South Pacific Aviation Outlook 2018
Qantas embarks on a "transition year" for international; Air New Zealand returns another strong 1H profit as the South Pacific enjoys benign conditions.
AN OPTIMISTIC OUTLOOK pervades the direction of the two main airlines in the South Pacific region, Qantas and Air New Zealand. Following a record first half profit from Qantas and an expectation of a best ever full year result for Air New Zealand, all appears rosy in the South Pacific. Despite that, it remains an intensely competitive market, especially internationally.
Virgin Australia is meanwhile bedding down its Tigerair dual brand operation. After shedding its group executive - and apparent heir to the CEO role - John Thomas in Jun-2017, Tigerair CEO Rob Sharp was appointed to head the international and domestic operations, while longstanding group executive John Borghetti remains in his role.
The highly lucrative domestic Australian market is experiencing "continued capacity discipline", delivering substantial profitability - at least to the Qantas Group, which incorporates Jetstar. In the domestic market the group enjoyed a record half year EBIT of AUD1063 million (USD828.2 million) for the six months to 31-Dec-2017, up 12.0% on the previous period. Of that domestic accounted for AUD659 million (USD519 million), while international contributed a mere AUD220 million (USD173 million), down 5.5%. The Jetstar Group showed an AUD318 million (USD248 million) profit, up 15.6% year-on-year and, to illustrate the holistic nature of the group, Qantas Loyalty made a profit of AUD184 million (USD143 million), up 1.7%.
- Qantas and Air New Zealand are optimistic about their financial performance in the South Pacific region.
- Qantas Group's domestic market in Australia is highly profitable, while its international market is facing challenges.
- Virgin Australia is undergoing a transformation period and aims to achieve a small net profit in the first half of 2018.
- Air New Zealand is experiencing robust passenger demand and revenue growth, with plans to expand capacity by 6% in 2018.
- Both Australia and New Zealand are benefiting from inbound Chinese tourism, with China becoming Australia's largest tourism source in 2018.
- Smaller islands' airlines, such as Samoa Airways and Fiji Airways, face unique challenges in maintaining profitability and sustainability.
In both Australia and New Zealand, home market dominance continues to generate sound profitability. In Australia's case Qantas and Jetstar shape up with a joint 57% market share by capacity, against Virgin Australia and Tigerair's 38%. The role of Jetstar as part of the dual brand is better established than that of Tigerair's, but that is gradually ramping up, taking care not to rock the capacity boat too much.
In 2018, Qantas International is entering a "transition year". The Boeing 787 is joining the fleet (previous group aircraft have gone to Jetstar), the westbound network is reshaping as Qantas reverts to a Singapore hub for its own metal, flying through to London, while renewing the JV and codeshare with Emirates, which continues over Dubai. Reverting to the Singapore offshore hub allows Qantas to service onward Asian points more effectively, including linking into Jetstar Asia services. And there is the much heralded launch of the London-Perth nonstop service in Mar-2018.
Meanwhile, Qantas' loyalty programme has been exceptionally profitable. In 1H2017, it generated topline revenue of AUD763 million (USD594.4 million), a 2.7% year-on-year increase.
Virgin Australia, meanwhile, is in its "transformation" period, reducing its losses in FY2017, and regrouping as it works towards a new generation of leadership and achieving a small net profit in 1H2018 of AUD4.4 million (USD3.5 million), an improvement of AUD25.9 million (USD20.4 million) over the previous first half. For the Virgin Australia domestic business, which represents around 70% of the Group's activity, unit revenue increased by a healthy 8.8%, revenue load factor increased by 3.8 points to 81.4% and passengers carried increased by 1.0%, while capacity was reduced by 3.3%.
The airline falls under a holding company whose ownership has undergone turbulence over the past year as some of its various shareholders, Etihad Airways, Hainan Tourism Group, Nanshan Capital and Singapore Airlines (along with Virgin Group) have encountered their own headwinds. Air New Zealand also sold down, but all of this does not seem to have impacted directly on its operations.
Tigerair is now being fully integrated into the network, as it rationalises its route system and expands steadily.
Australia: Domestic airline market shares by capacity*
Virgin Australia Holdings' large foreign airline partner equity ownership means there is only a small free float on the Australian exchange. There had been speculation that the company would be taken private, but chairman Elizabeth Bryan advised in Feb-2018 that, "following discussions with the major shareholders, the Board has decided not to privatise the company". However, nearly two thirds of the 38,000 smaller shareholders hold parcels of less than AUD500 (USD393), so these investors will be offered the opportunity to "sell their shares at an appropriate price and in a convenient, cost effective manner".
New Zealand: Domestic airline market shares by capacity*
Virgin Australia too has a relatively positive outlook for the remainder of this financial year. CEO John Borghetti anticipates that "the Group's underlying performance for the second and third quarter of this financial year will continue to improve compared to the second and third quarter of the 2017 financial year".
This will undoubtedly be aided by both major airlines pruning capacity in the domestic market.
Air New Zealand is experiencing "robust passenger demand and revenue growth" according to chairman Tony Carter in Feb-2018. Like Qantas, the airline dominates the domestic market, but with a much greater share of the smaller market. Qantas Group's Jetstar continues to expand its domestic market share slowly, but Air New Zealand has aggressive plans to again expand capacity by 6% in 2018. This is underpinned by "the domestic market continu(ing) to show strength driven by the New Zealand economy as well as inbound tourism", according to CEO Christopher Luxon.
For the six months to Dec-2017, Air New Zealand showed a net profit of NZD232 million (USD166 million), down 9% year-on-year. A 21% increase in fuel costs, to NZD470 million (USD335 million) was a main contributor to the slight downturn. Qantas, with its different hedging profile showed only a 4% fuel cost increase. By contrast, Qantas' non fuel costs increased by 6%, compared with Air New Zealand's 2%.
Both Australia and New Zealand have benefitted from inbound Chinese tourism.In 2017, Chinese inbound tourism accounted for 15% of Australia's arrivals for a total of 1.4 million, while they accounted for 11% of New Zealand's, at 418,000. In each case, their trans Tasman tourism continued as the #1 destination, although China is likely to become Australia's largest tourism source in 2018. Australia has no less than eight Chinese airlines flying directly as of Feb-2018 - although over half of all Chinese visitors arrive via third country airlines.
Visitor arrivals to Australia by market for 2017
Visitor arrivals to New Zealand by market for 2017
Happily, most other markets are also performing well, as a continuing low fare regime encourages travel to and within the region. On trans Pacific routes, the market is dominated by three groups, United Airlines-Air New Zealand, Delta Air Lines-Virgin Australia and Qantas-American Airlines. The US Department of Transportation's tentative rejection of an expanded Qantas-American "joint business" proposal is being appealed by the pair.
Samoa, after decades of heavy loss making with a government owned national airline, enjoyed several years of a joint venture with Virgin Australia - operating as Virgin Samoa - but ambitiously decided to terminate the relationship as of Dec-2017, with support from Fiji Airways. According to a government release, the decision to launch Samoa Airways in Nov-2017 was taken as the country "can no longer rely on others to determine our destiny in terms of air travel, we can no longer sit back and let others dictate to us what's best for our people and this country". The airline was supported by Fiji Airways in its establishment and will codeshare with the Fijian flag carrier. Samoa's Prime Minister Tuilaepa Lupesoliai Dr Sailele Malielegaoi said that by having its own airline, Samoa will create employment and contribute to economic growth via increased exports and tourism. Determining that destiny will come at a price, unless Fiji Airways can work some magic. Previous incarnations of the airline managed to accrue losses as large as the national GDP.
The ambiguous and demanding role of smaller islands' airlines was well summed up by Fiji Airways chief marketing officer Marc Cavaliere, in Aug-2017, observing that the airline's "business model lies in between a national developer and a national network carrier… it's imperative we find a way to be self dependent... As a company we have to be self sustaining to deliver a net contribution not a draw on the national treasury".
The airline has had a rocky relationship with part owner Qantas in recent years, but has recently established a codeshare agreement with Jetstar Airways and Jetstar Asia, covering services between Fiji and New Zealand and Fiji and Singapore, as well as New Zealand domestic routes, effective 01-Feb-2018. This builds on an interline agreement with the Jetstar Group, signed in May-2016 and an expanded codeshare agreement between Fiji Airways and Qantas signed in early Nov-2017.
As Fiji Airways evolves from its 737-800 fleet to 737 MAXs (through sale and leaseback), it will be launching a new route, Nadi-Tokyo in Jul-2018 with its A330 aircraft.
Overall the relatively benign conditions project another good year for the airlines (and airports) of the South Pacific.
Although market conditions are competitive and fares generally low, profitability should accompany solid traffic growth.