices, who can forget ash clouds, midair engine explosions and industrial disputes?
Last month the International Air Transport Association reduced its forecasts for airline profits worldwide this year by $US500 million ($477 million) to $US3 billion due to high fuel prices. The peak airline body did, however, forecast that airlines in the Asia-Pacific region will post higher combined profits this year than previously expected.
The chief executive of Emirates, Tim Clark, also warned recently that more airlines will go bust this year as fuel costs and weak European and US economies blunt profitability.
Low-cost airlines might be enjoying growth in passengers in Asia, but it still a challenge for them to make a buck. That's because fuel is a bigger proportion of a budget carrier's costs.
Tiger Airways and Malaysia's AirAsia X - in which Virgin's Richard Branson has a 10 per cent stake - are cases in point. The long-haul affiliate of AirAsia blamed high jet fuel prices and weakening demand for air travel for its recent decision to abandon flights to Europe and India. It has since reoriented itself to its primary Asian markets after learning not to ''stretch ourselves too thin''.
Asia has its pitfalls. As Australian executives know well, it is not an easy place to do business due to political, cultural, economic and regulatory hurdles. Jetstar, too, has found Vietnam a difficult place to operate, while its Singaporean operations took years to turn a profit.
The low-cost carriers and high Australian dollar are also exacerbating the shift of Australians and their hard-earned money overseas, which is creating a headache for domestic tourism operators.
Historically, passenger traffic in and out of Australia was evenly split, but in recent years about 60 per cent of traffic is on flights to overseas destinations. Industry veterans say airlines increasingly see more value flying routes such as between Perth and Bali than Melbourne to the Gold Coast.
''The growth of low-cost carriers are very vital for Australia. The downside is that it takes a lot of people out of the country but it has potential to bring a lot of people in as well,'' says Dixon, who is now the chairman of Tourism Australia
''But what can you do about the dollar? We can all go on about it but what we need to do is make sure our product in Australia is attractive because we are at the moment a high-cost destination. And you cannot do anything about the fact that the dollar takes you a long way [overseas].''
As growth slows to a crawl in the West, airlines will increasingly turn to Asia, and low-cost offshoots as their best hopes. ''Jetstar does have first-mover advantage. The others are now going to be challenger brands, and that is a difficult position to come from,'' Dixon says.
Read more: Sky's the limit for new breed of budget airlines (http://www.smh.com.au/business/skys-the-limit-for-new-breed-of-budget-airlines-20120406-1wgov.html#ixzz1rJ6dGo5k)