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Australian resource flying to further expand to east coast, possibly internationally in medium-term

Analysis

As Australia's domestic market shows signs of slowdown, increasingly presenting itself as an opportunity for mainline Australian carriers is flying for the booming resource sector. The resource industry flying has been heavily concentrated in Perth, where charter carrier with small aircraft sub-737/A320 size can effectively reach most of the state of Western Australia, where the majority of resource work occurs, although increasing amounts are in Queensland too.

But as Perth becomes saturated - from peak aircraft movements, housing availability and skilled labour - resource companies will be increasingly pulling from the country's more populous east coast. These distances place restrictions on existing charter carriers, creating the opportunity for Qantas and Virgin Australia to fill demand just as their traditional regular public transport markets are weakening. In a second phase of growth, resource flying could even be extended to Southeast Asia to tap that region's skilled labour pool, if Australian immigration policies allow.

Summary
  • The resource industry flying in Australia is shifting from Perth to the east coast due to saturation and restrictions.
  • Qantas has added a weekly return service between Sydney and Newman to cater to the resource demand.
  • Virgin Australia, with its alliance with Skywest, could also expand its presence in the resource traffic market.
  • Qantas and Virgin Australia are likely to pick up the east-west resource demand as their traditional domestic market weakens.
  • The challenge for carriers is segregating their premium product for corporate and resource traffic.
  • There is potential for further growth in Southeast Asia as the demand for skilled labor in the resource sector increases.

Qantas' Sydney-Newman route latest addition

An early sign of further resource flying from Australia's east coast is Qantas' addition of weekly return service between Sydney and Newman from 15-May-2012. From Perth, Qantas and Virgin already serve Newman, a resource town in the northern part of the state. Existing east-west resource routes include Qantas' Adelaide-Kalgoorlie and Brisbane/Melbourne/Sydney-Karratha services.

Qantas Sydney-Newman service: 15-May-2012

Route Departure Arrival Frequency Aircraft
Sydney-Newman 6:15am 9:30am Tuesday 737-800
Newman-Sydney 10:10am 4:10pm Tuesday 737-800

Additional routes from Qantas are likely while Virgin Australia could make larger forays in resource traffic. It does, however, have an alliance with Perth-based Skywest, which operates a single A320. The A320 can cross Australia whereas the F100, the aircraft of choice for resource-driven charter carriers, cannot. While resource flying is done at high margins, reflecting the high margins of the resource industry, the charter carriers operate thinly, obtaining used F100s very cheaply. There would be hesitation to expand into 737/A320 operations given the higher costs, amongst other factors.

That largely leaves Qantas and Virgin Australia to pick up any east-west resource demand. (Tiger and Jetstar are very unlikely to pick up any such traffic.) Both carriers are seeing their traditional domestic market weaken. How much capacity the carriers shift into resource traffic is not clear. Virgin Australia is growing yields following its transformation into a corporate carrier, and those yields could offset weakened demand. Qantas meanwhile is intent, so far at least, to match Virgin's growth to ensure it (with Jetstar) maintains a 65% market share. They may realise the benefit of adding high-margin services for the resource sector instead of lower-margin corporate traffic at a time of market softness.

See related article: Australian aviation market shows signs of slowdown just as airlines were enjoying yield premiums

A looming challenge for the carriers is segregating their premium product for corporate versus resource traffic. Currently the two segments utilise the same lounge, to the frustration of corporate traffic, which sees its needs and requirements for pampering higher. As resource traffic grows, the contestation is increasing.

Further growth could occur in Southeast Asia

The greater demand on east-west resource flying indicates opportunities for intra-WA flying are not as strong as they have been owing to available skilled labour drying up. The east coast represents new markets, but also looming is the potential of Southeast Asia. While resource companies enjoyed boom times, the boom is dipping and market salaries for resource work - skilled or unskilled - are growing rapidly. That could see the companies turn to Southeast Asia's lower-cost employment pool, although cooperation would be needed with the Australian government, with which the resource sector has not had the smoothest relationship with.

That would open opportunities for Asian carriers - as with east coast flying, WA-based carriers are typically range-limited - although this possibility is a medium-term one.

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