The Commercial Viability of Ultra Long-Haul Operations Evidence From

The Commercial Viability of Ultra Long-Haul Operations

Evidence from Qantas’ Perth-London Service

Guest Lecture Royal Aeronautical Society UAE Branch Building A @ Emirates Training College Dubai, 3 February 2020

©️ Linus Benjamin Bauer MSc MRAeS Agenda

1. Introduction

2. Background of Research Project

3. Market Analysis: Key Findings

4. Market Opportunity Analysis: Key Takeaways

5. Revenue-Cost Model: Results and Key Takeaways

6. Sensitivity and Risk Analysis: Results and Key Takeaways

7. Conclusion

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Introduction Work ExperienceWork in Experience Aviation in Aviation

PROLOGIS AG Senior Consultant Hamburg, Germany

Independent Aviation Consultant Bonn, Germany / Bern, Switzerland

SkyWork Airlines AG Manager Revenue Management and Pricing Bern, Switzerland

Singapore Airlines Ltd Management Trainee Programme Frankfurt, Germany

Etihad Airways Marketing Assistant DACH & Offline Markets Eastern Europe Munich, Germany, and Abu Dhabi, United Arab Emirates Linus Benjamin Bauer, MSc MRAeS Condor Senior Consultant at PROLOGIS & International Sales Visiting Lecturer in Air Transport Management at Frankfurt, Germany City University of London in London and Dubai Education Education

City University of London, London (GB) and Dubai (UAE) Recipient of the City University of London’s Master of Science in Air Transport Management Outstanding Academic Achievement Award IUBH – School of Business and Management, Bonn (GER) Personally presented in Dubai by Bachelor of Arts in Aviation Management HH Sheikh Ahmed bin Saeed Al Maktoum Yale University, New Haven (US) (Chairman and CEO, Emirates Group) Visiting International Student Programme (Y-VISP) International Economics & Global Affairs

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Agenda

1. Introduction

2. Background of Research Project

3. Market Analysis: Key Findings

4. Market Opportunity Analysis: Key Takeaways

5. Revenue-Cost Model: Results and Key Takeaways

6. Sensitivity and Risk Analysis: Results and Key Takeaways

7. Conclusion

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Background of Research Project ▪ Master’s Thesis at the City University of London

▪ Topic: The Commercial Viability of Ultra Long- Haul Operations, Evidence from Qantas’ Perth-London Market

▪ Project Supervisor: Mr Paul Clark

▪ Duration: September 2018 – March 2019

▪ Locations: London, Dubai, Perth and Sydney

▪ Highlights: ▪ Miles flown: 74,108 miles ▪ Longest Flight: Perth-London (QF9) ▪ Most memorable flight: Scenic flight above Sydney area on a Cessna Caravan & departure from Sydney’s first international airport in Rose Bay, New South Wales ▪ Most memorable highlight: Visit at Sydney’s first international airport where the first plane for Southampton took off in 1938 (Flying Boat: 10 days journey with 30 stops/20 for refuelling)

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Main Objectives of Research Project

RESEARCH PROJECT PROCESS

Development of a Revenue-Cost Model Production of Academic Evidence Filling the Gap in the Academic Literature and Enhancing the Current Debate on the Review of Previous Ultra Long-Haul Routes Application of Specifically Designed Viability of Current and Future Ultra Long- Revenue-Cost Model Haul Operations Identification of Drivers for Ultra Long-Haul Operations Analysis of Results from R-C-Model Review of Results (Evidence) Collection of Qualitative and Quantitative Data Sensitivity Analysis Provision of Revenue-Cost Model Market Analysis as a Foundation for R-C-Model for Consulting Projects (Qualitative Method) Risk Analysis (Route Simulation/Analysis Tool) (Supporting the Validity of Results) e.g. used by Set-up of Revenue-Cost Model (Quantitative Method)

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Sources of Data and Information

Data and information for the Revenue-Cost-Model Analysis and Market Analysis were derived from the following sources to create a hugely powerful proprietary dataset with accurate data and reliable assumptions:

▪ Flight Data collected from multiple flights between UK-AUS ▪ Aircraft manufacturers (e.g. Boeing) ▪ Engine manufacturers (e.g. Rolls Royce) ▪ Financial and statistical reports from Qantas and IAG ▪ Financial and statistical reports from Heathrow Airport and Perth Airport ▪ Airport charges documentation and information from Heathrow Airport and Perth Airport ▪ National civil aviation authorities and governmental organisations (UK, EU and Australia) ▪ Data providers incl.: OAG, IATA, CAPA, FlightGlobal, ch-aviation, InFare and RDC ▪ Independent in-house research conducted by Linus Bauer

Detailed Methodology (Revenue-Cost-Model) available upon request. Image collected from: Envato Logos collected from: above-mentioned sources

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Agenda

1. Introduction

2. Background of Research Project

3. Market Analysis: Key Findings

4. Market Opportunity Analysis: Key Takeaways

5. Revenue-Cost Model: Results and Key Takeaways

6. Sensitivity and Risk Analysis: Results and Key Takeaways

7. Conclusion

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Customer-perceived Value of Ultra Long-Haul Flights (e.g. QF9/10)

▪ Ultra long-haul operators position themselves in the premium market segment by offering higher fares for the direct flight as a premium product Customer-perceived Value from a Service-Price Offer ▪ According to Dunleavy and Westermann (2005), the price is critical, Qantas‘ QF9/10 vs. OAL however, products ultimately sell on value rather than on price alone

▪ More than 30% of the customers in 2018 did not choose the cheapest flight offered via Skyscanner (Skyscanner, 2018)

▪ Customers’ substantial body is also to some degree product-sensitive and therefore customers must perceive value

▪ The fundamental objective is to pitch a better bid for customers’ business than competitors are pitching by offering perceptibly more customer value to targeted customer segments (Holloway, 2008)

▪ Products of airlines on the right side of the curve are only sustainable in the long-term if there are entry barriers preventing competition from other carriers willing to position on the left side of the curve or if the segment is insufficiently profitable to attract such customer-driven competitors

▪ Qantas offer good value relative to the competitors when they provide unique benefits which justify premium pricing for the premium product: non-stop service between Perth and London ©️ Linus Benjamin Bauer (including the QF9/10-related products on ground and onboard)

▪ By designing a service-price offer that is believed to sit somewhere on that segment’s acceptable perceived value curve, Qantas can target specific customer segments

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer The rise of the Mega Hubs along the Kangaroo Route

▪ The famous Kangaroo Route between Australia and the UK has been one of the most competitive air corridors in aviation history

▪ Various airlines are competing for traffic through their points, including emerging hubs across Asia and the Middle East

▪ Qantas’ direct link from Perth to London bypasses 12 of the world’s 20 busiest hub airports by seats

▪ The majority of them are also main hubs of airline alliances: Star Alliance, SkyTeam and Oneworld

▪ Out of the 12 world’s busiest hub airports by seats in the area between Australia and the UK, six airports belong to the Top13 hub airports with the highest share of connecting passengers between both countries: Dubai (Emirates), Singapore and Bangkok (Star Alliance), Guangzhou (China Southern), Kuala Lumpur and Hong Kong (Oneworld)

▪ Singapore, Bangkok and Hong Kong alone are three Asian transfer points with a population pool of around 45m people → Qantas’ shift of A380 Ops from Dubai back to Singapore (SYD/MEL-SIN-LHR)

▪ Singapore and Dubai are significant hubs for the traffic between Europe ©️ Linus Benjamin Bauer and Australia

▪ In recent years, the Gulf carriers have leveraged their privileged geographical location and thus obtained a competitive advantage on the UK-Australia market supported by an efficient hub-and-spoke system and competitive cost structures (Pilz et al., 2018) Sources: OAG, FlightGlobal, Pilz et al.

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Perth (PER) – London (LHR) Market Key Players / Main Competitors of Qantas (QF9/10)

3x 2x Hong Kong (HKG)

Bangkok (BKK)

Kuala Lumpur (KUL) London Heathrow (LHR)

Singapore (SIN) Facts (APR-SEP18):

▪ 41% of the passengers‘ journey between Perth and London were via Abu Dhabi, Dubai and Doha Doha (DOH) (IATA PaxIS)

▪ 26% of the passengers flew via the following hub airports in Asia: Singapore, Bangkok, Kuala Lumpur and Hong Kong (IATA PaxIS) Dubai (DXB) Perth (PER)

▪ Note: Etihad withdrew its daily AUH-PER service in October 2018 as part of a continuing review of Etihad‘s network performance (Etihad, 2018) Images collected from Airlines and Envanto Sources: IATA PaxIS, OAG FlightAnalyzer, CAPA, FlightGlobal, Office for National Statistics

Guest Lecture at Royal Aeronautical Society ©️ Linus Benjamin Bauer - 11 - O&D Market Share Perth-London April – September 2017 vs 2018 ▪ 178,560 passengers in total flew between Perth and London during the period April– September 2018

▪ April – September 2018 versus April – September 2017: +2%

▪ Qantas’ direct link immediately captured a significant market share of 24% by passengers flown

▪ Market shares of the competitors decreased, the premium carrier Singapore Airlines was mainly affected by this (-7%) since Heathrow- Perth belongs to SIA’s Top5 connecting airport-pairs since 2016/2017 O&D Market Share by Passengers Flown (April – September 2017) (anna.aero, 2019)

▪ Despite being located in one of Emirates’ key markets Australia, the existing Emirates-Qantas partnership until 2023 contributes to Emirates’ large share in the Perth-London market

▪ In 2018, Emirates’ declining market share was also driven by Qantas’ strategic move to shift its A380 ops from Dubai back to Singapore (Sydney/Melbourne – Singapore – Heathrow)

▪ Conclusion: Qantas’ success on the PER-LHR route led to competitors’ move to reduce frequencies and capacities to Perth (e.g. Emirates, Singapore Airlines and Malaysia Airlines) Data collected from following sources: anna.aero, IATA PaxIS, CAPA and OAG O&D Market Share by Passengers Flown (April – September 2018)

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer O&D Market Share Perth-London (Premium) April – September 2017 vs 2018

▪ Between April and September 2018, a total of 21,497 premium passengers (+6% vs 2017) travelled between Perth and London in First and Business Class

▪ April – September 2017: 18,465 premium passengers

▪ As mentioned in the previous slide, the premium carrier Singapore O&D Market Share by Passengers Flown (April – September 2017) Airlines was mainly affected by Qantas’ launch of Perth-London (despite no capacity reductions at that time)

▪ Conclusion: Qantas successfully captured market shares from its main competitor SIA in the premium segment

O&D Market Share by Passengers Flown (April – September 2018) Data collected from following sources: IATA PaxIS, CAPA and OAG

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Outbound QF9 QF9/10 Feeder Traffic from/to Perth (O&D Share in %) Number of Flights: 364 Top10 Cities, 1st April 2018 – 31st March 2019 Darwin (DRW) Number of Passengers: 77,170 DRW-PER-LHR: 1.0% Avg. Number of Passengers/Flight: 212 LHR-PER-DRW: 0.2% Avg. LF: 90%

Inbound QF10 Number of Flights: 361 Number of Passengers: 77,550 Broome (BME) Avg. Number of Passengers/Flight: 215 BME-PER-LHR: 0.4% Avg. LF: 91% London Heathrow (LHR) LHR-PER-BME: 0.5%

Auckland (AKL) AKL-PER-LHR: 1.5% LHR-PER-AKL: 0.6%

Brisbane (BNE) BNE-PER-LHR: 5.9% LHR-PER-BNE: 4.7%

SYD-PER-LHR: 6.8% Facts: Sydney (SYD) LHR-PER-SYD: 10.7% Perth (PER) ▪ In comparison with London-Heathrow as a large PER-LHR: 50.1% Canberra (CBR) CBR-PER-LHR: 2.1% O&D market with a larger catchment area, Perth LHR-PER: 51.3% Adelaide (ADL)** LHR-PER-CBR: 2.4% relies more on domestic connections to other parts of Australia, which is much needed from the airline Melbourne (MEL) and hub economic perspective in order to achieve MEL-PER-LHR: 24.6% satisfied commercial performance results LHR-PER-MEL: 23.5% *True Origin/Destination QF9/10

▪ Qantas‘ main focus lies on providing a feeder **ADL-PER-LHR: 4.4% network at the Perth end, leading to a competitive LHR-PER-ADL: 4.8% HBA-PER-LHR: 0.7% advantage by offering an own feeder network from Hobart (HBA) LHR-PER-HBA: 0.1% Perth to 14 destinations in Australia Sources: OAG TrafficAnalyzer, Deloitte Access Economics, Qantas Airways Ltd, Tourism Research Australia

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer - 3 - Facts: QF9/10 Feeder Traffic from/to Heathrow (O&D Share in %) ▪ Based on figures from the OAG Traffic Top10 Cities, 1st April 2018 – 31st March 2019 Analyzer in 2018, the London market was the largest O&D market in Europe regarding total passengers flown between London and Australia

▪ According to the data collected from IATA PaxIS, CAPA and OAG, slightly more than 1.3 million two-way passengers flew Aberdeen (ABZ) between Australian cities and London in 2018 ▪ An additional reason for offering the very Edinburgh (EDI) limited amount of code-sharing feeder traffic from the mega-hub airport Heathrow Glasgow (GLA) to cities in the UK and Europe are the Gulf Dublin (DUB) carriers, offering more convenient one-stop Newcastle (NCL) journeys between the UK/Europe and Belfast (BFS) Australia via their hubs in the Middle East Cork (ORK) (e.g. Milan, Paris, Frankfurt)

Shannon (SNN) Manchester (MAN) Leeds-Bradford (LBA)

Top10 Cities (O&D) ex/to Heathrow: MAN-LHR-PER (9.6%) / PER-LHR-MAN (9.8%) LBA-LHR-PER (4.0%) / PER-LHR-LBA (3.1%) Perth (PER) NCL-LHR-PER (3.2%) / PER-LHR-NCL (2.9%) GLA-LHR-PER (6.0%) / PER-LHR-GLA (5.1%) EDI-LHR-PER (5.2%) / PER-LHR-EDI (3.7%) ABZ-LHR-PER (2.1%) / PER-LHR-ABZ (1.7%) BFS-LHR-PER (0.4%) / PER-LHR-BFS (0.2%) London Heathrow (LHR) DUB-LHR-PER (7.5%) / PER-LHR-DUB (7.2%) ORK-LHR-PER (3.4%) / PER-LHR-ORK (2.7%) Sources: IATA PaxIS, OAG FlightAnalyzer, Deloitte, SNN-LHR-PER (1.1%) / SNN-LHR-PER (0.6%) British Airways, IAG, Office for National Statistics UK Images collected from: British Airways, Qantas and Envato

Guest Lecture at Royal Aeronautical Society ©️ Linus Benjamin Bauer - 11 - Largest O&D Markets in Europe (ex/to Australia)

©️ Linus Benjamin Bauer

▪ In terms of the total amount of passengers flown between London and Australia in 2018, Heathrow was the largest O&D market in Europe

▪ Slightly more than 1.3m two-way passengers travelled between 2018

the cities in Australia and London in

▪ Heathrow can be characterised as a large O&D market in the

long-haul sector Passengers

▪ 202 of the UK’s Top300 companies are headquartered within a Total 25-mile radius of Heathrow, thus making it very attractive as a final destination for business travellers

▪ In addition to London’s population (~8.8m), over 4.5m people live within a 60-minute radius of Heathrow

European Airports

Data and information collected from following sources: CAPA, Heathrow Airport, Qantas, FlightGlobal, Deloitte Access Report

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Fare Benchmarking Analysis ex Perth DAYS BEFORE DEPARTURE

©️ Linus Benjamin Bauer ▪ Departure Period: December 2018 – March 2019 ▪ Date of Fare Collection: 22 November 2018 ▪ Sources: Skyscanner, ITA Matrix, GDS and Websites of Airlines ▪ Return Fare in Business Class: 5-7 days ▪ Return Fare in Economy Class: 7-21 days

▪ Due to very limited/no availability of Premium Economy Class cabins on aircraft of competitors (e.g. Gulf carriers), Premium Economy Class fares were not considered in the fare benchmarking analysis

▪ The same applies to First Class since Qantas’ Boeing 787-9 Return fares in Business Class in AUD (PER-LHR-PER)

fleet does not contain First Class cabins ©️ Linus Benjamin Bauer

▪ Business Class fares out of Perth are up to 72% higher than fares offered by main competitors ▪ Monopolistic position of Qantas (non-stop) ▪ Demand and pricing driven by the high connectivity share between Perth and the East Coast of Australia ▪ About 40% of the bookings are made by passengers starting their journey from cities such as Sydney, Melbourne, Brisbane and Adelaide via Perth to London ▪ High-Yield Focus on passengers flying from Perth to Heathrow and back (P-2-P) Return fares in Economy Class in AUD (PER-LHR-PER)

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Fare Benchmarking Analysis ex Heathrow DAYS BEFOREBEFORE DEPARTURE DEPARTURE ▪ Departure Period: December 2018 – March 2019 ▪ Date of Fare Collection: 22 November 2018 ▪ Sources: Skyscanner, ITA Matrix, GDS and Websites of Airlines ▪ Return Fare in Business Class: 5-7 days ▪ Return Fare in Economy Class: 7-21 days

▪ The feasibility of premium pricing is influenced by competition, customers’ perception of value and economic conditions in both markets

▪ Due to intense network competition on the Kangaroo Route Return fares in Business Class in GBP (LHR-PER-LHR) (UK-Australia), the fares for transfer itineraries are usually more competitive than the fares for non-stop itineraries (Bischoff et al., 2011)

▪ In most cases, airlines (e.g. Qantas on LHR-PER) increase prices to focus on direct premium traffic between a congested airport and a secondary airport if demand outstrips supply (Bouwer, 2015)

▪ Heathrow’s attractiveness due to high proportion of premium passengers and long-haul routes also drive the fares up Return fares in Economy Class in GBP (LHR-PER-LHR)

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Fare Comparison Economy Class Non-stop (QF9/10) vs. One-Stop

▪ Departure Period: 24 March – 30 April 2018 (First month) ▪ Date of Fare Collection: February 2018 ▪ Source: CAPA (2018) ▪ Duration of Stay: 7 days ▪ Cabin Class: Economy Class

▪ The Economy Class cabin with 166 seats owns the highest capacity share (70%) on Qantas’ 787-9

▪ Ultra long-haul flights from London to Perth were Return fares in Economy Class in GBP (First month of PER-LHR-PER) averagely 58% more expensive than the one-stop flights via the Middle East, South East Asia or East Asia

▪ On a couple of travel periods, the QF10 fares out of London were up to 98% higher than the cheapest one- stop return fares

▪ In contrast to the fares ex LHR, the return fares out of Perth fluctuated between 16% and 76%, partly driven by the higher share of QF9/10 connecting traffic (e.g. Sydney/Melbourne/Brisbane-Perth-London) Return fares in Economy Class in GBP (First month of LHR-PER-LHR)

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Agenda

1. Introduction

2. Background of Research Project

3. Market Analysis: Key Findings

4. Market Opportunity Analysis: Key Takeaways

5. Revenue-Cost Model: Results and Key Takeaways

6. Sensitivity and Risk Analysis: Results and Key Takeaways

7. Conclusion

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Commercial Viability of Ultra Long-Haul Operations Key Takeaways from ULH Market Opportunity Analysis (1/3)

▪ One of the key influencing factors for the stimulation of ultra long-haul traffic demand: The propensity to travel increases dramatically when people enter the middle class in many parts of the world (growth of global wealth), thus these changes are essential for ultra long-haul air travel demand since continuing strong consumer spending on travel has bolstered air travel in recent years

▪ The rapid expansion of business networks globally, the rise of affluent consumers, and growing numbers of immigrants worldwide with a disposable income due to globalisation have led to a growth of total premium class bookings worldwide (e.g. Indians working in the Silicon Valley & Bay Area → SFO – DEL/BOM)

▪ Holding up better than the declining Economy Class yields: Premium passengers travelling in First, Business and Premium Economy Class are essential for operators to obtain economically viable yields on ultra long-haul routes

▪ Apart from increasing air transport deregulation, hub congestion and economic growth of the regions around the non- hub/secondary hub airports, the rise of unique city-pairs in the (ultra) long-haul sector is also driven by the development of fuel- and cost-efficient twin-engine aircraft such as the Boeing 787 and Airbus A350, making direct services/thinner routes between main hubs and secondary hubs/cities commercially viable again (e.g. Boeing 787 reduce costs by 15 per cent on average)

▪ Catchment area: A large and attractive catchment area with a large existing premium customer base (higher willingness-to-pay) is a necessary condition for launching ultra long-haul services between a main hub (e.g. Heathrow as a large long-haul O&D market) and secondary hub/city (e.g. Perth)

▪ Feeder network: Providing feeder traffic for the ultra long-haul flight is required (e.g. Qantas provides QF9/10 feeder traffic from Perth to 14 Australian airports = reduction of total travel time and amount of stops → leading to Qantas‘ competitive advantage towards competitors)

▪ The reliability (On-time performance and customer punctuality) of such services plays a crucial role in the premium segment, therefore the success of providing and operating a premium route to premium passengers also depends on the reliability of the (congested) airports including the infrastructure (accessibility) and suppliers such as ground handling, catering and air traffic control Source: In-house research conducted by Linus Benjamin Bauer Image collected from: Envato

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Commercial Viability of Ultra Long-Haul Operations Key Takeaways from ULH Market Opportunity Analysis (2/3) ▪ Premium pricing for offering higher convenience: Customers in general (e.g. Australians as frequent long-haul travellers due to “geographical disadvantage”) do value taking the connecting flight (domestic → long-haul and vice versa) in their home country or on their home continent instead of interrupting their long journey in Dubai, Abu Dhabi or Doha in the middle of the night/early morning

▪ Seasonality of Demand: In general, the monthly variable costs (DOC) of operating an ultra long-haul route are largely affected by the seasonality of demand which mainly occur in the leisure market or during the statutory holidays when leisure traffic usually peaks while business travellers‘ demand shrinks

▪ Price Elasticities of Demand on Ultra Long-Haul: By targeting less price-elastic (-0.265) and benefits-sought premium customer segments with high willingness-to-pay (WTP) for the premium fare (avg. 30% higher than one-stop fares), the ultra long-haul operator would be able to build a strong premium market position for corporate, premium leisure and VFR travellers

▪ Two class configuration on aircraft (Business & Premium Economy) should be avoided (Example: Singapore Airlines‘ real struggle to fill the seats in Premium Economy cabin on SIN-EWR route, a route mainly attracting business travellers travelling in Business Class → leading to high level of dependency on business travellers)

▪ From a Revenue Management and Pricing perspective, a three/four class configuration on the aircraft with at least 40 per cent share of premium seats (F/C/YW) is considered as an optimal configuration for ultra long- haul services (Opportunities incl. Upselling, Demand Stimulation, Revenue Maximization, Improving Yield Mix)

▪ Cabin interior refurbishment & modification on ultra long-haul aircraft with new products in order to attract the premium market segment and retain a base of loyal customers, e.g. a new Premium Economy Class product in the future since YW generates 2.3 times higher revenues than its production cost (1.6 times higher than Economy Class), leading to the highest marginal returns of all cabin classes (F/C/YW/Y)

▪ Value-added product to SMEs, Leisure and VFR segment: Development of a new cabin between Business and Premium Economy Class on Ultra Long-Haul Flights since the gap between both classes gets larger from time to time (Passenger Experience & Hard Product) Source: In-house research conducted by Linus Benjamin Bauer Image collected from: Envato

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Commercial Viability of Ultra Long-Haul Operations Key Takeaways from ULH Market Opportunity Analysis (3/3) ▪ Focus on direct premium traffic: Ultra long-haul operators focus on premium pricing for the premium point-to-point traffic between a congested airport (e.g. LHR) and secondary hub airport (e.g. PER) if demand outstrips supply (Heathrow’s attractiveness due to high proportion of premium passengers and long-haul destinations also drive the prices up)

▪ High Net Promoter Score: Ultra long-haul routes nowadays enjoy high NPS (e.g. Perth-London, highest NPS in Qantas’ entire network), leading to a strong position in the premium segment

▪ Environmental-friendly: Less CO2 emissions on ultra long-haul routes, attracting the growing eco-minded customer segment (taking one direct flight instead of flying two legs with two take-offs)

▪ Increasing importance of VFR traffic for “filling the seasonality gaps”: Strong ethical ties between two countries/markets lead to more stability of demand throughout the year (e.g. Perth’s population is notable of its very high proportion of UK- and Ireland-born residents)

▪ Extension of code-share pact with another airline would strengthen the premium market position by offering higher frequencies and more destinations (feeder traffic)

▪ Strategic partnership with another airline (e.g. JV): In addition to enjoying the common benefits from a strategic partnership/joint venture activity, a strategic partnership with another alliance member airline (e.g. British Airways and Qantas from 2023 on) would establish and strengthen the “Premium Kangaroo Route” (+ increase the premium market shares of BA/QF) between the United Kingdom and Australia/New Zealand via the establishing hub in Western Australia

▪ Ancillaries: For ultra long-haul operators, ancillaries have become an increasingly important mechanism for cost recovery (e.g. higher proportion of last-minute upgrades to the next cabin class on ultra long-haul routes paid with cash, miles or both)

▪ Increasing Importance of Frequent Flyer Programme: The loyalty programme of alliance member airlines (e.g. Qantas’ FFP) nowadays can be seen as an essential driver of market share and revenue quality, and having a large existing FFP customer base in the home and foreign market (e.g. UK and Australia) can be considered as one of the

necessary market conditions for ultra long-haul services Source: In-house research conducted by Linus Benjamin Bauer Image collected from: Envato

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Agenda

1. Introduction

2. Background of Research Project

3. Market Analysis: Key Findings

4. Market Opportunity Analysis: Key Takeaways

5. Revenue-Cost Model: Results and Key Takeaways

6. Sensitivity and Risk Analysis: Results and Key Takeaways

7. Conclusion

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Study Parameters, Inputs and Assumptions R-C-Model Scenario: Perth (PER) – London (LHR)

▪ Study Parameters ▪ Currency: USD ▪ Time Period: April – September 2018 ▪ Route: London (LHR) – Perth (PER) ▪ Carrier: Qantas ▪ Aircraft: Boeing 787-9

▪ Study Inputs ▪ Weekly Frequency: 7 ▪ Total Passengers: 130,874 ▪ Load Factor: 82.0% ▪ Average One-way Net Fare: US$ 928.75

▪ Aircraft / Key Assumptions ▪ Aircraft Capacity: 236 ▪ Aircraft Configuration: Business 42 / Premium Eco 28 / Eco 166 ▪ Aircraft MTOW: 254,012 ▪ Jet Fuel Price: US$ 2.11/gallon ▪ Route Distance: 14,800km

Images collected from: Qantas, Envato

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Overview of Results from R-C-Model Analysis Scenario: QF9/10 Perth (PER) – London (LHR) Period: 1 April – 30 September 2018 April 18 – September 18: Frequency: 183 Revenue Costs RRPK (US cents) Capacity: 86,376 Passengers: 70,858

US$ 68.8m US$ 67.4m ¢ 6,56 London Heathrow (LHR) RASK (US cents) CASK (US cents) CASK excl. Fuel

¢ 5,38 ¢ 5,28 ¢ 3,44

Route Profit/Loss Breakeven LF (%) ASKs

US$ 1.37m 79,8% 1,278,364,800

Margin (%) Load Factor (%) RPKs

Perth (PER) 2,00% 82,0% 1,048,698,400 Jet Fuel Price: US$ 2.11/gallon

Note: Figures highlighted above are not from Qantas Source: R-C-Model Analysis conducted by Linus Benjamin Bauer Images collected from: Qantas and Envato

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Breakdown of Revenue and Costs Scenario: QF9/10 Perth (PER) – London (LHR) Revenue-Cost-Model: Bottom-Up Approach*

Currency: US$

©️ Linus Benjamin Bauer

→ With a share of 64%, the fuel is the main cost driver for Qantas’ non-stop service between Perth and London (Variable Direct Operating Costs). ©️ Linus Benjamin Bauer * In a bottom-up approach, unit costs per passenger and frequency were modelled and calculated. Note: Figures highlighted above are not from Qantas

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Monthly Overview: April – September 2018 (QF9/10)

Currency: US$

©️ Linus Benjamin Bauer

Note: Figures highlighted above are not from Qantas

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Performance Overview (April – September 2018) Scenario: QF9/10 Perth (PER) – London (LHR)

Together with sufficient yields, the golden rule for FSNCs on (ultra) long- haul routes is to achieve a minimum load factor between 80 and 85%. It could prove that the sufficient demand for ultra long-haul services exists.

©️ Linus Benjamin Bauer

Note: Figures highlighted above are not from Qantas

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Monthly Load Factor Performance (April – September 2018) Scenario: QF9/10 Perth (PER) – London (LHR) The Breakeven Load Factor (BELF) is the average percentage of seats that must be filled on an average flight at current average fares for Qantas’ passenger revenue to breakeven with the operating expenses of that ultra long-haul route.

©️ Linus Benjamin Bauer In order to achieve a positive profit margin and average revenue of US$ 971.30 per passenger on the ultra long-haul route between Perth and London, an average load factor of minimum 79.8% or higher would be required for Qantas to breakeven on that route.

Key finding from the in-house research: A study conducted by RDC Aviation (2018) highlights that the breakeven revenue per passenger at Emirates for instance is up to 16 per cent lower on the one-stop service between Perth and London via its hub Dubai. The result is mainly driven by the compounding cost of flying fuel for an ultra long-range distance. Note: Figures highlighted above are not from Qantas

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Key Takeaways from the Revenue-Cost Model Analysis (1/3)

▪ Boeing 787-9 Configuration: Qantas deploy a 787-9 with a configuration of 34 seats less in total than the average of all 787-9 operators, however, they do offer more Business Class seats (+9 vs. average) for its premium route

▪ Revenue per Seat increases with increasing stage length, however, Revenue per Available Seat Kilometre (RASK) decreases with each additional kilometre flown

▪ Operating Costs increases with increasing stage length, however, Cost per Available Seat Kilometre (CASK) also decreases with each additional kilometre flown → higher productivity of aircraft and crew

▪ Fixed Crew Costs: The Gulf and Asian carriers have a cost advantage over Qantas by paying lower wages to employees and having less strict labour laws/weak labour unions in their countries, however, when it comes to the wage costs-productivity equation, the staff-related productivity (ASK per Crew Member) is higher on ultra long-haul routes

▪ Distribution of Costs: Airport, handling and overhead costs are distributed across more flown kilometres

▪ Fuel Costs: Jet fuel is the most significant single expense for ultra long-haul operators, up to as much as one-third of the total operating costs and two-third of the variable direct operating costs (~ 64%)

▪ Carriage of Extra Fuel: One of the fuel cost-related disadvantages of bypassing a hub airport (e.g. DXB or SIN) on a direct route is that the forgoing of a refuel-stop forces the ultra long-haul operator to carry the jet fuel for the second leg of the flight from the first take-off (e.g. PER-LHR: 94.3t)

▪ Fuel-saving Techniques: Qantas invested five years and millions of AUD in the development of fuel-saving strategies such as single engine taxi and a new flight planning system (4D) that makes better use of jet streams and tailwinds on (ultra) long-haul flights based on the usage of cloud computing to crunch data on thousands of possible flight paths → usage of millions of data points in order to develop a cost map of the most efficient routes (Qantas, 2018)

▪ Ancillary Revenue: In 2017, Qantas earned US$ 1.15bn from selling ancillary products (12.1% of total revenue) and the loyalty programme (11.8m members) with a share of approximately 90% of the total ancillary revenue has become a main ancillary revenue stream for Qantas nowadays

Source: In-house analysis conducted by Linus Benjamin Bauer Image collected from: Envato

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Key Takeaways from the Revenue-Cost Model Analysis (2/3)

▪ Fuel for flights above 8,000 miles could cost as much as up to 30% more than the corresponding fuel for 2x 4,000 mile legs, however, the take-off procedure is very fuel-consuming → leading to a high fuel consumption on two legs

▪ Lower Emission Costs: Perth-London service has a lower environmental impact than flights via points in South East Asia or the Gulf, even if the A380 aircraft may be in use in concentrated flows (O’Kelly, 2012) → leading to lower overall emission costs

▪ Maintenance Costs: Qantas’ modern and young 787-9 fleet with an average age of 0.7 years (September 2018) requires fewer of the labour-intensive maintenance and overhaul procedures, however, once the fleet age increases, the maintenance- and overhaul-related costs increase (ageing effect on maintenance costs)

▪ Influence of Sector Length on the maintenance costs has to be considered as another contributing factor: Due to the very high utilisation rate of aircraft, the maintenance costs on (ultra) long-haul flights are not the prime cost-driver in contrast to short-haul routes

▪ Average Sector Length is linked with aircraft utilisation: Various cyclic-related costs involve expensive items such as tyres, brakes and wheels (Clark, 2017) → Relationship between cycles and hours flown: Qantas’ 787-9 perform fewer cycles per hours flown (PER-LHR)

▪ Airport Charges: There are cost-saving potentials for Qantas’ non-stop service, e.g. the usage of two airports rather than three is one of the few cost-saving potentials, however, the costs can be spread per movement across a much higher number of passengers on the A380 (e.g. Emirates)

▪ En-route Charges can be considered as another cost-saving potential for operating a direct route since the en-route charges on QF9/10 are GBP 5,000 lower than for two Emirates legs via Dubai and GBP 3,200 lower than for two SIA legs via Singapore (RDC Aviation, 2018)

▪ En-route Charges per Passenger are influenced by the size of the aircraft: At Qantas, the charges per passenger are 18% higher than at Emirates and 5% higher than at Singapore Airlines when the cost is spread across passengers

Source: In-house analysis conducted by Linus Benjamin Bauer Image collected from: Envato

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Key Takeaways from the Revenue-Cost Model Analysis (3/3)

▪ Connecting Passengers: An increase in share of connecting passengers and the establishment of new codesharing/interlining agreements lead to higher operational complexity and inflexibility, thus higher costs at the end of the day (0.06 US Cents/ASM)

▪ Yield: The fare structure, traffic mix, length of haul, intensity of competition and network design are factors influencing the yield of a route → To a large extent, Qantas’ yield (above the average) on the direct route is the reflection of the interaction between product design and pricing activities on the UK-Australia market

Source: In-house analysis conducted by Linus Benjamin Bauer Image collected from: Envato

1. Introduction

2. Background of Research Project

3. Market Analysis: Key Findings

4. Market Opportunity Analysis: Key Takeaways

5. Revenue-Cost Model: Results and Key Takeaways

6. Sensitivity and Risk Analysis: Results and Key Takeaways

7. Conclusion

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Sensitivity Analysis First Scenario The first sensitivity scenario assumed a 9.5% rise in the jet fuel price from US$ 2.11 to US$ 2.31 per gallon over a period/due to an unforeseen event and the actual load factor of 82% from the Revenue-Cost-Model analysis.

+ 9.5%

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Sensitivity Analysis Apart from not sufficient LFs (~78%) and fuel- inefficient aircraft (e.g. A340-500), the high jet Second Scenario fuel price (US$ 3.00 per gallon) between 2011 to 2013 led to the suspension of several ultra The second sensitivity scenario assumed a 42.2% rise in the jet fuel price from US$ 2.11 to US$ 3.00 per gallon long-haul routes, e.g. SIN-EWR/LAX (SQ) & over a period/due to an unforeseen event and the actual load factor of 82% from the Revenue-Cost-Model BKK-LAX/EWR (TG) analysis.

+ 42.2%

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Commercial Viability of Ultra Long-Haul Operations Key Takeaways from Risk Analysis (1/2) The ultra long-haul routes are exposed to a variety of risks influencing the commercial viability and profitability of such services:

▪ Oil price volatility and higher jet fuel prices → leading to higher fuel costs and possible loss from fuel hedging

▪ Economic recession and currency volatility (exchange rate fluctuation) ▪ Decline in (premium) demand and yield / downgrade to lower cabin classes

▪ Ongoing conflict in the Middle East ▪ Establishment of no-fly zones (e.g. Iran / Iraq) → operational disruptions (diversion/cancellation) ▪ Qantas’ non-stop service will be redirected to go over Afghanistan instead (+ 40-50min) ▪ Up to 90 Economy Class passengers will be bumped from its 236-seat Boeing 787-9 aircraft in order to reduce weight and enable the jet to travel the longer route ▪ Alternative option with a 236-seat aircraft: Fuel stop in Singapore for QF9 from Perth to London

Source: In-house research conducted by Linus Benjamin Bauer Images collected from: Envato and Flightradar24

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Commercial Viability of Ultra Long-Haul Operations Key Takeaways from Risk Analysis (2/2)

The ultra long-haul routes are exposed to a variety of risks influencing the commercial viability and profitability of such services:

▪ Operational inflexibility ▪ Payload/range limitations, e.g. SQ on SIN-EWR (Configuration) ▪ Scheduling: All ULR flights of EK and EY depart late night / early morning from DXB and AUH in order to avoid the heat and humidity in summer and consequential payload limitations ▪ Strict regulations implemented by Civil Aviation Safety Authorities (e.g. working hours for crew)

▪ Rise of neo-protectionism in aero politics, natural disasters (e.g. bushfires in Australia)

▪ Market entry of new competitor on route (direct / via hub) & roll-out of new premium products

▪ Increasing security-related costs in the post-9/11 era

▪ Increasing labour costs in many parts of the world (e.g. UK and Australia) ▪ Higher than Qantas’ main competitors on the Kangaroo route ▪ Strong bargaining power of labour union and pilot associations (e.g. in UK and Australia)

▪ Increasing airport and route charges ▪ Airport charges at Perth will be increased by 38% over the next five years ▪ Australian airspace: Higher en-route charges than in other airspaces between London and Perth

Source: In-house research conducted by Linus Benjamin Bauer Images collected from: Envato and Flightradar24

1. Introduction

2. Background of Research Project

3. Market Analysis: Key Findings

4. Market Opportunity Analysis: Key Takeaways

5. Revenue-Cost Model: Results and Key Takeaways

6. Sensitivity and Risk Analysis: Results and Key Takeaways

7. Conclusion

▪ A new generation of ultra long-haul operators begins: The results from the Revenue- Cost-Model analysis spread confidence and optimism that Qantas is likely to have a much better chance of achieving profitability on ultra long-haul flights in the era of game- changing economics.

▪ While the cost advantages of ultra long-haul services may be slight compared to one-stop services, they are likely to make up for it in market positioning by targeting the rising premium segment, one of the contributing factors to the increase in profitability of the 21st century airline business.

▪ Additional contributing factors from the macroeconomic perspective are following: Rise in global demand for air travel, recent jet fuel price development, development of fuel-efficient aircraft (e.g. Boeing 787-9), economic growth, globalisation, rise of the middle class (propensity to travel), increasing importance of Premium Economy Class product (e.g. highest marginal return of all cabin classes) and ancillary products (mechanism for cost recovery), and the increasing importance of VFR traffic filling the seasonal gaps (e.g. UK- Australia).

▪ At large hub airports such as Heathrow, the costs to accommodate a Boeing 787-9 aircraft is very high compared to secondary hubs/cities. FSNCs such as Qantas rely on the hub- and-spoke operations at Perth which offer advantages in terms of cost savings and demand stimulation with respect to economies of scale, scope, and density. Having a large and attractive catchment area around the airport (e.g. LHR) and a wide feeder network (e.g. PER) are necessary prerequisites for ultra long-haul flights.

Image collected from: Envato

▪ Despite the deployment of fuel-efficient aircraft nowadays, the results from the Sensitivity analysis deliver the key message that ultra long-haul flights are particularly sensitive to jet fuel price fluctuations. Therefore, a serious threat to the viability of an ultra long-haul service is the climate of high fuel price volatility, driven by the current geopolitical crisis in the Middle East (e.g. ongoing conflict between Iran, Saudi Arabia and the allies).

▪ Apart from applying new jet fuel-saving strategies in the digital era (e.g. flight planning systems), the adoption of fuel and currency hedging policies, the practice of a careful aircraft empty weight management (MEW) and the optimization of airport- and staff-related costs (e.g. cost reduction programme and renegotiations with airport authorities and labour unions for instance) are necessary for increasing the chance of achieving profitability on ultra long-haul routes in general (e.g. Heathrow-Perth).

▪ Less price-sensitive customer segments can pass on the higher costs of a high fuel burn concerning premium tickets with higher yield. Lower initial yields will make it difficult to sustain the ultra long-haul operations from a commercial point of view.

▪ In conclusion, due to the limited realistic opportunities at the moment, ultra long-haul flights will remain a niche. ▪ South East Asia/Indian Subcontinent/OZ – US/Canada ▪ Perth – Europe (London, Paris, Frankfurt, Manchester) ▪ Istanbul – Sydney/Melbourne

Image collected from: Envato

Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer Please spread the word (e.g. LinkedIn) about the upcoming guest lectures in the following cities in the near future. Thank you!

Guest Lecture Royal Aeronautical Society Perth Branch Edith Cowan University @ Mt. Lawley Campus Perth, 25 March 2020 18:30 – 20:30 LT

Guest Lecture Royal Aeronautical Society Sydney Branch University of Sydney Business School Sydney, 6 May 2020 12:00 – 14:00 LT

Guest Lecture Royal Aeronautical Society Toulouse Branch Airbus Campus 1 @ Airbus Group Headquarters Toulouse, 12 May 2020 18:00 – 20:00 LT

Other cities between April and June 2020: Hamburg (TBA), Singapore (TBA), Chicago (TBA) and Washington DC (TBA)