Australia-India air travel market grows rapidly but SE Asian hubs hinder nonstop services

Indian visitor numbers to Australia have increased by 50% in three years

Australia attracted approximately 242,000 Indian resident visitors in the year ending 30-Jun-2016 (FY2016), according to Australian Bureau of Statistics and Tourism Australia data. India visitor numbers grew 9.4% year-over-year, broadly matching the 10% growth in total visitor numbers.

Visitor numbers from India have grown over 50% since FY2013, when Australia reported approximately 160,000 Indian resident visitors. India is now the ninth largest source market for Australia's tourism sector- slightly ahead of Hong Kong and slightly behind South Korea.

The surge over the last three years coincides with the launch of services to Australia by Air India. Air India re-entered the Australian market in Aug-2013 with daily flights on a triangular routing combining Melbourne and Sydney. It currently operates four weekly 787-8 flights from New Delhi to Sydney and three weekly 787-8 flights from Delhi to Melbourne.

Air India has contributed to the growth but has only a small share of the total market

Air India carried approximately 142,000 passengers to and from Australia in calendar 2015, according to Australia BITRE data. This included approximately 77,000 inbound passengers from India to Australia with an average inbound load factor of 85%, and approximately 65,000 outbound passengers from Australia to India with an average outbound load factor of 71%. 1H2016 data shows a similar trend, with Air India averaging an inbound load factor above 80% for most months, but a significantly lower outbound load factor.

However, Air India accounts for a relatively small share of total Australia-India passengers and only approximately half of the total growth experienced by the Australia-India market since its Australia launch. Air India accounted for 11% of total Australia to India bookings in the year ending 30-Jun-2016, according to OAG Traffic Analyser.

The total number of Australia-India bookings has increased by nearly 30% - from approximately 440,000 one-way passengers in FY2013 to nearly 560,000 one-way passengers in FY2016. Since it carried 64,000 of the 560,000 Australia to India passengers in FY2016 Air India has accounted for approximately half of the total growth in the market since FY2013.

Australia to India bookings: FY2013 to FY2016

Note: based on one-way passengers from Australia to India
Source: CAPA - Centre for Aviation and OAG Traffic Analyser

Singapore Airlines is the Australia-India market leader by a wide margin

A majority of Australia-India passengers continues to fly between the two countries via intermediate hubs. Singapore has historically been the most popular intermediate hub between the two countries, followed by Kuala Lumpur and Bangkok.

Singapore Airlines (SIA) accounted for 41% of total Australia-India bookings in FY2016, according to OAG Route Analyser data. Malaysia Airlines accounted for approximately 16% while Thai Airways accounted for just under 11% - slightly less than Air India's share.

Australia-India passengers by airline (% of bookings): year ending 30-Jun-2016

Note: based on one-way passengers from Australia to India
Source: CAPA - Centre for Aviation and OAG Traffic Analyser

SIA has benefitted from the overall growth in the Australia-India market and has not lost market share as a result of Air India's entrance. SIA Australia-India bookings increased 28% from FY2013 to FY2016, enabling the airline to maintain a 41% share of the market as the total market grew by a similar amount.

Malaysia Airlines and Thai Airways remain large players but have lost market share

Malaysia Airlines and Thai Airways have lost market share - not surprising given that they have been restructuring. Malaysia Airlines' Australia-India bookings dropped 14% from FY2013 to FY2016, resulting in an 8ppt drop in market share from 23% to 15%. Thai Airways' Australia-India bookings dropped 8%, resulting in a 4ppt drop in market share from 15% to 11%.

The 11% of the market picked up by Air India as it launched nonstop services essentially came at the expense of Malaysia Airlines and Thai Airways. However, Malaysia Airlines and Thai Airways remain relatively large players in the Australia-India market and continue to pursue traffic in this market aggressively.

A small number of Australia-India passengers - approximately 6% - backtrack via the Gulf on Emirates, Etihad and Qatar Airways. Cathay Pacific and China Eastern also attract a small number of Australia-India passengers via their North Asia hubs - 5% and 3% respectively.

Guangzhou and Hong Kong offer slightly more circuitous routes compared with Southeast Asian hubs but are much more convenient than the Gulf hubs. Cathay Pacific, and particularly China Southern, have a smaller presence in India compared with their Southeast Asian rivals - which explains their much smaller share of the Australia-India market.

Singapore's domination to continue as Scoot enters Australia-India market

In FY2016 approximately 45% of Australia-India traffic transited in Singapore. This includes the 41% share from SIA and Qantas' 4% share - Qantas routes most of its India passengers via Singapore, where it connects with its codeshare partner Jet Airways. Qantas and Jet are now seeking approval to also codeshare via Bangkok but Singapore will remain the main intermediary hub for Qantas offline services to India as Qantas serves four Australian cities from Singapore while it only serves Sydney from Bangkok.

Singapore Changi is well positioned to maintain its leadership position in the Australia-India market. SIA's long haul low cost subsidiary Scoot launched services to India in late May-2016, providing a new competitively priced one-stop option in the Australia-India market.

Scoot will likely account for a large chunk of the anticipated growth, rather than take away market share from its parent, which continues to rely on India connections for its large (and still growing) Australia operation.

Scoot has been serving Australia since its 2012 launch but did not have its own flights to India until May-2016, and initially did not have any connecting product with its sister airlines SIA or Tigerair. Even when a connection product with SIA and Tigerair was launched, the product attracted very few passengers due to marketing and IT issues. In FY2016 Scoot accounted for only 1% of total Australia-India bookings.

As CAPA has previously observed - Scoot is banking heavily on Australia connections for its new services to Amritsar, Chennai and Jaipur. Chennai-Australia is particularly a target market for Scoot as Chennai is a much larger market from Australia than Amritsar and Jaipur. Chennai also has more frequencies - from Scoot and sister SIA Group airlines - making it easier for Scoot to offer Chennai-Australia connections.

See related report: Scoot begins new phase of strategic expansion for the SIA Group: three new routes to India

AirAsia and Malindo to drive Australia-India growth for Kuala Lumpur

Kuala Lumpur International Airport (KLIA) is also well positioned to grow its already strong share of Australia-India traffic due to new LCC options provided by AirAsia.

AirAsia X resumed services to Delhi in Feb-2016 and is now heavily promoting connections between Australia and Delhi. AirAsia X previously served Delhi and Mumbai, but dropped both routes in early 2012, and at the time did not promote a connecting product. Nearly half of all AirAsia X passengers now connect in Kuala Lumpur to other AirAsia X or AirAsia flights.

For several years the AirAsia Group has offered connections from Australia to southern and eastern India, where its short haul subsidiary Malaysia AirAsia currently serves seven destinations. But these are all much smaller markets from Australia than Mumbai and Delhi - and in some cases are miniscule.

AirAsia now has the only LCC product from Australia to Delhi, the largest market in India from Australia. AirAsia X is keen to resume Mumbai but currently there are no available traffic rights to Mumbai for Malaysian carriers.

See related report: AirAsia Part 4: AirAsia X pursues turnaround. Delhi to add to Honolulu & Sapporo as new routes

Lion Group's Malaysian JV, Malindo Air, is also now offering a new competitively priced option from Perth to Australia. Malindo launched services to Perth in late 2015 and serves six cities in India, including Delhi and Mumbai. Malindo will likely expand its Australian network over the next few years with a heavy reliance on connections to India.

LCCs bring new lower fares to Australia-India market

Malindo is a full service airline yet sometimes offers fares only slightly higher than LCCs. Malindo's fares from Perth to Delhi for travel in Oct-2016 now start at approximately USD600 return, including taxes.

AirAsia X's fares between Perth and Delhi start at approximately USD400 return, including taxes. SIA and Malaysia Airlines offer Perth-Delhi fares starting at approximately USD700 return, including taxes.

From the much bigger Melbourne to Delhi market, AirAsia X fares for travel in Oct-2016 start at approximately USD500 return. Air India fares for its nonstop product start at approximately USD800 return, while SIA and Malaysia Airlines offer fares from approximately USD700.

Scoot currently does not sell tickets from Australia to Delhi or Mumbai. For the time being Scoot only offers flights from Australia to eight smaller Indian cities served by Tigerair or Scoot. As Scoot's interline with SIA and SilkAir is expanded to include more markets, more Australia-India connections are likely.

Perth-Chennai fares on Scoot for travel in Oct-2016 now start at approximately USD400 return, while Melbourne-Chennai fares start at approximately USD500 return. AirAsia fares in these markets start approximately USD100 higher for travel in Oct-2016. SIA and Malaysia Airlines fares for Melbourne-Chennai and Perth-Chennai start at approximately USD700 return.

Singapore Airlines has a huge competitive advantage

SIA has the advantage of offering the largest network in both Australia and India.

SIA has five destinations in Australia (soon six with the launch of Canberra) and six destinations in India. The SIA full service regional subsidiary SilkAir provides SIA with another two destinations in Australia and another five destinations in India that are also not served by the parent airline.

SIA also has more frequencies than competitors in all the main markets for Australia-India traffic. SIA currently has four daily flights to Melbourne and Sydney, 17 weekly frequencies to Mumbai, and two daily flights to Delhi.

Malaysia Airlines remains a strong competitor

Malaysia Airlines currently serves five destinations in Australia and five destinations in India.

Malaysia Airlines reduced its Australian presence significantly in Aug-2015, with a 40% capacity cut and suspension of Brisbane services. However, Malaysia Airlines still has twice daily flights to Melbourne and Sydney - the main markets for India.

The restructured flag carrier's new business plan heavily relies on regional connections within Asia Pacific from Australia, including India, to offset significant reductions on the Kangaroo route from Australia to Europe. Malaysia Airlines has dropped all of its European destinations except London.

The twice daily product to Melbourne and Sydney is critical because it enables Malaysia Airlines to continue offering convenient one-stop connections between Australia and India in both directions. AirAsia X also has two daily flights in these markets but only has four weekly flights to Delhi, and none to Mumbai. Malaysia Airlines currently has one daily flight to Delhi and two daily flights to Mumbai.

Thai Airways to increase focus on Australia-India connections

Thai Airways also offers twice daily flights to Melbourne and 11 weekly flights to Sydney. It has four destinations in Australia which happen to be the four largest markets for Australia-India traffic.

Thai Airways has six destinations in India, including 19 weekly flights to Delhi and 10 weekly flights to Mumbai.

Thai Airways recently adopted a new strategy focusing more on regional connections within Asia Pacific. The group plans to expand in India, with potential new routes to secondary cities to be operated by its full service regional subsidiary Thai Smile. Australia-India traffic will be a target as Thai Airways expands in India.

Australia-India traffic is spread out across several Indian cities

Tourism Australia and other government agencies in Australia are now lobbying for more direct flights to Australia. However, intense competition from Southeast Asian airlines - both full service and low cost - will make it hard for any airline to justify new nonstop flights in the Australia-India market.

The Southeast Asian airlines have the capacity in both Australia and India to cater to increased demand for Australia-India traffic - and have ideally located hubs for Australia-India traffic. Most significantly, Southeast Asian airline groups have the networks to cater to all significant Australia-India city pairs.

The biggest Indian gateway for Australia-India traffic is Delhi, the base that Air India uses for its nonstop services to Melbourne and Sydney. However Delhi only accounts for just under 40% of all Australia-India bookings, according to OAG Route Analyser data for the year ending 30-Jun-2016.

Mumbai accounts for approximately 15% while nearly half the market is spread out across several smaller Indian cities. Australia is unlikely to attract nonstop services from any of these other Indian cities. But collectively they account for a large volume of passengers.

Australia-India bookings based on destination city in India: year ending Jun-2016

Source: CAPA - Centre for Aviation and OAG Route Analyser

A relatively large share of Australia-India traffic is also heading to cities other than Melbourne and Sydney. But again it is unlikely that any of these Australian cities can attract nonstop services from India.

Melbourne and Sydney each account for approximately 35% of total Australia-India bookings. Brisbane and Perth each account for approximately another 10%. Secondary cities account for the remaining 10%.

Australia-India bookings based on Australian city or origin: year ending Jun-2016

Source: CAPA - Centre for Aviation and OAG Route Analyser

More Air India capacity to Australia is justified but unlikely

Australian airports are certainly keen to attract more, or new, nonstop services from India.

More capacity from Air India is probably the most feasible scenario. Air India has performed fairly well in Australia, particularly since it ended the initial triangle routing and began operating separate nonstop flights to Melbourne and Sydney in May-2015.

There now seems to be sufficient demand to upgrade both the Melbourne and Sydney services to daily. However more capacity for Melbourne and Sydney is not currently a priority for Air India, which is focusing more on launching new long haul destinations.

Jetstar or Qantas could struggle to justify India services

Services to India from Jetstar or Qantas seem relatively unlikely. Qantas, which served Mumbai via Singapore until 2012, could potentially move the stopover of one of its London flights from Dubai to Delhi or Mumbai (used previously as an intermediate point by Qantas). Qantas is now assessing new options for stopping one of its two daily London flights, but selecting an East Asian airport is more likely.

Jetstar is expected to free up some of its 787-8s over the next couple of years as A320neos replace 787-8s on Australia-Bali routes. Jetstar is assessing several options for these aircraft and India may be in the running. However, there are several other potential routes for Jetstar's limited 787 fleet - particularly China.

The reality is that it will be difficult for any Australian or Indian airline to compete against Southeast Asian airlines.

The Australia-India market will continue to grow, but Southeast Asian airlines are much better placed to capture this growth.