January 2011 Archives

Tiger Australia's latest managing director is Crawford Rix, an affable British chap formerly with bmi and who you could almost hug if it wasn't for a tiger beating you to it. Although Tiger is still lip-tight about its plans, Rix's gravitas makes Tiger's secrecy less insulting.

Rix and I were having a chat after Tiger launched its Avalon base last November and, with our talk going well, I thought I would turn to a thorny and much-despised issue: Tiger's Stripes program.

Much like Spirit Airlines' $9 fare club, with Stripes you pay an annual membership fee of A$29 (for Spirit it's US$59) and in return get first dibs on sales with the pitch being that you'll recoup the membership fee in fare specials.

This did not go down well with the public, especially once some made the mistake of calling Stripes a frequent flyer programme, as Rix knows all too well.

"I don't know why people criticise it. It's strange, really," Rix begins.

Stripes, he continues, "is simply about getting to ahead of the queue for the best deals. At the moment it's 24 hours but it could be 36 hours or 48 hours."

"We are the choice of students. We are the choice of the smart guys. They figure us out," Rix says.

"People can take it or leave it, and they're taking it in droves," Rix says. "It's very popular and we're pleasantly surprised."

Would he disclose membership numbers?

"Oh not yet. Oh no, no no, I wouldn't do that."

Rix says he expects the majority of members will recover the $29 fee in their first purchase . "If you're first in the queue for a $9.99 or $19.99 fare and it goes up to $49, there you go."

"The vast majority will recover [the membership fee] in the first round [of bookings]. Certainly in two or three flights you can recover it," Rix bets.

So then how does Tiger make money?

First, Tiger spends little on administration. "Why would we have cost? We're not about adding cost. It's a simple programme--very easy," Rix says.

Second, Tiger may not be offering lower fares than it has previously. What has changed is that it makes it previously public sales only accessible to its members. Now that Tiger has been in the Australian market for nearly three years, people know about its sales and, the reckoning may go, be willing to plonk $29 for the sale fares previously accessible to everyone.

That's only my take because I'm not a Stripes member, which Rix isn't pleased to hear about.

"For $29, c'mon," he says. "Who has to be cynical about $30?"

Okay, Rix. I'll try out Stripes and report back here with my impressions.

As Virgin Blue's V Australia prepares for a major strategy shift by launching flights to Abu Dhabi next month as part of its alliance with Etihad Airways, it is worth noting the partnership has a friendship at its core.

Virgin Blue chief executive John Borghetti and his counterpart at Etihad Airways, James Hogan, were all smiles at Virgin's annual results last August, above, when the Etihad partnership was announced.

And rightly so: Borghetti and Hogn were breaking out of their decades-long classification as second place contenders.

"I started in Ansett in 1975 checking in bags at Melbourne airport," Hogan says, "and I think you were the--"

"Mail boy," Borghetti chimes in.

"Mail boy at Melbourne airport."

"I was envious at the time," Borghetti says with a grin to Hogan. "You were checking bags."

Borghetti rose to be Qantas's general manager but quit after being passed over for the top post in favour of then-Jetstar chief executive Alan Joyce. When Borghetti joined Virgin last year, it was immediately apparent to staff that Borghetti was out to prove himself. He would make Virgin, the hipster up-start, a worthy rival to the revered and dignified carrier he spent so long with.

Hogan had a stint as Gulf Air's chief executive but left over managerial differences, as did a few other aviation faces. At Etihad, Hogan would lead a cash-rich carrier with superior service placing mind-boggling aircraft orders yet would always be overshadowed by neighbouring Emirates.

For Borghetti and Hogan, last August was their time.

By codesharing with Etihad out of Abu Dhabi, Borghetti's Virgin gained one-stop access to European cities whereas Qantas largely has to backtrack its passengers around London or Frankfurt. A few weeks prior Joyce said Virgin could not easily emulate Qantas's network.

Nor could Virgin have a sizeable frequent flyer program, a lure for corporate travellers, Joyce reckoned. The Etihad partnership included reciprocal frequent flyer benefits.

The bigger gains undoubtedly went to Borghetti and Virgin, but Hogan and Etihad did not go away empty-handed. From next month Etihad will have double-daily flights out of Sydney (including codesharing on V Australia), an attractive schedule to the corporate market.

Etihad will codeshare with Pacific Blue across the Tasman to New Zealand, where Emirates already plies the market with a sizeable presence. Etihad also receives feeder traffic from around Australia, which Emirates lacks.

There was a hint of the two adding insult to injury. Etihad had a partnership with Qantas, which Borghetti brokered while he was at Qantas. Emirates meanwhile had a partnership with Virgin. Etihad's Qantas and Virgin's Emirates alliance ended in the wake of Virgin and Etihad tying up. The deal between second-place contenders left their first-place rivals empty.

"It's perhaps quite ironic here we are today discussing this partnership," Hogan says.

Ironic yes, and definitely the day the underdogs trumpeted. What will their friendship bring next?

Over the next few weeks Virgin Blue is expected to make a number of announcements to help the carrier capture more of the corporate market and strengthen its network. Since new strengths will come at the expense of Qantas, it is worth considering what Qantas thinks of Virgin's plans and how Qantas plans to fend off Virgin.

Qantas chief executive Alan Joyce offered his first insights into the topics last July. Here's what's changed since Joyce's first remarks and what further changes we can expect from Virgin.

Network
Quote Joyce:

I believe it's very hard to replicate our network. It's going to require a huge investment in new aircraft in order to replicate that network.

Virgin's mainline domestic network rivals Qantas's. For regional flying, Virgin is making inroads with this month's announcement of a partnership with Skywest (although some frequent flyers have questioned the comfort of the planned yet unspecified turboprops compared to Embrarer E-jets, left).

Internationally, Virgin made significant network inroads into Europe with its partnership with Etihad Airways. The Delta partnership, be it a joint-venture or codesharing with Delta, will improve V Australia's North American traffic. What remains is Virgin's Asian strategy, which Virgin Blue chief executive John Borghetti has only said will entail more partnerships and Virgin flying some routes itself.

These intercontinental partnerships give Virgin Blue a virtual network. As Borghetti explained last August: "With a small number of airplanes [operating] into two key hubs, in Los Angeles and Abu Dhabi, we actually open up hundreds of destinations around the world, hundreds to the point we would never be able to fly to on our own without buying squadrons of aircraft."

Frequent flyer: core of corporate market
Joyce:

It's very hard for our competition to replicate our frequent flyer program. With 7.2 million members it's got the largest penetration of any domestic market of any airline I think in the world. That gives us a hugely solid foundation and makes it hard for them to penetrate the corporate market as a consequence.

The most crucial part, along with codesharing, of Virgin's partnership with Etihad is reciprocal frequent flyer benefits. Corporate travelers want to earn frequent flyer points they can use for personal trips and the Etihad partnership has helped expand Virgin's limited Velocity programme. Velocity's expansion will continue as Virgin partners with more carriers.

Qantas has not done itself any favour by taking away platinum elite anytime lounge access and priority check-in for silver members. In comparison, Virgin Blue Silver Status members, the lowest elite levels, can avail themselves of priority check-in. The highest Velocity elites, gold members, do not receive anytime lounge access. Given the number of disgruntled Qantas Frequent Flyer members, Virgin Blue might want to consider what the cost is of granting anytime lounge access and adding that perk into its plan to woo corporate travelers.

Product
Joyce:

The product that we're offering is miles ahead of the competition today and we're not stopping there. We're investing hundreds of millions of dollars in new product on the ground and in the air and that I believe will put it out of reach of where the competition can get without a significant investment in product and that's going to be a big difficult thing for them without the core traffic.

Virgin's product is the outstanding item that has yet to change and its domestic A330 configuration has not been released. Virgin acknowledges short-haul premium economy has not worked and will be changed. Lounges are also getting upgraded. Internationally Virgin needs to align its product with its partners, particularly Air New Zealand since the two will be codesharing across the Tasman and a product imbalance could make customers avoid one carrier.

The more pressing product concern may be with Qantas and not Virgin. Frequent flyers scowled in November at the image of the new domestic business class on A330 VH-EBO (right).

The seats were more akin to economy seats or Jetstar's Star Class, ostensibly to make aircraft interchange between Qantas and Jetstar easy. Some frequent flyers said they would not pay for business class between Melbourne/Sydney and Perth if that was the product they would receive.

If there is one domestic interior Qantas should not dishevel, it is this one. Virgin Blue has said it will take three A330-200 aircraft to use on the Melbourne/Sydney-Perth runs. The interior is undisclosed, but if VH-EBO is the competition, Virgin has it easy. For everything else, Virgin will have to prove itself.

To each his own?
Joyce:

For Qantas it's up to us to play our game and we play our best game. It doesn't matter what the competition will do in terms of those issues because Qantas is so strong.

For all of Joyce's public nonchalance, once the doors close, expect a fight.


Photo Credit: Virgin Blue from AirSpace photographer Rear Loader

It was November 2000 and the Qantas board was deciding between two very large aircraft (VLA) known only as the A3XX and 747X-Stretch to replace and grow its 747-400 fleet, which in turn would replace the 747 classic fleet that would be sold.

The A3XX would eventuate as the world's largest passenger aircraft, the Airbus A380, while the 747X would be nixed as the manufacturer, Boeing, turned its sights on the medium-sized aircraft market.

Despite Qantas having a previously cosy relationship with Boeing, the Airbus A3XX was the clear winner for Qantas, as documents filed to support the legal case between Qantas and Rolls-Royce indicate in greater detail than previously disclosed.

A3XX Benefits
The A3XX offered higher payload despite higher cost, a larger customer base, and "greater developmental potential for further payload and range improvements", says the Qantas board's November 2000 acquisition request for approval.

Airbus also offered "superior risk mitigation", in particular giving walk away rights from the A3XX "if the key payload range, environmental, aircraft program and airport development targets are not met," the request says.

"The competition for launch customers has helped Qantas secure from Airbus greater delivery stream flexibility and superior walkaway right conditions for the significant elements of project risk, compared to Boeing," the request says.

Boeing's approach, Qantas says, "was to require Qantas to take delivery of the potentially infringing aircraft. A capped remedy would be paid to Qantas during a period of up to four years during which Boeing would attempt to rectify the infringement. If Boeing were unable to rectify the shortfall within the four year period, Boeing would repurchase the aircraft at an assessed value."

A3XX downside

The A3XX would better alleviate some of Qantas's 747-400 payload limited routes than the 747X-Stretch. From Los Angeles to Sydney the A3XX was projected to be able to carry 43 more passengers and three more tonnes of cargo than the 747X-Stretch. From Singapore to London the A3XX would have been able to carry 26 more passengers and 5.3 more tonnes of cargo than the 747X-Stretch. Note those figures are based on interior configurations from 2000.

(Payload and seat cost are an interesting contemplation in light of the 747-8 v. A380 sales effort.)

The A3XX's increased seat kilometre cost, the request says, was "driven primarily by the higher fuel and aircraft weight related charges as well as the increased maintenance cost."

Both the A3XX and 747X-Stretch faced higher maintenance costs than the 747-400 due "to the premium costed in 'power-by-the-hour' maintenance schemes versus traditional maintenance". Qantas's TotalCare package for the Rolls-Royce Trent 900 engines it ordered for its A380 has been called into question in light of the QF32 uncontained engine failure and subsequent lack of spare engines.

Price
For price, Qantas says Airbus indicated it would only offer unspecified price incentives until the end of 2000, or for 100 aircraft, whichever came first. The exact discounted price from Airbus and Boeing was redacted.

"It is anticipated that these prices cannot continue to be offered, given the investment required," Qantas opined. That perhaps explains why Qantas wanted to close the deal before 2000 ended. The Qantas board agreed to purchase 12 A3XX aircraft during a 7 am conference call on 24 November 2000.

Delivery schedule
Airbus would let Qantas reschedule its fifth through twelfth firm aircraft (and every second option aircraft) up to 36 months with 28 months' notice. Airbus would also permit Qantas to bring deliveries forward subject to availability. Boeing's flexibilities were not detailed.

Airport readiness
While airport capability was a concern prior to the A380's entry into service, Qantas found "the majority of the costs associated with Australian airport upgrades could be recovered through the normal landing charges that would apply to the higher takeoff weight associated with the larger aircraft."

Airbus provided Qantas with walk away rights if Sydney, Singapore, London, and Los Angeles airport were unable to confirm A380 readiness 24 months before entry into service.

Brand factor
Qantas concluded the new wider cabin and full-length upper deck of the A3XX "is more likely to have a positive impact on the Qantas brand in terms of a premium position and technical innovation than the B747X," the request says.

"This is believed to have been a significant element in the decision by Singapore Airlines to acquire the A3XX."

The request notes, however, "no financial benefit was given to the new fuselage cross section or new product status of the A3XX."

Qantas's lawsuit against Rolls-Royce is supported by a profusion of documents, copies of which were obtained by Wings Down Under, and give insight into Qantas's A380 operations.

One such example is where the Qantas A380 fleet may fly to next.

Bangkok and Tokyo
In its 2000 request for proposal to engine manufacturers to supply powerplants for its very large aircraft acquisition (VLA; A380 or 747X-Stretch), Qantas outlined an "indicative only" plan of where it would operate its VLAs.

The first route would have commenced in the third quarter of 2005 on the Melbourne-Singapore-London route and eventually ramped up to nine weekly flights.

The next quarter would see the start of daily services from Sydney to London via Bangkok.

The first quarter of 2006 would see the start of thrice-weekly Melbourne-Los Angeles flights and twice daily Sydney-Los Angeles flights.

Finally a thrice-weekly Sydney-Tokyo service would be launched on the A380 in the third quarter of 2006.

Only last month did the first pegged route, Melbourne-Singapore-London start on the A380. The kangaroo flight from Sydney was routed through Singapore, not Bangkok, and frequencies all around have changed, but the general routes have so far held, suggesting Bangkok and Tokyo could--could--be future A380 destinations.

Arguments against this are Bangkok's political woes being a deterrence from deploying the premium A380. Plus since Bangkok is 807 miles closer to London than Singapore, the A380's higher payload makes more of a difference from Singapore than Bangkok.

The Japanese market has seen a downturn since 2008 with much capacity re-allocated to Jetstar. It was only last year Qantas put a 747 on the route in recent times. Even then, the Melbourne-Tokyo route has not been re-instated. How soon will Tokyo be ready for more capacity?

Value Qantas saw in A380
Tokyo Narita along with Sydney, London, and Los Angeles was a key destination for the A380 when Qantas management sent its request for approval acquisition to its board in November 2000.

The A380 would "address slot, curfew and commercial scheduling limitations" at those four airports, says the request, approved by then-CEO James Strong and reviewed by CEO Designate Geoff Dixon and CFO Peter Gregg.

The A380 would also "improve existing payload-limited sectors such as Los Angeles-Sydney and Singapore-London," the request says. Qantas initially planned for the A380s to "provide international capacity growth at approximately 5% per annum".

Planned A380 configuration

Qantas also in 2000 detailed indicative interior configurations. The configurations are an example of industry trends: fewer premium seats and premium economy becoming more popular. They also reflect what changed in the eight years between Qantas's indicative configuration, the delivered configuration, and forthcoming configuration. In short: the number of economy seats stayed the same, first class decreased, business shrunk significantly, and premium economy grew out of nowhere.

Qantas envisioned seating 514 passengers in the A380 across three classes: 18 in first (2-4-2 on the main deck), 106 in business (2-2-2 on upper deck), and 390 in economy (3-4-3 on the main deck or 2-4-2 on upper deck). The 747X-Stretch would have seated 488 passengers: 14 in first, 100 in business, and 374 in economy. The upper deck would have seated business class exclusively.

An alternative A380 configuration was to place 14 first class seats in a 1-2-1 configuration on the upper deck (which Qantas followed through with, albeit on the lower deck), 96-106 business seats, and 390-414 economy seats for a total of 514 to 524 seats.

The current Qantas A380 configuration of 450 seats (390 in economy, the creation of premium economy with 32 seats, 72 in business, and 14 in first) shows there were steep reductions across the board from the indicative configuration: 15% in economy, 32% in business, and 22% in first. The large drop in business seats is noteworthy considering future Qantas A380s will have fewer business class seats.

Missing, of course, is how much Qantas planned to charge for the 514 seat configuration; it is possible Qantas has higher yields with the lower seat count due to a better product and premium economy costing little extra above economy but delivering higher yields.

Virgin Blue wasted little time promoting its win of sponsoring the AFL, previously Qantas's turf.

(Photos: Virgin Blue)