Virgin returns Haneda allocation sparking expedited IASC process

Last Friday, 6 September 2024, Virgin Australia applied to the International Air Services Commission (IASC) to revoke their authority to utilise Australia’s 3rd daily Haneda slot allocation, following the cancellation of their Cairns-Tokyo Haneda service.

While Virgin announced the cancellation in July, the formal notification is neccessary so that the allocation can be made available to other Australian carriers and ensure that Australia doesn’t loose access to it. This will ensure that the new operator will have sufficient time to begin services to Haneda immediately following Virgin’s withdrawal on 24 February 2025.

To ensure this the IASC acted rapidly. Yesterday, 10 September 2024, it invited applications and indicated that they will conduct an expedited process, intending to make a decision by 10 October.

It is somewhat inevitable that the 3rd daily Haneda slot allocation will be awarded to Qantas given Virgin’s decision to return the slot rather than seek an alternative use of the slots. Furthermore, no other carriers would appear likely to meet the technical and operational requirements to operate to Haneda.

So where and how will Qantas utilise the slot? Let’s delve into it and see what to expect from Qantas’s IASC application.

Why the fuss about Haneda?

Australia and Japan entered into an open skies agreement in 2011, allowing unlimited capacity between the countries, with one exception: Tokyo’s Haneda Airport! While airlines are free to fly any number of flights between any international airport in Australia and airports in Japan, including Tokyo’s Narita Airport, Haneda is carved out for seperate treatment.

Haneda has been Tokyo’s primary airport since the 1950s and is conveniently located in Tokyo Bay. Since the 1950s, the rapid growth in air travel led Haneda becoming congested. In 1978, international flights were moved to the newly built Narita, located 60km east downtown Tokyo, leaving Haneda handling only domestic flights.

Fast forward two decades. Two additional runways were built on reclaimed land in Tokyo Bay in 1997 and 2000, allowing a significant expansion of Haneda’s capacity. This enabled a limited number of international flights to Haneda. It’s relative convenience to Tokyo makes it more popular with travellers and combined with the scarcity of capacity generates an implicit yield premium compared to Narita.

However, slots for international flights are limited with a fixed number allocated during specific periods. Unusually, international slots are allocated to countries as part of bilateral air services agreements. There have been several expansions of international slot access at Haneda in recent decades.

The first major expansion was in 2008, when International “nighttime” were made available (departures and arrivals must occur between 10 pm and 7 am). One daily slot pair was allocated to Australian carriers as part of the 2011 open skies agreement (Japan granted one slot pair for Japanese carriers to utilise to Australia). The allocation doesn’t guarantee a slot and operators are still subject to the normal slot allocation and management procedures, subject to availably at the requested times.

Furthermore, the allocation of the rights are not managed by Japan, but rather the partner country. Like other air rights, Australia’s allocation is managed by the IASC who allocated the “nighttime” slot pair to Qantas in 2014 as no other carriers contested the application. The authority is valid until 2029 after being renewed in 2019 and 2024.

In 2019, 50 more daily slot pairs were made available by Japan for International flights, of which half were to be assigned to foreign carriers. Australian carriers were granted two additional slot pairs, as were Japanese carriers. Unlike the original allocation, these additional slots aren’t limited to “nighttime” use, rather for use during “daytime” hours.

The IASC opened a new allocation round in 2019 which saw applications from both Qantas and Virgin. Qantas applied for both slot pairs, while Virgin applied for only one slot pair. After conducting an extensive process, the IASC allocated one to each carrier. Qantas’s 2019 application provides extensive detail regarding their intentions for the slots. It’s worth reviewing as it sheds light on its likely intentions for the 3rd slot pair.

Qantas’s 2019 application

Prior the 2019 expansion, Qantas operated overnight flights in each direction between Sydney and Haneda, with the aircraft spending 17 hours on the ground at Haneda. This configuration was partly determined, but not necessitated, by the “nighttime” slot limitation at Haneda, with both the arrival and departure at Haneda being limited to between 10 pm and 7 am. Rather then seek a very early morning departure from Haneda, the overnight flights were well-timed for connections on both ends.

The very long ground time at Haneda came at a cost including low aircraft utilisation. This was tolerated as strong yields overcame higher costs. Furthermore, utilisation of the older B747-400 on the route generated a smaller opportunity cost than other aircraft types with less demand for its utilisation on competing routes.

NS 2018

QF25 SYD HND 21:35 05:00+1
QF26 HND SYD 22:00 09:30+1

NW 2018-19

QF25 SYD HND 21:50 05:15+1
QF26 HND SYD 22:00 09:35+1

In its 2019 application to the IASC, Qantas sought the allocation of both additional “daytime” slots. They indicated their intention to utilise one on a 2nd daily Sydney-Haneda flight and the 3rd on a Melbourne-Haneda flights (replacing their existing Melbourne-Narita flight). This would result in a net increase in one flight per day.

Qantas
BNE-NRT: 5-7 per week (A330-300)
MEL-NRT: 5-7 per week (A330-300)
SYD-HND: daily (B747-400)
SYD-KIX: 3-4 per week (A330-200/300)

Jetstar
CNS-NRT: 5-7 per week (B787-8)
CNS-KIX: 4-7 per week (B787-8)
OOL-NRT: 4-7 per week (B787-8)

The 2nd Sydney flight was aligned with a significant network reconfiguration. Firstly, Qantas was planning to retire the B747-400 that operated on the route in late 2020. As Qantas are unable to operate the A380 to Haneda, the replacement aircraft will be smaller. The 2nd Sydney flight partially offsets the lost capacity from the retirement of the B747-400s. However, the cost of leaving the replacement A330 or B787 on the ground for 17 hours exceeds the benefit of the overnight flights. However, by utilising the “nighttime” and “daytime” slots in a coordinated manner they can dramatically reduce aircraft ground time at Haneda. It’s actually incredibly clever!

Previously, QF25 would arrive at Haneda in the early morning and only return to Sydney as QF26 late that evening. QF25 maintains its early morning arrival (utilising the same “nighttime” arrival slot) but instead QF now returns immediately (QF26), utilising the “daytime” departure slot. The second flight (QF59) arrives in the evening, utilising the “daytime” arrival slot, before its immediate turnaround as QF60 utilising the “nighttime” departure slot.

The aircraft are rotated through Haneda using the countervailing slot pairs. One aircraft arrives with “nighttime” arrival slot and departs with a daytime” departure slot, while the other aircraft arrives with a “daytime” arrival slot and departs with a “nighttime” departure slot. This solution means that each aircraft limits the ground time at Haneda to approximately two hours each rather than the 17 hours under the previous schedule and significantly increases aircraft utilisation. For only 50% more aircraft time, it gets double the number of flights.

Nighttime slots:
QF25 SYD HND 21:05 5:55+1
QF60 HND SYD 22:00 8:45+1

Daytime slots:
QF59 SYD HND 11:10 20:15
QF26 HND SYD 7:55 18:35

Furthermore, the new schedule provides both overnight and daytime flights in each direction, giving customers more choice and flexibility.

Northbound schedule:
QF59 SYD HND 11:10 20:15
QF25 SYD HND 21:05 5:55+1

Southbound schedule:
QF26 HND SYD 7:55 18:35
QF60 HND SYD 22:00 8:45+1

Why did Qantas favour Melbourne ahead of Brisbane?

Qantas provided a strong motivation of their choice in their application to the IASC. This was especially interesting since their own data showed that Queensland was the most popular destination in Australia for Japanese visitors. While Victoria was a larger source for Australian residents traveling to Japan, the relative popularity of Queensland to Japanese visitors outweighed this making Queensland (and New South Wales) the largest markets between Australia and Japan by some margin.

Qantas already provided substantial capacity on routes between Queensland and Japan. As indicated earlier, in addition to mainline services between Brisbane and Narita, Jetstar had a substantial presence with Cairns-Narita, Cairns-Osaka, and Gold Coast-Narita (now Brisbane-Narita). This capacity serves the large volume of leisure travellers from Japan to Queensland.

Meanwhile, Qantas argue that unlike Queensland’s leisure focused traffic, Victoria-Japan held a stronger business market and was more suited to Haneda’s “skew towards premium passengers”. In their own words:

“Victoria is the second largest market to/from Japan for business purpose travel, reflecting close corporate ties with Japan. There are more than 170 Japanese companies across a wide range of industries currently operating in Victoria, generating demand for a direct Haneda service, which would be popular with business travellers due to its downtown Tokyo location. For these travellers, Haneda is a more convenient option, saving up to one and a half hours on the airport commute compared to Narita.”

Another argument they advance is the network advantaged provided by Melbourne. Specifically, they argued that Melbourne provided better connectivity and capacity to regional Victoria, Tasmania, and South Australia, compared to existing services to/from Sydney or alternative services to/from Brisbane. Meanwhile, connectivity to regional Queensland that Brisbane would provide is negated by existing direct services to Cairns and Gold Coast.

How anything changed since 2019?

How likely is it that Qantas’s forthcoming proposal will follow the 2019 application and once again propose utilising the 3rd slot pair for Melbourne-Haneda? On the assumption that not much has changed since 2019 then the answer is a straightforward yes. But 2019 seems a very long time ago. One global pandemic later and a lot has changed!

Firstly, Qantas’s partnership with Japan Airlines was blocked by the ACCC in 2021. This limits Qantas’s ability to utilise codeshare capacity for domestic connections to/from Haneda, something that was highlighted in their 2019 application. Qantas can can still utilised this capacity on interline tickets but it limits their ability to control pricing on itineraries beyond Haneda. It’s somewhat of a competitive disadvantage but applies equally to all Qantas flights to/from Haneda. This may affect the choice between Brisbane and Melbourne if one would be less or more dependent on that connecting traffic.

Secondly, the dynamics of the Australia-Japan market have evolved. Tourist demand from Australia to Japan has surged on the back of the weak Yen, while recoveries in tourist demand from Japan to Australia been slow to recover after the pandemic. We briefly touched on this in a chart of the week last month.

Chart of the Week #3: Where are Australians traveling?

It’s difficult to assess how this might meaningfully affect the choice between Melbourne and Brisbane. It’s not clear that these changes are sufficient or meaningful enough (relative to the original reasoning) to favour Qantas changing course.

Thus, it appears most likely that Qantas utilise the 3rd daily slot to Haneda from Melbourne, switching the daily Melbourne-Narita flight.

Other options including Brisbane-Haneda or a split Brisbane/Melbourne flight seem unlikely as less than daily service may undermine yield generation on both routes (e.g. alternating Melbourne-Haneda operating 3-4 times per week and Brisbane-Haneda on the remaining days; and Melbourne-Narita and Brisbane-Narita operating on alternating days).

There are also some outrageous options although their viability is questionable. The most intriguing would be routing the 3rd flight via Auckland (e.g. Brisbane-Auckland-Haneda). While technically a fifth freedom flight, it would seek to sell the legs independently. This would be an intriguing prospect given Air New Zealand’s lack of Haneda access. However, it’s likely on shaky legal grounds under bilateral agreements, despite the Australia-Japan open skies agreement and Australia-New Zealand single aviation market. And this isn’t even getting into the New Zealand-Japan bilateral air services agreement. Nonetheless, it’s a provocative option in light of Qantas’s recent willingness to challenge Air New Zealand on their own turn. For example, see out recent analysis of Qantas’s Sydney-Auckland-New York flight.

How much of a hub is Auckland to Qantas?

We won’t have to wait long though as the IASC plan to complete the process by 10 October. And before we forget, remember that the allocation is not route specific, meaning that Qantas are free to change their mind at any time! So what may start as Melbourne can change at any time.