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The Commercial Viability of Ultra Long-Haul Operations

Evidence from Qantas’ Perth-London Service

©️ Linus Benjamin Bauer MSc MRAeS

Guest Lecture

Royal Aeronautical Society UAE Branch

Building A @ Emirates Training College

Dubai, 3 February 2020

Agenda

Guest Lecture at the Royal Aeronautical Society

1. Introduction

2. Background of Research Project

3. Market Analysis: Key Findings

4. Market Opportunity Analysis: Key Takeaways

5. Revenue-Cost Model: Results and Key Takeaways

6. Sensitivity and Risk Analysis: Results and Key Takeaways

7. Conclusion

©️ Linus Benjamin Bauer

Introduction

Linus Benjamin Bauer, MSc MRAeSSenior Consultant at PROLOGIS &

Visiting Lecturer in Air Transport Management at

City University of London in London and Dubai

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer

Work Experience in Aviation

PROLOGIS AG

Senior Consultant

Hamburg, Germany

Independent Aviation Consultant

Bonn, Germany / Bern, Switzerland

SkyWork Airlines AG

Manager Revenue Management and Pricing

Bern, Switzerland

Singapore Airlines Ltd

Management Trainee Programme

Frankfurt, Germany

Etihad Airways

Marketing Assistant DACH & Offline Markets Eastern Europe

Munich, Germany, and Abu Dhabi, United Arab Emirates

Condor

International Sales

Frankfurt, Germany

Education

City University of London, London (GB) and Dubai (UAE)

Master of Science in Air Transport Management

IUBH – School of Business and Management, Bonn (GER)

Bachelor of Arts in Aviation Management

Yale University, New Haven (US)

Visiting International Student Programme (Y-VISP)

International Economics & Global Affairs

Work Experience in Aviation

Education

Recipient of the City University of London’s

Outstanding Academic Achievement Award

Personally presented in Dubai by

HH Sheikh Ahmed bin Saeed Al Maktoum

(Chairman and CEO, Emirates Group)

Agenda


1. Introduction






7. Conclusion



Background of Research Project

▪ Master’s Thesis at the City University of

London

▪ Topic: The Commercial Viability of Ultra Long-

Haul Operations, Evidence from Qantas’

Perth-London Market

▪ Project Supervisor: Mr Paul Clark

▪ Duration: September 2018 – March 2019

▪ Locations: London, Dubai, Perth and Sydney

▪ Highlights:

▪ Miles flown: 74,108 miles

▪ Longest Flight: Perth-London (QF9)

▪ Most memorable flight: Scenic flight

above Sydney area on a Cessna

Caravan & departure from Sydney’s

first international airport in Rose Bay,

New South Wales

▪ Most memorable highlight: Visit at

Sydney’s first international airport

where the first plane for Southampton

took off in 1938 (Flying Boat: 10 days

journey with 30 stops/20 for refuelling)


Main Objectives of Research Project

Development of a Revenue-Cost Model

Review of Previous Ultra Long-Haul Routes

Identification of Drivers for Ultra Long-Haul Operations

Collection of Qualitative and Quantitative Data

Market Analysis as a Foundation for R-C-Model

(Qualitative Method)

Set-up of Revenue-Cost Model

(Quantitative Method)

Production of Academic Evidence

Application of Specifically Designed

Revenue-Cost Model

Analysis of Results from R-C-Model

Sensitivity Analysis

Risk Analysis

(Supporting the Validity of Results)

Filling the Gap in the Academic Literature

and Enhancing the Current Debate on the

Viability of Current and Future Ultra Long-

Haul Operations

Review of Results (Evidence)

Provision of Revenue-Cost Model

for Consulting Projects

(Route Simulation/Analysis Tool)

e.g. used by

RESEARCH PROJECT PROCESS


Sources of Data and Information

Data and information for the Revenue-Cost-Model Analysis and

Market Analysis were derived from the following sources to

create a hugely powerful proprietary dataset with accurate data

and reliable assumptions:

▪ Flight Data collected from multiple flights between UK-AUS

▪ Aircraft manufacturers (e.g. Boeing)

▪ Engine manufacturers (e.g. Rolls Royce)

▪ Financial and statistical reports from Qantas and IAG

▪ Financial and statistical reports from Heathrow Airport and

Perth Airport

▪ Airport charges documentation and information from Heathrow

Airport and Perth Airport

▪ National civil aviation authorities and governmental

organisations (UK, EU and Australia)

▪ Data providers incl.:

OAG, IATA, CAPA, FlightGlobal, ch-aviation, InFare and RDC

▪ Independent in-house research conducted by Linus Bauer

Detailed Methodology (Revenue-Cost-Model) available upon

request.Logos collected from: above-mentioned sources

Image collected from: Envato

Agenda


1. Introduction






7. Conclusion



Customer-perceived Value of Ultra Long-Haul Flights (e.g. QF9/10)

▪ Ultra long-haul operators position themselves in the premium market

segment by offering higher fares for the direct flight as a premium product

▪ According to Dunleavy and Westermann (2005), the price is critical,

however, products ultimately sell on value rather than on price alone

▪ More than 30% of the customers in 2018 did not choose the cheapest

flight offered via Skyscanner (Skyscanner, 2018)

▪ Customers’ substantial body is also to some degree product-sensitive

and therefore customers must perceive value

▪ The fundamental objective is to pitch a better bid for customers’ business

than competitors are pitching by offering perceptibly more customer value

to targeted customer segments (Holloway, 2008)

▪ Products of airlines on the right side of the curve are only sustainable in

the long-term if there are entry barriers preventing competition from other

carriers willing to position on the left side of the curve or if the segment is

insufficiently profitable to attract such customer-driven competitors

▪ Qantas offer good value relative to the competitors when they

provide unique benefits which justify premium pricing for the

premium product: non-stop service between Perth and London

(including the QF9/10-related products on ground and onboard)

▪ By designing a service-price offer that is believed to sit somewhere

on that segment’s acceptable perceived value curve, Qantas can

target specific customer segments

Customer-perceived Value from a Service-Price Offer

Qantas‘ QF9/10 vs. OAL



The rise of the Mega Hubs along the Kangaroo Route

▪ The famous Kangaroo Route between Australia and the UK has been

one of the most competitive air corridors in aviation history

▪ Various airlines are competing for traffic through their points, including

emerging hubs across Asia and the Middle East

▪ Qantas’ direct link from Perth to London bypasses 12 of the world’s 20

busiest hub airports by seats

▪ The majority of them are also main hubs of airline alliances: Star Alliance,

SkyTeam and Oneworld

▪ Out of the 12 world’s busiest hub airports by seats in the area between

Australia and the UK, six airports belong to the Top13 hub airports with

the highest share of connecting passengers between both countries:

Dubai (Emirates), Singapore and Bangkok (Star Alliance), Guangzhou

(China Southern), Kuala Lumpur and Hong Kong (Oneworld)

▪ Singapore, Bangkok and Hong Kong alone are three Asian transfer

points with a population pool of around 45m people → Qantas’ shift of

A380 Ops from Dubai back to Singapore (SYD/MEL-SIN-LHR)

▪ Singapore and Dubai are significant hubs for the traffic between Europe

and Australia

▪ In recent years, the Gulf carriers have leveraged their privileged

geographical location and thus obtained a competitive advantage on the

UK-Australia market supported by an efficient hub-and-spoke system and

competitive cost structures (Pilz et al., 2018) Sources: OAG, FlightGlobal, Pilz et al.


Guest Lecture at Royal Aeronautical Society - 11 -©️ Linus Benjamin Bauer

Perth (PER) – London (LHR) Market

Key Players / Main Competitors of Qantas (QF9/10)

Perth (PER)

Images collected from Airlines and Envanto

Sources: IATA PaxIS, OAG FlightAnalyzer, CAPA, FlightGlobal, Office for National Statistics

▪ 41% of the passengers‘ journey between Perth and

London were via Abu Dhabi, Dubai and Doha

(IATA PaxIS)

▪ 26% of the passengers flew via the following hub

airports in Asia: Singapore, Bangkok, Kuala

Lumpur and Hong Kong (IATA PaxIS)

▪ Note: Etihad withdrew its daily AUH-PER service in

October 2018 as part of a continuing review of

Etihad‘s network performance (Etihad, 2018)

Facts (APR-SEP18):

Doha (DOH)

Dubai (DXB)

Singapore (SIN)

Kuala Lumpur (KUL)

Bangkok (BKK)

Hong Kong (HKG)

London Heathrow

(LHR)

3x 2x


O&D Market Share Perth-London

April – September 2017 vs 2018

▪ 178,560 passengers in total flew between Perth and London during the

period April– September 2018

▪ April – September 2018 versus April – September 2017: +2%

▪ Qantas’ direct link immediately captured a significant market share of

24% by passengers flown

▪ Market shares of the competitors decreased, the premium carrier

Singapore Airlines was mainly affected by this (-7%) since Heathrow-

Perth belongs to SIA’s Top5 connecting airport-pairs since 2016/2017

(anna.aero, 2019)

▪ Despite being located in one of Emirates’ key markets Australia, the

existing Emirates-Qantas partnership until 2023 contributes to

Emirates’ large share in the Perth-London market

▪ In 2018, Emirates’ declining market share was also driven by Qantas’

strategic move to shift its A380 ops from Dubai back to Singapore

(Sydney/Melbourne – Singapore – Heathrow)

▪ Conclusion: Qantas’ success on the PER-LHR route led to competitors’

move to reduce frequencies and capacities to Perth (e.g. Emirates,

Singapore Airlines and Malaysia Airlines)Data collected from following sources: anna.aero, IATA PaxIS, CAPA and OAG

O&D Market Share by Passengers Flown (April – September 2017)



O&D Market Share Perth-London (Premium)

April – September 2017 vs 2018

▪ Between April and September 2018, a total of 21,497 premium

passengers (+6% vs 2017) travelled between Perth and London in

First and Business Class

▪ April – September 2017: 18,465 premium passengers

▪ As mentioned in the previous slide, the premium carrier Singapore

Airlines was mainly affected by Qantas’ launch of Perth-London

(despite no capacity reductions at that time)

▪ Conclusion: Qantas successfully captured market shares from its

main competitor SIA in the premium segment

Data collected from following sources: IATA PaxIS, CAPA and OAG



Guest Lecture at the Royal Aeronautical Society - 3 -©️ Linus Benjamin Bauer

QF9/10 Feeder Traffic from/to Perth (O&D Share in %)

Top10 Cities, 1st April 2018 – 31st March 2019

London Heathrow (LHR)

Perth (PER)

Sources: OAG TrafficAnalyzer, Deloitte Access Economics, Qantas Airways Ltd, Tourism Research Australia

Number of Flights: 364

Number of Passengers: 77,170

Avg. Number of Passengers/Flight: 212

Avg. LF: 90%

Brisbane (BNE)BNE-PER-LHR: 5.9%

LHR-PER-BNE: 4.7%

Sydney (SYD)

Canberra (CBR)

Hobart (HBA)

Melbourne (MEL)

Adelaide (ADL)**

Darwin (DRW)DRW-PER-LHR: 1.0%

LHR-PER-DRW: 0.2%

Broome (BME)BME-PER-LHR: 0.4%

LHR-PER-BME: 0.5%

Outbound QF9

Number of Flights: 361

Number of Passengers: 77,550

Avg. Number of Passengers/Flight: 215

Avg. LF: 91%

Inbound QF10

SYD-PER-LHR: 6.8%

LHR-PER-SYD: 10.7%

CBR-PER-LHR: 2.1%

LHR-PER-CBR: 2.4%

MEL-PER-LHR: 24.6%

LHR-PER-MEL: 23.5%

*True Origin/Destination QF9/10

HBA-PER-LHR: 0.7%

LHR-PER-HBA: 0.1%

PER-LHR: 50.1%

LHR-PER: 51.3%

**ADL-PER-LHR: 4.4%

LHR-PER-ADL: 4.8%

Auckland (AKL)AKL-PER-LHR: 1.5%

LHR-PER-AKL: 0.6%

▪ In comparison with London-Heathrow as a large

O&D market with a larger catchment area, Perth

relies more on domestic connections to other parts

of Australia, which is much needed from the airline

and hub economic perspective in order to achieve

satisfied commercial performance results

▪ Qantas‘ main focus lies on providing a feeder

network at the Perth end, leading to a competitive

advantage by offering an own feeder network from

Perth to 14 destinations in Australia

Facts:

Guest Lecture at Royal Aeronautical Society - 11 -©️ Linus Benjamin Bauer

QF9/10 Feeder Traffic from/to Heathrow (O&D Share in %)

Top10 Cities, 1st April 2018 – 31st March 2019


Perth (PER)

Images collected from: British Airways, Qantas and Envato

Sources: IATA PaxIS, OAG FlightAnalyzer, Deloitte,

British Airways, IAG, Office for National Statistics UK

Edinburgh (EDI)

Glasgow (GLA)

Belfast (BFS)

Manchester (MAN)Leeds-Bradford (LBA)

Newcastle (NCL)Dublin (DUB)

Cork (ORK)

Shannon (SNN)

Aberdeen (ABZ)

MAN-LHR-PER (9.6%) / PER-LHR-MAN (9.8%)

LBA-LHR-PER (4.0%) / PER-LHR-LBA (3.1%)

NCL-LHR-PER (3.2%) / PER-LHR-NCL (2.9%)

GLA-LHR-PER (6.0%) / PER-LHR-GLA (5.1%)

EDI-LHR-PER (5.2%) / PER-LHR-EDI (3.7%)

ABZ-LHR-PER (2.1%) / PER-LHR-ABZ (1.7%)

BFS-LHR-PER (0.4%) / PER-LHR-BFS (0.2%)

DUB-LHR-PER (7.5%) / PER-LHR-DUB (7.2%)

ORK-LHR-PER (3.4%) / PER-LHR-ORK (2.7%)

SNN-LHR-PER (1.1%) / SNN-LHR-PER (0.6%)

▪ Based on figures from the OAG Traffic

Analyzer in 2018, the London market was

the largest O&D market in Europe

regarding total passengers flown between

London and Australia

▪ According to the data collected from IATA

PaxIS, CAPA and OAG, slightly more than

1.3 million two-way passengers flew

between Australian cities and London in

2018

▪ An additional reason for offering the very

limited amount of code-sharing feeder

traffic from the mega-hub airport Heathrow

to cities in the UK and Europe are the Gulf

carriers, offering more convenient one-stop

journeys between the UK/Europe and

Australia via their hubs in the Middle East

(e.g. Milan, Paris, Frankfurt)

Top10 Cities (O&D) ex/to Heathrow:

Facts:


Largest O&D Markets in Europe (ex/to Australia)

▪ In terms of the total amount of passengers flown between

London and Australia in 2018, Heathrow was the largest O&D

market in Europe

▪ Slightly more than 1.3m two-way passengers travelled between

the cities in Australia and London

▪ Heathrow can be characterised as a large O&D market in the

long-haul sector

▪ 202 of the UK’s Top300 companies are headquartered within a

25-mile radius of Heathrow, thus making it very attractive as a

final destination for business travellers

▪ In addition to London’s population (~8.8m), over 4.5m people

live within a 60-minute radius of Heathrow

European Airports

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Data and information collected from following sources: CAPA, Heathrow Airport, Qantas, FlightGlobal, Deloitte Access Report



Fare Benchmarking Analysis ex Perth

▪ Departure Period: December 2018 – March 2019

▪ Date of Fare Collection: 22 November 2018

▪ Sources: Skyscanner, ITA Matrix, GDS and Websites of Airlines

▪ Return Fare in Business Class: 5-7 days

▪ Return Fare in Economy Class: 7-21 days

▪ Due to very limited/no availability of Premium Economy Class

cabins on aircraft of competitors (e.g. Gulf carriers), Premium

Economy Class fares were not considered in the fare

benchmarking analysis

▪ The same applies to First Class since Qantas’ Boeing 787-9

fleet does not contain First Class cabins

▪ Business Class fares out of Perth are up to 72% higher

than fares offered by main competitors

▪ Monopolistic position of Qantas (non-stop)

▪ Demand and pricing driven by the high connectivity

share between Perth and the East Coast of Australia

▪ About 40% of the bookings are made by passengers

starting their journey from cities such as Sydney,

Melbourne, Brisbane and Adelaide via Perth to London

▪ High-Yield Focus on passengers flying from Perth to

Heathrow and back (P-2-P)

Return fares in Business Class in AUD (PER-LHR-PER)

Return fares in Economy Class in AUD (PER-LHR-PER)

DAYS BEFORE DEPARTURE




Fare Benchmarking Analysis ex Heathrow

▪ Departure Period: December 2018 – March 2019

▪ Date of Fare Collection: 22 November 2018

▪ Sources: Skyscanner, ITA Matrix, GDS and Websites of

Airlines

▪ Return Fare in Business Class: 5-7 days

▪ Return Fare in Economy Class: 7-21 days

▪ The feasibility of premium pricing is influenced by

competition, customers’ perception of value and economic

conditions in both markets

▪ Due to intense network competition on the Kangaroo Route

(UK-Australia), the fares for transfer itineraries are usually

more competitive than the fares for non-stop itineraries

(Bischoff et al., 2011)

▪ In most cases, airlines (e.g. Qantas on LHR-PER)

increase prices to focus on direct premium traffic

between a congested airport and a secondary airport if

demand outstrips supply (Bouwer, 2015)

▪ Heathrow’s attractiveness due to high proportion of

premium passengers and long-haul routes also drive

the fares up

Return fares in Business Class in GBP (LHR-PER-LHR)

Return fares in Economy Class in GBP (LHR-PER-LHR)

DAYS BEFORE DEPARTUREDAYS BEFORE DEPARTURE


Fare Comparison Economy Class

Non-stop (QF9/10) vs. One-Stop

▪ Departure Period: 24 March – 30 April 2018 (First month)

▪ Date of Fare Collection: February 2018

▪ Source: CAPA (2018)

▪ Duration of Stay: 7 days

▪ Cabin Class: Economy Class

▪ The Economy Class cabin with 166 seats owns the highest

capacity share (70%) on Qantas’ 787-9

▪ Ultra long-haul flights from London to Perth were

averagely 58% more expensive than the one-stop

flights via the Middle East, South East Asia or East Asia

▪ On a couple of travel periods, the QF10 fares out of

London were up to 98% higher than the cheapest one-

stop return fares

▪ In contrast to the fares ex LHR, the return fares out of Perth

fluctuated between 16% and 76%, partly driven by the

higher share of QF9/10 connecting traffic

(e.g. Sydney/Melbourne/Brisbane-Perth-London)

Return fares in Economy Class in GBP (First month of PER-LHR-PER)

Return fares in Economy Class in GBP (First month of LHR-PER-LHR)

Agenda


1. Introduction






7. Conclusion



Commercial Viability of Ultra Long-Haul Operations

Key Takeaways from ULH Market Opportunity Analysis (1/3)

▪ One of the key influencing factors for the stimulation of ultra long-haul traffic demand: The propensity to travel

increases dramatically when people enter the middle class in many parts of the world (growth of global wealth), thus

these changes are essential for ultra long-haul air travel demand since continuing strong consumer spending on travel

has bolstered air travel in recent years

▪ The rapid expansion of business networks globally, the rise of affluent consumers, and growing numbers of immigrants

worldwide with a disposable income due to globalisation have led to a growth of total premium class bookings

worldwide (e.g. Indians working in the Silicon Valley & Bay Area → SFO – DEL/BOM)

▪ Holding up better than the declining Economy Class yields: Premium passengers travelling in First, Business and

Premium Economy Class are essential for operators to obtain economically viable yields on ultra long-haul routes

▪ Apart from increasing air transport deregulation, hub congestion and economic growth of the regions around the non-

hub/secondary hub airports, the rise of unique city-pairs in the (ultra) long-haul sector is also driven by the

development of fuel- and cost-efficient twin-engine aircraft such as the Boeing 787 and Airbus A350, making

direct services/thinner routes between main hubs and secondary hubs/cities commercially viable again (e.g.

Boeing 787 reduce costs by 15 per cent on average)

▪ Catchment area: A large and attractive catchment area with a large existing premium customer base (higher

willingness-to-pay) is a necessary condition for launching ultra long-haul services between a main hub (e.g. Heathrow

as a large long-haul O&D market) and secondary hub/city (e.g. Perth)

▪ Feeder network: Providing feeder traffic for the ultra long-haul flight is required (e.g. Qantas provides QF9/10 feeder

traffic from Perth to 14 Australian airports = reduction of total travel time and amount of stops → leading to Qantas‘

competitive advantage towards competitors)

▪ The reliability (On-time performance and customer punctuality) of such services plays a crucial role in the

premium segment, therefore the success of providing and operating a premium route to premium passengers also

depends on the reliability of the (congested) airports including the infrastructure (accessibility) and suppliers such as

ground handling, catering and air traffic controlImage collected from: EnvatoSource: In-house research conducted by Linus Benjamin Bauer



Key Takeaways from ULH Market Opportunity Analysis (2/3) ▪ Premium pricing for offering higher convenience: Customers in general (e.g. Australians as frequent long-haul

travellers due to “geographical disadvantage”) do value taking the connecting flight (domestic → long-haul and vice

versa) in their home country or on their home continent instead of interrupting their long journey in Dubai, Abu Dhabi

or Doha in the middle of the night/early morning

▪ Seasonality of Demand: In general, the monthly variable costs (DOC) of operating an ultra long-haul route are

largely affected by the seasonality of demand which mainly occur in the leisure market or during the statutory holidays

when leisure traffic usually peaks while business travellers‘ demand shrinks

▪ Price Elasticities of Demand on Ultra Long-Haul: By targeting less price-elastic (-0.265) and benefits-sought

premium customer segments with high willingness-to-pay (WTP) for the premium fare (avg. 30% higher than one-stop

fares), the ultra long-haul operator would be able to build a strong premium market position for corporate, premium

leisure and VFR travellers

▪ Two class configuration on aircraft (Business & Premium Economy) should be avoided (Example: Singapore

Airlines‘ real struggle to fill the seats in Premium Economy cabin on SIN-EWR route, a route mainly attracting

business travellers travelling in Business Class → leading to high level of dependency on business travellers)

▪ From a Revenue Management and Pricing perspective, a three/four class configuration on the aircraft with at

least 40 per cent share of premium seats (F/C/YW) is considered as an optimal configuration for ultra long-

haul services (Opportunities incl. Upselling, Demand Stimulation, Revenue Maximization, Improving Yield Mix)

▪ Cabin interior refurbishment & modification on ultra long-haul aircraft with new products in order to attract the

premium market segment and retain a base of loyal customers, e.g. a new Premium Economy Class product in the

future since YW generates 2.3 times higher revenues than its production cost (1.6 times higher than Economy Class),

leading to the highest marginal returns of all cabin classes (F/C/YW/Y)

▪ Value-added product to SMEs, Leisure and VFR segment: Development of a new cabin between Business and

Premium Economy Class on Ultra Long-Haul Flights since the gap between both classes gets larger from time to time

(Passenger Experience & Hard Product)

Image collected from: EnvatoSource: In-house research conducted by Linus Benjamin Bauer



Key Takeaways from ULH Market Opportunity Analysis (3/3) ▪ Focus on direct premium traffic: Ultra long-haul operators focus on premium pricing for the premium point-to-point

traffic between a congested airport (e.g. LHR) and secondary hub airport (e.g. PER) if demand outstrips supply

(Heathrow’s attractiveness due to high proportion of premium passengers and long-haul destinations also drive the

prices up)

▪ High Net Promoter Score: Ultra long-haul routes nowadays enjoy high NPS (e.g. Perth-London, highest NPS in

Qantas’ entire network), leading to a strong position in the premium segment

▪ Environmental-friendly: Less CO2 emissions on ultra long-haul routes, attracting the growing eco-minded customer

segment (taking one direct flight instead of flying two legs with two take-offs)

▪ Increasing importance of VFR traffic for “filling the seasonality gaps”: Strong ethical ties between two

countries/markets lead to more stability of demand throughout the year (e.g. Perth’s population is notable of its very

high proportion of UK- and Ireland-born residents)

▪ Extension of code-share pact with another airline would strengthen the premium market position by offering higher

frequencies and more destinations (feeder traffic)

▪ Strategic partnership with another airline (e.g. JV): In addition to enjoying the common benefits from a strategic

partnership/joint venture activity, a strategic partnership with another alliance member airline (e.g. British Airways and

Qantas from 2023 on) would establish and strengthen the “Premium Kangaroo Route” (+ increase the premium market

shares of BA/QF) between the United Kingdom and Australia/New Zealand via the establishing hub in Western Australia

▪ Ancillaries: For ultra long-haul operators, ancillaries have become an increasingly important mechanism for cost

recovery (e.g. higher proportion of last-minute upgrades to the next cabin class on ultra long-haul routes paid with cash,

miles or both)

▪ Increasing Importance of Frequent Flyer Programme: The loyalty programme of alliance member airlines (e.g.

Qantas’ FFP) nowadays can be seen as an essential driver of market share and revenue quality, and having a large

existing FFP customer base in the home and foreign market (e.g. UK and Australia) can be considered as one of the

necessary market conditions for ultra long-haul servicesImage collected from: EnvatoSource: In-house research conducted by Linus Benjamin Bauer

Agenda


1. Introduction






7. Conclusion



Study Parameters, Inputs and Assumptions

R-C-Model Scenario: Perth (PER) – London (LHR)

Images collected from: Qantas, Envato

▪ Study Parameters

▪ Currency: USD

▪ Time Period: April – September 2018

▪ Route: London (LHR) – Perth (PER)

▪ Carrier: Qantas

▪ Aircraft: Boeing 787-9

▪ Study Inputs

▪ Weekly Frequency: 7

▪ Total Passengers: 130,874

▪ Load Factor: 82.0%

▪ Average One-way Net Fare: US$ 928.75

▪ Aircraft / Key Assumptions

▪ Aircraft Capacity: 236

▪ Aircraft Configuration: Business 42 / Premium Eco 28 / Eco 166

▪ Aircraft MTOW: 254,012

▪ Jet Fuel Price: US$ 2.11/gallon

▪ Route Distance: 14,800km


Overview of Results from R-C-Model Analysis

Scenario: QF9/10 Perth (PER) – London (LHR)

Period: 1 April – 30 September 2018


Perth (PER)

Images collected from: Qantas and Envato

US$ 68.8m

Revenue

US$ 67.4m

Costs

Margin (%)

Route Profit/Loss

CASK (US cents)RASK (US cents)

Load Factor (%)

Breakeven LF (%)

RRPK (US cents)

CASK excl. Fuel

ASKs

RPKs

Frequency: 183

Capacity: 86,376

Passengers: 70,858

US$ 1.37m

2,00% 82,0%

79,8%

1,048,698,400

1,278,364,800

¢ 6,56

¢ 5,38 ¢ 5,28 ¢ 3,44

Source: R-C-Model Analysis conducted by Linus Benjamin Bauer

April 18 – September 18:

US$ 2.11/gallon

Jet Fuel Price:

Note: Figures highlighted above are not from Qantas


Breakdown of Revenue and Costs


Revenue-Cost-Model: Bottom-Up Approach*

* In a bottom-up approach, unit costs per passenger and frequency were modelled and calculated.

→ With a share of 64%, the fuel is the main cost driver for Qantas’ non-stop service between

Perth and London (Variable Direct Operating Costs).



Currency: US$





Monthly Overview: April – September 2018 (QF9/10)


Currency: US$



Performance Overview (April – September 2018)



Together with sufficient yields, the

golden rule for FSNCs on (ultra) long-

haul routes is to achieve a minimum

load factor between 80 and 85%. It

could prove that the sufficient demand

for ultra long-haul services exists.



Monthly Load Factor Performance (April – September 2018)


In order to achieve a positive profit margin and average revenue of US$ 971.30 per passenger on the ultra long-haul route between Perth and London, an

average load factor of minimum 79.8% or higher would be required for Qantas to breakeven on that route.

Key finding from the in-house research: A study conducted by RDC Aviation (2018) highlights that the breakeven revenue per passenger at Emirates for

instance is up to 16 per cent lower on the one-stop service between Perth and London via its hub Dubai. The result is mainly driven by the compounding cost of

flying fuel for an ultra long-range distance.

The Breakeven Load Factor (BELF) is the average percentage of seats that must be filled on an average flight at current

average fares for Qantas’ passenger revenue to breakeven with the operating expenses of that ultra long-haul route.




Key Takeaways from the Revenue-Cost Model Analysis (1/3)

▪ Boeing 787-9 Configuration: Qantas deploy a 787-9 with a configuration of 34 seats less in total than the average of

all 787-9 operators, however, they do offer more Business Class seats (+9 vs. average) for its premium route

▪ Revenue per Seat increases with increasing stage length, however, Revenue per Available Seat Kilometre (RASK)

decreases with each additional kilometre flown

▪ Operating Costs increases with increasing stage length, however, Cost per Available Seat Kilometre (CASK) also

decreases with each additional kilometre flown → higher productivity of aircraft and crew

▪ Fixed Crew Costs: The Gulf and Asian carriers have a cost advantage over Qantas by paying lower wages to

employees and having less strict labour laws/weak labour unions in their countries, however, when it comes to the wage

costs-productivity equation, the staff-related productivity (ASK per Crew Member) is higher on ultra long-haul routes

▪ Distribution of Costs: Airport, handling and overhead costs are distributed across more flown kilometres

▪ Fuel Costs: Jet fuel is the most significant single expense for ultra long-haul operators, up to as much as one-third of

the total operating costs and two-third of the variable direct operating costs (~ 64%)

▪ Carriage of Extra Fuel: One of the fuel cost-related disadvantages of bypassing a hub airport (e.g. DXB or SIN) on a

direct route is that the forgoing of a refuel-stop forces the ultra long-haul operator to carry the jet fuel for the second leg

of the flight from the first take-off (e.g. PER-LHR: 94.3t)

▪ Fuel-saving Techniques: Qantas invested five years and millions of AUD in the development of fuel-saving strategies

such as single engine taxi and a new flight planning system (4D) that makes better use of jet streams and tailwinds on

(ultra) long-haul flights based on the usage of cloud computing to crunch data on thousands of possible flight paths →

usage of millions of data points in order to develop a cost map of the most efficient routes (Qantas, 2018)

▪ Ancillary Revenue: In 2017, Qantas earned US$ 1.15bn from selling ancillary products (12.1% of total revenue) and

the loyalty programme (11.8m members) with a share of approximately 90% of the total ancillary revenue has become a

main ancillary revenue stream for Qantas nowadays

Image collected from: EnvatoSource: In-house analysis conducted by Linus Benjamin Bauer



▪ Fuel for flights above 8,000 miles could cost as much as up to 30% more than the corresponding fuel for 2x 4,000 mile

legs, however, the take-off procedure is very fuel-consuming → leading to a high fuel consumption on two legs

▪ Lower Emission Costs: Perth-London service has a lower environmental impact than flights via points in South East

Asia or the Gulf, even if the A380 aircraft may be in use in concentrated flows (O’Kelly, 2012) → leading to lower overall

emission costs

▪ Maintenance Costs: Qantas’ modern and young 787-9 fleet with an average age of 0.7 years (September 2018)

requires fewer of the labour-intensive maintenance and overhaul procedures, however, once the fleet age increases,

the maintenance- and overhaul-related costs increase (ageing effect on maintenance costs)

▪ Influence of Sector Length on the maintenance costs has to be considered as another contributing factor: Due to the

very high utilisation rate of aircraft, the maintenance costs on (ultra) long-haul flights are not the prime cost-driver in

contrast to short-haul routes

▪ Average Sector Length is linked with aircraft utilisation: Various cyclic-related costs involve expensive items such as

tyres, brakes and wheels (Clark, 2017) → Relationship between cycles and hours flown: Qantas’ 787-9 perform fewer

cycles per hours flown (PER-LHR)

▪ Airport Charges: There are cost-saving potentials for Qantas’ non-stop service, e.g. the usage of two airports rather

than three is one of the few cost-saving potentials, however, the costs can be spread per movement across a much

higher number of passengers on the A380 (e.g. Emirates)

▪ En-route Charges can be considered as another cost-saving potential for operating a direct route since the en-route

charges on QF9/10 are GBP 5,000 lower than for two Emirates legs via Dubai and GBP 3,200 lower than for two SIA

legs via Singapore (RDC Aviation, 2018)

▪ En-route Charges per Passenger are influenced by the size of the aircraft: At Qantas, the charges per passenger are

18% higher than at Emirates and 5% higher than at Singapore Airlines when the cost is spread across passengers




▪ Connecting Passengers: An increase in share of connecting passengers and the establishment of new

codesharing/interlining agreements lead to higher operational complexity and inflexibility, thus higher costs at the end of

the day (0.06 US Cents/ASM)

▪ Yield: The fare structure, traffic mix, length of haul, intensity of competition and network design are factors influencing

the yield of a route → To a large extent, Qantas’ yield (above the average) on the direct route is the reflection of the

interaction between product design and pricing activities on the UK-Australia market


Agenda


1. Introduction






7. Conclusion




First Scenario

The first sensitivity scenario assumed a 9.5% rise in the jet fuel price from US$ 2.11 to US$ 2.31 per gallon over a period/due to an unforeseen

event and the actual load factor of 82% from the Revenue-Cost-Model analysis.

+ 9.5%

©️ Linus Benjamin Bauer ©️ Linus Benjamin Bauer



Second Scenario

The second sensitivity scenario assumed a 42.2% rise in the jet fuel price from US$ 2.11 to US$ 3.00 per gallon

over a period/due to an unforeseen event and the actual load factor of 82% from the Revenue-Cost-Model

analysis.

Apart from not sufficient LFs (~78%) and fuel-

inefficient aircraft (e.g. A340-500), the high jet

fuel price (US$ 3.00 per gallon) between 2011

to 2013 led to the suspension of several ultra

long-haul routes, e.g. SIN-EWR/LAX (SQ) &

BKK-LAX/EWR (TG)


+ 42.2%



Key Takeaways from Risk Analysis (1/2)The ultra long-haul routes are exposed to a variety of risks influencing the commercial viability and

profitability of such services:

▪ Oil price volatility and higher jet fuel prices → leading to higher fuel costs and possible loss from fuel hedging

▪ Economic recession and currency volatility (exchange rate fluctuation)

▪ Decline in (premium) demand and yield / downgrade to lower cabin classes

▪ Ongoing conflict in the Middle East

▪ Establishment of no-fly zones (e.g. Iran / Iraq) → operational disruptions (diversion/cancellation)

▪ Qantas’ non-stop service will be redirected to go over Afghanistan instead (+ 40-50min)

▪ Up to 90 Economy Class passengers will be bumped from its 236-seat Boeing 787-9 aircraft in order

to reduce weight and enable the jet to travel the longer route

▪ Alternative option with a 236-seat aircraft: Fuel stop in Singapore for QF9 from Perth to London

Images collected from: Envato and Flightradar24 Source: In-house research conducted by Linus Benjamin Bauer



Key Takeaways from Risk Analysis (2/2)

The ultra long-haul routes are exposed to a variety of risks influencing the commercial viability and

profitability of such services:

▪ Operational inflexibility

▪ Payload/range limitations, e.g. SQ on SIN-EWR (Configuration)▪ Scheduling: All ULR flights of EK and EY depart late night / early morning from DXB and AUH in order to

avoid the heat and humidity in summer and consequential payload limitations

▪ Strict regulations implemented by Civil Aviation Safety Authorities (e.g. working hours for crew)

▪ Rise of neo-protectionism in aero politics, natural disasters (e.g. bushfires in Australia)

▪ Market entry of new competitor on route (direct / via hub) & roll-out of new premium products

▪ Increasing security-related costs in the post-9/11 era

▪ Increasing labour costs in many parts of the world (e.g. UK and Australia)

▪ Higher than Qantas’ main competitors on the Kangaroo route

▪ Strong bargaining power of labour union and pilot associations (e.g. in UK and Australia)

▪ Increasing airport and route charges

▪ Airport charges at Perth will be increased by 38% over the next five years

▪ Australian airspace: Higher en-route charges than in other airspaces between London and Perth

Images collected from: Envato and Flightradar24 Source: In-house research conducted by Linus Benjamin Bauer

Agenda


1. Introduction






7. Conclusion



Conclusion (1/2)

▪ A new generation of ultra long-haul operators begins: The results from the Revenue-

Cost-Model analysis spread confidence and optimism that Qantas is likely to have a much

better chance of achieving profitability on ultra long-haul flights in the era of game-

changing economics.

▪ While the cost advantages of ultra long-haul services may be slight compared to one-stop

services, they are likely to make up for it in market positioning by targeting the rising

premium segment, one of the contributing factors to the increase in profitability of the 21st

century airline business.

▪ Additional contributing factors from the macroeconomic perspective are following: Rise in

global demand for air travel, recent jet fuel price development, development of fuel-efficient

aircraft (e.g. Boeing 787-9), economic growth, globalisation, rise of the middle class

(propensity to travel), increasing importance of Premium Economy Class product (e.g.

highest marginal return of all cabin classes) and ancillary products (mechanism for cost

recovery), and the increasing importance of VFR traffic filling the seasonal gaps (e.g. UK-

Australia).

▪ At large hub airports such as Heathrow, the costs to accommodate a Boeing 787-9 aircraft

is very high compared to secondary hubs/cities. FSNCs such as Qantas rely on the hub-

and-spoke operations at Perth which offer advantages in terms of cost savings and

demand stimulation with respect to economies of scale, scope, and density. Having a large

and attractive catchment area around the airport (e.g. LHR) and a wide feeder network

(e.g. PER) are necessary prerequisites for ultra long-haul flights.



Conclusion (2/2)

▪ Despite the deployment of fuel-efficient aircraft nowadays, the results from the Sensitivity

analysis deliver the key message that ultra long-haul flights are particularly sensitive to jet

fuel price fluctuations. Therefore, a serious threat to the viability of an ultra long-haul

service is the climate of high fuel price volatility, driven by the current geopolitical crisis in

the Middle East (e.g. ongoing conflict between Iran, Saudi Arabia and the allies).

▪ Apart from applying new jet fuel-saving strategies in the digital era (e.g. flight planning

systems), the adoption of fuel and currency hedging policies, the practice of a careful

aircraft empty weight management (MEW) and the optimization of airport- and staff-related

costs (e.g. cost reduction programme and renegotiations with airport authorities and labour

unions for instance) are necessary for increasing the chance of achieving profitability on

ultra long-haul routes in general (e.g. Heathrow-Perth).

▪ Less price-sensitive customer segments can pass on the higher costs of a high fuel burn

concerning premium tickets with higher yield. Lower initial yields will make it difficult to

sustain the ultra long-haul operations from a commercial point of view.

▪ In conclusion, due to the limited realistic opportunities at the moment, ultra long-haul flights

will remain a niche.

▪ South East Asia/Indian Subcontinent/OZ – US/Canada

▪ Perth – Europe (London, Paris, Frankfurt, Manchester)

▪ Istanbul – Sydney/Melbourne



Please spread the word (e.g. LinkedIn) about the

upcoming guest lectures in the following cities

in the near future. Thank you!

Guest Lecture

Royal Aeronautical Society Sydney Branch

University of Sydney Business School

Sydney, 6 May 2020

12:00 – 14:00 LT

Guest Lecture

Royal Aeronautical Society Perth Branch

Edith Cowan University @ Mt. Lawley Campus

Perth, 25 March 2020

18:30 – 20:30 LT

Guest Lecture

Royal Aeronautical Society Toulouse Branch

Airbus Campus 1 @ Airbus Group Headquarters

Toulouse, 12 May 2020

18:00 – 20:00 LT

Other cities between April and June 2020:

Hamburg (TBA), Singapore (TBA), Chicago (TBA)

and Washington DC (TBA)


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