13-Jun-2013 8:02 PM

Wellington International Airport plans NZD300million runway extension to attract long-haul services

Analysis

Wellington International Airport (WIAL) plans to extend its existing 2,000 metre runway by 300 metres so as to allow New Zealand's capital city to attract direct long-haul services to Asia and North America using the Boeing 787 and Airbus A350.

The airport argues its geographic position at the centre of the country, and the nation's domestic hub, means it is well placed as a third international gateway to Auckland and Christchurch. Based on its research the airport says sufficient numbers of passengers already fly to Auckland to connect with onward long-haul services to sustain a daily direct service to an Asian hub.

The exponential growth forecast from Asian markets combined with the lower operating costs and improved performance of new generation widebody aircraft are likely to make direct services to secondary destinations like Wellington a more viable proposition by the end of this decade, reducing the financial risk of extending the runway which could not have been contemplated a decade ago. Nonetheless, risk it is. But the rewards are (potentially) high.

Summary

Wellington International Airport plans to extend its runway by 300 metres to attract direct long-haul services to Asia and North America.
The airport argues that it is well placed as a third international gateway to Auckland and Christchurch due to its geographic position and domestic hub status.
The exponential growth forecast from Asian markets and the lower operating costs of new generation widebody aircraft make direct services to secondary destinations like Wellington more viable.
Wellington Airport has received local government support for the NZD300 million runway extension project, which is expected to take five to seven years to complete.
Wellington is New Zealand's highest yielding international market but is currently under-served, with limited international connections to Australia.
Wellington's catchment area accounts for over 433,000 long-haul trips per year, with potential demand for direct services to Asia and North America.

A risk equation that goes well beyond conventional forecasting, as the step-change 787s and A350s arrive

The equation here is an intriguing one. There is a much-derided - but in reality not always misguided - principle of "build it and they will come"; many countries are consequently littered with white elephant airports, thanks to a combination of this and the political principle of pork-barrelling to buy votes. Then there is an alternative, whose outcome is much easier to predict - don't build it and they won't come.

And here is where the risk analysis comes in, as a necessary first step.

As a basic commercial practice, it is always desirable from an airport's point of view for supply to lead demand, that is, to build adequate capacity to allow for future growth. Beyond that goal, more practical forces come into play; someone has to pay for that additional space. Capital commitments require funding well ahead of the time the capacity comes into operation. Airlines are generally the major contributors to airport revenues out of which these commitments must be made. They understandably are reluctant to pay for the development of facilities they may never use.

That has become a well-chewed bone of contention between the two sides. Almost every airport and its stakeholders goes through this sequence constantly.

The Wellington proposition takes this a step further. Forecasting future demand, based on recent history, is a relatively straightforward process; but projecting demand where a step change is involved adds a whole new dimension. And that is where Wellington Airport finds itself now.

The introduction of Boeing's 787 Dreamliner, to be followed by Airbus' A350 types (the first test flight is on 14-Jun-2013), certainly create a step change in the way airline route planning can occur. The smaller aircraft, with long haul capability, can fly non-stop between smaller points with similar economics to larger aircraft - whose larger number of seats to fill require them to fly between hubs where they can aggregate traffic flows. For this reason, Boeing originally described the Dreamliner as a "hub-buster".

The point is well illustrated, at least in theory, by the first-announced proposed service. Back in May-2010, Continental Airlines said it would start service between Houston and Auckland in late 2011. Subsequent delivery delays and the merger of Continental with United got in the way of that, but the seed was sown.

Wellington's NZD300 million runway extension receives local government support

This is where Wellington Airport, with an existing 1936m runway that can only accommodate short-medium haul operations, sees an opportunity to join the long haul league. The NZD300 million (USD236 million) project has the support of the Wellington City Council which has voted in favour of paying NZD1 million (USD787,000) towards the two-year resource consent process, matching the airport's contribution.

WIAL is 66% owned by Infratil, which also owns Glasgow Prestwick Airport and Kent International through holding company Infratil Airports Europe. The Wellington City Council owns the remaining 33% of WIAL.

Under the proposal the runway would be extended to the north into Wellington's Evans Bay. If approved, construction is expected to take five to seven years to complete. Economic research firm BERL calculates the potential economic benefit of the project at more than NZD113 million (USD89 million) per year through increased tourism and improved trade access for the region.

WIAL points to Wellington being New Zealand's highest yielding international market, but is under-served, with international connections currently limited to trans-Tasman services to Australia.

Just three airlines, Air New Zealand, Virgin Australia and Qantas offer services from Wellington to Sydney, Brisbane and Melbourne. The route is in effect a duopoly as Air New Zealand and Virgin Australia operate a metal neutral alliance on the Tasman.

Wellington routes (seats): 10-Jun-2013 to 16-Jun-2013

Wellington capacity (international seats per week) by all carriers: 10-Jun-2013 to 16-Jun-2013

Wellington capacity (seats per week) by all carriers: 10-Jun-2013 to 16-Jun-2013

WIAL processes more than five million passengers per year from a catchment area of 1.1 million people covering the lower North Island south of Lake Taupo, as well as the top of the South Island.

Wellington, New Zealand's capital city and seat of government, has a population of 490,000 in its regional metropolitan area and boasts the country's highest GDP, higher average wages and a significantly lower cost of living than Auckland and Christchurch.

The government spends about NZD200 million a year on travel, and a number of corporates and institutions are either headquartered in the city or maintain some head office functions there. As a result business travel accounts for 15% of the Wellington market compared to 12% in Auckland and just 7% in the more leisure oriented Christchurch market.

All this could make Wellington an attractive proposition for a long-haul carrier prepared to take the first mover advantage, even if that requires initially launching services via Australia or Auckland before the runway is extended.

Wellington's catchment accounts for over 433,000 long-haul trips per year

Airport analysis of Statistics New Zealand and Sabre data shows OD traffic from Wellington's catchment totalled more than 433,000 in the 12 months to Feb-2013. Of this, Asian markets accounted for nearly 146,000 trips and Europe about 147,000 trips. About 115,000 trips were made to and from North America with the United States making up nearly 89,000 of those.

Britain is by far the catchment area's biggest single inbound and outbound market with about 29,000 visitor arrivals in the year to Feb-2013, while nearly 51,000 residents from the region travelled to Britain in that time.

The challenge for WIAL will be to convince tourists to switch their arrival or departure point to Wellington instead of the traditional gateways at Auckland or Christchurch. WIAL sees itself as a potential alternative gateway to the South Island including the resort town of Queenstown. The compact city has a number of tourist attractions as the home of New Zealand's film industry as well as the national museum,Te Papa, and a large wine industry within an hour's drive.

Wellington Airport has a strong outbound catchment

The Wellington business community has pushed hard for long-haul services to be established to provide a much needed economic boost for the region.

WIAL's catchment area also has a strong outbound market with residents making about 290,000 long-haul international trips in the year to Feb-2013 including about 166,300 residents from the Wellington region and a further 123,000 residents from the wider catchment area.

Of the total trips made by residents about 106,000 were to and from Asia, about 93,600 to Europe and 71,600 to the United States.

WIAL says more than 50% of Australian demand in the wider catchment area already connects via Wellington, suggesting that direct long-haul services could receive similar support.

However, Wellington will at best attract a direct link to just a single hub in Asia and North America. That compares to about dozen direct options available from Auckland, including Asia's four biggest hubs as well as Los Angeles in the United States.

A direct service to a Southeast Asian hub such as Singapore, Kuala Lumpur or Bangkok - all of which offer a multitude of onward connections to Asia as well as to Europe, the Middle East and Africa - would be most beneficial to WIAL. Hubs further north, in particular China, would require extensive back tracking for most markets.

Singapore Airlines is seen as Wellington Airport's ideal long-haul service provider

Singapore Airlines (SIA), which has orders for 70 Airbus A350s, is at the top of WIAL's wish list. SIA's hub is ideally placed at the southern tip of Asia and is a member of the dominant Star Alliance grouping which would appeal to the members of Air New Zealand's loyalty scheme (although both Air New Zealand and Singapore Airlines also each have substantial shareholdings in Virgin Australia, which itself is likely to commence Singapore directs with its Boeing 777s).

New Zealand system capacity share (seats) by alliance: 10-Jun-2013 to 16-Jun-2013

Air New Zealand could potentially seek to codeshare on a SIA service from Wellington, improving the route's viability. Air NZ does not compete on the Auckland-Singapore route. But any long-haul service from Wellington will draw passengers from SIA's existing New Zealand services including its daily Singapore-Christchurch operation.

Air NZ would also be concerned that another link to Asia and Europe would impact on its Auckland-Los Angeles-London service as well as its daily Shanghai offering and Hong Kong which it now serves twice daily in a codeshare partnership with Cathay Pacific. In addition Air NZ benefits from feeding nearly all long-haul passengers to and from its Auckland hub through its extensive domestic network.

See related reports:

North American market offers a high yield opportunity

WIAL believes the North American market also presents a high yield opportunity for a competitor to Air NZ given the 115,000 trips per year made between the airport's catchment and North America.

Air New Zealand operates the Auckland-Los Angeles route two or three times daily through the year. One of those frequencies goes on to London. The carrier has had a monopoly on direct services to North America since Qantas pulled off the Auckland-Los Angeles route in May-2012.

WIAL says Qantas picks up a considerable amount of premium traffic associated with Wellington's film industry as the only carrier offering business class service between the city and Los Angeles via Australia despite adding about three hours to a one-way journey. Air New Zealand offers only economy services between Auckland and Wellington, while the only other option is Qantas LCC subsidiary Jetstar.

A direct trans-Pacific link would also allow a carrier to capture the market without competing directly for the point-to-point demand out of Auckland. "Being the only game in town is a huge advantage," a WIAL executive told CAPA.

Average long-haul fares from Wellington are up to 50% more expensive

WIAL calculates that the lack of direct long-haul services has resulted in average premium long-haul fares from Wellington being between 30% and 50% higher to Asia and North America respectively, compared to Auckland and Christchurch. Average economy fares are also significantly higher from Wellington to Asia, Europe and North America than the two main gateways.

While direct long-haul services may continue to attract a premium, at least for some destinations, it is likely average fares will reduce along with a contraction in yields as Air NZ competes more aggressively to attract passengers in the region via its Auckland hub.

Emirates could operate Melbourne-Wellington with a 777-300ER

A longer runway could also lead to increased trans-Tasman services and competition by encouraging fifth freedom operators with larger widebody twin engine aircraft to enter, according to WIAL.

Three long-haul carriers operate on the Tasman under fifth freedom rights - Emirates, China Airlines and LAN Airlines.

Emirates has stated it will consider adding Wellington to its trans-Tasman network if the runway is extended. Emirates already operates 28 weekly services on the Tasman route including three times daily to Auckland from Sydney, Melbourne and Brisbane. It also flies daily from Sydney to Christchurch. These services are operated by a mix of A380s and 777-300ERs. While the A380 could not operate from Wellington's extended runway, the 777-300ER will be able to, according to WIAL.

Emirates does currently park a Boeing 777-300ER at Melbourne for just over 10 hours awaiting its return flight to Dubai via Singapore, according to Innovata schedules. However, this is more than two hours short of the time needed to make a trans-Tasman crossing.

If Emirates were able to adjust the schedule to allow for a Wellington service the 777-300ER would add 370 seats each way on the Melbourne route. A daily Emirates service would double the average number of seats available per week on the underserved route, to about 5,000 one-way seats per week. Such an increase would significantly reduce fares and yields on the Wellington-Melbourne route, including those of alliance partner Qantas. WIAL estimates that average fares for the Tasman from Wellington are about 20% higher than from Auckland and Christchurch due to the lack of competition, including no LCC services.

But Emirates would add significant premium seat capacity, including seven first class and 42 business class seats to a route which is currently served exclusively with 737-800 and A320 equipment. Only Qantas offers business class.

In addition the 777-300ER would provide 18 tonnes of freight capacity to a market that moves just 1,500 tonnes per year due to the lack of widebody operations. This is despite WIAL's catchment area producing 30% of New Zealand's GDP in 2007.

Wellington fits Qatar Airways' strategy of serving secondary markets

Rival Gulf carrier Qatar Airways could also eye Wellington as an attractive fifth freedom destination rather than entering the highly competitive Auckland routes. Qatar and New Zealand signed an air services agreement earlier in 2013, clearing the way for trans-Tasman services. Qatar Airways currently operates daily from Doha-Perth and Doha-Melbourne.

The carrier has a strategy of operating to secondary airports in markets already served by Emirates. However, both its existing Australian services would need to be retimed to allow a Tasman crossing.

Long-haul air services from Wellington possible by 2020

According to the study, the large number of trips to and from the Wellington catchment area suggest that a ready market exists for a daily long-haul service to Asia if the airport extends its runway.

Given the lengthy time frame to construct the facility, combined with massive influx of tourism and trade forecast to occur from Asia, the proliferation of next generation aircraft like the 787 and A350, should allow Wellington to attract its sought after long-haul operation.

Risks still exist, including stiff competition from the much larger Auckland hub and home to the national carrier, Air New Zealand, as well as a range of foreign flag carriers able to offer one stop direct links to multiple Asian and Pacific Rim hubs.

But if enough passengers from the country's second largest long-haul catchment can be convinced to swap an Auckland transit for a transit at a single Asian hub, long-haul services from Wellington could well become a reality by the end of the decade.

A lot will happen over the remainder of this decade. Airline liberalisation is changing the face of the industry, new partnerships are skewing the way people now fly and new technology is constantly altering the route planning landscape - for example, it is a combination of ultra-long haul aircraft + liberalisation + new airlines that have allowed the Gulf carriers to have startlingly altered the shape of global aviation.

All of these forces have tended to support the role of hub-to-hub operations, as large aircraft are required on these long routes. The new "hub-busters" are likely to provide some changes to this pattern as they become more numerous later in the decade.

But so also are new partnership and airline route plans. Qantas' oneworld partner, American Airlines for example is currently reportedly considering entering the US-New Zealand market, which would reinforce Auckland's hub role across the Pacific. Then again, by 2020, it is highly probable that Emirates and other Gulf carriers, and probably even Singapore Airlines, will also be crossing the Pacific in partnership with their various allies.

It is pretty certain that if Wellington doesn't extend its runway it won't have the opportunity to play in the long haul league. But a decision to go ahead involves some challenging - yet potentially extremely rewarding - choices. Today's aviation environment is sufficiently volatile to allow some bold bets to be made. Assessing risk amid this volatility is another issue.