Taiwan's Transit Bonanza

Vol. 22 No. 1 February 2015 orientaviation.com

TAIWAN’S TRANSIT BONANZA Ban to go on Mainland onward travel predicts China Airlines chairman, Huang-Hsiang Sun

Fuel fall fires Skymark enters Haneda airport welcomes up profits bankruptcy protection first LCC – Peach Aviation

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ORIENT AVIATION MEDIA GROUP Mailing address: GPO Box 11435 Hong Kong Office: 17/F Hang Wai Commercial Building, 231-233 Queen’s Road East, TAIWAN’S Wanchai, Hong Kong Tel: Editorial (852) 2865 1013 Fax: Editorial (852) 2865 3966 TRANSIT E-mail: [email protected] Website: www.orientaviation.com

Publisher & Editor-in-Chief BONANZA Christine McGee E-mail: [email protected] Ban to go on Mainland onward travel predicts Chief Correspondent Tom Ballantyne China Airlines chairman, Tel: (612) 9638 6895 Huang-Hsiang Sun Fax: (612) 9684 2776 E-mail: [email protected]

Greater China Correspondent Dominic Lalk Tel: (852) 2865 1013 COMMENT MAIN STORY Fax: (852) 2865 3966 5 How low will oil go? 16 Fuel fall fires up profits E-mail: [email protected] North Asia Correspondent NEWS Geoffrey Tudor Tel: (813) 3373 8368 6 AirAsia’s Tony Fernandes calls for single Asean E-mail: [email protected] safety regulator

India Correspondent 6 LLCs win 50% of South Korean air passenger R. Thomas market Tel: (852) 2865 1013 E-mail: [email protected]

Photographers Rob Finlayson, Colin Parker, Graham Uden NEWS BACKGROUNDERS Design & Production 8 Co-founder rescues his budget baby SpiceJet Chan Ping Kwan 10 Indonesia AirAsia crash prompts regulatory Printing 6 THAI to cut network by 10% as it restructures review Printing Station(2008) under new president 12 ICAO examines new tracking rules ADMINISTRATION 7 Korean Air’s debt to escalate 28 Japan Skymark enters bankruptcy protection

General Manager Shirley Ho E-mail: [email protected]

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South East Asia and Pacific Tan Kay Hui Tel: (65) 9790 6090 7 China tops chart for MRO growth 28 Government opens Tokyo’s Haneda airport to E-mail: [email protected] 7 Air New Zealand CEO, Christopher Luxon, was LCCs The Americas / Canada presented with the 2014 Orient Aviation Person Barnes Media Associates Ray Barnes of the Year award at a gala reception, sponsored SPECIAL REPORT Tel: (1 434) 770 4108 by Airbus, in Auckland last month 31 Manufacturers winning battle for MRO business Fax: (1 434) 927 5101 E-mail: [email protected]

Europe & the Middle East REM International Stephane de Rémusat Tel: (33 5) 34 27 01 30 Fax: (33 5) 34 27 01 31 E-mail: [email protected]

FEBRUARY 2015 / ORIENT AVIATION / 3 253mm Live 273mm Trim 283mm Bleed

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How low can oil go?

The travelling public is expecting the dramatic decrease in in a sweet spot that AirAsia group boss, Tony Fernandes, the oil price should quickly be passed onto them in the form described as “massive”. of lower airfares, as cautiously predicted by the International To illustrate how risk laden hedging can be, the region Air Transport Association. needs to look no further than the experience of some of its But buying jet fuel, and managing its volatility over the best run airlines. It was not so long ago that big operators annual operating cycle is more complex than it appears. like Cathay Pacific Airways, Singapore Airlines and the major These swings, of which the most recent is the 50% collapse Chinese carriers suffered serious paper losses after making in oil prices since last June, has confronted airlines with a wrong way bets on oil hedging. It is more than likely that for Catch 22 situation. some airlines, 2015 will repeat that bitter experience. Do you hedge? At what price? For how much and for Generally, there is no doubt the drastically lower cost of how long? There is no simple answer to these questions. oil is a huge bonus for the industry. Last month, the average Ultimately, for airline senior management, it comes down to price for jet fuel was around $1.71 per gallon, some 18.1% a gamble, no matter how informed the process was that lead lower than a month earlier and down a phenomenal 43.2%, to the decision. year on year. In the Asia-Pacific, different airlines are taking different But IATA is right in reminding everyone that several approaches to managing fuel volatility. With jet fuel at risks remain for airlines in the global environment, its lowest level in more than six years, carriers with less including political unrest, conflicts, and some weak regional hedging in place and buying at spot prices will be the economies that will influence the oil price. biggest beneficiaries of the current price, at US$50 per The short term landscape for oil remains positive. barrel. Some forecast the price will go as low as $43 a barrel. Other Those who have locked in their fuel requirements at industry analysts insist producers will adjust their output higher prices will suffer, as long as the price remains low. and prices will rise. Those who take a hedging position at today’s price will At the 2014 IATA AGM last June, airline bosses said they benefit significantly when fuel goes up. have found they could manage the high price of oil, but oil’s Whatever happens, the fuel bill of low-cost carriers, price volatility was a challenge to operations. How right they who pay up to 50% of their operating costs for jet fuel, is were. ■

TOM BALLANTYNE Chief Correspondent Orient Aviation Media Group

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FEBRUARY 2015 / ORIENT AVIATION / 5 REGIONAL ROUND-UP

AirAsia’s Fernandes wants single Asean regulator

As news becomes available “Asean is not just open about the contents of skies. It is about having some Indonesia AirAsia QZ8501’s Asean standardization and flight and voice recorders, institutions to advance the AirAsia Group boss, Tony Asean aviation industry,” he Fernandes, has joined in calls said. for changes to the region’s Asean is pushing ahead air safety systems. “It’s time with plans for a single aviation for Asean institutions to step market, or “open skies” forward, for commonality, for in 2015, that will allow its standardization and for quality,” members’ airlines unlimited he said. “We should have one access to the markets of each Asean regulator for air traffic, other. However, execution of one Asean safety standard and Asean open skies in terms of one pilot training qualification adopting uniform technical and so there will be mobility of the safety standards have been low workforce.” priorities to date. ■

Korean LCCs control 50% of local air traffic

For the first time in their Korean low-cost carriers: Jeju Jin Air (9.2%), T’Way Air (9%) since budget carriers began operating history, South Korean Air (13.9%), Air Busan (11.7%), and Eastar Jet (7.4%). KAC said flying in South Korea in 2005, budget carriers held more they earned a reputation as safe, than 50% of the country’s but with competitive fares. The domestic market last year, airport group said it expected attracting 51.25%, or 24.4 the budget sector to increase million, domestic travelers in its market share on short and 2014, said the Korean Airports medium haul international flights Corporation (KAC) in a January to Southeast Asia and Japan as report. There are five South well as in the domestic market. ■

THAI cutting routes not staff

Thai Airways International international routes, sell off 22 greater inroads into its market, annual passenger numbers (THAI) president, former Stock older aircraft by July, but only with the carrier now recording from above 20 million a year Exchange of Thailand president, involve staff redundancies as a load factors approaching 60%. in 2012 to 17.8 million last Charumporn Jotikasthira, last resort. THAI has recorded Extended political unrest and year. The new president, who has announced a two-year miserable results in 2014 as a poor performance in its took over in December, must recovery plan that will eliminate passengers continued to decline domestic and nearby regional deal with disposing of older loss-making domestic and and budget carriers made ever markets reduced THAI’s aircraft, while taking delivery of new planes that will produce unwanted capacity at the carrier. Apart from a profit for the July-September quarter last year, mainly due to currency gains, THAI has posted losses for six quarters since civil protests in Bangkok took hold in the second half of 2013. The Thai military staged a successful coup d’etat in May last year. The junta will not let THAI fail, analysts who report on THAI said. ■

6 / ORIENT AVIATION / FEBRUARY 2015 REGIONAL ROUND-UP

Korean Air’s debt escalates

Flag carrier, Korean Air (KAL), plans to sell off 44 airplanes, mainly B747s, by 2017 as part of efforts to reduce a multi- billion dollar debt that is forecast to increase when the company announces its final quarter results this month. In January, KAL associate company, Hanjin Energy, sold its 28.4% holding in South Korean refiner, S-Oil to Saudi Arabian offshore oil company, Aramco Overseas Co. The deal, worth US$1.83 billion, will be followed by a sale of shares in KAL in a new issue next month. Combined with progressive disposals of some lower valued assets, the share and aircraft sell plea of not guilty in the South became enraged when she was so the offending flight purser off could provide KAL with Korean courts to charges of served Macadamia nuts in a bag could be put off the plane. Cho another US$3.2 billion for debt flight plan changes, coercion rather than a bowl, as required could face up to 15 years in jail. reduction. and obstructing justice. She in first class. At the time, the It is predicted she will receive a Separately, Cho Hyun-Ah was ordered into detention aircraft in which she was suspended sentence, but that (40), one of the three children at the end of December. The travelling had pushed back in KAL will be punished with a of KAL chairman, Cho Yang Ho, “nut rage” case, which became New York and was taxing to the fine of US$2 million and a ban remained in detention at press a national scandal in South runway for take-off. She ordered on serving some of its route time, following her January 18 Korea, erupted after the heiress the aircraft to return to the gate network for several weeks. ■

China tops chart for MRO growth

Global MRO forecasters predict MROs based in China. The China will lead the region in country’s MROs are estimated MRO business in the next to have earned $601 million decade with the Asia-Pacific from airlines, excluding continuing its role as the modifications. industry’s growth engine, with The Asia-Pacific generally an annual growth rate of 5% is a net exporter of airframe a year compared with a global maintenance services, with the average of 4.2%. region’s airlines generating China’s huge MRO business US$1.3 billion in aircraft MRO is expected to be 250% bigger demand. About 93% of this by 2025, with an annual growth demand is met by Asia-Pacific rate of 9.8%. India will expand MRO providers. See at over 10% a year, but will Manufacturers winning battle Air New Zealand CEO, Christopher Luxon, was presented remain a relatively small part of for MRO business. Page 31. ■ with the 2014 Orient Aviation Person of the Year award at a gala the total market, with growth reception, sponsored by Airbus, in Auckland last month. averaging 1%-3% every twelve Mr. Luxon, who is the third Air New Zealand CEO to receive months. the award, is pictured with Isabelle Floret, Airbus senior vice China is a net exporter of president, Pacific and Christine McGee, publisher and editor-in- aircraft MRO with Mainland chief of the Orient Aviation Media Group. A few days earlier, Ms. Chinese airlines earning Floret received the Legion d’Honneur, France’s highest award S478 million, with 91% of for outstanding civil service, at a ceremony in Toulouse. ■ the contracts serviced by

FEBRUARY 2015 / ORIENT AVIATION / 7 NEWS BACKGROUNDER

and resolve issues pertaining to air connectivity, infrastructure development and rationalization Perfect timing of taxes on aviation turbine fuel (ATF). We will go to their SpiceJet co-founder, Ajay Singh, has bought doorstep and make all efforts to catalyse growth of the civil the debt-ridden low-cost carrier for S$243.5 million aviation sector,” said a senior in a deal that will give him full management control ministry official. In the meantime, passenger as well as 100% ownership of the carrier. demand continues to increase, with the latest figures from the Directorate General of Civil By Tom Ballantyne Aviation (DGCA) reporting air traffic expanded by 9.7% piceJet’s woes may not no avail until he emerged in late suppliers and the industry as a last year compared with 2013 be over, but the widely 2014 as SpiceJet’s savior. Backed whole. The airline has excellent although a significant amount expected deal that will by an investor network, the deal slots, brand and staff. Given the of this growth was driven by see one of the carrier’s was signed in January and is right support, it can rebuild itself discounting. founders returned to awaiting government approval. into a profitable airline in the Indian airlines carried 10.9 Sfull ownership and control of A new five-year plan to next year,” Dubey said. million passengers in 2014 the airline could not have been rebuild the carrier includes an While Indian aviation against 10 million a year earlier. better timed. infusion of investment funds struggles with high costs, fierce Some 8.9 million passengers, Last month, entrepreneur from associates of Singh. Indian competition and excessive or 81.6%, travelled on private Ajay Singh paid $243.5 million media has reported the carrier taxation, analysts consider airlines, with state-owned Air for the low-cost carrier at a time will return to a single-type the market underserved. In India reporting an 18.4% share, when global oil prices had fallen or two million passengers, of the New SpiceJet owner, by more than 50% in seven market. Ajay Singh, to return to months and Indian domestic air an all-B737 fleet? Low-cost carrier, IndiGo, traffic growth was improving. was the market leader with 3.5 SpiceJet was in trouble. It million passengers, or 31.8% owed its creditors, including of the market. The Jet Airways airport operators, oil companies, group, now part-owned by Abu ground handlers and other Dhabi’s Etihad Airways, carried suppliers, more than $200 2.4 million passengers, 21.7% million. It had reduced its daily passengers for the year. Another flights by a third since last budget airline, GoAir, attracted September and grounded half its one million passengers ( 9.2%) fleet. It had returned 20 B737s fleet of B737s, phase out its 15 recent months, there are signs for 2014. to lessors in the past few months Bombardier Q400s and shrink its the government will ease the All seven domestic carriers, because it couldn’t meet its network. biggest burden airlines have, the including the new AirAsia/Tata payments. SpiceJet has 42 B737 MAX lowering of the value-added tax joint venture, no-frills AirAsia Payment of staff salaries jets due for delivery from 2018. imposed by the country’s various India, and regional airline, Air have been delayed on two At press time, it was not known if states on jet fuel. Costa, reported higher load occasions. It posted a record the order would be reviewed. Ranging from 4% to as high factors during the December loss of $162.8 million last year Analysts said the SpiceJet as 30% under different Indian peak season. and has not been profitable, resurrection is a good sign for state governments, the tax Air India’s seat factor rose to on a full-year basis, since the the local airline industry. Amber results in fuel making up as much 85.9% in December from 76.9% 2012-2013 fiscal year ending Dubey, partner and India head of as 50% of airline costs. in November. IndiGo reported March 31, 2013. aerospace and defence at global India’s Civil Aviation minister, an 88.8% average load factor Singh, who founded Spicejet consultancy, KPMG, said the Ashok Gajapati Raju Pusapati, is for the month compared with with two partners in 2005, sold failure of an airline with a 17% visiting all 29 states – the process 78.6% in November. Jet Airways the Delhi-based carrier to media market share is the last thing will continue throughout the also reported an 89% seat factor baron, Kalanidhi Maran, and India’s beleaguered aviation year - to convince the provincial against 83.8% in November. All his Sun Group and supporting sector needed. governments to lower the tax. of the carriers have benefitted investors in 2010. The airline tried “SpiceJet’s revival is good for “The minister has decided from SpiceJet’s forcibly reduced to raise funds to keep flying to passengers, employees, lenders, to reach out to states to discuss network. ■

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requests can be critical in a region where changing conditions such AirAsia crash as strong winds and tropical thunderstorms pose time-critical challenges for pilots. prompts regional None of this information comes as a surprise to the local airline industry. At its annual regulatory review Assembly of Presidents in Tokyo last November, the Association of Asia Pacific Airlines (AAPA) said airlines are investing heavily By Tom Ballantyne in fuel-efficient planes to meet rising demand, but there is he crash of Indonesia to stall and then spiral into a fatal While pilots in the region are growing concern about matching AirAsia flight QZ8501 plunge into the sea. reluctant to speak openly about infrastructure expansion to this on December 28, Accident safety experts the situation, privately they said growth. the third accident are asking did the crew of the skies are becoming more The growth in airline involving Southeast the Indonesia AirAsia airliner dangerous as more aircraft enter capacity, with new generation TAsian carriers in nine months, contribute in some way to the service. One Indonesian captain, jets equipped with the latest dealt another body blow to the air aircraft’s loss by mishandling the who regularly flies the same route high technology equipment, safety reputation of the region’s situation? Or were they totally operated by QZ8501, told Orient is outpacing developments in airlines. incapable of doing anything Aviation delays in requests for co-ordinating the region’s aviation And like the bizarre about it? course changes and different regulations and protocols, said disappearance of Malaysia They also want to establish altitudes occur frequently, mainly carriers. “Leaving aside all the Airlines’ MH370 and the why the aircraft was in the centre because of changed weather accidents, this region is going murderous shooting down of of such a severe storm cell. It is conditions. But they are often to see the largest growth of air MH17, the accident has raised known the pilots were aware of rejected because there are too traffic for the next 20 years,” serious questions about the storm activity - common in the many planes flying at the altitude said Ken McLean, IATA’s regional region’s safety systems and region at that time of year – and requested. director of safety and flight government regulatory oversight requested clearance from air “The result is you have to operations. “Do we have the rules beyond the airlines involved. traffic control to climb to a higher take a snap decision on whether and regulations to meet it?” he It will be several months altitude to avoid it. That request to fly into the weather or, if you asked. Right now, most airline before the report on the Indonesia was met by some two minutes believe there is real danger, alter chiefs would respond with a AirAsia A320 crash into the Java of silence. By the time controllers course without permission and resounding ‘No’.” Sea, which claimed the lives of gave permission for the aircraft worry about the consequences McLean is one of the leaders 162 passengers and crew, will be to climb to the higher altitude, later,” he said. in moving the region towards completed. But early disclosure of QZ8501 had disappeared from The pilots flying the AirAsia a concept of Asian “Seamless the data has made one fact clear: radar. aircraft might have been in that Skies”, rather than attempting an extraordinary weather event What has emerged since the situation and staying on course to mimic Europe’s largely failed was a major contributing factor to December 28 crash is air traffic while waiting for ATC permission attempts to forge “Single Skies”. the accident. control delays are common in may have been their downfall, The concept recognizes that Information from the flight a region that is experiencing he said. A Singaporean pilot Asia is a diverse continent with data recorder revealed the single unprecedented growth in traffic said as airways become more a myriad of differing regulators, aisle jet suddenly climbed at least volume, with much of the crowded, it is taking ATC longer unlike Europe with its European five times its capability, at some expansion due to the boom in to co-ordinate requests and give Union and single regulator. The 6,000 feet per minute. Its rate of low-cost carrier operations. clearances such as higher altitudes Association of Southeast Asian ascent far exceeded the normal LCCs are increasingly vying and weather deviations. Delays to Nations (ASEAN), for example, limit of 1,000 feet per minute at for space in now over-crowded has no the 30,000 feet plus height at air corridors. The number of which it was flying. passengers carried annually Pilots of A320s have said across the Asia-Pacific has there is only one explanation for jumped by two-thirds in the such an extraordinary ascent: the last five years, to more than 1 aircraft must have been trapped billion, and budget airlines make Lion Air, Indonesia’s in a massive updraft in a severe up about 60% of seat capacity in largest airline, was found to have thunderstorm that situation led it Southeast Asia. committed 35 violations of flight permits

10 / ORIENT AVIATION / FEBRUARY 2015 NEWS BACKGROUNDER

regional agencies overseeing Minister, Ignasius Jonan, said aviation safety or co-ordinating Over regulation limits the companies were Garuda air traffic control, unlike the more crew recruitment Indonesia, Lion Air, Wings Air, developed European market. Trans Nusa and Susi Air. The Aviation experts hope Martin Eran-Tasker, the technical director government suspended flight QZ8501, tragic though it has of the Association of Asia-Pacific Airlines said permits for 61 routes at the five perceived shortages could be addressed if been, may spur moves to improve airlines. countries made it easier for qualified pilots and engineers to move the region’s infrastructure and Lion Air, the largest carrier in freely between different jurisdictions for work. its patchwork of differing safety “In our opinion, the perceived shortage problem in the the country, committed the most standards. Alan Khee-Jin Tan, near term is that the movement of qualified staff needed to fill violations, with the government professor of aviation law at the available positions is restricted by the lack of harmonized regulatory suspending 35 of its routes. National University of Singapore procedures that allow the verification, confirmation and transfer Garuda breached regulations said: “Hopefully, the QZ8501 of qualifications and licenses of technical and pilot staff from one on four routes. The minister crash will galvanize the states into jurisdiction to another,” he said. said all airport authorities and making technical harmonization operators will be audited with the a priority.” He pointed out there from all aircraft in the area. government has alleged Indonesia assistance of the National Police are difficult issues in achieving “There is a lot of work to AirAsia was operating outside the Criminal Investigations Directorate harmonization because they be done to address and identify rules. (Bareskrim), to learn if potential impact on national sovereignty. deficiencies and to strengthen It is reported the airline was problems such as allegations of Countries in the region are regulatory oversight. That’s true cleared by the transportation route buying were well founded. also at very different levels of in Indonesia and it’s true in a ministry to fly the route from The country’s Corruption development and capacity. number of other markets,” said Surabaya to Singapore on Eradication Commission (KPK) The reputational stakes are the AAPA’s director general, Mondays, Tuesdays, Thursdays, would assist the ministry in the particularly high for Indonesia, Andrew Herdman. and Saturdays, but it was actually audit. which is forecast to be one the He said the expanding air flying on Mondays, Wednesdays, From June this year, the world’s largest aviation markets traffic in the region should push Fridays and Sundays (the day the government will revoke the by 2020. Despite improvements, airline executives, governments accident occurred). licences of airlines that do not the air safety record of Southeast and civil aviation bodies to Contradicting this report is own at least five aircraft and Asia’s most populous nation improve coordination efforts. a statement by Singapore’s Civil charter carriers that do not own remains patchy. Not surprisingly, “Countries are quite sensitive Aviation Authority (CAAS), which at least one aircraft. “If airlines Indonesia’s air safety regime is to their progress. The industry said it had authorized Indonesia cannot fulfill this requirement being closely scrutinized after the is growing. The population is AirAsia to operate daily flights their licenses will be revoked,” latest crash. growing quite rapidly. So the during the winter season under a he said. In the recent past, serious quality of regulatory oversight bilateral air-services accord. The According to Indonesian law, lack of safety oversight by the has to keep pace with demand,” conflict has revealed a lack of airlines must operate at least 10 country’s regulators resulted in Herdman said. co-ordination between Singapore aircraft with five owned by the the nation’s airlines being banned Even though there is a and Indonesian authorities. carrier and five leased. Charter from flying to Europe and the possibility the investigation into For its part, Indonesia did airlines must own at least one U.S. A few airlines, including flag QZ8501 may find the disaster react quickly. It immediately aircraft and lease at least two to carrier, Garuda Indonesia, are now was not the fault of the airline, conducted an audit of flight operate. Jonan also said he was exempted from the bans. but the result of a string of events permits for all domestic carriers considering a plan to ban all LCC But concerns remain in the involving air traffic congestion and imposed sanctions on five operations in Indonesia, which industry about the country’s air and pressures, the Indonesian domestic airlines. Transportation most observers believe will not safety systems. At present, to eventuate. keep aircraft travelling in a flight Founder and chief executive corridor at a safe distance from Leaving aside all the accidents, of the AirAsia group, Tony each other, Indonesian air traffic Fernandes, said on the day of controllers still employ procedural this region is going to see the largest the crash: “Until today, we have separation, using pilots’ radio growth of air traffic for the next 20 years. never lost a life. But I think that reports to calculate their position Do we have the rules and any airline chief executive who relative to other traffic. said he can guarantee his airline This operating procedure regulations to meet it? Right now, is 100% safe, is not accurate. We takes longer than the more most airline chiefs would respond have carried 220 million people sophisticated radar separation with a resounding ‘No’ up to this point. Of course, there’s system used in Singapore and going to be some reaction, but we elsewhere where controllers can Regional director safety and are confident in our ability to fly more quickly assess radar returns flight operations International Air Transport Association people,” he said. ■

FEBRUARY 2015 / ORIENT AVIATION / 11 NEWS BACKGROUNDER

developed stringent tracking recommendations. “If (member ICAO examines states) agree to the standard, the safety conference will be asked how quickly it expected new tracking rules implementation and if it would want ICAO to expedite that process. Once our states have The International Civil Aviation Organization (ICAO) made their views known, we’ll is considering a proposal that all commercial aircraft operate have a better idea of the time frame,” he said. systems that require airliners to report their position every A large number of airlines 15 minutes. But not everyone is happy with the 12-month already track their flights using satellites and most aircraft have deadline for implementation. systems on board that can transmit their positions. But the equipment isn’t always turned Tom Ballantyne reports on and there are gaps in satellite coverage, including on polar t an International from its Kuala Lumpur to Beijing also believe adoption within routes and some remote oceanic Civil Aviation route, has been found. a year of new performance areas. Organisation The industry task force, criteria, including the ability to While radio, or voice (ICAO) safety whose members included track planes across their entire communication, can be conference in representatives of the potential range, is unrealistic. used, again there are gaps in AMontreal this month, the International Air Transport They argue the response to transmission where reception organization is expected to Association (IATA) and regional MH370 requires more time and is non-existent or of extremely decide if it should introduce airline bodies, as well as investigation, IATA director poor quality. new regulations that require aircraft manufacturers, pilots’ general and CEO, Tony Tyler, told In terms of unlawful the world’s airlines to operate a and Flight Safety Foundation reporters at a briefing in Geneva interference - the ACARS standardised global and more representatives, issued last December. (Aircraft Communications frequent aircraft tracking system. its recommendations last At the same gathering, Addressing and Reporting The new rules, which would November. the organization’s senior System) and transponders on require all aircraft to report their IATA, which led the task vice-president safety and flight MH370 were disarmed before position every 15 minutes, is force, said the 12-month operations, Kevin L. Hiatt, said the flight disappeared - it is a result of a review of global deadline for implementation airlines are being encouraged to unlikely there will be moves to aircraft tracking practices may be impractical. Some airlines evaluate their current tracking ensure they cannot be turned off conducted by the Aircraft capabilities and that those not by cockpit crew. Tracking Task Force (ATTF). The currently meeting the criteria IATA’s Hiatt said that without ATTF was set up after the still should implement measures to speculating what happened unresolved disappearance of do so within twelve months. to MH370 “redesigning the Malaysia Airlines’ MH370 in Hiatt pointed out that aircraft’s fail safe systems to March last year. some airlines, based on their ensure transponders or other key At the time, the loss of the operations, may not be able to tracking systems cannot be shut aircraft and 239 passengers and implement some items within off is well beyond the near-term crew provoked widespread the time frame. This month’s focus of the ATTF”. disbelief. Aerospace and ICAO safety conference is Flight crews must be able to safety experts have struggled expected to take a close look de-activate equipment in case to understand how a high at the deadline proposal. of malfunction, such as ATC technology passenger jet ICAO spokesman, disruption, or a safety hazard, could disappear into thin air. No Anthony Philbin, said the such as an electrical fire. trace of the B777, believed to proposals represented a In the short-term, he said, have ultimately crashed in the “foundational flight tracking the next step was to “use what southern Indian Ocean standard”, which would apply we currently have and are being after diverging while the organization offered”. In the near-term, it is to look to other solutions if the aircraft or airline doesn’t have the latest technology. In the

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medium-term, the goal should The ejectable or deployable emergency occurs. recorder is estimated at $30,000 be to utilize new technology and recorders separate from the Cost is a consideration. Each or above, with the additional look at tamper-proofing. tail during a crash and emit a box costs between $13,000 investment of retrofitting fleets Another issue that has satellite distress signal as they and $16,000. A deployable with the new boxes. ■ emerged since the MH370 float. disappearance is the difficulty of “Airbus is working with locating and retrieving aircraft EASA... and other stakeholders Aircraft tracking recommendations black boxes after a plane crashes to advance the approval of such The Aircraft Tracking Task Force’s six key findings are: into the sea. a solution industry-wide,” said • There is a range of existing technologies and services, many Airbus has begun talks with an Airbus spokesman, although installed on aircraft, that can enhance world-wide tracking in the European regulator, the he added there was no indication the near-term. European Aviation Safety Agency of when installation might occur. • This range of technologies will enable airlines to take a perfor- (EASA), with the aim of providing “In the future, applicability mance-based approach when implementing or enhancing their ejectable flight data recorders on for our other aircraft products tracking capabilities. its two largest jets, the A380 and could be likewise considered, • There is a need to amend existing procedures and develop new the new A350. It is also looking but presently we have decided to or improved communications protocols between airlines and at the possibility of placing them focus on the A350 and A380.” air navigation service providers. on new versions of the A330 and There is disagreement within • A set of performance-based criteria will establish a baseline level of aircraft tracking capability. A320. If successful, Airbus would the industry about deployable • Any changes to equipment to address unlawful interference are become the first manufacturer to recorders. Critics argue it would long-term prospects because of significant design, operational, install the ejectable black boxes be far better to focus on a procedural, certification and safety considerations. on commercial airliners. system that allows real-time • Additional options will become available as new products and The upgraded recorders are transmission of data from flights, services are developed. widely used on military aircraft. possibly activated when an

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FUEL FALL FIRES UP PROFITS

Confidence among airline managements that 2015 could be one of their best twelve months for years is surging. Their optimism is driven by the dramatic plunge in the fuel price, continuing traffic growth and a revival in air freight.

Tom Ballantyne reports

irline profit expectations for the coming outlook for the industry’s performance. year have become more positive, consistent IATA had already lifted its profit forecast for global with improvements in the industry’s recent airlines in 2015, from $19.9 billion to $25 billion, in performance, with only the Asia-Pacific December, which gave the industry a global profit margin reporting slower growth. of 3.2%. Asia-Pacific operators are expected to report a net AIn its latest quarterly survey of airline chief financial profit of $5 billion this year, up from $3.5 billion in 2014. officers and cargo heads, released in January, the But the fuel price level, if sustained, could lead to better International Air Transport Association (IATA) said falling projections later in the year, analysts said. costs and growth in volumes were responsible for the better Last month, the average price for jet fuel was around financial performance, in combination with a more positive $1.71 per gallon, some 18.1% lower than a month earlier

16 / ORIENT AVIATION / FEBRUARY 2015 MAIN STORY

and down a phenomenal 43.2%, year on year, at press time. Singapore Airlines (SIA) and the major Chinese carriers. But despite demand being largely positive, IATA cautioned SIA might be at risk again. It has hedged 65.3% of its that risks persist in today’s global environment, including fuel needs in the six months to March, 2015, at an average political unrest, conflicts, and some weak regional price of $116 a barrel. “We do have hedges in place… and economies. that’s going to mute the effect of lower fuel prices,” the “Nevertheless, with the global economy steadily carrier’s chief financial officer, Stephen Barnes, said at an recovering and the fall in oil prices expected to strengthen earnings briefing last December. “On the other hand, it will the upturn in 2015, the industry outlook is steadily protect our earnings from the full effects of a bounce if that improving,” IATA said. were to happen.” Unusually, the downward influences on airline Cathay Pacific would not comment on its current performance in the past few months have been in the Asia- hedging position, but last August its finance director, Pacific. After a slight improvement last October, annual Martin Murray, said the airline had hedged 44% of international traffic growth for the region’s carriers slowed projected fuel needs for 2015 at $101 a barrel of Brent to 4.9% in November, the latest period the data covers. crude, and 25% of its needs for 2016 and 2017 at $99 a There is a slowdown in regional production activity, barrel. Thai Airways International has a high percentage of especially as China recalibrates the direction of its economy its fuel hedged and is looking to increase this position using from exports to domestic sustainability, although trade current low prices. volumes have remained strong. Analyst Shukor Yusof, founder of aviation research Even if international traffic experienced a modest firm Endau Analytics, pointed out that in the last six bounce-back in the peak December season, annual growth months of 2014 very few airlines were brave enough to go for Asia-Pacific carriers was expected to slow to an average into the hedging market. And if they did, it was in very of 4%, compared with global growth of 6%, said IATA. small volumes. With prices dropping so fast, carriers may On the other hand, the most significant freight see buying fuel in the spot market as a far better option expansion is taking place in two regions: the Asia-Pacific than the possibility of being caught on the wrong side of a (up 5.9% in November) and the Middle East (up 12.9%). long-term hedge, he said. Carriers in these regions captured the vast majority of the Another analyst, who requested anonymity, said global increase (93%) in air freight, with the Asia-Pacific making decisions on hedging in the current circumstances accounting for 55% of the total year-on-year growth and is extremely tricky, but that hedging at today’s low levels a market share of 39.7%. Middle East airlines, which have could be an excellent opportunity. He did not believe crude 13.3% of global air cargo business, expanded their freight output would be sustained at current prices and said some business by 38%. increase in demand and a reduction in supply is bound to Despite global financial services firm, Morgan Stanley, force up the price. predicting oil will be as low as $43 a barrel by the third If the price does stay low, however, several carriers quarter of this year, the rock bottom fuel price does not have been identified as potential beneficiaries of spot price guarantee more profits for some Asia-Pacific airlines. purchases. South Korea’s Asiana Airlines halted hedging Analysts predicted the ultimate impact of cheaper fuel last September because of price volatility. on airlines’ bottom lines will depend largely on individual It has hedged carriers’ fuel hedging policies. Airlines with low hedging exposure and that are buying fuel at spot prices will reap big benefits from cheaper fuel. Airlines with a large percentage of their fuel secured by hedges at higher levels than current fuel prices will lose out unless fuel soars again. Many Asian airlines have been cautious about hedging after they burnt their fingers in 2008. Back then, they locked in fuel costs as crude oil surged above $100 a barrel for the first time. Then oil plummeted to less than $40 per barrel before the year’s end. As a result, many airlines suffered huge paper losses as they had to account for wrong- way fuel hedges or pay to unwind contracts prematurely. Among the big losers were Cathay Pacific Airways, which resulted in the Singapore Airlines has hedged 65.3% of its fuel needs in the six months to March, 2015, airline’s first annual loss in more than a decade, at an average price of $116 a barrel

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8.4% of its fuel needs for this year. hundreds of older aircraft, A spokesman for Shanghai-based destined for the scrapheap, China Eastern Airlines said the carrier have become economically does not hedge. viable. Air India, which also goes largely At an aircraft financier’s unhedged, estimated it could eliminate conference in Dublin last $375 million from its annual fuel bill month, delegates were told of about $1.5 billion, based on savings that jets bound for the desert or made since prices began falling scheduled to be broken up, such eight months ago. Nevertheless, as A340s and older B747s, have the carrier’s director of finance, S. ben given a reprieve. Venkat, said Air India is looking at “We are seeing a big pick-up in hedging between 30% to 40% of demand for aircraft we thought we its fuel needs, or about 300,000 would scrap,” Aengus Kelly, chief barrels a quarter, at current jet fuel executive of lessor, AerCap, told prices. the Airline Economics conference Another winner could be in Dublin. The world’s largest Australia’s Qantas Airways, independent leasing company, which has “significant scope” to AerCap, has recently leased out older benefit, according to a spokesman. The oil price collapse passenger aircraft and freighters such About 70% of the fuel that Qantas as A340s, B747s and B757s, rather will use in the six months to June is “massive” for the than parking them up, he said. 30, will be bought at spot prices. The Malaysian headquartered The potential lives of some remainder will be priced between of these older aircraft had been current levels and higher prices prior low-cost carrier group extended by three and four years, to September 2014. Tony Fernandes Kelly said. Other delegates said some The biggest beneficiaries of AirAsia group chief executive airlines were retrieving mothballed cheaper fuel in the region will almost B747s from desert storage to return certainly be low-cost carriers, whose them to flying. fuel costs represent a higher proportion of expenses than However, there is universal agreement that record full-service carriers, at up to 50%. AirAsia group chief orders for the new generation of fuel-saving, carbon-fibre executive, Tony Fernandes, said the oil price collapse is aircraft, placed as carriers sought protection from high oil “massive” for the budget carrier group. prices, will stay in place. One aspect of the fuel price change that is confronting Indeed, if low fuel costs are sustained long-term, buying some airlines is fuel surcharges. The public, watching a new B787, A350, B737 MAX or A320neo will be even prices plummet at their local service stations, question why more attractive. The current jet fuel price is about 51.1% airlines are not reducing or eliminating this charge from lower than the price Boeing assumed it would be when the their air tickets. manufacturer calculated estimated savings of $112 million Some airlines are doing so. Japan Airlines (JAL) has for a fleet of 100 B737 MAX 8s. announced significant reductions from February 1. On a The problem is, while airlines are relieved fuel is so much JAL service from the Philippines to Japan and onto the U.S. cheaper, they also are aware of the volatility of oil markets the surcharge has been cut from $259 to $173 a ticket. On and their ability to surge suddenly to higher levels. ■ other routes the reduction is as high as 50%. Despite the reluctance of many carriers to pass on fuel savings, IATA predicted fares will fall about 5% Asia-Pacific airline share spike this year, if current fuel price trends continue. Ratings agencies expected this to be mainly driven by capacity IATA’s upbeat mood was underscored by ratings growth outstripping demand. But it is anticipated there agency, Moody’s. In January the credit ratings agency upgraded its outlook for global airlines to “positive” will be some impact from the rollback of fuel surcharges in from “stable” as most carriers appeared set to benefit regulated markets like China. from the sharp drop in fuel prices from June last year. In the Asia-Pacific, Moody’s warned a flood of capacity Moody’s upgraded its projected profit margins for the from start-up airlines could outstrip demand and weigh global industry to 12%-14% for this year and 11.5% to on yields and margins in the next few years. IATA forecast 13.5% in 2016. This forecast is significantly higher than its capacity in the region will rise by 8.5% this year, while previous estimate of 8.5%-9.95%. Airline shares across the traffic demand will expand by 7.7%. Asia-Pacific shot up to their highest level in three years as There is another interesting development for the the jet fuel price continued to drop. industry as a result of the fuel price collapse. Suddenly,

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SUN AWAITS TRANSIT BONANZA

Global economic volatility, fierce regional competition, a low-cost start-up and high operating costs have made profits elusive at China Airlines (CAL). But 2015 holds promise predicts chairman, Huang-Hsiang Sun, especially if China lifts the ban on Chinese tourists transiting through Taiwan.

Tom Ballantyne reports from Taiwan

s he watched China Airlines’ (CAL) first to September 30, mainly due to high fuel prices in the early B777-300ER fly out of Taipei to Los Angeles part of the year and a $90 million payment to settle a U.S. last December, the CAL chairman and airline lawsuit on alleged price fixing. veteran, Huang-Hsiang Sun, must have been However, the dramatic decline in the price of oil since relieved that some good news was finally last June resulted in a profit of $40.36 million in the third Acoming the carrier’s way after a punishing 12 months. quarter to September 30, which could only improve with the Apart from the fleet upgrade, which will see most of thinning out of its B747s and as new planes come on line. CAL’s B747s phased out of operations, CAL is showing The B777s, which will number ten when deliveries are strong signs of recovery from last year’s financial red ink. It completed, are a pivotal part of CAL’s multi-million revamp suffered a net loss of US$81.06 million in the nine months that is a quantum leap in CAL’s service, network and cabin

22 / ORIENT AVIATION / FEBRUARY 2015 COVER STORY

If the restriction was lifted in the Mandarin speaking nation, Taiwan would offer both an appealing alternative for Chinese travelling abroad as well as allowing CAL access to a huge number of new passengers. Just how confident is Sun that a breakthrough will be achieved? “This issue has been going on for some time. Too long,” he told Orient Aviation in an interview in the airline’s new VIP lounge at Taoyuan Airport. “Now is about the time. I can see progress in the last couple of months that is very encouraging. The official dialogue has begun. I am quite optimistic. I think both sides will find a solution and make the transfer point in Taiwan feasible. “I would say maybe in six months. We are ready for it and have been for a long time. The Chinese carriers are carrying a lot of beyond traffic from Taiwan, so I don’t see any reason why we should not be able to do the same.” The policy change would be one of the most important developments in CAL’s history. Since cross strait flights were introduced over the last decade, CAL has expanded its regional network to include 152 flights a week to 32 cities in China. Offering 75,000 seats weekly between the Mainland and Taiwan, CAL is the largest cross strait operator in available seat kilometres (ASK). It has almost 30% of the cross-strait market, and enjoys an average load factor of near 80%. “Taiwan and China share the same language and culture so we aim to be the leading cargo and passenger carrier serving both sides of the Taiwan Strait,” said Sun. “Taiwan is a small island with abundant resources for tourism and hi-tech development, which should boost business, particularly aviation industry prospects. “Since we have opened the door to friendly dialogue between the two sides, when new [Mainland] destinations and flights are opened we will have more opportunities in standards. The brand facelift includes new cabin interiors, the China market. Because of our geographic advantage, new lounges for its frequent travelers and cabin services, Taiwan is working aggressively towards being a a regional such as inflight bars and lounge areas, in aircraft fitted with hub. As the largest airline based in Taiwan, business wood paneling throughout their cabins. expansion is anticipated.” Also on order are 14 A350-900XWB (with six options) He said cross strait business has become one of CAL’s that will begin arriving in the third quarter of next year focal markets. “With the partial deregulation of air travel we (2016), as well as three B737-800s that will be added to the look forward to further relaxation of traffic rights for both 16 the carrier has in its fleet. China and Taiwan. In the meantime, the cross strait market Improvements in market conditions, lower fuel costs not only contributes to our regional network, but also to our and upgraded airliners are all good news for CAL’s bottom long haul load factor. So, it makes sense for CAL to continue line. But the icing on the cake would the long awaited lifting to expand its cross strait network,” he said. of Mainland China’s ban on allowing its citizens to transit There is another issue on the China front that Sun hopes through Taiwan to destinations across the world. can soon be resolved. Unlike other airlines, CAL is not Sun told Orient Aviation he is confident a major permitted to fly over Mainland China en route to Europe. breakthrough on this issue is on the horizon. Mainland Its flights must detour through Southeast Asia and then fly Chinese international travelers can transit to third countries north to Europe. via South Korea, Japan and Hong Kong in North Asia but If overflights can be negotiated, the airline would benefit not Taiwan. from thousands of hours of reduced flying time and have a Statistics published by the U.S. Department of much lower annual fuel bill. At present, it is not known how Commerce report that of the 1.8 million Mainland Chinese negotiations are progressing on these issues. tourists who visit the U.S. annually, 60% transit through Sun is no stranger to the political and operational third-party airports such as Hong Kong, Seoul and Tokyo. challenges of both Mainland Chinese and Taiwanese

FEBRUARY 2015 / ORIENT AVIATION / 23 COVER STORY

produce further savings of US$50 million. It aims to reduce CABIN CHIC contract rates by 3%, achieve a 20% reduction in optional expenses and a suspension of non-urgent expenses. Underpinning CAL’s determination to remain a Like Japan, until recently Taiwan had no home-grown major global airline are the investments it has made to lift service standards. It spent five years conducting low-cost carriers. CAL launched its Tigerair Taiwan field passenger surveys before it decided its core service subsidiary last September, a few months before V Air, a concept should be “presenting the best of Taiwan”. subsidiary of rival, TransAsia Airways, made its first flight. Sun admitted to Orient Aviation that operating Sun said that as the leader of Taiwan’s aviation industry, the B747 for so long resulted in CAL “not being as the onus was on CAL to respond to the low-cost carrier competitive as others”. The new B777 is “a milestone (LCC) challenge. “We not only want to directly compete for us”, he declared. with existing LCCs, but also plan to offer travelers more CAL’s B777-300ER, designed by acclaimed choices that will promote Taiwan’s tourism industry and Taiwanese architect, Ray Chen, seats 358, and is designed economic development. to evoke the Song Dynasty (960-1276 CE) era. Persimmon “We have full confidence in Tigerair Taiwan. Its biggest tree grain paneling decorates the cabin throughout the aircraft. Poetry and period art decorate the walls, advantages are the high brand recognition of Tigerair in including aircrafts’ bathrooms. Taiwan and the Tigerair Group’s route and sales network Each premium cabin has a Sky Lounge, which is a across the Asia-Pacific,” Sun said. bar and relaxation area modelled on a classic Chinese “Tigerair Taiwan will focus on routes to Southeast and teahouse, and library with a rotating selection of Chinese Northeast Asia such as Thailand, Japan and South Korea. and English language books. If we can secure approval for new Mainland China services, CAL has introduced the Family Couch in ten rows our LCC will actively participate in that market.” of economy, a product which raises arm and leg rests Asked if he was concerned about Tigerair Singapore’s (it to create a full-flat bed across three seats. It purchased has a 10% stake while CAL holds 90%) recent loss-making the rights from Air New Zealand, which created the performance, Sun said the partnership was the most product. “Everything was designed from ground zero,” said Sun. “We will have new uniforms from the middle important factor in the deal. of this year.” “If we had set up our own LCC without a partner the learning curve would have been too steep. So yes, Tigerair may be having some difficulties, but I don’t think that will aviation. He joined CAL in 1970 and has held leadership affect our operation at all,” he said. positions across the group and at several of its affiliates. In “Tigerair Taiwan has been in operation for only a the past four decades, he has served as vice president of the few months and everything is going quite smoothly. It is carrier’s passenger sales and corporate planning divisions, growing very fast. There were only two aircraft in its fleet at general manager of its Europe and San Francisco branch the end of 2014. offices, vice president of Mandarin Airlines, president of “By the end of this year, there will be seven and we are Formosa Airlines and TransAsia Airways and chief executive talking about adding five aircraft a year. There is room to of Yangtze River Express Airlines. He was appointed grow. The LCCs certainly get part of CAL’s traffic, but they president of CAL in June 2008 and chairman in March also generate traffic. It’s a fact of life.” 2013. Significantly, Tigerair Taiwan has been operating with Obviously, lower fuel costs will help the airline load factors of around 90% since take-off and was expected financially, he said. “We have been nailed down by high fuel to end 2014 with a relatively small loss that will only costs for quite some years. But now they are at a reasonable modestly impact on CAL’s annual results. level. Also, cargo demand is looking a little better,” he said. There is little doubt the budget sector holds big promise. “With the [oil] price drop people have more disposable Singapore’s Jetstar was the first LCC to fly into Taiwan, in income to travel. That’s good for everyone. It’s a good 2004. Since then the number of LCCs servicing Taiwan has positive cycle. I am looking forward to a better 2015, but we increased to 14, including airlines from Singapore, Malaysia, still have to be very careful.” Japan, South Korea, Hong Kong and China. While the economic outlook is healthier, CAL is not According to Taiwan’s Civil Aeronautics Administration ignoring the need for consistent cost reduction. It launched (CAA), budget airlines account for up to 7% of passengers “Pheonix” six years ago, a company wide program to carried in Taiwan. The number of people traveling in and maximize revenue and minimize costs without sacrificing out of Taiwan on budget airliners has climbed from 260,000 flight safety, service quality, market share and employee in 2009 to 2.32 million in 2013. benefits. Another important factor in CAL’s strategy is its Explained Sun: “our cost reduction projects cover fuel, membership of global alliance, SkyTeam, which it joined ground operations, maintenance costs, procurement, process in September 2011. Membership increased its international improvement and other smaller departments. All are tracked destinations from 118 to 1,052 and remains an integral part to maximize revenue, but in different way.” of CAL’s strategy to increase its international traffic and CAL added the Gap Abatement Project in May 2014 to profitability, said Sun.

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“Our relationship with SkyTeam grow, but with limited expansion members is very important, but there are on longer-haul routes and increases some destinations the SkyTeam network in flight frequency on regional doesn’t completely cover, so we will routes.” develop partnerships with appropriate Sun is not phased by greater non-SkyTeam carriers.” competition from big U.S. carriers CAL has code-share agreements putting more capacity into Asia as with 17 airlines, including Qantas they seek seats in the world’s biggest Airways, China Southern Airlines, aviation growth market. “They are China Eastern Airlines, Shanghai coming, but I always say that it’s not Airlines, Xiamen Airlines, Delta Air bad for competition,” said Sun. Lines, Garuda Indonesia, Vietnam “You cannot stop it. The only way Airlines, Korean Air, Czech you can compete is to be better. More Airlines, KLM, Alitalia, Japan U.S. carriers coming to Taiwan are Airlines, Hawaiian Airlines and welcome. Maybe we can make the pie Transaero Airlines. bigger. We are not so far away from the “We’ve been concentrating U.S. West Coast - nine to ten hours - but on regional expansion. That long-haul traffic there is only about 10% must be right to feed a successful of our total traffic. There is room long-haul business,” he explained. for growth. “Obviously, Mainland China is More U.S. carriers coming “The Visa waver program, the big market. We have more than introduced in 2012 for Taiwanese 152 flights a week between Taiwan to Taiwan are welcome. travelling to the U.S., made a huge and Mainland China, covering 32 Maybe we can make difference [to us] because people destinations,” he said. the pie bigger. We are not can go to the States any time they “According to our analysis, want. So it’s not bad to have new passengers taking cross strait flights so far away from the U.S. competition.” account for about 55% of total West Coast - nine to ten hours - Whatever the challenges cross strait travellers. This means ahead, Sun said CAL is prepared 45% of travellers transit through but long-haul traffic is only for them. “I’ve been in this other regions on their way to about 10% of our total traffic. industry for 40 years, but the last China. So we would like to increase There is room for growth few years have definitely been flight frequencies to China.” the toughest. Airlines have been Japan is also important. “In Huang-Hsiang Sun severely affected by events outside 2011, the market was liberalized Chairman China Airlines of their control. between Japan and Taiwan and we “There has been global expanded our service to Japan from 95 flights a week, to 130 economic uncertainty, political instability, SARS and other flights to 13 destinations each week. In Southeast Asia, we potential pandemics. Fuel prices soared. It has become more are increasing flights to major cities such as Manila, Jakarta and more difficult to manage an airline in such a volatile and Bangkok,” he said. world. “But we are a full-service airline and we have a very “While it is more challenging than ever, airlines have viable long-haul business. In fact, our long-haul services grown stronger. There have been many improvements. By account for around 45% of our passenger revenue. We have strengthening our core competencies we are better able to bought our new aircraft with the long-haul sector in mind.” adapt to the outside environment,” he said. ■ Sun said the new B777s, and when they arrive, the A350s, will significantly improve the airline’s long-haul network. After the first B777, which he describes as the Fleet transition “gold standard” for long-haul flying, began services to Los Angeles in December, CAL will add flights to San Francisco CAL has a fleet of 81: 24 A330-300, six A340-300X, 16 B737-800, 11 B747-400, 21 B747-400F (three are in and New York with the aircraft type. storage) and three B777-300ER. With the new B777s and “China Airlines offers more than 20,000 seats a week A350s, it will entirely replace its long-haul fleet by 2018. between Taiwan and North America. To expand our The A340s, flown primarily on routes to Europe, will be network, we started code-sharing with Virgin America and retired by 2017. The B747s will be phased out in the next WestJet last October, which provides passengers with a few years. A decision on ordering new narrow-body greater choice of destinations in the U.S. and Canada,” he aircraft – either the B737 MAX or the A320neo - is planned said. for mid-year. “We expect both Intra-Asia and Trans-Pacific traffic to

26 / ORIENT AVIATION / FEBRUARY 2015 Pivotal Changes en Route to LA

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Skymark appoints new president after airline enters bankruptcy protection

By Geoffrey Tudor in Tokyo

n a dramatic turn of events for Japanese aviation, internet entrepreneur and president of Skymark Airlines, Shinichi Nishikubo, faced the inevitable Iand resigned from the carrier on January 29, 18 hours after the airline announced it would file for bankruptcy protection. The 59-year-old’s decision was quickly followed by the appointment of Skymark’s chief Skymark over extended financial officer, Mazakazu itself when in introducing Arimori, (58), as Nishikubo’s the A330 into its fleet successor. At a press conference called At the time, the partnership set up in 1998 to challenge the and training equipment, since after his elevation to the top of the strange bedfellows was dual supremacy of Japan Airlines mid-2014 and has been actively job, Arimori sought to reassure regarded as the financial lifeline (JAL) and All Nippon Airways seeking investors prepared to shareholders with the news that that would sustain Skymark (ANA). finance it through its very rough the Integral Group would provide through its darkest hours. After its years of success, patch. interim financing so that the However, mounting debt, when it offered lower fares than Skymark has almost carrier could continue to operate coupled with an impending either JAL or ANA, the landscape completed domestic route code as Japan’s third largest carrier. compensation duel with Airbus changed with the arrival, in 2012, share agreements at Tokyo’s It is believed the private equity over the cancellation of a US$2.2 of local low-cost carriers and a Haneda Airport with JAL and group is interested in investing in billion order for six A380s, pushed consequent drop in its market ANA, which were predicted to Skymark. the carrier beyond its financial share. add 16 billion yen to Skymark’s After an extraordinary general limits. Airbus has filed notice of an The situation was exacerbated bottom line. meeting on January 28, the intended suit in the British courts. by the start-up costs of adding Before the bankruptcy Skymark board filed for protection Skymark, based at Tokyo A330s to its fleet and a decision was made, investors told with the Tokyo District Court Haneda airport, was profitable commitment to six A380s. Skymark that a successful sign-off under the Civil Rehabilitation Law for several years, but had been Adding to the negative cash of the code share deals was a as it faced debts of 71 billion yen running at a loss for most of flow was a huge leap in the price pre-requisite for any funding (US$603 million). Analysts said this 2014, particularly after it incurred of jet kerosene made worse by a support. amount could blow out to 100 unanticipated high costs for the declining Japanese yen. Almost At the time of Arimori’s billion yen when off balance sheet introduction of A330s on some all airline deals are done in US$ appointment, the airline said the items were included. of its 27 domestic routes. It is denominated currency. Negative code-share talks with JAL and Earlier in January, Skymark forecast to lose 13.6 billion yen for publicity about its struggles did ANA are continuing. announced JAL and ANA, its the year, to March 31, a figure that not help. Japan’s notoriously risk It is a highly unusual proposed fiercest rivals, came together to could go higher. averse travelers increasingly went arrangement, which in effect was offer Skymark code-shares on Skymark Airlines broke new elsewhere. intended to help their competitor key routes out of Haneda, with a ground in Japan’s highly regulated The airline has been selling off survive. Skymark initially starting date of March 29. domestic airline industry when it assets, such as ground handling approached JAL last year on a

28 / ORIENT AVIATION / FEBRUARY 2015 NEWS BACKGROUNDER

possible code-share deal, to which was planned to last five years. the former flag carrier responded Skymark appoints insider Industry sources estimated the favorably. as president deal will bring in eight billion yen But the Minister of Land, annually to Skymark. Infrastructure, Transport Mazakazu Arimori, the 58-year-old successor to Shinichi The carrier’s load factor in and Tourism (MLIT) was not Nishikubo as Skymark Airlines’ president, has come to his job in December was 54.5%, its worst comfortable with a JAL-only deal. unusual circumstances. But he knows what is ahead of him. Until performance since 2010. Load January 29, finance trained Arimori was managing director and a In 2010, JAL had been saved by factors on the five Haneda routes director of Skymark, positions he has held since 2010. the previous government and had fallen below 70%, compared He joined Skymark in 2004 as general manager accounting, backed by public funds. It would after 25 years at leading Japanese finance sector firms, including with the early 80s in more recent give JAL an unfair advantage, said Nikko Securities Co. Ltd, now SMBC Nikko Securities Inc. He times. the minister, Akihiro Ota. was made a director and manager of the business planning office Skymark saw the code-share How Skymark’s situation, in 2005 before his promotion to managing director almost five deal as a way to maintain its which bears similarities to JAL’s years ago. independence. It had resisted position in 2010, will affect the investment from ANA, which proposed code-shares is yet to be made about these assets, which Kobe, Kagoshima and Naha. would have turned it into another played out. allow Skymark to operate 36 Three of these routes, Fukuoka, feeder carrier for Japan’s biggest The ministry went on to services daily from the preferred Sapporo and Naha are in the top airline. This has been the fate of engineer a three-way deal, downtown airport. 12 busiest city pair routes in the other ‘new’ entrants in Japan since including ANA. A key element Haneda slots are a passport world. the mid-1990s, such as Solaseed, of the discussions was the to profitability. Each one is worth Starting with the 2015 Starflyer and Air Do. MLIT’s guarantee that it would between two billion and three summer season, ANA and JAL If joining ANA had happened, maintain Skymark’s Haneda slots billion yen in revenue. Not exactly planned to put their codes on there would be the risk of higher indefinitely. licenses to print money, but close. these five routes, selling just less domestic fares, which would Slot allocations are usually The three way code-share than 20% of the seat capacity. be ironic, as Skymark launched reviewed every five years and a deal was being written to apply to More than 20% would mean a into business on the crest of a review was due in January. At five of Skymark’s Haneda routes: change of slot ownership. wave calling for deregulation and press time, no change had been Sapporo (New Chitose), Fukuoka, Skymark’s triple code-share cheaper fares in Japan. ■ Government opens Haneda to local LCCs

By Geoffrey Tudor regarded by regulators as business Even so, the MLIT has been so long as the destinations are cities travel oriented and are favored cautious about granting Haneda without scheduled services and are apan’s first and most when international slots are slots to LCCs because it does not operated from Haneda. successful low-cost carrier allocated at convenient Haneda want to erode Narita’s standing Other Haneda slots planned (LCC), Peach Aviation, will airport, which is 14 kilometres from as an international airport. But for increasing frequencies on the notch up another first when central Tokyo. having approved the Peach flights, Tokyo-China route have now it becomes Japan’s first LCC However, of the 40 slots it has set a precedent and may be become available as diplomatic toJ offer international flights from available daily at Haneda, from forced to formulate a more LCC relations between the two Tokyo’s downtown airport, Haneda. 11pm to 6 am, only 26 (65%) have transparent policy. countries deteriorated. They will From the northern hemisphere been taken up, mainly because In a recent interview in Japan’s be used, temporarily, for domestic summer, Kansai-based Peach of limited late night access to the Asahi Shimbun, MLIT minister, flights. will operate a scheduled daily airport. The MLIT has nothing to Akihiro Ota, said he would accept Peach, launched in 2012, service between Haneda and lose by offering them to willing LCC applications to use late night operates from its original Kansai Taipei’s Taoyuan International LCCs. To date, the only other slots at Haneda “to make the hub as well as a more recently Airport, using vacant overnight LCC using Haneda is Hong Kong most of the airports in the Tokyo established base in Naha slots. Taiwan is a huge market for Express. metropolitan area”. His main (Okinawa), which will be used to Japanese travel. Peach is taking advantage of concern, he said, is to attract more develop a Southeast Asian network Until late last year, Japan’s an MLIT program, introduced last foreign tourists to Japan through for the LCC. Ministry of Land, Infrastructure, November, intended to attract better inbound access. This year, Peach will move Transport and Tourism (MLIT), airlines to Haneda with lower late Other Haneda slot issues into the Kanto region, in regarded LCCs as predominantly night and early morning landing remain. Valuable daytime slots Greater Metropolitan Tokyo and leisure carriers that were only fees. The incentive package offers are idle. Slots not taken up by U.S. commence flights out of Narita to allowed to operate from Narita, carriers a 50% reduction in the first carriers that are going spare can be Hokkaido (Sapporo) in northern a long journey from downtown year, 30% in the second year and used for international charters up Japan and Fukuoka in western Tokyo. Full service airlines are 20% in year three. to nine times daily in summer 2015, Japan from March. ■

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A350_AirFranceIndus_202x273_VA.indd 1 26/01/15 18:42 SPECIAL REPORT MRO: AN ASIA-PACIFIC UPDATE Manufacturers winning battle for MRO business

Aviation’s Maintenance, Repair and Overhaul (MRO) sector is undergoing a seismic shift as original equipment manufacturers (OEMs) win more and more long-term after care contracts from airlines. The aggressive strategy is a threat to the bottom lines of global maintenance providers.

Tom Ballantyne reports

hen India’s especially as the OEM onslaught newest airline, – not only from Airbus but from the Singapore Boeing, Embraer and other Airlines (SIA)- aircraft manufacturers and Tata joint Rolls-Royce, Pratt & Whitney and Wventure full-service carrier, Vistara, GE - is gathering pace as MRO entered the country’s skies in demand is slowing. January little attention was paid And an additional concern is to a critical aspect of its fledgling developing for Asia-Pacific MROs. operations, the maintenance of its Their cost advantage over rivals 20-strong fleet of leased A320s. in the Northern Hemisphere is And the news was not good disappearing. MRO rates in the for third party MRO companies. U.S. stand at around $50 per It won’t be done in-house. hour, against about $30 in Asia. Despite its links with SIA, Vistara’s By 2020, they are expected to airliners won’t be flown across be almost on par, according to the seas for maintenance at the forecasts. the carrier’s highly regarded SIA A 2014 MRO survey by Engineering. Instead, Delhi-based management consultants, Oliver Vistara has signed a long-term Wyman, which interviewed Flight Hours Services Tailored airline, MRO, OEM and finance Support Package (FHS-TSP) with and leasing senior management, A320 manufacturer, Airbus. William Kircher, said OEMs are “aggressively The contract provides an vice president of invading MRO markets” by integrated, guaranteed service Pratt & Whitney’s leveraging new aircraft as a that ranges from components Singapore Overhaul means to persuade airlines to and Repair subsidiary supply and repair to full airframe and president of UTC use OEM MRO services, despite maintenance and engineering Aerospace Singapore competitors’ claims the OEMs’ services. An on-site Airbus team rates are high. The survey will manage daily maintenance the aircraft manufacturer major business in the global A320 concluded airlines and non-OEM activities, including spares, supporting our aircraft inventory, maintenance market, explained MROs could “hold back the warehousing and line and maintenance and engineering is Airbus executive vice president invaders, by banding together in engineering checks. the most comprehensive solution customer services, Didier Lux. joint partnerships”. Said Rajender Singh, Vistara’s for our operational readiness Airbus’ FHS subsidiary covers But the penetration of senior vice president engineering, from day one,” he said. more than 150 aircraft at airlines OEMs into the traditional MRO the commitment represented The deal was even more whose fleets include the A320, market was made clear by the airline’s confidence that significant for Airbus. It marks A330 and the A380. the survey when airlines were Airbus could deliver the highest an important step forward in the It is worrying trend for asked who they would hire for quality MRO to Vistara. “Having company’s strategy to establish a independent MRO providers future maintenance. In terms

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14T2146_45_OrientAviation_P_GB_202x273.indd 1 26/06/14 17:04 SPECIAL REPORT MRO: AN ASIA-PACIFIC UPDATE

of engine maintenance, 69% venture or intellectual property of respondents said they would MRO rates in the U.S. stand at agreement with an OEM in the use OEMs. Only 31% opted past three years is virtually the for MROs. For components about US$50 per hour against same, at 27%, compared with and structures, 63% said they US$30 in Asia. By 202, they are 31% previously. would still go to an MRO, but a expected to be almost on par The stagnation could significant 44% would choose mean MROs have given up on OEMs. Only in base maintenance proposing advanced concepts would airlines plump for MROs OEM MROs, this is a fundamental Plucker, Frost & Sullivan’s industry to OEMs as they have failed to (88%), with 6% nominating concern “because OEMs, manager for Aerospace & establish mutually beneficial OEMs. Airbus and Boeing, are doing Defense. frameworks during the past “For airlines seeking to everything they can to sew up the “Now the global air transport several years, said the survey. compete and place engine and after-sales MRO on these aircraft MRO market is worth more than “Failed collaboration in component maintenance on for themselves. Their chances $60 billion annually, and growing, all forms declined from 2013 next-generation aircraft, OEMs of success will improve once the their attitude has changed. to 2014. It is the generational have largely emerged as the only world’s carriers are reliant on just With all this revenue available, change in aircraft and engines choice. Engine and large systems a trio of their planes”. Airbus, Boeing and Bombardier that is playing a pivotal role in the manufacturers have designed and Even without this, it can see the very real advantages changing face of global MRO. deployed effective strategies to concluded, the OEMs are of providing such after-market The bottom line: MRO restrict alternative material and successful. “In 2014, OEMs support, not just for the money demand growth is decreasing repair development by third party were the winners for high-value, it brings in, but for the chance it because the fleet is getting MROs,” the survey said. aftermarket aviation services, offered to keep customers buying younger, more reliable and has There is a lot at stake. In which left MRO scouting for their aircraft when fleet renewal improved system design. 2013, according to aviation paths to evolve and grow,” Oliver falls due.” The penetration of OEMs consultancy, ICF International, the Wyman said. While 76% of MRO into the MRO market is world’s MROs supported 123,000 According to industry respondents said they had illustrated by the increasing civilian and military aircraft flying insiders, the OEMs’ successful partnered with an OEM in the number of contracts written about 97 million hours annually. push into MRO represents a last three years, (up from 71% by Pratt & Whitney’s Singapore The global MRO market earned seismic shift from their former in 2013), just 56% described Overhaul and Repair Facility. $131 billion, with about 46%, approach to the after-sales the partnership as a licence William Kircher, vice president or $60.7 billion, earned from air market. “For years, the OEMs agreement (down from 82%). of the Singapore subsidiary and transport MROs. seemed to regard MRO work The proportion of MROs that president of UTC Aerospace North America remained the as beneath them,” said Wayne reported a successful joint Singapore, told Orient Aviation number one MRO market, with 31% of revenue. The Asia-Pacific edged out Europe for the first time (27% and 26% respectively), followed by the Middle East with 7%, South America at 5% and Africa ( 4%). It is forecast MRO spending will grow 3.9% annually to 2023, to $89 billion. A TeamSAI study forecast MRO spend at a lower level. It valued the market at $57.7 billion in 2014, expanding to $86.8 billion by 2024 (for jets and turboprops), representing a 4.2% compound annual growth rate. Whoever is winning the business, older aircraft such as the A330, B747, B767 and B777 will be phased out for fuel-efficient A350WXBs, B777Xs and the B787. The Oliver Wyman survey said for both airlines and non-

FEBRUARY 2015 / ORIENT AVIATION / 33 SPECIAL REPORT MRO: AN ASIA-PACIFIC UPDATE

there is more demand for after for MROs.” sales agreements. The OEMs are often accused Next generation aircraft “In 2003, Pratt & Whitney of using their position to charge had about 10% of its active higher rates, a charge they deny. reducing MRO demand engine fleet worldwide captured Rolls-Royce, one of the most The generational change in aircraft and engines is playing a for maintenance through Fleet successful after-market service pivotal role in changing global MRO operations. Pratt & Whitney Management Programs (FMP). providers, said it is only fair the aftermarket president, Matthew Bromberg, summed up the This has risen quickly to nearly company should seek as much situation at a major U.S. MRO conference last year when he said 50%,” he said. “Today, about MRO work on its engines as it traditionally, MRO growth has been larger than OEM growth. 45% of the PW4000 fleet and can. It said its outlook is different “Ten years ago, we estimated OEM growth of 3%–4% a year and MRO growth to be 6%–8%. And today? It is common about 60% of the V2500 fleet from third-party MROs, as are the knowledge we are riding an amazing bow wave of new aircraft are under Pratt & Whitney FMPs. advantages and responsibilities. deliveries. The installed base of aircraft is projected to reach more “We anticipate about 80% Mark Kerr, the UK company’s than 41,000 by 2030,” he said. of the Geared Turbo Fan engine head of marketing for services, “As a result, OEM growth is forecast to expand at 6%–8% fleet will be under FMP. It’s a said recently that by pricing its for the next decade. One would expect MRO growth to follow. trend that will continue. Engines TotalCare support packages on a However, it has not. There is a solid consensus in the industry maintained under FMP provide dollar-per-flight-hour rather than that global MRO spend will grow at only 3%–4% per year in the operators with predictable a time and materials basis, “we’re next decade.” maintenance costs, fewer incentivised to do things to the Bromberg said: “Today, the average aircraft age is 15 years, unscheduled engine removals and engine that makes it as reliable as which is the oldest fleet ever. In the next decade, this will drop as new aircraft are introduced into fleets and aircraft are retired. Since longer time on-wing between possible. shop visits. This offers greater “Independent shops, Modern airliners require value to the customer as engines operating on a time and less maintenance stay on the wing longer.” materials basis, don’t have Kircher said airlines want to this incentive.” Rolls-Royce focus on the core competencies believes its data shows engines of flying people and parcels. supported by TotalCare stay on “They are transferring the wing 20%–30% longer than ownership of maintenance on the engines handled independently MRO side. Whether it is engine by airlines. development, on-wing health “For these engines, the total younger aircraft require less maintenance, the demand for MRO monitoring or overhaul and life-cycle costs are lower. One services will drop,” he said. repair, customers want the value reason is the contracts “take on “This new fleet is more reliable. Pratt & Whitney is inserting of having it all under one service board all the service directives, cutting-edge technologies, such as our geared architecture, program umbrella within a single shop and repair activity that advanced materials, and 3D aerodynamics, to stretch engine transaction,” he said. needs to be included,” said Kerr. performance. Engine time on wing and aircraft reliability have Efforts by MROs to stem “Another benefit Rolls-Royce increased by 30% in the past 10 years.” the OEM tide by establishing can offer airlines, although some He added that 40 years ago in-flight shutdown rates were in the partnerships with the OEMs have MRO shops also can do this, range of 40 per 100,000 engine flight hours. Today, the industry targets a rate closer to one shutdown per one million hours, an stalled. The Oliver Wyman survey is providing additional spare improvement of almost 400 times. suggested MROs have reached engines if customers need them. “Finally, aircraft and engines are designed for reduced a critical point in seeking fruitful “That tends to be at our maintenance. The P&W Geared Turbofan engine has 2,000 fewer forms of cooperation with OEMs. expense,” said Kerr. “There is a airfoils and six fewer LLP stages than a conventional turbofan. The Progress in shaping deeper lot of risk transfer [to Rolls-Royce] engine has a 50% improvement in on-wing inspection intervals relationships, however, appeared involved” in its TotalCare with many previous tasks eliminated. Engines are designed for less to have slowed or even cease. agreements. “We get feedback frequent and easier maintenance. This also reduces MRO demand.” Failed license agreements from customers that they like “As the [global] fleet grows, it is becoming less diverse. In the were reported by 64% of MRO this.” last ten years, Boeing and Airbus aircraft types have reduced from respondents in 2013, declining to Obviously, airlines will decide 13 to seven. Today, 75% of all aircraft are narrow-body, and 90% of those are the B737 and the A320. Even with strong deliveries 46% this year. who comes out on top in the from Bombardier and Embraer, and new models from Mitsubishi, Last year, 47% of MROs OEM versus independent MRO COMAC and Irkut, the worldwide fleet is becoming less diverse,” reported failing to finalize battle. In today’s high risk aviation Bromberg said. proposed joint ventures in the last business, where cutting expenses “In the long run, this creates economies of scale across the three years. Without the steady and eking out efficiencies are MRO landscape. Consequently, the industry will require less influx of licensed work from critical, whoever offers the most diversity among parts, tools, and shops and less capacity to deliver OEM partners, generating new cost efficient solution will win the the same MRO services.” sources of revenue is imperative most customers. ■

34 / ORIENT AVIATION / FEBRUARY 2015 No.1 Asia-Pacific commercial aviation magazine

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