RESURRECTION AT ROYAL BRUNEI?

Royal Brunei Airlines (RBA) has survived several near busts in the last decade, but Dermot Mannion, the man charged with the carrier’s corporate revival, is determined to improve its financial fortunes.

by CHIEF CORRESPONDENT, TOM BALLANTYNE  

October 1st 2015

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Royal Brunei Airlines is one of the most secretive airlines in the world when it comes to financial transparency. But you don’t need to be a company insider to recognize the carrier is under siege from nimble budget airlines and full service rivals with better networks. Read More »

To counter this fierce competition, RBA recently completed a restructuring and is now writing a five-year plan the company’s CEO and deputy chairman, Dermot Mannion, hopes will improve RBA’s long-term financial viability.

Deputy chairman and CEO Royal Brunei Airlines, Dermot Mannion: “the elephant in everybody’s room is the Gulf carriers. During the restructuring, the best way to compete with them was not to compete with them”

Mannion told Orient Aviation in Sydney recently: “Restructuring is a never-ending story. That’s the challenge. In this industry, you go through one restructuring program and sign that off. The next morning you get up and ask: ‘well, what’s next’? And what’s next is seeking to grind more cost out of the business.” The latest plan is scheduled to be put before Brunei’s government and shareholders next month.

But discussions about the new strategy don’t include details of the airline’s balance sheet for analysts’ scrutiny. When it comes to money matters all lips at RBA are sealed. No details of the financial performance of the carrier, wholly-owned by Brunei’s oil-rich government, effectively the Sultan of Brunei Darussalam, are published.

What is known is that RBA has flirted with fiscal failure. Industry analysts said it continues to lose money, though not nearly as much as it did during its darkest days after the GFC of 2008.

It was then, in 2009, that Brunei’s Ministry of Finance brought in Mannion to lead a restructuring of the carrier. The trained accountant had a solid track record, having spent 15 years with Emirates Airline, rising to be president of group support services before leaving to take charge of Aer Lingus.

At the Irish flag carrier, he floated the company on the London and Dublin stock exchanges and defended two hostile takeover bids from Ryanair. His reputation for achieving strong cash flow, improved productivity and low unit costs was just what RBA needed.

Mannion did not take long to right-size the airline. He reduced staff by 25%, to 1,500, and eliminated costs of $100 million in five years. The route network was rationalized, with services to five of its 18 destinations cancelled: Auckland, Perth, Brisbane, Kuching and Ho Chi Minh City.

The next step along the RBA road is the new business plan, designed to run from April next year to March 2021. It will build on expansion of RBA’s regional network and extend to partnerships in Gulf Cooperation Council (GCC) countries.

Operating a fleet of four B787-8 Dreamliners on long-haul routes and four A320s and two A319s regionally, RBA will add up to 10 A320neo as it returns to routes it had closed when times were bad.

Mannion said: “Now we are better able to compete with the LCCs in the regional market and the full-service airlines on long haul. Sixty per cent of seats in Southeast Asia are on LCCs. Either we compete in that market or we withdraw from it altogether.

“We compete well with AirAsia and Cebu Pacific. On long haul routes, we have introduced the B787 and offer a unique B787 service between London and Australia. The challenge is identifying profitable opportunities. One has to be honest and say that in the current market that is a very, very difficult challenge indeed.”

Nevertheless, Mannion sees opportunities around the region, especially in China. RBA flies to Hong Kong and Shanghai from Brunei’s capital, Bandar Seri Begawan, and he said there is considerable scope to expand in both cities.

“A very important development that will soon come to fruition is a codeshare with China Eastern Airlines, which will open up many of the behind points in China. It is critically important to us. That’s not a market we have had access to in the past,” he said.

“We have been developing, because of the limited size of the Brunei market, a very successful two centre product. Passengers from China spend a couple of days in Brunei and go on to Kota Kinabalu, which is the fastest growing destination in Malaysia.

“We have a very big presence there, with 14 flights a week. More recently, we returned to Bali and there are very attractive passenger opportunities there from China.”

RBA considers Brunei, with a population of about 400,000 that enjoys the world’s fifth highest GDP per capita, is well positioned, midway between the region’s north and south, to attract transit traffic.

“We also have an airport where there is little congestion and also offers growth opportunities. It’s a relatively easy airport, with its refurbished terminal, at which to operate and transit,” Mannion said.

Long haul, RBA has switched to Melbourne from Brisbane as part of its network restructuring. It flies Brunei-London via Dubai and directly to Jeddah in Saudi Arabia. “We made decision in 2010, early in my tenure, to focus very much on the 787,” he said.

“We are probably the only airline in the world whose long-haul services are exclusively B787. So if you want to fly between London and Australia and you like the B787, we’re the only ticket in town. It’s been a great success.

“Previously, we used the B777-300ER. Just on fuel burn alone we are doing 30% better than we were with the 777 fleet. That’s been a tremendous boost to the overall product. We have four in the fleet, with another one to come. We don’t have a definite delivery date yet. It will be sometime in the next couple of years. So that’s pretty modest in terms of where we are going on long haul.”

RBA also is using the B787 selectively, at peak times, to increase capacity to short-haul destinations such as Hong Kong, Singapore and Shanghai.

“A challenge in China is that tourism is heavily driven by groups. There will be days when there is potential demand for a large number of passengers. To cater for it, we need a bigger gauge aircraft. Again, the B787 is a very good performer regionally and internationally. That aspect of fleet management has been a bonus,” he said.

Mannion, as a former Emirates Airline senior executive, said: “the elephant in everybody’s room is the Gulf carriers. During the restructuring period, we decided the best way to compete with them was not to compete with them.

“It is difficult to keep off their radar, but we certainly try. We are not ruling out anything we might do on long-haul, but we are being very cautious. The fact we have just one more long haul aircraft to be delivered is probably an indication of that.”

'The challenge is identifying profitable opportunities. One has to be honest and say that in the current market that is a very, very difficult challenge indeed'

Dermot Mannion CEO and deputy chairman Royal Brunei Airlines

Regionally, apart from Kota Kinabalu and Bali, RBA flies to Manila, Bangkok, Kuala Lumpur, Singapore, Jakarta and Surabaya. It returned to Ho Chi Minh City last year after a long absence.

Much of RBA’s focus will be on increasing frequencies on existing regional routes. Expansion will come once the A320neos begin arriving from late 2017. He said: “Very soon we will have, long-haul and short-haul, one of the most modern and fuel-efficient fleets in the world. I think we’ve got it right. We’re certainly very happy with the selection of the 787 and we are very optimistic the A320neo is right.

“With the A320neo you can potentially go five or six hours, which traditionally was a wide-body aircraft service. The neo gives us the potential to expand to North Asia. We could not do that with our former fleet.

“We have tended to dip a toe in the market by initially operating charter services at peak times of the year. We did this with Seoul. There is certainly potential for charters into Northern Asia. They could be a springboard for greater activity.”

Like many airlines, RBA is benefitting from the fuel price collapse. “The fuel situation has been positive, but in the airline industry it’s never only good news,” he said.

“The currency has been a challenge. The Singapore dollar, to which we are linked, has depreciated against the US dollar. The Brunei economy is heavily oil and gas-based, which has had an adverse effect in the local market.

“We don’t hedge. Our view and our owner’s view is that Brunei has a huge oil and gas exposure that creates a natural hedge for us. In my previous life, I have been involved in hedging strategies and it’s a difficult game.

“It is very merciless if you get it wrong. When the fuel price falls the market expects adjustments almost straight away. It is very unsympathetic to long-term hedging arrangements that might be in another direction.”

Freight is also very vital to RBA’s recovery. “We decided early in my time here we didn’t know as much about freight as we should. We outsourced that part of the business to Air Logistics, which is the fifth largest air logistics company in the world. They’re doing a very good job and are very bullish about potential in China. So we are working with them to deliver that potential.”

One issue that Mannion is ambivalent about is global alliances. “My sense is we probably don’t have the scale to be in an alliance. For smaller carriers the costs of joining [an alliance] can be disproportionate to the benefits, especially the IT integration costs,” he said.

“We work on bilateral arrangements all the time. We have very flexible code-share agreements with Thai Airways International and Garuda Indonesia. We will look at interesting and useful bilateral relationships whenever they arise. When I arrived, we had relatively few bilateral relationships. We have dramatically expanded that.”

In the meantime, RBA is making progress in its goal of becoming a “boutique” full-service carrier in a region capable of taking on all comers.

As a recent report from consultancy CAPA put it: “RBA still faces huge challenges and is a long way from profitability. But the flag carrier has improved significantly in the last three years while most of its competitors in Southeast Asia have seen profitability decline.”