30 Jun, 2003

Oz Airlines Seek Marketing Support to Try New Asian Destinations

Imtiaz Muqbil

Australian airlines are open to talks on flying to specific Asian destinations if the destinations can build a strong case and, uhhm, put up some money.

– From the Australian Tourism Exchange 2003 in Melbourne

In this dispatch :

1. OZ AIRLINES SEEK MARKETING SUPPORT TO TRY NEW ASIAN DESTINATIONS (1,503 words): Australian airlines are open to talks on flying to specific destinations if the destinations can build a strong case and, uhhm, put up some money.

2. NORTHERN TERRITORY MAKES AVIATION HEADWAY (665 words): NT is making such a case to open more access to Darwin and Alice Springs.

3. NO MINOR WIFE AT THE MAJOR FUNCTION (544 words): The Australian Tourist Commission says managing airline relations is a delicate balancing act.

4. VIRGIN BLUE: WE NEED A COMMITMENT (343 words): No more free lunch, says Richard Branson’s Australian subsidiary.

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1. OZ AIRLINES SEEK MARKETING SUPPORT TO TRY NEW ASIAN DESTINATIONS

Several months ago, the tourism organisation of the Malaysian state of Sabah approached Qantas’ low-cost subsidiary, Australian Airlines, to start a flight from Sydney to the state capital of Kota Kinabalu. Although the richly rainforested Malaysian state had not even figured on the business plan of Australia’s first all-economy, full-frills international leisure carrier when it was launched last November 2002, there is nothing like a good crisis to make all plans flexible and everything negotiable.

Over the course of several visits, Sabah Tourism officials offered Australian Airlines marketing support for a Sydney-KK flight, a sweetener designed to help cut both the risks and costs of a totally new route between Australia and Malaysia. Details are not divulged but it is apparently a three-year pact that has allowed AA to start the flight on June 29. It will operate once-weekly Sydney-KK v.v. but later extend beyond to Singapore, allowing Sabah to pull in visitors from both ends. The funds from Sabah Tourism and deals from Sabah hotels and tour operators are allowing AA to offer 8-night packages for A$1099. The first flight was full up weeks ahead of departure.

It’s a sign of the times, the dynamics of which are not lost on the Australian Tourist Commission. Says ATC Managing Director Ken Boundy, “The whole airline agenda is changed. They need to get profitable routes and good load factors. The onus is really on the industry to build cases (for the airlines) to fly routes which they are not currently flying.”

AA knows this well. Its own existence is partly the result of a pitch made by Tourism Queensland to Qantas to hub in Cairns, gateway to the Great Barrier Reef, and draw visitors from Japan, Hong Kong, Taiwan and Korea. That largely ‘inbound’ formula hit the skids with the Iraq war and SARS. As traffic fell, AA responded û cutting flights to SARS-hit destinations, pruning costs by dispatching one of its four Boeing 767s for a C-check, delaying delivery of its fifth Boeing 767 from July to October and, thanks partly to the pitch from Sabah Tourism, advancing its plans to start outbound traffic.

Today, AA’s acting chief officer Andrea Staines says AA’s yield is down and profitability is lower than projected. Mr John Borghetti, Qantas’ Executive GM for Sales and Marketing, denies that Qantas is subsidising AA’s operations, saying that the airline is making “some money.” Slowly, as demand rises, AA is rebuilding its routes to Hong Kong, contemplating going ahead with the delayed plan to Shanghai and eyeing India. Interestingly, it is talking to one other Asian tourism board about starting a operation similar to KK. Ms Staines says the airline is open to other similar offers.

Australia’s location and size makes aviation the lifeline of its domestic and international tourism industry. Ever since the crippling pilots strike in 1989, a vulnerable and volatile aviation industry has claimed a high casualty rate. The combination of a small domestic market, high costs, unions, predatory pricing, regulatory issues and global economic and political volatility have killed off the original Australian Airlines, Impulse, Ansett and some smaller regional airlines. Today, the badly stung industry is searching for sustainable ways to balance airline ownership, yield and capacity against consumer and industry calls for lower fares, more access to Australian tourist destinations and more traffic rights for foreign airlines.

At the moment, Qantas reigns supreme. The airline flies in 35pc of all visitors to Australia and, since the fall of Ansett in September 2001, dominates the domestic market with a network of 5,300 flights to 67 destination and territories. Mr Borghetti says, “It’s been very difficult for all in tourism. Just as we started to recover from 9/11, we suffered the Bali bombing. Then came Afghanistan and the war in Iraq and now SARS. No doubt, the worst impact by far is SARS.”

With the exception of New Zealand, he says, no market was left unscathed. As the airline moved to match capacity with demand, Hong Kong, one of the worst affected, was slashed from 35 to seven flights a week, and London from 21 to 17. Paris was halved from four to two and eventually dropped. Inspite of the huge costs, domestic flights to all the tourist destinations were maintained.

Yield has declined and is expected to suffer over next 3-4 months. Says Mr Borghetti, “Reinstating too much capacity too soon will have a severe impact on airline economics. Airlines have to manage increases in capacity — prudently and appropriately. We are ready to react quickly as we see markets responding. Qantas is absolutely committed to stimulating the overseas market and working with the ATC and the state tourism organisations on promotional initiatives.”

Initially, recovery plans are focussing on the US. By the end of June, QF was planning to boost flights from 25 to 28 a week and 35 by the end of August. The Paris flights were replaced by a code-share with Qantas’ oneworld partner Cathay Pacific over Hong Kong. Events like the Rugby World Cup in October-November, expected to attract teams and thousands of spectators from 20 nations, will see Qantas deploying eight more 747 flights, or about 2,500 seats, just for the South African markets.

Still, Mr Borghetti says, “We can’t become complacent and think that the worst is over.” The airline is maintaining investment in new products. In September, new business and first class seats will be launched with high-tech gizmos that will allow passengers to send and receive SMS messages. In 2006, the first double-decker A380 aircraft will be deployed on routes to London, Singapore, Los Angeles and Tokyo.

While Asia is important to Qantas, the job of reinstating capacity to Asia is being led by Australian Airlines whose entire business plan was designed around attracting leisure traffic from Asia to Cairns and the Gold Coast. The eight-hour range of its all-Boeing 767 fleet allows it to operates routes with strong leisure or corporate incentive traffic from cities like Nagoya, Taipei, Hong Kong, Osaka and Singapore to the Queensland resort of Cairns and the Gold Coast. In-flight services and personnel are tailored to appeal to both Asian and western cultures.

During the SARS crisis, AA suspended all flights to Taiwan, slashed them back to Hong Kong and adjusted them to Japan. The climb-back to pre-SARS level has begun, starting with Hong Kong, followed by Japan. If no further crises strike, Ms Staines says there are plenty more opportunities, such as a Mumbai to Australia sector via Singapore and a Shanghai-Cairns sector. The Middle East is another potential market, filling a gap that Qantas, with its higher costs, has found commercially unviable. AA would need to operate at least three a week but much would depend on crew and accommodation costs.

She says the airline’s low-cost, non-unionised structure has helped it avoid lay-offs. Travel agents are generating over 90pc of the sales but software development for an Internet system is under way which may shift the equation.

The new Kota Kinabalu flights have evolved because AA advanced its plan for an outbound-Australia operation to balance its current 80:20 inbound:outbound traffic ratio. That plan also includes three new flights from Sydney and Melbourne to Bali, as of July 25. Both the KK and Bali flights will go on to Singapore, generating traffic to the two resorts from both the Australian and Singaporean ends. Traffic from Europe will be generated through Qantas’ regional hub in Singapore. Indeed, AA’s linkage with Qantas in terms of sales staff, cargo, frequent flyer programmes, etc., is a critical part of the low-cost operation.

The strengthening of the Australian dollar certainly will help. Ms Staines refers to Sabah as an undiscovered destination that no-one paid any attention to because of Australia’s love affair with Bali. Now, she says, the flight could aid the rise of an ‘alternative’ destination. To promote awareness, about 150 Australian travel agents have been flown up on a familiarisation trip. Sabah received 5,220 visitors from Australia in 2002 from all points of entry, an increase of only 0.1 per cent over 2001. In Jan-April this year, however, arrivals from Australia have hit 2,368, a sudden surge from 1,216 in the same period of 2002.

She says the marketing support from Sabah Tourism is “the most sensible approach” which leverages each party’s experience, and creates a win-win situation. The first four flights in June-July are timed to ride the Australian winter school-holiday break, and the first flight was full several weeks ahead. Frequency can be raised if traffic grows. On the outbound sector from Sabah to Australia, a trickle of student and family traffic exists but the Australian Tourist Commission says the numbers are too small to warrant a major promotion effort.

Ms Staines’ message to other Asian destinations looking to target the Australian market: “That is a good formula to copy. We’re open to offers.” She reminds tourist boards that AA has to reduce the risk in the start-up phase and needs a breakeven load factor of about 65pc to make the route viable.

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2. NORTHERN TERRITORY MAKES AVIATION HEADWAY

As building cases for airlines to fly to specific destinations is the name of the game, the Australian state of Northern Territory (NT) has done just that to attract airlines to Darwin and Alice Springs, the closest major airport to the famous Australian tourism icon of Uluru (aka Ayers Rock).

The state’s strategic tourism development plan for 2003-2007 identifies air, road and sea access as its primary challenge. The key strategy to develop air access, as listed in the plan, is to “develop and present business cases” to airlines to attract additional air capacity. As other states have done, in November 2002, the Northern Territory appointed its first Aviation Development Director, a position jointly funded by the Northern Territory Government and the state’s Airport Development Group.

The man appointed to the job is Peter Roberts, a chartered accountant who spent 13 years with Qantas, once ran a travel agency, and has been involved in the set-up and management of small to medium sized airlines like Air Niugini, Norfolk Jet Express, Air Nauru and Air Vanuatu. In 1993-94, he was also CEO of the Indian airline, Jet Airways.

Since then, NT has been active with Asia-Pacific airlines and in a number of international forums to ‘build cases’ for airlines to fly to Darwin and Alice Springs. Millions of dollars are being spent on upgrading those airports, which raises the obvious need to have airlines fly there. Talks have been held with Garuda, Air Macau, Philippines Airlines and even Emirates. Last March, before the SARS crisis, the NT government signed an agreement with Cathay Pacific to study the feasibility of a Hong Kong-Darwin route. Talks have been held with Malaysian Airlines for flights from Malaysian points.

Scheduled airlines are not the only ones being targeted. Charters are fine, too. At the ATE, it was announced that two of the largest Japanese wholesalers, Kintetsu lnternational and HIS, will operate charters from Haneda airport in Tokyo to Alice Springs in August. Still subject to regulatory approvals, the flights will be operated by Qantas and the marketing “strongly supported” by the NT Tourist Commission in Japan, the Australian Tourist Commission and Kintetsu’s subsidiary company, Club Tourism.

Four 220-seat Boeing 767-300 flights are anticipated between 1 August and 17 August 2003. The three-night packages to Central Australia are estimated to inject over A$1.2 million into the local economy. NT tourism officials say consumer research in Japan shows Central Australia has a wide appeal for nature experiences.

The announcement came barely two months after an April visit to NT by the Managing Director of Kintetsu International. The NT Tourist Commission also sponsored a key planning meeting for senior Kintetsu executives at Uluru in June. If the charters work, NT officials are hoping it may encourage airlines to consider scheduled flights from Japan, or at least regular seasonal charter programs.

Tourism Minister Dr Chris Burns admits that “intensive lobbying” was carried out by the NT Airports Corporation, Peter Roberts and NT Tourist Commission executives. “We have been working closely with the ATC and Qantas to build a sustainable business case to operate these charter flights, in a traditionally busy period for outbound travel from Japan.” He praised Qantas for “working hard” to increase capacity into the Territory. “This is another example of (Qantas’) willingness to think outside the square to benefit the Territory.”

Lobbying with Virgin Blue also led to the decision to begin a service from Sydney to Darwin. Virgin, too, told NT officials that its decision would be based on a strong business case, network expansion and sustainable demand. Said Dr Burns, “No one wanted an airline who would come to Central Australia for two or three years and then pull out because it wasn’t profitable. Virgin has made a sensible business decision based on economic factors. The next step for this Government is to begin building the business case for a Darwin to Alice route, and to encourage Virgin to see Darwin as an important hub for flights into Asia.”

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3. NO MINOR WIFE AT THE MAJOR FUNCTION

The Australian Tourist Commission does not always have to ‘build a case” for airlines to fly to Australia but it does provide plenty of marketing support. However, there is a clear policy that working with other airlines must not create undue competitive pressure for Qantas and its scheduled operations.

Richard Beere, the ATC’s General Manager for the Eastern Hemisphere, explains the approach: “Qantas is our key Australian partner. We first work with them, then the national airline of the country in which we are marketing, and then the airlines with whom we have strategic agreements like Singapore Airlines and Japan Airlines and other third country carriers.”

Mr Beere says the ATC has to make sure that Qantas’ interests are not jeopardised because it is the national airline and generates most of the inbound traffic on scheduled routes which have to be sustained. “We have to balance the relationship (with other airlines)”, he says. “We can’t support the newcomer way in excess of the existing partnership. You don’t want to take your minor wife to the major function.”

In each market, the ATC tailors its marketing programmes in a way that exploits specific windows of opportunity, such as targeting different market segments in different seasons with a different product. Says Mr Beere, “It’s a fairly heavy balancing act to make sure that we don’t have competing campaigns but complementary campaigns. We also have to reconcile the interests of the airline and how (the campaign) fits in with their objectives.”

He says that while charters have always interested the ATC because they provide some extra capacity during peak periods and help open up new destinations, the ATC has to remain more focussed on scheduled services. For example, he says, Tradewings of Singapore has run charters to Tasmania. “From a strategic perspective, we have to ensure that we don’t dilute the regular schedule because that is what is more sustainable,” Mr Beere says.

While the ATC has a memorandum of understanding with Singapore Airlines, especially for traffic from Europe, it is aware of the additional feed that could be provided by Emirates, Gulf Air and Qatar Airways through the Middle East. Says Mr. Beere, “One lesson we had to learn is that route profitability is about two-way traffic. It’s very difficult to sustain any route with one-way traffic.”

Mr Beere lauds the recent moves by the Australian states (like NT in the story above) to appoint aviation development directors. “The states are in a strong position to broker deals by involving their own governments and the airports,” he says. “They’ve said that they have to better understand what drives the airlines’ business and their strategic decision-making in terms of the routes they will fly or expand or pull out. As a result, the states have brought in expertise to help them talk at the right level in the right terms with the right people in a whole-of-government approach at the state level.”

As Australian Airlines grows its routenet, the ATC is working with it on the Hong Kong, Taipei and Japan routes and will work on other routes like China. He says the upcoming merger between Qantas and the money-losing Air New Zealand will impact the region’s airline industry but precisely how still remains to be seen.

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4. VIRGIN BLUE: WE NEED A COMMITMENT

Launched on 31 August 2000 with one aircraft flying between Brisbane and Sydney, Virgin Blue is today operating to 19 Australian destinations with an all Boeing 737-700 fleet. It claims a 25pc market share on 475 daily direct and connecting services.

Owned 46pc by Richard Branson’s Vigrin Group, the airline’s marketing slogan is “keeping the air fair” and its business model is designed around a low-fare, low-cost alternative. This means a user-pays philosophy under which inflight dinners can cost A$8.50 and a bottle of still water A$2.00. There is one lounge at its main hub, Brisbane airport, which can be used by any passenger upon payment of A$5, unless they have bought a 12-month ‘Blue Room Passport’.

The buzzword is to grow slowly and cautiously. David Huttner, Virgin Blue’s manager for strategy and communications, says the airline needs feed from abroad to make domestic routes reliable and profitable. However, it’s low-cost model means that it cannot provide the frills sought by customers of the major airlines. At the moment, it has a limited code-share with United Airlines and is talking to Emirates. However, he says, “We will not compromise the business model. Every new thing we put in means an additional cost involved.”

It is also staying clear of damaging air-fares with Qantas that have led to the demise of other airlines and do nothing to grow the market. The principle is that if fares are to be lowered, the airline needs a commitment from the target customer segment (like corporate groups) about the business to be generated. Mr Huttner says that when fares were lowered blindly, and matched by Qantas, the customer got the benefit but did not necessarily move to Virgin Blue. Now, he says, “We will not just lower our fares so that they can fly Qantas on lower fares. We will need some strong commitments from the parties involved.”

Virgin Blue has plans for a 50-aircraft fleet which will be deployed to international sectors like New Zealand, Fiji, Singapore, Malaysia, Bali, Papua New Guinea and the South Pacific destinations.

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