COMPETITION, FUEL COST PRESSURE AIR PACIFIC: But airline goes ahead with ‘Dreamliners’

(Islands Business, August 2006)

Almost two years after low-cost airlines made their incursions into the South Pacific, Fiji’s international carrier, Air Pacific, believes it has taken the right action to meet competition head-on.

Meeting competition head on... prompted Air Pacific to purchase five wide-bodied Dreamliners.

“Yes, we believe we made the right choice by remaining a full service airline and although we have evaluated the possibility of spinning off some aircraft or converting Air Pacific into a no-frills product, we have taken the decision to remain full service.

“We believe our customers recognise the value we offer,” said Air Pacific’s CEO John Campbell.

“The low-cost or no-frills airlines are certainly aggressive competitors. But they primarily focus on cherry-picking established routes rather than doing any pioneering work.

“The experience we have is that they do not grow markets at any greater rate than the rate of growth present before they came in.

“There is merely a shift in market share and a significant level of predatory behaviour.”

Campbell’s confirmation of Air Pacific’s decision to remain a full service airline comes as the Fijian carrier announced the placement of orders for five wide-bodied Boeing 787-9 Dreamliners with purchase rights for three others.

The 320-seat aircraft will operate in two-classes, business and economy. Five aircraft will commence service in 2011 and 2012.

Air Pacific says the total cost of the five B787 will be in the vicinity of US$900 million, with each costing about US$180 million.

“This is a momentous decision for Air Pacific that has taken many months of detailed study and negotiations,” said the airline’s outgoing chairman Gerald Barrack.

“I am pleased with the price negotiated and the certainty this decision provides for Air Pacific, for the future of air transport links within the Pacific and, particularly, for the future growth of Fiji’s tourism and export industries.”

The aircraft will be fitted to provide full service including wireless in-flight entertainment to serve all routes currently operated by Air Pacific’s wide-bodied fleet including Auckland, Brisbane, Melbourne, Sydney, Los Angeles and Tokyo.

In addition, the B787-9s will provide for expanded non-stop services.

The aircraft has the capacity to uplift up to 22,000 kilogrammes of freight, dependent on the distance flown and passenger-load. It will use 20 percent less fuel for comparable operations than similarly sized airplanes while travelling at speeds similar to today’s fastest commercial planes.

Fuel consumption is under close scrutiny by Air Pacific because of continuing rise in oil prices and the intense competition on all routes. With jet fuel price nearing the US$100 mark, Campbell said the high fuel cost is causing extreme pressure.

Airlines like Air Pacific are finding it difficult to maintain viability in the current fuel climate, especially because competitive pressures do not allow them to increase fares or add further fuel surcharges.

“In response to the cost pressures, we are resisting attempts by suppliers to increase prices where we cannot see justification for doing so.

“We negotiate powerfully for all purchases and demand value for money and we certainly are in no condition to pay for unjustifiable or unjustified cost increases particularly to monopoly providers such as airports.

“Unfortunately, external assistance or relief opportunities are non-existent because we are a totally commercial enterprise.

“We cannot go to government for protection nor for subsidies and have to manage these challenges as best we possibly can.”

After striking a A$16 million before tax profit in its latest financial year, the airline says fuel bill chewed up 35% of its total expenditure. Its profit dipped by 40% from the previous financial year and the airline said a flat local tourism market didn’t help.

“We believe that Fiji hotels have enjoyed a boom for the last couple of years and as consequence have been raising rates to levels that mean that Fiji is losing its competitive positioning versus other Asia and Pacific destinations,” Campbell told ISLANDS BUSINESS.

“The industry and the airlines were hit by adverse (media) reporting in the lead-up to Fiji’s election (last May) and confusion over the introduction of a turnover tax.

“But we believe the prime driver for the shortfall in bookings is a loss of value for money status relating primarily to hotel accommodation, food and beverage charges.

“At a time when airlines have reduced airfares dramatically and are struggling to break-even, we know that many hotels are making windfall profits. We have no problems with running the business at a profit, in fact it is essential to facilitate investment. But we are concerned that putting up prices dramatically is killing the ‘goose that lays the golden egg,” Campbell said.