26-Aug-2013 10:00 AM

Australia's air market readjustment accelerates as AUD shifts promise changes in travel patterns

Analysis

Australia's outbound market has continued to strengthen while its inbound market has been relatively stable in recent years.

Australian residents took a record 8.4 million short-term trips overseas in the financial year ended 30-Jun-2013, according to the Australian Bureau of Statistics (ABS), up from 8 million trips in 2012 and nearly three times the number from 10 years ago when 3.3 million short-term departures were recorded.

This growth has been largely driven by Australia's strong resources fuelled economy, with a high AUD making international travel more appealing for Australians compared to a domestic holiday. The recent substantial fall in the AUD has not yet had time to make its effects felt at the consumer end, but the approximately 15% fall against the USD since Apr-2013 (and against those currencies linked to the USD) will be causing pain to airlines whose reliance on Australian outbound traffic is high.

Despite the AUD losing ground however, there appears to be little lessening of appetite for Australians to travel - at least in the short term.

Summary

Australian residents took a record 8.4 million short-term trips overseas in the financial year ended 30-Jun-2013, driven by a strong resources-fueled economy and a high AUD making international travel more appealing.
Asian destinations make up six of the top 10 international destinations for Australian travelers, with Indonesia (mainly Bali) being the biggest market, followed by Thailand and China.
Despite the fall in the AUD, Australians continue to travel overseas and are even borrowing to do so, indicating a strong appetite for international travel.
Foreign airlines operating to Australia are not experiencing a drop in demand and, in some cases, are seeing demand increase, although average yield has fallen when stated in USD.
Qantas' capacity share in the Asian market has declined, while AirAsia X has become Australia's fourth-largest foreign carrier.
China is Australia's second-largest inbound market and third-largest outbound market, with Qantas expanding its codeshare agreement with China Eastern Airlines to improve access to major cities in China.

Australian resident short-term departures reached record levels in FY2013

Asian markets make up six of the top 10 international destinations in FY2013 (to 30-Jun-2013), with Indonesia the biggest market largely due to holidaymakers to Bali which makes up about 80% of all traffic to Indonesia, followed by Thailand. China comes in third as Chinese carriers rapidly add capacity to the market.

Together the Asian destinations in the top 10 account for nearly 33% of all outbound traffic from Australia.

Australian resident short-term departures financial years

Singapore experienced the highest growth rate of any Australian outbound market with an extra 46,000 Australians visiting the city state in FY2013, up 16%. Thailand also grew by 28,000 visitors, an increase of 5% while an extra 10,300 travelled to China and another 6,900 to Malaysia, representing 3% growth for each of those markets. Hong Kong, however, was down 5,300 or 2% and Indonesia was almost flat.

More than 80% of Australian outbound travel is for holiday and VFR

Of the Australian's headed overseas for a short trip, 58% did so for a holiday followed by 23% to visit friends and relatives (VFR) and 10% for business.

On the flip side, short-term visitor arrivals also grew slightly to a new record of 6.3 million in FY2013, but their number has remained relatively stable in recent years.

Australia has been a net outbound market for short-term travel since FY2007 as the strong AUD on the back of the commodities boom made international holidays more affordable.

Australian resident short-term departures (trend and seasonally adjusted)

Australian resident continue to travel despite a lower AUD and will even borrow to do so

The AUD has devalued about 15% or AUD0.14 since Apr-2013 when it was trading at about AUD1.05 and hit a peak of AUD1.10 in Jul-2011.

AUD/USD: 25-Aug-20008 to 19-aug-2013

But despite reducing household consumer confidence as the economy slows, Australian residents are continuing to travel overseas and are even prepared to borrow to do so.

Commonwealth Bank of Australia chief economist Michael Blythe told the CAPA Australia Pacific Aviation Summit in Sydney on 08-Aug-2013 that one of the fastest growing forms of personal lending currently is for overseas travel, pointing, he said, to a gap between people's perception and reality.

This helps to explain why a number of foreign airlines that operate to Australia, both from Asia and North America are not experiencing a drop in demand, and in some cases are seeing demand increase, although average yield has fallen when stated in USD.

The fall in the value of the AUD is benefiting Australian carriers by reducing operating costs that are not denominated in USD. But it could also potentially reduce the incentive for foreign airlines to add large amounts of competing capacity on routes to Australia. The high dollar allowed foreign airlines to benefit from sales made in Australia when they exchanged that revenue into other currencies.

Foreign airlines have no plans to reduce Australian capacity

But foreign carriers who attended the CAPA Australia Pacific Conference poured cold water on the prospect of pulling capacity from the market in response to the falling currency.

Some in fact, including Hawaiian Airlines, stated that their Australian routes remained profitable with increasing load factors and yields despite the currency movements. Hawaiian Airlines VP of planning and revenue told CAPA TV: "We have found the passenger volumes have not dropped off even though the currencies have come off quite a bit. So long as we can keep moving the passenger volumes up . . . and have the proper cost structure these are still profitable routes."

Hawaiian is not only happy with the performance of its Australian operations, it is even prepared to grow them, Mr Watterson said.

AirAsia X CEO Azran Osman-Rani agrees, stating that while the decline in the currency could lead to a softening in outbound demand from Australia, it may also stimulate inbound traffic as an Australian holiday becomes more affordable for Asian travellers. "So far we have not seen any material changes and even with big swings in AUD in recent years there have not been any major shifts in travel patterns."

Melbourne Airport CEO Chris Woodruff is less confident, telling CAPA TV that the effect of the lower AUD will be felt over the next few years. "We are going to see the impact of a lower AUD. I think the hot growth we have all experienced in outbound Australia travel will ease off a bit. I think it will remain strong, but we won't see the high growth rates".

High inbound growth rates to Australia would continue from most Asian countries, according to Mr Woodruff. But Australia must negotiate more liberal bilateral agreements in advance of capacity requirements with key markets such as China, Hong Kong and Malaysia, which are either fully taken up or are close to capacity. Airlines need certainty 18 months to two years out that they can fly their planes to Australia, Mr Woodruff said.

Asia is Australia's biggest market

Southeast Asia is Australia's largest market by seats and together with Northeast Asia account for nearly 460,000 seats per week.

Australia international capacity (seats) by region: 19-Aug-2013 to 25-Aug-2013

While New Zealand is the biggest single market, accounting for nearly 20% of Australia's international capacity, Singapore has the greatest Asian capacity followed by the UAE, the US and Indonesia and Malaysia.

Thai Airways has increased capacity from 12,641 seats in Aug-2012 to 14,211 in 2013 as the carrier seeks to take advantage of the rapid growth in the Australia-Asia market. Thai dominates the route with Emirates as the closest, but distant, competitor with just 2,590 seats, followed by Qantas, Jetstar and Virgin Australia.

Australia international capacity (seats) by country: 19-Aug-2013 to 25-Aug-2013

Qantas continues to cut Asian capacity as AirAsia X moves in

But while Asia is Australia's biggest single market and also its biggest growth market, Qantas' capacity share by seats has declined from about 13% in Mar-2013 to 9.7% in Aug-2013. This will reduce further to as low as 8.9% in Jan-2014 as the flag carrier implements its new Asian strategy following the commencement of an extensive alliance with Emirates, which saw Qantas move its hub for European operations from Singapore to Dubai.

Over the same period that Qantas' market share declines, AirAsia X will increase its market share from a little under 7% to 11.5% by the end of 2013 as the LCC becomes Australia's fourth largest foreign carrier by dedicating nearly all of its additional capacity to its biggest market for the remainder of the year.

Singapore is Australia's biggest Asian outbound growth market, driven by the Singapore Airlines and Virgin Australia alliance

While Singapore is Australia's fourth largest outbound market to Asia, accounting for 332,000 trips in FY2013, it is the market with the highest growth, gaining 16.4% during the year.

The market is dominated by SIA which formed a formidable partnership with Virgin Australia in 2011, providing SIA with the long sought after feeder traffic from the Australian domestic market which the carrier regards as its backyard. In return, Virgin Australia codeshares on SIA's mainly Asian network as part of its strategy to operate a near virtual long-haul network through alliance partners that also include Etihad and Delta Air Lines.

The alliance has seen SIA increase capacity to Australia by about 17% in the year to Jul-2013.

The Qantas-Emirates alliance has freed up Qantas to reshape its Asian network

Qantas' alliance with Emirates and the resulting switch of hubs for westbound traffic from Singapore to Dubai has freed up Qantas to focus on reshaping its Asian network and return it to profitability. In the process Qantas has made extensive capacity and scheduling adjustments to its services over Singapore which are no longer dictated by European connections and have instead been retimed to optimise onward Asian connections, in particularly for business customers.

While the move has resulted in an overall 25% reduction in seats Qantas operates to Singapore, the capacity now terminating at Singapore has increased by about 40% allowing Qantas to more effectively compete against Asian carriers, including SIA, in the fast growing Australia-Asia market which is much more closely aligned to Australia and the airline's economic future.

In addition Qantas codeshares on Emirates' daily flights to Singapore from Melbourne and Brisbane, both of which continue on to Dubai, effectively giving the alliance partners double daily frequencies on both routes. Qantas also codeshares on Emirates' Sydney-Bangkok and Melbourne-Kuala Lumpur services.

Qantas has become the smallest competitor between Perth and Singapore

Remarkably, Qantas will become the smallest of the four carriers on the Perth-Singapore route in Dec-2013 when its 2,079 one-way seats per week - down from about 4,000 seats in Mar-2013 - will be overtaken by Tigerair which is doubling capacity to 2,520 seats compared to May-2013. As a group however, Qantas is responding to the Tigerair challenge as Jetstar adds 1,080 seats to 2,340 seats.

SIA, however, has stepped in to fill the void left by Qantas by ramping up capacity to 8,288 one-way seats on the route from 6,022 in Aug-2012. SIA's Perth capacity increase is part of a broader push which has seen the carrier increase total frequencies to Australia from 108 per week in Nov-2012 to 123 in Sep-2013 as its seeks to leverage its deeper relationship with Virgin Australia and compete with Qantas and Emirates.

Australia to Singapore (seats per week, one way): 19-Sep-2011 to 9-Feb-2014

China has grown to become Australia's second largest inbound and third-largest outbound market

China is Australia's second-largest inbound market after New Zealand, but has also grown to be the third-largest outbound market, albeit still some distance behind Indonesia and Thailand.

Four Chinese carriers compete on the China-Australia route with Qantas, offering a combined 19,540 one-way seats per week. The route has been steadily growing and will reach a new capacity record in Nov-2013 when it reaches 25,189 driven largely by China Southern adding 3,491 seats.

Australia to China (seats per week, one way): 19-Sep-2011 to 9-Feb-2014

Qantas expands its codeshare agreement with China Eastern

As part of its broader strategy to strengthen its Asian presence, Qantas significantly expanded its codeshare agreement with China Eastern Airlines in Apr-2013, which is also its JV partner in Jetstar Hong Kong, improving access to major cities in China and meeting strong demand for business travel.

Under the expanded arrangement Qantas codeshares on China Eastern's daily Melbourne-Shanghai as well as Sydney-Nanjing-Beijing services, which operate three times weekly and China Eastern's domestic Shanghai-Nanjing services.

The expanded codeshare arrangements mean Qantas has access to a combined 17 direct services between Australia and mainland China each week with onward connections via Shanghai to 11 domestic destinations.

Qantas also has codeshare services on China Eastern services between Singapore and Shanghai, with connections to Qantas services operating from Sydney, Melbourne, Brisbane and Perth.

But Qantas will need to find partners other than its LCC Jetstar affiliates to build its Southeast Asian network. This is its key strategic goal as the Asian market refocus continues.

Hong Kong capacity has declined despite bilateral

Total capacity between Australia and Hong Kong has declined since Dec-2011 when a total of 32,900 one-way seats were offered, to 28,500 seats per week in Aug-2013. Bilateral capacity on the route of 70 weekly frequencies has been fully taken up by Cathay Pacific, which is now is being prevented from further expanding its services to Australia due to stalled bilateral negotiations.

Most of the decline in seats is due to Cathay which has reduced capacity by 3,034 seats per week since Dec-2012 to 19,110 in Aug-2013, including from Sydney, Melbourne, Brisbane, Perth and Cairns.

Qantas has also withdrawn nearly 1,400 seats over that time to a total of 7,177 seats in Aug-2013, primarily as a result of dropping its daily Perth-Hong Kong link in Mar-2013. This was partly offset by an increase in frequencies from Brisbane to Hong Kong which went from four weekly services to daily. Qantas overtook Cathay as the dominant carrier by capacity on the Brisbane route in Jul-2013.

Qantas has also announced it will increase capacity on its daily Sydney-Hong Kong service with the introduction of a fifth weekly A380 service from 28-Oct-2013 replacing one of the three 747-400 services. The change will add 123 seats to the route for a total of 3,019 one-way seats per week and only replace a fraction on the 1,138 seats withdrawn from the route in Mar-2013.

Qantas has applied to regulators to allow Jet Airways to codeshare on its Hong Kong route

Qantas has applied to the International Air Services Commission for permission to allow Jet Airways to codeshare on the Hong Kong route. Qantas operates a total of 22 frequencies per week to Hong Kong and has capacity allocations for 25 frequencies per week.

Jet Airways' decision to partner with Qantas rather than Virgin Australia is interesting in light of Etihad taking a 24% shareholding in the Indian carrier in Apr-2013. Etihad also has an Australia-Europe alliance with 10%-owned Virgin Australia.

Australia to Hong Kong (seats per week, one way): 19-Sep-2011 to 9-Feb-2014

Bali keeps Indonesia as the top Australian outbound market to Asia

Indonesia, and more specifically Bali, is the number one Asian holiday destination for Australians, accounting for some 26,000 one-way seats per week in Aug-2013 of which 81% operates to Bali. Garuda Indonesia, Jetstar Airways and Virgin Australia each operated about a quarter of the total capacity to Bali, with AirAsia X is not far behind with 22%.

By far the biggest route is Perth-Bali with 11,300 seats per week, but the biggest capacity growth to Bali has been from Brisbane where seat numbers have increased 71% to 2,700 per week with the launch of daily 737-800 services by Garuda in Aug-2013 in competition with Virgin Australia. Darwin-Bali capacity has grown 53% with the return of Indonesia AirAsia, but the 1,962 seats on offer are still well short of the 3,000 seats that were available before Indonesia AirAsia withdrew from the route in Apr-2012.

Garuda has ramped up capacity between Australia and Indonesia to 10,295 seats in the week of 19-Aug-2013 to 25-Aug-2013, up from 8,541 at the same time in 2012 and will build this to 11,039 in Nov-2013.

Australia to Indonesia (seats per week, one way): 19-Sep-2011 to 9-Feb-2014

Australia's will need to adjust capacity settings on Asian markets as the outlook shifts

The previously high AUD and the long running strength of the Australian economy has resulted in an imbalance in favour of outbound to inbound travel from the country. This in turn has attracted foreign carriers keen to take advantage of the exchange rate benefits of selling fares in Australia, improving the economics of the market.

In the near term it appears outbound demand will be sustained, with the expectation that there will only be a small reduction in the number of Australians flying internationally.

Meanwhile, neither of Australia's major international airlines has achieved a clearly developed Asian strategy. Qantas is in the throes of readjusting its Singapore hub timings to be more appropriate for Asian connections, where previously most of its capacity was dedicated to Europe-Australia service. Virgin Australia, with its Singapore Airlines partner (and part owner) has not yet been able to establish an attractive Asian pricing structure or north Asian partnership.

As with the capacity limited Hong Kong market, regulatory settings may have to be adjusted along with the direction of airline strategies. If the two Australian airlines are to become competitive in Asia, their government's air services negotiators will probably be kept busy with bilateral talks over coming months.

Australia, on the lip of Asia, is well positioned to attract new inbound traffic flows as the AUD weakens, at the same time as Australian travel patterns shift towards the north. All of this suggests some substantial shifts in airline focus - Australian and foreign - as currency and other factors force realignments.