On the contrary, if the business model of this LCC subsidiary is not accurately positioned and if its cost base is not competitive enough to compete with Skymark Airlines or the LCC subsidiary under consideration by its arch-rival All Nippon Airways (ANA), JAL’s LCC subsidiary will undoubtedly be a short-lived mirage like United Airlines’ Ted and Delta Air Lines’ Song.

“We have been studying what they [Qantas] are doing with Jetstar,” a JAL spokeswoman revealed.

“With the deregulation of the Japanese aviation industry, we are looking at ways to stay above the competition and starting a low-cost carrier could be one of those ways,” she commented.

Image Courtesy of HNL Rarebirds

The prerequisite to make this LCC subsidiary successful is to have a cost base that is sufficiently low and competitive enough to fend off the competition from the rapidly-growing Skymark Airlines.

And in doing so, this LCC cannot afford to use the well-paid flight attendants from its parent JAL in addition to cargo-handlers, ground staff, etc, or otherwise achieving a low cost base will remain as a distant dream.

Therefore it is indeed very apparent that recruiting new flight attendants with significantly lower wages and benefits is the only viable way going forward.

Moreover, the new LCC subsidiary should be based in only Tokyo Haneda airport instead of operating at both Haneda and Narita airports in order to minimise the operational cost involved which will be hurting its bottom line.

Operating in Haneda Airport bodes well for this LCC since it can also handle a small scale of international operations that would otherwise not be feasible and profitable should it be operated by its parent JAL, in addition to the unprofitable domestic routes taken over from its parent JAL.

Furthermore, the strategic proposition of this LCC must be carefully determined in order to prevent the revenue dilution from the undesired internal competition within the JAL group that inevitably snares the most price-elastic passengers away from the JAL mainline to this LCC.

This is a major headache facing Qantas and Jetstar and how to prevent this revenue dilution from happening at JAL and its LCC subsidiary will be paramount in maximising the revenue for the entire JAL group.

With the JAL Group still facing financial and other challenges in simplifying its operations despite the waiver of US$6.2 billion in debts and the decommissioning of its entire 747-400, A300-600R, MD-90 and MD-81 fleets, the most sustainable and feasible way going forward for the JAL Group is to have only three core subsidiaries – mainline JAL, the new LCC and merge the remaining regional subsidiaries such as J-Air, JAL Express, Hokkaido Air System, JALways, etc, into one regional player, and dispose of any non-core assets to strengthen its balance sheet.

Then the JAL Group will be well-positioned with the JAL mainline focusing on the lucrative international operations, the LCC handling all domestic routes and those unprofitable or low-yield international routes previously flown by JAL, and the JAL regional player operating the remaining regional routes.

In doing so, the revenue streams can be maximised and the internal competition within the JAL Group will be minimised.

Meanwhile, JAL can transfer a large part of its 737-800 fleet at JAL Express to this new LCC  while returning the remaining 737-800s to its mainline operations for international short-haul sectors and thereby minimise the operational cost of the LCC through operating a single type of aircraft.

For many years the Japanese carrier is accredited with its ultra-high standard of services which comes at a painfully high cost that pushed the biggest Asian carrier by sales into bankruptcy. How to lower its cost while maximising its revenue is the key to achieving profitability.

A sustainable option is to enlarge its premium economy class at the JAL mainline while reducing the redundant seat counts in its Business Class and First Class. Not only this maximise the revenue by luring the middle class to fly on Premium Economy Class instead of Economy Class, this also boosts the load factor in the Business and First Class to a reasonable and profitable level at which JAL can increase its yields.

Last but not least, while the jury is still out on whether JAL can successfully streamline its operations and deliver sustained profitability, a lot of structural changes have to take place at JAL and although a new LCC opens up a new opportunity for JAL Group to maximise its revenue and rebuild it into an airline group with a strong business model, this initiative has to be done carefully and correctly.

“The delivery date revision follows an assessment of the availability of an engine needed for the final phases of flight test this fall,” Boeing explained in a statement.

“Boeing said last month that the cumulative impact of a series of issues, including supplier workmanship issues related to the horizontal stabilizer and instrumentation delays, could push first delivery of the 787 a few weeks into 2011. The delay in engine availability has extended that estimate to mid-first quarter 2011,” Boeing further elaborated.

“We have been informed by Boeing that the currently planned dates for Trent 1000 engine deliveries will not support their latest flight test program requirements.  We are working closely with Boeing to expedite delivery in support of their program schedule. Rolls-Royce confirms that the engine availability issue is unrelated to the test bed event which occurred earlier this month,” Rolls-Royce spokesman Bill O’ Sullivan clarified.

Image Courtesy of Boeing

First of all, although this latest delay is unsurprising, it nevertheless disappoints the 787 customers who have been eagerly waiting for the revolutionary aircraft to deliver its superior operating economics to translate into an improvement to their bottom lines.

The launch customer of the 787, All Nippon Airways, said that it “regrets” of learning the latest delay to the 787.

“Given the success of the flight test program so far, it is regrettable to hear of the delay. However, we trust that the time will be used to deliver the best possible aircraft in the shortest possible timeframe,” ANA spokeswoman Megumi Tezuka commented.

She emphasized that the latest delay would have no impact on earnings for the current financial year as the Japanese carrier did not include the introduction of the 787 in that period of time. ANA is now notified that its first 787-8 will be delivered in mid-February 2011.

Boeing Corporate President and Chief Financial Officer James Bell said in a 31st August Morgan Stanley conference that the latest delay doesn’t affect the production ramp-up planned for the 787 to 10 airplanes per month.

Despite Bell’s reassurance, however, should this latest delay threaten the 787 production ramp up plan to 10 per month by the end of 2013, would mean that the additional revenues brought by those 787s won’t trickle in until the deferred ramp up is successfully implemented.

However, this could provide a much-needed breathing space for the struggling 787 suppliers, such as Alenia, to catch up with the proposed ramp up and have any quality issues resolved while fixing the quality control system that allowed quality issues such as the incorrect installation of the composite shim in Alenia-built horizontal stabilizer went unnoticed for more than two years.

How to turn this delay into a worthwhile exercise in fixing the fundamental problems of the 787′s supply chain is the key to preventing the same scenario to have yet another moment of deja vu in the future.

Boeing could not be reached for comment over whether the latest 787 delay will have any impact on the production ramp up as of this writing.

Any further delay in deliveries will undermine the entire program’s profitability despite its strong business case and technically sound technologies. However, the possibility of a further slip could not be ruled out at this point as any new quality issues that may prop up will inevitably require another rework process and thereby reducing any new margins built into this new schedule, if any.

Image Courtesy of Randy's Journal

Meanwhile, Kenya Airways’ comments over this latest 787 delay seem to be overreacting.

“Yes, I would dare canceling the 787 order. If [Boeing] can’t deliver, we will cancel. We will take a decision [on whether to] go with Airbus or stay with Boeing before the end of the year,” Kenya Airways Chief Executive Officer (CEO) Titus Naikuni claimed.

“[I talked to Boeing representatives] this morning and they informed me there is a further three-month delay in the first deliveries. [A delay in first deliveries] would not [necessarily] affect our first deliveries, which are scheduled for around 2013,” Naikuni added.

Ironically enough over the threat to cancel its 787 order, Kenya Airways has been evaluating the A330 for almost a year now yet did not take any action to fill the capacity shortfall created by the 787 delay.

The comments made by its CEO over the evaluation of the A330 could be dated back to September 2008 and should the carrier be so desperate to expand, it should have leased Boeing 777-300ERs like Thai Airways and Turkish Airlines did from Jet Airways. With Air India planning to lease out  part of its 777-200LR and 777-300ER fleets, there is ample availability for fuel-efficient ultra-long haul aircraft which shares commonality with Kenya Airways’ existing 777-200ER fleet that enables the carrier to minimize the cost while expanding comfortably until the 787 arrives.

On the other hand, Airways Aviation News‘ reliable source has confirmed that the Rolls-Royce Trent 1000 “package A” missed its original Specific Fuel Consumption (SFC) by 3.5% while the package B will bring it in line with the original target, whereas the initial GEnx-1B engines missed the original SFC target by 1.5% while later modifications will enable the GEnx-1B to exceed the SFC target by 2%.

“GE does not discuss SFC targets. The GEnx engine will be 15% better than the CF6 engine that is currently in the same thrust class,” GE spokesman Case Deborah said.

“GE is working [on] two Performance Improvement Programs for the GEnx engine. PIP1 includes improvements to the design of airfoils in the low pressure turbine (LPT). GE has validated the redesign and is working the certification on this version. PIP2 includes improvement to the core. Testing is underway on this and it may certify next year,” Deborah firstly revealed.

Rolls-Royce did not answer a question regarding this.

Should the 787 production ramp up plan be indeed impacted, coupled with the potential new 787 compensations, the worst of the 6th 787 Dreamliner delay may have yet to come.

[Last Update: 31st August, 2010, 2300 GMT+8. Added Boeing CFO James Bell's comment that the latest delay won't affect the production ramp-up.]

Having proved itself as a credible player in combining different corporate cultures in the late 1990s, when Senn-Delaney worked with then-Integrated Defense System (IDS, now Boeing Defense, Space & Security, BDS) to combine the then newly-acquired McDonnell Douglas in 1997, Rockwell’s space and defense business in 1996 and Huges Space & Communications in 2000; there is no reason why the same consultant cannot successfully reshape the culture at Boeing Commercial Airplanes (BCA).

However, Boeing simply has no choice but to get this initiative right as the Chicago-based airframer cannot afford yet another perennial delays and setbacks that further undermine the credibility of the company and the profitability of the 787 program itself.

Image Courtesy of Boeing

“The 787 has tarnished the company’s reputation,” Boeing Commercial Airplanes Vice President (VP) & General Manager (GM) of Airplane Programs acknowledged.

Indeed, should this corporate culture not be changed by the time its plan of the 787 production ramp-up is ongoing at full speed, this may potentially be a show-stopper with disastrous results on the profitability of the 787 program.

In addition, this reshaping of BCA’s culture must be achieved alongside an improvement in the quality control system that resulted in the late discovery of the incorrect installation of composite shims in Alenia-built horizontal stabilizers this June that went two years without notice.

In reshaping the corporate culture, the ideal outcome is to discover any quality issues and have them resolved in the most efficient and effective way.

Furthermore, Boeing not only has to increase the steepness of its own learning curve by this fresh initiative, but also bring this to the first-tier suppliers that are consistently struggling on build quality, notably Alenia.

Despite the acquisition cost and procurement cost in new autoclaves may prove to be high, it is indeed worthwhile to purchase the Alenia operation (“Boeing Needs To Buy Alenia Out Of 787 Production“, FleetBuzz Editorial.com, 18th Aug 10) to ensure the future stability of the 787 production system.

Put it simply, purchasing Alenia’s 787 operation is costly, but not doing so will ultimately prove to be even costlier for Boeing.

In the face of the planned 787 production ramp-up, coupled with the assembly of the first 787-9s, in addition to the weight-saving block point changes (“Boeing looking at ways to simplify side-of-body modification“, 7th Apr 10), Boeing has to fix its fractured 787 production system.

In conclusion, Boeing should have done all these initiatives to reshape its culture and repair its fractured 787 production system much earlier, fortunately enough for Boeing, however, the mid-size aircraft market is lucrative and very large over the next 20 years, such that it’s better late than never.

Tenedora K has purchased a 95% stake in Nuevo Grupo Aeronautico which in turn controls Mexicana in addition to Mexicana Click and Mexicana Link.

“Tenedora K is a company formed by a group of Mexican businessmen as a vehicle to capitalise [on] the mentioned airlines, with the aim of rescuing them from the critical financial and operating situation they are in,” a statement released by the equity firm Advent International, which helped put the deal together, said.

However, this buyout alone does not mean that the structural problems and mismanagement problems at the carrier will be rectified.

On the contrary, including the pilot union group as a shareholder for 5% among the 95% shares bought by Tenedora K lays the foundation for future troubles.

Image Courtesy of planephotoman

Although whether the former Mexicana chief executive Manuel Borja who stepped down last Friday has been a good leader for the company or not remains in doubt, he had repeatedly criticised that the carrier’s labour costs are simply too high.

In selling the 5% stake to the pilots union, the Mexican consortium has granted its pilots more bargaining power when it comes to reducing labour costs and this may return to haunt the carrier in the future.

Make no mistake, employees should indeed be rewarded for their efforts made during this very difficult period of time to revitalise the carrier.

Unfortunately, selling a stake to the pilots union potentially means more resistance to the cost cutting efforts not for now, but for the future and thereby increasing future uncertainties.

Mexicana must be run as a normal business and the company must maintain its absolute independence over business decisions.

The best way to reward those employees is obviously tying a one-time bonus pending the successful outcome of the airline’s restructuring and return to profitability, but not a stake to the union that undermines the airline’s future sustainability and feasibility.

Therefore the new owner or the new management of the airline should purchase the 5% stake that will be held by the pilots union as soon as the airline returns to normalcy and its balance sheet strengthens significantly to a healthy level in order to maintain the management’s full independence.

Meanwhile, Mexicana’s fleet strategy of leasing a large portion of its fleet was a strategic mistake.

Indeed, leasing a large portion of its fleet does provide flexibility for the carrier; however, the rental cost will be higher than the average ownership cost that procuring aircraft would have.

With 40% of Mexicana’s fleet being returned to their lessors totalling 27, comprising 10 A318s and 2 A320s to General Electric Commercial Aviation Services (GECAS), among other aircraft being returned to ILFC and AerCap; should the carrier intend to restore its heydays by leveraging the oneworld code-share agreements and co-operation, it has to draft a solid fleet strategy for the sake of its own sustainability.

The sooner Mexicana’s new owner and leaders realise these, the better.

The Flight Attendants’ Union of Dragonair today held an extraordinary general meeting (EGM) to discuss the company’s latest proposal to resolve the labour shortage issue and threatened to strike at the end of this month.

464 of the 467 flight attendants casting  ballots voted in favour of staging industrial actions.

“Dragonair regrets the result of the Dragon Airlines Flight Attendants Association (FAA) ballot, taken at the union’s extraordinary general meeting this afternoon, in which members voted in favour of industrial action. However, the airline is pleased that the union has agreed to continue talks,” the airline said in an e-mailed statement.

The latest labour dispute centered on heavy workload that Dragonair’s flight attendants suffer as a result from high load factor and reduced staffing level from 13 flight attendants to 10 per flight.

Dragonair said the recent increased workload for its flight attendants was a result from flight delays caused by weather and other factors that totalled 1,600 hours in July, a staggering 130% increase over the same month last year.

Dragonair emphasised that it has already taken measures to address the heavy workload issue, including recruiting 70 new flight attendants that are currently in training, simplifying its workflow processes, as well as paying extra allowances for the overtime hours that they worked.

Image Owned by Airways Aviation News

“Dragonair is fully aware of the pressure faced by its cabin crew and has introduced or proposed a number of measures to increase the flexibility in manpower arrangements and alleviate the workload inflight, aiming to address any unexpected demands or challenges faced by its flight attendants,” the airline said in a statement.

This labour strike is simply unreasonable. Not only does it hurt the relationship between Dragonair’s management and flight attendants, it also significantly damages the interest of Dragonair’s passengers, and particularly so when the average load factors of its flights are so high.

Dragonair has a very strong and unrivalled foothold in the Mainland China market, coupled with Cathay Pacific’s comprehensive global network, it is unquestionably obvious that Dragonair’s business is lucrative and solidly profitable.

Blaming Dragonair’s management for those uncontrollable factors like weather in causing flight attendants’ heavy workload is unjustified and is simply unfair to the leaders of the company.

Moreover, no pain, no gain. In working overtime hours on Dragonair flights, those flight attendants can receive a considerable amount of extra allowances and have a higher aggregate salary as a result.

Launching a strike with only a-third of the over 1,300 flight attendants that Dragonair currently has does more harm than good to the company, its customers and the flight attendants themselves.

However, there is a silver lining to this situation. Given the stances of both parties, which are willing to compromise and strike a deal, coupled with the willingness of the company to take measures to address those concerns, there is a strong possibility that this fiasco will end up in the same way as Cathay Pacific’s last threat of strike did (“Cathay Pacific threatened with strike“, 5th Apr 10).

Agreeing on a deal fast will undoubtedly be the focus of Dragonair’s leaders in the next few days, but such an outcome would certainly be a welcoming one to all stakeholders involved.

“We are glad that the FAA said it would engage in further discussions with us. Dragonair management and the crew union are aligned in their goal to provide a better working environment and an enhanced workflow for cabin crew. We are all part of the same family and it’s in the interests of all us to work together and communicate effectively to resolve the issues,” Dragonair General Manager In-flight Services Cecilia Leung said.

As expected, Dragonair and the Flight Attendants Association (FAA) reached an agreement on Saturday morning to resolve the issues following a nightlong meeting session. As a result, the Dragon Airlines Flight Attendants Association (FAA) decided to call off all proposed industrial actions.

As part of the agreement, Dragonair agreed to recruit an additional 50 new flight attendants with immediate effect on top of the 70 new flight attendants that are already in training. Furthermore, Dragonair will operate certain sectors as charters as a short-term relief measure.

Dragonair said it will also provide extra allowances to those flight attendants who opt to go to work on scheduled off-duty days.

(Added the last two paragraphs. Last update: 1730 GMT+8 on 21st August, 2010)

Cathay Pacific

Cathay Pacific achieved a 16.5% profit margin on an underlying operating profit of HK$4.96 billion. Achieving a profit margin surpassing 10% is itself a black swan event for the global airline industry and it is indeed an extraordinary feat when the Hong Kong-based carrier nevertheless posted a HK$4.7 billion profit last year, a time when the global airlines were bleeding red ink everywhere. Revenue rose 33.7% to HK$41.337 billion from HK$30.921 billion and passenger yields, as measured by Revenue per RPK earnt, rose by 17.5% and cargo yields rose 36.1%.

Meanwhile, Cathay Pacific has signed a non-binding Letter of Intent (LoI) for 30 A350-900s and intends to purchase an additional 6 777-300ERs to support its expansion and partly replace its ageing fleet.

“[The A350-900 will replace] some of the older 747-400s and A340-300s, but not all as the orders are also for fleet growth,” said Cathay Pacific’s Carolyn Leung.

The US$7.82 billion A350 deal at list prices is viewed by many people as a devastating blow to Chicago-based Boeing.

Indeed, given the US$4.5 million commitment fee paid to Airbus, Cathay Pacific will firm this LoI up while the 787-9 stands a slim chance to win over Cathay Pacific. However, Cathay’s order is a significant testament to Boeing’s point-to-point, frequency based strategy, in which it will deploy those 30 A350-900s to secondary cities in Europe and the US where demand is insufficient to fill larger planes, chief executive Tony Tyler said in a Bloomberg interview.

Separately, Tyler also made clear that the airline is not looking to order the A380-800 either, which Airbus argued “hub-to-hub” is “big point-to-big point”, only to have it refuted by Cathay Pacific due to its insufficient Revenue Cargo Volume from which the carrier derives significant revenue.

According to airline sources, new destinations being looked at and evaluated include Munich, Madrid and Chicago.

“The major Chinese airlines watch Cathay very closely, as well they should. This is a big win for Airbus and the A350,” Airbus Chief Operating Officer (COO) John Leahy stated.

Most importantly, Cathay Pacific has been able to secure significant discounts from Airbus for the A350-900s, with which they can “maintain the balance” between Airbus and Boeing.

In doing so, the airline is preserving its bargaining power over any future aircraft purchases. This bargaining power is considered to be critical in Cathay’s procurement process and was the determining factor in this contest.

Notwithstanding this primary factor, given the larger size of the 314-seat A350-900, it nonetheless fits Cathay’s network better than the 787-9 does since the A340-300s and 747-400s that it replaces accommodate 283 and 379 passengers respectively.

“In our network, it [A350-900] just works better. The availability of the aircraft is good for us as well,” Cathay Pacific chief executive Tony Tyler explained.

Cathay Pacific has flexibility to switch to other variants in the A350XWB family but considers the A350-900 to be complementary to the 777-300ERs.

“Yes [the LoI carries flexibility to switch to other A350 variants],” Cathay Pacific spokeswoman Carolyn Leung reaffirmed.

“The A350-900 will be the backbone of our long-haul, mid-size fleet, complementing the wide-body, ultra long-haul 777-300ERs,” she added.

Despite the A350-900 being more fuel efficient, notwithstanding the current weight anddevelopment issues on the early build versions, the 777-300ER can still carry more payload – the 777-300ER has a Maximum Takeoff Weight (MTOW) of 775,000lbs, whereas the A350-900 only has 590,800lbs. This complementary strategy was reaffirmed by the biggest 777-300ER customer – Emirates’ chief executive, Tim Clark.

“They [Boeing executives] think it’ll take out the 777-300ER. People like me are saying ‘It’s not going to do that. And as your largest customer, don’t worry about it,’” Emirates chief executive Tim Clark commented.

Looking Ahead Despite there will be an increase in capital expenditure in the next few years due to the construction of HK$5.5 billion cargo terminal, this project will lower the cargo handling cost and provide substantial savings over the longer term as Cathay Pacific Cargo continues to be one of the biggest cargo carriers in the world.

Similarly, Cathay’s strong balance sheet which has just seen its net borrowings decreasing 24.6% and net debt-to-equity ratio decreasing to 0.40 times, its latest purchase of the A350-900 and 777-300ER that is worth HK$75 billion will ensure that Cathay will have significantly lower operating cost of its future fleet.

What’s more, there seems to be an unstoppable wave of recovery at Cathay Pacific, with solid forward bookings.

“We can look forward to the next six months with some confidence,” Cathay Pacific chief executive Tony Tyler said.

“Forward bookings are looking very good for the rest of the summer. Cargo is looking good for the rest of the year,” he added.

On the other hand, should Cathay decide to launch the Premium Economy Class later this year, as its chief executive Tony Tyler recently told Bloomberg that “there are pretty strong arguments for it”, the airline is unquestionably well-positioned to tap into this new opportunity and win business from competing carriers.

There has been a widening gap between the segments of Business Class and Economy Class, launching a Premium Economy Class will enable Cathay Pacific to maximise its revenue streams through discriminatory pricing of the Revenue Management System (RMS).

“No decision is made yet,” Leung cautioned, however.

In conclusion, Cathay is indeed a booming business and as the lyrics of its theme song go, “I can fly, I can fly, I can spread my wings out wide and touch the sky…”

“Despite signs of recovery, the global economy remains volatile and fragile,” said Singapore Airlines.

“In fact, we have announced that we will be putting back capacity cautiously, an increase of just 2% this financial year over the last.”

Indeed, Singapore Airlines is retaining capacity discipline despite a strong economic rebound in the Asia-Pacific region led by the burgeoning Chinese economy, and especially so as SIA is one of the biggest global air carriers facing the difficulty of a two-speed recovery.

In the face of this, directionality can become a big headache for carriers from not only a capacity management perspective, but also a marketing perspective as well as a revenue management one.

Directionality arises when different economic circumstances or market maturities take place at different ends of a route, such as the anaemic European economy versus the booming Asian economies.

Image Courtesy of KWsideB

The relatively weak Euro leads to a surge in traffic from Asia to Europe whereas the demand for the returning sector is significantly hindered by the sluggish European economies.

Indeed, the A380 has a lower unit cost as measured in Cost per Available Seat Kilometers (CASKs) against smaller but crucially more flexible twin-aisle aircraft; however and perhaps ironically enough, the twin-aisle aircraft enjoy lower total trip costs and most importantly, they arguably generate higher yields than Very Large Airplanes (VLAs) do.

For markets where directionality issue exists, deploying an aircraft large enough like the A380 can satisfactorily cope with the strong demand on the outbound sector, thereby fully realizing the potential demand and hence maximizing the revenue at one end of the route. In doing so, however, this creates serious problems at the other end of the route, where demand is significantly weaker.

Moreover, airlines often have to lower their prices in order to fill those seats, which mean lowering the yields of the entire flight considerably.

Given that the Breakeven Load Factor (BELF) = CASK / yield (revenue per RPK) x 100%, a people-mover like the A380 carrying a large amount of low-yield, passengers simply does not bode well for premium carriers such as Hong Kong-based Cathay Pacific and Singapore Airlines, albeit having a low CASK.

While an A380 unquestionably works well for a carrier that places a heavier emphasis on O&D (Origin & Destination) traffic like Emirates, an A380 for carriers like Cathay Pacific which put their emphases on frequencies, even a fully-loaded A380 can still be unprofitable.  That doesn’t take into account the A380’s insufficient revenue cargo volume which hampers its profit-generating capability.

In the meantime, higher frequencies theoretically lead to higher demand since the time lag between the preferred departure time and the available departure time is reduced when considering potential demand, thereby maximizing the total revenue.

Furthermore, should demand on a single flight be excessively high, deploying a relatively smaller aircraft helps create a shortage in supply in which yields can persistently be raised.

Though carriers adopting this frequency-based model should be aware that unless it has a dominant position such as Singapore Airlines at Singapore, Cathay Pacific at Hong Kong and British Airways at London Heathrow, so that the demand spilled (i.e. potential demand – traffic, or potential demand lost) is likely to be recaptured by other flights on the same carrier, or otherwise this potential demand may be lost to competitors.

Nevertheless Singapore Airlines revealed to me that 6 A380s still remain on option but it will evaluate the Higher Gross Weight (HGW) version of which British Airways (BA) is the launch customer for the type.

“SIA’s options for six additional A380s are not convertible to other aircraft types. These six A380s remain on option at this point as we review our capacity needs for the next few years. No decisions have been taken on exercising them,” the airline tells me.

“We will have taken delivery of all 19 of our A380s on firm order by mid-2013, which is when Airbus will start to offer the HGW as an option for the A380. We will be evaluating our need for the HGW A380 beyond that time.”

Singapore Airlines is very well-placed to improve its profitability by managing capacity carefully, no matter whether it makes new aircraft purchases in the foreseeable future or not.

“Aside from nine A380s and five A330s remaining on firm order, we also have on firm order 20 A350-900XWBs and 20 787-9s. In addition to the six A380s on option, we also have options/purchase rights for another 20 787-9s and 20 A350-900XWBs. At this point, we do not have any immediate requirements for additional aircraft orders.”

Jetstar

Aviation observers are quick to pronounce the heat the competition will bring to Singapore Airlines (SIA), which is a dominant player on the SIN-MEL route and the sole operator on the SIN-AKL route after Air New Zealand pulled out in 2006.

But can Jetstar take on an airline like SIA, an established name in those two markets and long reputed for its excellent service?

Image Courtesy of Lin.y.c

Just as many people will find the suggestion implausible. It would be more pertinent to ask: Should SIA be wary of the competition posed by Jetstar?

When budget carriers entered the Singapore arena – beginning with Valuair in 2004 – SIA had good reasons to stand apart from them, confident that they were after different markets. That was before the global economic recession took a toll on the airline industry, hitting airlines that thrive on premium travel hardest as corporations cut back executive travel and erstwhile front cabin travellers began downgrading.

In the good days, SIA generated 40 per cent or more of its revenue from premium class bookings.

But will an economy budget fare of S$900 compared to the normal full service fare of $1300 to $1400 be enough to cause SIA some concern, even more so when Jetstar will be operating a business class as well?  And, considering that the airline industry is on the mend with IATA forecasting a return to profitability after two years of losses, and that SIA has reported improved advanced bookings and “a pronounced recovery in demand for travel in business class.”

By all indications, SIA is on course to achieve profitability after reporting a net operating loss of S$39 million for the full year ended March 31, 2010. It was nonetheless a commendable performance if you consider how the airline lost S$428 million in the first half of the year, demonstrating its resilience to claw back even in hard times.

Competition is no stranger to SIA wherever it flies. A return to profitability can only mean it will be better positioned to take on additional competition.

When contacted, SIA informed this writer that the airline welcomes the competition, adding: “SIA is a full-service network airline with premium product and service offerings.” Therein SIA believes lies the differentiation.

Yet some kind of price confrontation is not precluded. That may even be useful initially to redefine the market. But it is unlikely SIA will feel much of a pinch.

The real competition comes with Jetstar’s success beyond Melbourne and Auckland. Jetstar chief executive officer Bruce Buchanan is looking at building “a solid foundation for future growth beyond Singapore to North Asia and Europe.”

That is good news for Changi Airport as the hub for Jetstar’s network of flights through Southeast Asia to possible destinations that include Beijing, Shanghai, Tokyo, Rome and Amsterdam. But for SIA, this is where the heat of the competition may be felt, though it will be cushioned somewhat by the belief that capacity will create demand, added to Singapore’s growing attraction for businesses and tourism.

However, while history has favoured the growth of regional budget carriers in recent years, the few that ventured beyond into the long haul, such as Canada’s Harmony Airways and Hongkong’s Oasis Airlines, had to fold up their wings soon after.

That is not saying Jetstar will meet with the same fate, noting its Qantas parentage and apparently strong home bases and network connections.

Much has changed since the days of Singapore’s first budget carrier Valuair which never realized its dream of flying long haul to London and was subsequently acquired by the Jetstar owners.

Jetstar might well still live that dream after how the economic crisis has reshaped air travellers’ preferences for reduced costs over frills. Some airlines such as Qantas are reducing front-end capacity to increase seating in economy.

Jetstar’s plans augur optimism for the airline business. As the industry recovers, there is certainly room for more competition. And SIA may already be asking what Jetstar can do, apart from offering lower fares, that Air New Zealand has not done before it quit Singapore.

Type Inspection Authorisation

Early test results are positive and better than originally envisaged, with both the GEnx-2B engines and the 747-8F’s new wings contributing toward this goal, further reaffirming the robustness of the aerodynamic design of its wing and that of the engines.

Both Boeing and General Electric have noted that it is too early to conclude whether results match their intended projections.

“NAMS testing is underway. It is a little early to make any determinations on the results,” a Boeing spokesman said.

“We can’t confirm that [the better performance] at this time. It’s still too early on in testing. However, the combination of the engines and the wings are key drivers in the 747-8 increased performance compared to the 747-400.”

Image Courtesy of Boeing

While the better-than-expected performance is not anticipated to be confirmed by the airframer soon, Boeing did reaffirm that the GEnx-2B engines and the 747-8’s new wings had contributed to its economics.

Coupled with the ongoing weight-saving program, the 747-8F is expected to exceed its contractual obligations which may result in an increase in range/payload.

“Our team has identified weight-reduction opportunities and we are implementing plans to take advantage of those opportunities. The 747-8 Freighter will meet the payload and range targets, while providing customers with the forecasted economic benefits,” confirmed Boeing.

Should these weight savings be realised, the sales of the 747-8F will hopefully be helped and improve the program’s forward-loss position facilitated by new orders.

Despite the loss, Boeing has not been desperate to sell and had rejected several 747-8 deals last year based on pricing differences with several customers. Boeing is now focused on program profitability despite the fact that the last major 747-8F order came 30 months ago from Dubai Aerospace Enterprise in December 2007.

Unlike Airbus’ beleaguered $25 billion-plus A380 program which has been hit by rising production costs, deferrals and delivery slippages; Boeing CEO Jim McNerney noted that the 747-8 program could become profitable should they successfully capture half of the 740 units that the airframer forecast the very large airplane market.

With an economic recovery being led by the Asia/Pacific region, Boeing is optimistic not only on the 747-8F’s fortunes, but also for the 747-8 Intercontinental – lessons learned on the 747-8F flight test program will be applied to the 747-8 Intercontinental.

“Some of the testing from the 747-8 Freighter will apply to the 747-8 Intercontinental. While there will be performance testing, the Intercontinental testing will have a heavy focus on the interior,” says Boeing.

“We’re optimistic regarding both the 747-8 Freighter and the Intercontinental. Interest is increasing. We are talking to more and more customers. We recently added an order in the VIP configuration last week. That marks our eighth VIP customer.”

Yet the threat remains in the form of aggressive A380 pricing. There are indeed possibilities for Boeing to explore, particularly with operators that suffer from a capacity gap that exists between the A380 and other smaller, but significantly more flexible aircraft in their fleets.

Critically, the larger revenue cargo volume of the 747-8I when compared to the A380 should bode well for carriers that place a bigger emphasis on freight, especially Asian-based carriers, from whom 33.3% of the worldwide freight tonnage kilometres (FTKs) originated even in the midst of the global financial crisis back in 2008.

The commonality between the 787 Dreamliner’s GEnx-1B engines and the 747-8I’s GEnx-2B engines could be a selling point to 787 Dreamliner customers whose fleets are large enough and are able to accommodate the 747- 8, too. To date, the GEnx-1B engine has roughly 40% of the announced 787 orders, slightly ahead of Rolls-Royce.

General Electric also noted that there is no weight-saving program for the GEnx-2B engines at present.

“In terms of weight savings packages on the GEnx-2B engine, there is nothing that is underway. The GEnx engine is already lighter than other comparable engines due to its composite fan case and fan blades as well as fewer airfoils in its turbine section, which has taken 400 lbs of weight off each engine. For the Boeing 747-8 aircraft with 4 engines, that means 1,600 lbs off the airframe.”

Boeing also acknowledged that the Trailing Edge Variable Camber (TEVC), one of the unique features on the 787 Dreamliner, does not feature on the 747-8 family.

“The 747-8 does not have TEVC. The 747-8 Program did study adding TEVC but found the performance benefit was not as great as on the 787. The 747-8 does not have active gust suppression control laws. The 747-8 has better response to wind gust due to its physical size. However, the 747-8 will have active control laws designed to improve the ride quality of the airplane.”

Despite the sluggish sales, uncertainty and volatility in the economy triggered by the global financial crises, the 747 program is progressing into a future that Boeing hopes is a lot brighter to replicate some of the sales successes witnessed on the larger A380 in recent years and look to translate that into the 747-8 Intercontinental.

Cathay Pacific

“We can only confirm that the bit about the airline is evaluating new-generation Airbus A350 and Boeing 787 aircraft,” Cathay Pacific spokeswoman Carolyn Leung said.

Indeed, both the Boeing 787-9 and the A350XWB can fit into Cathay’s worldwide network seamlessly.

The 787-9 shares cockpit commonality with its bigger sister 777-300ER, thereby reducing the cost of pilot training significantly.

Image Courtesy of Boeing

Moreover, the 787-9 can very well replace the 11-unit A340-300 and the ever growing A330-300 fleets in one fell swoop. Since the latest range target of 8,150 nm for the 787-9 does not take into account of the prospective block point changes, its range is very likely to increase beyond the original target of 8,500 nm or result in a payload increase, which enables the aircraft to potentially carry more than 300 passengers.

Cathay’s existing A340-300s have two configurations including the one accommodating 243 passengers and another accommodating 283, whereas the A330-300s accommodate 264 and 311 passengers in different configurations.

Therefore the 787-9 can cater for thinner routes in the Cathay network while retaining flight frequencies which formed the backbone of Cathay’s business model as a premium carrier.

However, sources at the Hong Kong-based carrier indicate that the A350-900 is the most likely candidate to be selected.

The A350XWB provides Cathay with more capacity which is much-needed in a rapid expansion despite the carrier’s downsizing of the 747-400 to the 777-300ER.

Although the 747-400 will remain as a core part of Cathay’s long-haul fleet for some time yet, the 777-300ER is widely seen as a “defacto” 747-400 replacement.

More importantly, is the strategic value that an A350XWB order may bring. Cathay has long been retaining a hybrid fleet of both Airbus and Boeing; in doing so, Cathay can maintain its bargaining power over pricing and delivery slots and squeeze the best price and delivery slots from the winning bid.

Given the fact that Cathay has ordered a large quantity of Boeing 777-300ER’s, the A350XWB can enable the carrier to keep maintaining this Airbus/Boeing balance.

What’s more, with the expansion plan gaining steam following the global economic recovery, although still in a fragile state, means Cathay’s future fleet is large enough to accommodate both Airbus and Boeing sub-fleets.

In addition, the Mixed Fleet Flying (MFF) and Cross Crew Qualification (CCQ) between the Airbus A350 and A330-300/A340-300 fleets also reduces the training cost of cockpit crew.

Regardless of which variant that Cathay may order, the A350 XWB will unquestionably be a complement to the 777-300ER fleet, rather than a replacement.

The 777-300ER still has superior payload performance when compared to its closest competitor in the A350-1000 variant.

As Tim Clark, chief executive of the biggest 777 customer – Emirates, accurately points out that while the A350-1000 looks great and will cut fuel burn, it is a 10-12 hour aircraft with full payload, “its performance [nonetheless] falls away after that”.

“What matters is what the aircraft will deliver in terms of performance. Performance does not only consist of weight, but also aerodynamics, engine performance, and other parameters. The payload and range are maintained and even improved for the A350-800 with extra 250nm of range and 3 tons extra structural payload keeping full commonality with the basic model the A350-900,” Airbus’ Marcella Muratone noted.

Last but not least, the possibility for Cathay to order additional 777-300ER cannot be overlooked.

A 777-300ER selection provides earlier delivery slots than either the 787-9 and A350XWB while enabling the carrier to launch routes - Chicago is just one of many routes currently on Cathay’s radar screen.

Furthermore, Boeing is considering a Performance Improvement Package (PIP) that will see the 777-300ER’s SFC being reduced by further 4%, potentially reaching a figure as low as the 787-8’s fuel burn.

“Yes, the performance improvement package under study for the 777-300ER includes a further 4 percent improvement, which would potentially reduce fuel burn to 2.6 liters of fuel per passenger per 100 km with nine-abreast economy seating, or even a bit better with ten-abreast economy seating. This data is related to a factory production version of the package,” Boeing’s Bob Saling stated.

In addition, the 777-300ER’s superb revenue cargo volume of 5,191 cu. feet is unrivalled. Revenue cargo volume refers to the cargo space left that enables carriers to carry revenue cargo after passengers’ luggage has been fully loaded.

This is significant since 30% of Cathay Pacific’s total revenues are contributed by carrying cargo.

A point which is also noteworthy is, ordering additional 777-300ERs saves the training cost involved with ordering and installing Full Flight Simulators (FFS), train an initial group of pilots flying a new aircraft instead of deploying them into flying revenue services, ordering spare parts, etc.

With Boeing announcing its decision on the 777X in 2011, the possibility for Cathay putting its acquisition plan on hold and waiting is also real. Nevertheless, the wait won’t be that long.