David Stone: Budget carriers smile, despite aviation gloom

Jetstar CEO Bruce Buchanan admits the carrier's early operations in New Zealand were well below par. Photo / Brett Phibbs

Aviation veterans maintain the industry has never been in a worse state. But their new low-cost competitors are determined to remain upbeat.

Despite the downturn affecting the airline industry worldwide, low-cost carriers in this part of the world put on a bold front at this year's Australia Pacific Aviation Outlook Summit, with representatives of Virgin Blue, Jetstar, Tiger Airways and Air Asia X all trumpeting success stories.

At the summit in Sydney this month, sober presentations were made by former Qantas chief executive Geoff Dixon and Air New Zealand's chief financial officer, Rob McDonald.

Dixon quoted Tony Tyler, chief executive of Cathay Pacific and chairman of the International Air Transport Association (Iata), as saying he had never seen the airline industry in such a bad state. Dixon agreed, and predicted it would take until 2013 for the industry to recover.

Dixon believes airlines in China and India will improve the fastest, and will underpin a global recovery. But in the meantime, airlines will continue to face issues such as how and where to cut capacity, whether the demand for premium travel will revive to its previous level, and what will happen in the severely depressed market for freight.

Looking longer term, he noted that the traditional business model adopted by "legacy" airlines was to operate a "hub and spoke" system. The advent of low-cost carriers had not only brought lower fares, but also the new challenge of point-to-point flights.

He noted that standalone, low-cost airlines have their own difficulties, particularly securing the enormous sums of money required to run an airline. Not surprisingly, however, he commended the two-carrier combination, exemplified by Qantas and Jetstar, as a "recipe for success".

This was later taken up by his successor at Qantas, Alan Joyce.

Joyce revealed that it was not the original intent of Jetstar to grow so big internationally, but he claimed the low-cost carrier was now well placed to take advantage of that expansion, especially through its joint ventures Jetstar Asia in Singapore and Jetstar Pacific in Vietnam.

He was also confident that Qantas would recover well from the downturn.

There have been costs. To save capital, Qantas has taken 10 aircraft out of its fleet this year and deferred delivery of a substantial number of new aircraft, including Airbus 380s and Boeing 737-800s and 787s.

Air NZ's McDonald drew attention to the grievous state of the airline funding market. He showed that since 2000 IATA airlines had been in profit for only a little over 18 months - mid-2006 to early 2008 - with just three now making a profit. The price of Singapore jet fuel jumped from US$90 to US$170 in the year ending July 2008, before demand started to come off as airlines reduced capacity in the face of evaporating travel markets.

McDonald noted that the lending market had skyrocketed in response to the airlines' tough times, with huge increases in export credits at high interest rates. To cope, apart from rushing to export credit queues, airlines have deferred delivery on new aircraft, used up cash and existing facilities, and resorted to the sale and lease-back of their aircraft. With a real decline in revenue of more than 25 per cent, many airlines have incurred substantial losses this year, with some signs of passenger and freight growth only just beginning to appear.

McDonald's final slide showed an unidentified blaze, and posed the question: "Will the industry ever make sense?" - leaving his audience momentarily stunned.

By contrast, Jetstar CEO Bruce Buchanan pointed out that after operating for just five years, Qantas' low-cost carrier already had 50 aircraft flying to 50 destinations, with over 65 new aircraft on order. With 7000 employees, Jetstar was continuing to increase both the routes and frequency of its services, and had partnerships with nine international carriers. The airline's part-sister airline, Jetstar Asia, was also expanding.

Buchanan admitted, however, that Jetstar's early operations here had been "well below par".

David Lloyd, Virgin Blue's head of strategic development, reacted to criticism that the airline was "stuck in the middle" - a reference to Virgin Blue adopting a number of the services usually offered only by the "legacy" carriers. Rather, he said, the middle was where Virgin Blue had sought to be, providing the best of both worlds.

According to Lloyd, Virgin Blue operates more domestic flights to more Australian airports than any other carrier - although this is only true if Qantas and Jetstar are separated. He also claimed that since January 2004 Qantas had cancelled 35 per cent more flights than Virgin Blue and had a worse on-time performance record.

He avoided any reference to Virgin Blue's diving share price and subsequent need to raise capital.

Tiger Airways' managing director of Australia, Shelley Roberts, told the conference that Tiger's low-cost, no-frills model was based on airlines such as Ryanair, which now carries more passengers than British Airways. Roberts showed that Australian domestic fares had fallen by 23 per cent since Tiger's launch.

According to Roberts, Tiger has stimulated demand by lowering fares. She said traffic at Adelaide airport, Tiger's second base, had doubled the average Australian airport growth rate. And she maintained that Tiger's low fares were made possible by targeting its entire cost base.

Perhaps the most stand-out performance has been that of Air Asia X, the low-cost but long-haul carrier based in Kuala Lumpur. CEO Azran Osman-Rani claims his airline has operating costs nearly half those of other "world-class low-cost carriers", helping it to produce a 13 per cent operating profit in the first quarter of this year.

Eighty per cent of the airline's passengers arriving in Kuala Lumpur from the Gold Coast self-transfer to sister carrier Air Asia's flights to 11 other Asian destinations. Similarly, 24 per cent of passengers arriving at Stansted on its British flights self-transfer to Ryanair or EasyJet services.

In both situations, passengers make their own bookings and there has been no need for inter-lining, code-sharing or alliances that add cost complexity.

Osman-Rani announced an increase in his airline's flights from Melbourne. He confirmed to Friday Business that his carrier still aims to fly to New Zealand, but probably not for another two years.

David Stone is an independent aviation writer and consultant. He travelled to the Australia Pacific Aviation Outlook Summit courtesy of Air New Zealand.