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Monday, September 24, 2012

British Airways hanging onto Sydney, but who should it partner with?

Following the announcement by Qantas and Emirates of their ground-breaking new alliance, and the breaking of the Joint Service Agreement (JSA) between Qantas and British Airways for services between the UK and Australia, the question begged as to what would happen to British Airways' one remaining daily service to Sydney?

Two leg long haul routes

These sorts of routes are rare, if only because there are few routes that need two long haul hops to be accessible and are operated by "end of the line" airlines anymore.  For Australasia, only Qantas, British Airways, Virgin Atlantic and Air New Zealand operate such services.  Elsewhere, the nearest equivalents are the likes of Singapore Airlines services from JFK to Frankfurt to Singapore, where the point is to service a high profile high yielding destination, or the various services from south east Asia to the United States via Japan, because the alternatives are few and markets are sizeable and growing.

However, for Australasia the reasons for such services are partly historic and partly driven by tourism promotion for Australia and New Zealand.  No continental European airline flies to Australia (or NZ) because they can more economically service the market by feeding into partner hubs in Asia (or North America).  Qantas and Air NZ service London because the UK is a major source of tourism traffic to their home countries, and as such both airlines are key sources of marketing for their home countries as a destination in their own rights.  The cost of doing this is to maintain crew and require additional aircraft to serve the second hops, and to face trying to backfill the London to midpoint hops with traffic that would otherwise have little interest in Australia or NZ.  Qantas did this through three hubs until this year when it dropped Bangkok and Hong Kong in favour of Singapore, now its dropping Singapore in favour of Dubai, purely because Emirates can offer a stronger feed into Europe than was ever possible flying to London and Frankfurt.  

Quite simply, Qantas couldn't attract high yielding business traffic between London and Bangkok, Hong Kong or Singapore, as the UK based traffic would largely be loyal to BA and the Asian origin traffic to Thai, Cathay and Singapore Airlines.  So why does Qantas retain services to London at all?  Because there is sufficient Australia-UK business traffic and reasonable yielding tourism traffic for it to be important, and because Qantas sees itself as key in growing the UK origin tourism market to Australia.

Air NZ has the same reason for retaining an almost 2x daily service, with daily service via LAX and 4-7x weekly service (depending on season) via Hong Kong.  However, the LAX service does have significant point to point traffic between Heathrow and LA, in part because the route was heavily protected until recently under the Bermuda Agreement that limited competition between Heathrow and the US.  Air NZ has long attracted high yielding (compared to other routes) traffic on that sector, bolstered by its Star Alliance membership meaning United frequent flyers see it as a high quality option that still earns miles.  This makes the AKL-LAX-LHR route worth running.  The Hong Kong-LHR sector does not have much high yielding point to point traffic for the same reason Qantas didn't, but for Air NZ it is about competing with the likes of Singapore Airlines, Emirates, Cathay and other Asian carriers to Europe.  The LAX route is particularly unattractive to frequent flyers and some tourists because the transit stop requires all through passengers to queue up to clear US immigration and sit in a pokey transit lounge for 2 hours, even if they have no intention of entering the United States.  Still, the economics of the Hong Kong route remain marginal and Air NZ may be hoping that the arrival of the 787 in two years will change this.

Virgin Atlantic's services to Sydney seem harder to justify.  It is hardly a key player in attracting tourism to the UK (nor from the UK to Australia), and its 49% shareholder, Singapore Airlines, offers ample capacity between Australia and the UK, servicing five major Australian cities (and reciprocal frequent flyer privileges meaning Virgin's small but loyal UK business traveller clientele have plenty of options via Singapore).  It does have a significant domestic feed in Australia from its partner Virgin Australia (which itself has partnered with both Singapore and Etihad, for codesharing to Europe and the UK) and Trans Tasman (with Air NZ offering it as an alternative to its direct service from Auckland).  As such, Virgin may get enough point to point Sydney- Hong Kong traffic from Virgin Australia's growing customer base.

BA also isn't in Australia to attract tourists to the UK, it has two OneWorld partners (albeit one that has just demoted its relationship significantly) and while a useful feed from Qantas for domestic/Tasman traffic, its not significant (partly because Sydney is an unattractive airport to transit from domestic to international).  BA is also not likely to attract significant Singapore-Sydney traffic as Singapore is no hub for any of its partners.  So the while there has been a declaration from British Airways that it is retaining its direct (via Singapore) service, the bigger question is what does this all mean for the future? 

Where does BA stand now?

It's worth recalling a number of facts before speculating on future business decisions by BA on this route.

1.  Qantas is concentrating all of its services to Europe through Dubai, removing Singapore as a transit point but not a destination: This will mean Qantas will now hub into Dubai and use Emirates' extensive network of routes into Europe for connectivity to that wider market.  It wont mean Qantas will not also feed BA at Heathrow, but it is likely such a feed will be far more limited.  Qantas is betting passengers to locations other than London would rather transit the new Emirates terminal at Dubai than Heathrow.

2. Qantas will still fly into Singapore, Hong Kong and Bangkok, where flights are likely to still be able to interline with BA:  Remember that a year ago Qantas flew four times a day to London, with one daily flight from both Melbourne and Sydney via Singapore, another from Sydney via Bangkok and one from Melbourne via Hong Kong.  BA also flew a service from Sydney via Bangkok.  There will still be options to connect with Qantas services, but as Qantas will not be actively marketing this, it wont be a strong option for BA to retain connectivity to Australia.  Note Qantas also flies to Hong Kong and Singapore from Brisbane and Perth, and Singapore from Adelaide.  

3. Qantas and BA will both remain in the OneWorld alliance: What this means is that frequent flyers from both airlines still have reasonable incentives to fly on each others' airlines.  Although Qantas Frequent Flyers will earn status credits flying Emirates flights which carry Qantas codeshares, they will continue to earn status credits on ALL BA flights.  This maintains a key advantage for BA in retaining and growing market share down under.  For BA frequent flyers, there is no incentive at all to fly Emirates to connect with Qantas or as an alternative.  The real alternative for OneWorld frequent flyers is Cathay Pacific.

4.  Emirates will have the bulk of the capacity between Europe and Australia compared to Qantas: Compared to the one daily flight from both Melbourne and Sydney to Heathrow via Dubai, Emirates will have far more options to both London and other European destinations than Qantas can offer.  

5.  Heathrow-Singapore-Sydney is a unique service operationally for BA, with poor aircraft utilisation and specific costs for additional crew:  Whilst BA has a few double hop long haul international routes, all of the others involve a relatively small sector and so do not involve the need for an additional aircraft or crew to service it.  By contrast, whilst the existing LHR-SIN-SYD service would only need two 747s to maintain a daily service to Singapore, it needs a third to cover the Sydney sector.  During that sector it spends around 12 hours on the ground in Sydney before returning to LHR via SIN.  If BA is concerned about utilisation and needs aircraft to expand services at LHR now that it has slots due to the BMI purchase, it may decide that there is better use to be made than servicing the SIN-SYD leg.  This is especially the case if it does not think it can win SIN-SYD point to point traffic.   It also needs a separate crew to staff that one long haul segment. 

6.  Cathay Pacific has a lukewarm relationship with Qantas, because they are arch rivals on high yielding routes between Australia and Asia, but may offer BA a partnership option:  LHR-HKG is an important high yielding route for BA and Cathay, because of both cities' roles as financial centres.  Qantas recently exited the route, and the remain direct competition (Virgin and Air NZ) do not have sufficient frequencies to affect BA and Cathay's role as capacity/price leaders (in fact the real price competition is from the Lufthansa group and Air France/KLM who offer far cheaper one stop hops from LON to HKG).  However, BA already partners with Cathay to service Auckland (one stop instead of two stop via Australia), and could partner again to service Sydney, Melbourne, Brisbane, Perth and Adelaide.  

7.  BA is actively courting Qatar Airways into either a formal partnership or full membership of OneWorld:  This is no secret and could offer BA some of the same opportunities Qantas sees with Emirates, only in reverse, as Qatar Airways serves many cities in Asia that BA does not (in China, Vietnam, Philippines etc).  However, Qatar Airways only services Perth and Melbourne in Australia, leaving obvious gaps that it either would need to cover, or BA would need to reach by other means (whether its own service to Sydney or not).  This partnership is not driven by connectively to Australia, but would be handy in contributing to this.

8.  BA sees growth in servicing Asia, Australia is of second-order priority compared to retaining and growing the market between the UK/Europe and Asia:  This is simply a matter of market size and growth prospects.  Whilst historic ties and sentimentality may mean there is a specific flavour around UK-Australian services, they are not likely to see meaningful growth in demand in the medium term, as leisure and business traffic between the countries is likely to remain stable.  By contrast, the growing middle classes in east and south Asia will seek more travel to Europe and business travel will grow with it.  

9. Malaysian Airlines is seeking to join OneWorld, and has been withdrawing lower yielding services to Europe:  Malaysian Airlines is a key competitor on services between Europe and Australia.  It services Sydney, Melbourne, Brisbane, Perth and Adelaide.  However, in Europe it is now down to London, Paris, Amsterdam and Frankfurt.  Its forthcoming OneWorld membership will make it attractive to both BA and Qantas frequent flyers, and as such it can readily service Australia via its Kuala Lumpur hub. 

10.  The BA/Qantas JSA was not dominant, and certainly not a price setter on the UK-Australia market: Aggressive marketing and pricing by the likes of Singapore Airlines (for which Australia-Europe is a core route) and more recently Emirates, Etihad and China Southern/China Eastern has rendered the Kangaroo route less and less a route that has been owned by Qantas/BA.  The amount of competition is significant, with airlines hubbing through Dubai, Doha, Abu Dhabi, Singapore, Kuala Lumpur, Bangkok, Hanoi, Hong Kong, Shanghai, Guangzhou, Jakarta, Bandar, Seoul, Taipei and elsewhere from Europe to Australia.  With BA only accessing Australia from its heavily constrained Heathrow hub (with a somewhat undeserved poor reputation for reliability and quality of transit), and Qantas likewise (except for Frankfurt where it can't compete effectively with multiple Lufthansa routes into Star Alliance partner hubs like Singapore, Bangkok, Seoul and Tokyo), Europe was becoming increasingly under-served by the JSA, which is why Qantas opted for Emirates - with a superior transit experience and extensive network feed from Europe (and neutralising a key competitor). 

However, BA wont retain the Sydney route just to avoid Sir Richard Branson claiming BA is abandoning Australia, but it needs to be business minded about it.  

So what options does BA have?

1.  Status quo:  In this case, BA hangs onto the Sydney route and does nothing about servicing other cities in Australia once the Qantas codeshare ends.  This only works if BA can rely on Qantas connections to BA at Singapore, Hong Kong and Bangkok (not Dubai), which will be inferior to what exists now.  Not really a long term option.

2. Partnership with Cathay:  To do this, BA would need to agree to concentrate on Hong Kong as a hub for services to all major Australian cities.    In effect it would have to mean a closer relationship on LHR-HKG which would likely need some competition authority approval in the UK (as the two airlines together would dominate the route).  The key advantage of this option would be to enable BA retain good connectivity to all major Australian cities, could open up a new relationship with Cathay to service a wider range of destinations in Asia (especially if it included subsidiary DragonAir). By Asia I mean north-east and south-east Asia, it would not help for south Asia. It would also have an obvious advantage of neutralising competition on a critical high yielding route.  For Cathay, the latter effect would be the key benefit, but it would also give Cathay a new stronger partner to battle the Gulf carriers into Europe, although that effect shouldn't be overestimated.  In this scenario BA could retain its direct Sydney service via Singapore, or reschedule it through Hong Kong (joining Virgin Atlantic), although again it seems like an orphaned route.

3. Partnership with Qatar Airways:  This is likely to mean an increase in services from Heathrow to Doha to connect with ongoing services to elsewhere in Asia.  However, it would need to be combined with new QR services to Brisbane, Sydney and possibly Adelaide to really deliver the Australian market.  If QR also joins OneWorld (which would be slightly awkward for Qantas, but not unexpected), this would help, but then this partnership wont be primarily about Australia, but Asia.  Australia is a spin off.  Unless and until QR reaches Sydney (and BA may give up its daily service to facilitate this), BA would remain in Sydney.  Given the low frequency of Australian services, QR is inferior to CX as a partner to Australia (and north-east Asia where Doha is far away from direct for routes from Europe to the likes of Japan and China), but not for servicing south and south-east Asia.  The other dimension is the courting Emirates is undertaking of American Airlines, which may well mean it seeks to attract US-Middle Eastern traffic away from the current AA-BA hubbing through Heathrow, although the key Emirates interest here is access to AA's extensive domestic US network for feeder traffic.  Bear in mind also that QR offers more than Asia, it also connects to the Middle East and parts of Africa that it is not economic for BA to service in its own right. QR also offers access into Europe, including IAG's Madrid hub, meaning Doha could be a base from which BA accesses feeds from the rest of Europe into a service that could fly London-Doha-Sydney.  Why do that?  QR has five daily services from Heathrow to Doha now and will be constrained in growing at Heathrow like all other airlines, it could usefully codeshare with BA flying to Doha and onto Sydney at a time that feeds other QR services into Doha.  Bear in mind that this partnership is likely to occur regardless of intentions for Australia, so what this means is whether it affects the chances of other options being chosen.   

4. Partnership with Malaysian:  Membership in OneWorld will beg the question.  For BA it also offers strong connectivity throughout south-east Asia, although it is far from helpful for north-east Asia or south Asia.  Similarly, Malaysian would benefit from a strong relationship with BA at Heathrow to feed its services, which are to be uplifted to A380 capacity.  The downside is that BA does not fly to Kuala Lumpur, and whilst Singapore is a relatively high yielding source of business traffic, Kuala Lumpur is not in that league.  BA would not benefit from transferring capacity from Singapore to Kuala Lumpur and would be even less likely to maintain a direct service to Sydney via Kuala Lumpur.  However, it may initiate the route in its own right if it abandoned the Singapore-Sydney route, which would strengthen its Asian presence into a growing hub in the region.  

5. Some combination of the above:  Let's remember that as BA is actively courting Qatar Airways, this partnership is likely to happen regardless, but will be inadequate for Australia on its own, but will deliver benefits in servicing south Asia and south-east Asia.  The obvious supplementary partner will be Cathay, as it can serve China and north-east Asia, as well as having a long established presence in Australia with a good reputation.  In such a scenario, the logic behind retaining a direct London-Singapore-Sydney service is unclear.

6. Abandonment of Australia: As much as this seems to be going to far, it remains a viable option if BA decides it simply isn't worth it.  It may maintain codeshares with Qantas and Cathay through Singapore, Bangkok and Hong Kong, and could attach codeshares to Qatar services, but also withdraw from Sydney and not actively seek to partner up with a focus on Australia.  Bear in mind this is a ruthlessly competitive market, with Qantas/Emirates and Singapore Airlines both delivering substantial capacity to it, and a wide range of carriers ranging from Malaysian to Korean, Asiana, Cathay, Thai, Etihad, Virgin Atlantic, China Southern, China Eastern, Air China and Garuda almost all with cost advantages seeking a part of a market that delivers fares that are little higher than direct services from London to Asia.  BA neither has the premium hard products to compete with the lavishly appointed A380s of some of them, nor the cost advantage to undercut the Chinese and Gulf carriers.  Expect Indian carriers to eventually emerge to do the very same in the longer term.  It may be better to focus on Asia, Africa and North America.


For now, BA will retain services to Sydney, but unless this route generates the sorts of yields and feed advantages that justify the costs, it seems difficult to envisage that it has a long term future.  It could be a candidate for the 777-300ER because this would offer a superior hard product and savings on fuel (and increased cargo capacity), but it really is only going to be worth it if can find a suitable partner to market the service alongside others.  The likelihood is that the strategy for Australia will complement that for Asia, which is the real prize.  My bet is that Qatar Airways will be a key part of this, but that it wont be adequate for BA's long term strategy into Asia.  

The logical other partner that can achieve this is Cathay Pacific/Dragonair.    This partnership would be superior to others for accessing China, but also Australia, as well as other north and south east Asian markets, and would consolidate BA and CX's hold on a critical high yielding route that will face growing indirect and lower cost competition.  A BA/CX partnership could enhance each others' brands and offer complementary feeds.  BA's need for such a relationship is clear, but CX also faces the threat of new Chinese airline competition, with far lower cost structures, support of vastly growing domestic networks and longer term views on capital returns, plus LCC competition heavily eroding regional yields to and from Hong Kong.  It could do with reducing the volatility and increasing feeds for its London services, and a boost to its regional services and Australasia with more BA feeder traffic (and likely BA commitment to operating A380s on the Hong Kong route), as it also will see the Emirates/Qantas partnership as a negative.

However, one thing is certain in this industry which is the cliche that nothing is certain.

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