The Commercial Viability of Ultra Long-Haul Operations
Evidence from Qantas’ Perth-London Service
©️ Linus Benjamin Bauer MSc MRAeS
Guest Lecture
Royal Aeronautical Society UAE Branch
Building A @ Emirates Training College
Dubai, 3 February 2020
Agenda
Guest Lecture at the Royal Aeronautical Society
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
©️ Linus Benjamin Bauer
Introduction
Linus Benjamin Bauer, MSc MRAeSSenior Consultant at PROLOGIS &
Visiting Lecturer in Air Transport Management at
City University of London in London and Dubai
Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer
Work Experience 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
Condor
International Sales
Frankfurt, Germany
Education
City University of London, London (GB) and Dubai (UAE)
Master of Science in Air Transport Management
IUBH – School of Business and Management, Bonn (GER)
Bachelor of Arts in Aviation Management
Yale University, New Haven (US)
Visiting International Student Programme (Y-VISP)
International Economics & Global Affairs
Work Experience in Aviation
Education
Recipient of the City University of London’s
Outstanding Academic Achievement Award
Personally presented in Dubai by
HH Sheikh Ahmed bin Saeed Al Maktoum
(Chairman and CEO, Emirates Group)
Agenda
Guest Lecture at the Royal Aeronautical Society
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
©️ Linus Benjamin Bauer
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
Development of a Revenue-Cost Model
Review of Previous Ultra Long-Haul Routes
Identification of Drivers for Ultra Long-Haul Operations
Collection of Qualitative and Quantitative Data
Market Analysis as a Foundation for R-C-Model
(Qualitative Method)
Set-up of Revenue-Cost Model
(Quantitative Method)
Production of Academic Evidence
Application of Specifically Designed
Revenue-Cost Model
Analysis of Results from R-C-Model
Sensitivity Analysis
Risk Analysis
(Supporting the Validity of Results)
Filling the Gap in the Academic Literature
and Enhancing the Current Debate on the
Viability of Current and Future Ultra Long-
Haul Operations
Review of Results (Evidence)
Provision of Revenue-Cost Model
for Consulting Projects
(Route Simulation/Analysis Tool)
e.g. used by
RESEARCH PROJECT PROCESS
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.Logos collected from: above-mentioned sources
Image collected from: Envato
Agenda
Guest Lecture at the Royal Aeronautical Society
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
©️ Linus Benjamin Bauer
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
▪ According to Dunleavy and Westermann (2005), the price is critical,
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
(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
Customer-perceived Value from a Service-Price Offer
Qantas‘ QF9/10 vs. OAL
©️ Linus Benjamin Bauer
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
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.
©️ Linus Benjamin Bauer
Guest Lecture at Royal Aeronautical Society - 11 -©️ Linus Benjamin Bauer
Perth (PER) – London (LHR) Market
Key Players / Main Competitors of Qantas (QF9/10)
Perth (PER)
Images collected from Airlines and Envanto
Sources: IATA PaxIS, OAG FlightAnalyzer, CAPA, FlightGlobal, Office for National Statistics
▪ 41% of the passengers‘ journey between Perth and
London were via Abu Dhabi, Dubai and Doha
(IATA PaxIS)
▪ 26% of the passengers flew via the following hub
airports in Asia: Singapore, Bangkok, Kuala
Lumpur and Hong Kong (IATA PaxIS)
▪ Note: Etihad withdrew its daily AUH-PER service in
October 2018 as part of a continuing review of
Etihad‘s network performance (Etihad, 2018)
Facts (APR-SEP18):
Doha (DOH)
Dubai (DXB)
Singapore (SIN)
Kuala Lumpur (KUL)
Bangkok (BKK)
Hong Kong (HKG)
London Heathrow
(LHR)
3x 2x
Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer
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
(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 2017)
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
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
Data collected from following sources: IATA PaxIS, CAPA and OAG
O&D Market Share by Passengers Flown (April – September 2017)
O&D Market Share by Passengers Flown (April – September 2018)
Guest Lecture at the Royal Aeronautical Society - 3 -©️ Linus Benjamin Bauer
QF9/10 Feeder Traffic from/to Perth (O&D Share in %)
Top10 Cities, 1st April 2018 – 31st March 2019
London Heathrow (LHR)
Perth (PER)
Sources: OAG TrafficAnalyzer, Deloitte Access Economics, Qantas Airways Ltd, Tourism Research Australia
Number of Flights: 364
Number of Passengers: 77,170
Avg. Number of Passengers/Flight: 212
Avg. LF: 90%
Brisbane (BNE)BNE-PER-LHR: 5.9%
LHR-PER-BNE: 4.7%
Sydney (SYD)
Canberra (CBR)
Hobart (HBA)
Melbourne (MEL)
Adelaide (ADL)**
Darwin (DRW)DRW-PER-LHR: 1.0%
LHR-PER-DRW: 0.2%
Broome (BME)BME-PER-LHR: 0.4%
LHR-PER-BME: 0.5%
Outbound QF9
Number of Flights: 361
Number of Passengers: 77,550
Avg. Number of Passengers/Flight: 215
Avg. LF: 91%
Inbound QF10
SYD-PER-LHR: 6.8%
LHR-PER-SYD: 10.7%
CBR-PER-LHR: 2.1%
LHR-PER-CBR: 2.4%
MEL-PER-LHR: 24.6%
LHR-PER-MEL: 23.5%
*True Origin/Destination QF9/10
HBA-PER-LHR: 0.7%
LHR-PER-HBA: 0.1%
PER-LHR: 50.1%
LHR-PER: 51.3%
**ADL-PER-LHR: 4.4%
LHR-PER-ADL: 4.8%
Auckland (AKL)AKL-PER-LHR: 1.5%
LHR-PER-AKL: 0.6%
▪ In comparison with London-Heathrow as a large
O&D market with a larger catchment area, Perth
relies more on domestic connections to other parts
of Australia, which is much needed from the airline
and hub economic perspective in order to achieve
satisfied commercial performance results
▪ Qantas‘ main focus lies on providing a feeder
network at the Perth end, leading to a competitive
advantage by offering an own feeder network from
Perth to 14 destinations in Australia
Facts:
Guest Lecture at Royal Aeronautical Society - 11 -©️ Linus Benjamin Bauer
QF9/10 Feeder Traffic from/to Heathrow (O&D Share in %)
Top10 Cities, 1st April 2018 – 31st March 2019
London Heathrow (LHR)
Perth (PER)
Images collected from: British Airways, Qantas and Envato
Sources: IATA PaxIS, OAG FlightAnalyzer, Deloitte,
British Airways, IAG, Office for National Statistics UK
Edinburgh (EDI)
Glasgow (GLA)
Belfast (BFS)
Manchester (MAN)Leeds-Bradford (LBA)
Newcastle (NCL)Dublin (DUB)
Cork (ORK)
Shannon (SNN)
Aberdeen (ABZ)
MAN-LHR-PER (9.6%) / PER-LHR-MAN (9.8%)
LBA-LHR-PER (4.0%) / PER-LHR-LBA (3.1%)
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%)
DUB-LHR-PER (7.5%) / PER-LHR-DUB (7.2%)
ORK-LHR-PER (3.4%) / PER-LHR-ORK (2.7%)
SNN-LHR-PER (1.1%) / SNN-LHR-PER (0.6%)
▪ Based on figures from the OAG Traffic
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
between Australian cities and London in
2018
▪ An additional reason for offering the very
limited amount of code-sharing feeder
traffic from the mega-hub airport Heathrow
to cities in the UK and Europe are the Gulf
carriers, offering more convenient one-stop
journeys between the UK/Europe and
Australia via their hubs in the Middle East
(e.g. Milan, Paris, Frankfurt)
Top10 Cities (O&D) ex/to Heathrow:
Facts:
Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer
Largest O&D Markets in Europe (ex/to Australia)
▪ 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
the cities in Australia and London
▪ Heathrow can be characterised as a large O&D market in the
long-haul sector
▪ 202 of the UK’s Top300 companies are headquartered within a
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
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Data and information collected from following sources: CAPA, Heathrow Airport, Qantas, FlightGlobal, Deloitte Access Report
©️ Linus Benjamin Bauer
Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer
Fare Benchmarking Analysis ex Perth
▪ 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
fleet does not contain First Class cabins
▪ 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 Business Class in AUD (PER-LHR-PER)
Return fares in Economy Class in AUD (PER-LHR-PER)
DAYS BEFORE DEPARTURE
©️ Linus Benjamin Bauer
©️ Linus Benjamin Bauer
Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer
Fare Benchmarking Analysis ex Heathrow
▪ 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
(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 Business Class in GBP (LHR-PER-LHR)
Return fares in Economy Class in GBP (LHR-PER-LHR)
DAYS BEFORE DEPARTUREDAYS BEFORE DEPARTURE
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
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 PER-LHR-PER)
Return fares in Economy Class in GBP (First month of LHR-PER-LHR)
Agenda
Guest Lecture at the Royal Aeronautical Society
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
©️ Linus Benjamin Bauer
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 controlImage collected from: EnvatoSource: In-house research conducted by Linus Benjamin Bauer
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)
Image collected from: EnvatoSource: In-house research conducted by Linus Benjamin Bauer
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 servicesImage collected from: EnvatoSource: In-house research conducted by Linus Benjamin Bauer
Agenda
Guest Lecture at the Royal Aeronautical Society
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
©️ Linus Benjamin Bauer
Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer
Study Parameters, Inputs and Assumptions
R-C-Model Scenario: Perth (PER) – London (LHR)
Images collected from: Qantas, Envato
▪ 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
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
London Heathrow (LHR)
Perth (PER)
Images collected from: Qantas and Envato
US$ 68.8m
Revenue
US$ 67.4m
Costs
Margin (%)
Route Profit/Loss
CASK (US cents)RASK (US cents)
Load Factor (%)
Breakeven LF (%)
RRPK (US cents)
CASK excl. Fuel
ASKs
RPKs
Frequency: 183
Capacity: 86,376
Passengers: 70,858
US$ 1.37m
2,00% 82,0%
79,8%
1,048,698,400
1,278,364,800
¢ 6,56
¢ 5,38 ¢ 5,28 ¢ 3,44
Source: R-C-Model Analysis conducted by Linus Benjamin Bauer
April 18 – September 18:
US$ 2.11/gallon
Jet Fuel Price:
Note: Figures highlighted above are not from Qantas
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*
* In a bottom-up approach, unit costs per passenger and frequency were modelled and calculated.
→ 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
©️ Linus Benjamin Bauer
Currency: US$
©️ Linus Benjamin Bauer
©️ Linus Benjamin Bauer
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)
©️ Linus Benjamin Bauer
Currency: US$
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)
Note: Figures highlighted above are not from Qantas
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
Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer
Monthly Load Factor Performance (April – September 2018)
Scenario: QF9/10 Perth (PER) – London (LHR)
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.
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
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
Image collected from: EnvatoSource: In-house analysis conducted by Linus Benjamin Bauer
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
Image collected from: EnvatoSource: In-house analysis conducted by Linus Benjamin Bauer
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
Image collected from: EnvatoSource: In-house analysis conducted by Linus Benjamin Bauer
Agenda
Guest Lecture at the Royal Aeronautical Society
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
©️ Linus Benjamin Bauer
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%
©️ Linus Benjamin Bauer ©️ Linus Benjamin Bauer
Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer
Sensitivity Analysis
Second Scenario
The second sensitivity scenario assumed a 42.2% rise in the jet fuel price from US$ 2.11 to US$ 3.00 per gallon
over a period/due to an unforeseen event and the actual load factor of 82% from the Revenue-Cost-Model
analysis.
Apart from not sufficient LFs (~78%) and fuel-
inefficient aircraft (e.g. A340-500), the high jet
fuel price (US$ 3.00 per gallon) between 2011
to 2013 led to the suspension of several ultra
long-haul routes, e.g. SIN-EWR/LAX (SQ) &
BKK-LAX/EWR (TG)
©️ Linus Benjamin Bauer
+ 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
Images collected from: Envato and Flightradar24 Source: In-house research conducted by Linus Benjamin Bauer
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
Images collected from: Envato and Flightradar24 Source: In-house research conducted by Linus Benjamin Bauer
Agenda
Guest Lecture at the Royal Aeronautical Society
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
©️ Linus Benjamin Bauer
Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer
Conclusion (1/2)
▪ 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
Guest Lecture at the Royal Aeronautical Society ©️ Linus Benjamin Bauer
Conclusion (2/2)
▪ 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
Image collected from: Envato
Guest Lecture at the Royal Aeronautical Society
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 Sydney Branch
University of Sydney Business School
Sydney, 6 May 2020
12:00 – 14:00 LT
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 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)
©️ Linus Benjamin Bauer