24-Jan-2020 10:45 AM

Bushfires, economy and now Wuhan slash Australia's air travel

Analysis

In Australia, it seems "it never rains, but...". The widespread bushfires ravaging much of Australia's south and east coasts follow years of drought, rendering the usual expression incongruous.

For Australia's aviation (and tourism) the damage had already started in 2019, as a slowing economy and reduced competition hobbled air travel growth, both domestically and internationally.

Then the widely publicised fires across many hundreds of thousands of hectares of bushland, right into many popular tourism destinations, caused a sudden and much steeper drop; international tourists stayed away and many domestic travellers changed plans, right at the height of the domestic holiday season.

Now, with memories of 2003's catastrophic SARS impact almost faded from memory, the threat of an animal-originated pandemic rears its head again - just as the massive Chinese New Year holidays begin. China is Australia's largest international inbound tourism market, and as many Chinese now call Australia home, the two way flow has increased the overall volume of traffic.

Summary

The Wuhan-originated coronavirus is creating concern across the region.
2019-nCoV is a coronavirus from the same family as the viruses that caused SARS in 2003 and MERS in 2015.
The World Health Organisation (WHO) is reviewing whether to nominate it as a "public health emergency of international concern".
Australia's travel has been slowing already, since mid-2019.
The 2019/2020 bushfires have rapidly curtailed current travel, with many forward cancellations.

Like SARS, the new virus hits just before the Lunar New Year, when over three billion people are on the move

In 2003 the year of the (friendly, mild) Goat was dawning. There was nothing friendly about SARS and it took a full six months to subside. This year it is the Rat, which arrives on 25-Jan-2020.

People born in a year of the Rat are expected to be industrious and thrifty, diligent and positive. And 17 years on from that deadly six months the "world's largest migration", of Lunar New year travellers, has grown to over three billion.

Unlike in the SARS outbreak in 2003, where Chinese local and national authorities at first covered up the threat, the Wuhan virus has been quickly identified and more efficient preventive efforts are under way across China and Asia Pacific, even into North America and Europe. So far the number of resulting deaths is between 10 and 20, but that number is expected to climb rapidly as there are many hundreds being diagnosed as infected.

The WHO is quick into action and may well declare an international emergency within days. On 23-Jan-20 an emergency committee of 21 members and advisers in Geneva delayed a decision, waiting to decide whether a "public health emergency of international concern" will be necessary to fight the deadly illness.

"The decision about whether or not to declare a public health emergency of international concern is one I take extremely seriously, and one I am only prepared to make with appropriate consideration of all of the evidence", WHO Director General Tedros Adhanom Ghebreyesus announced in Geneva. "Our team is on the ground in China as we speak, working with local experts and officials to investigate the outbreak and get more information", he said.

The WHO was accused of overreaction during the SARS pandemic and will be anxious to ensure that every step it takes is carefully thought out.

Wuhan has gone into lock down - 11 million people who won't travel for the Lunar New Year

Wuhan authorities, at the source of the original infection, have announced a "temporary" closure of its airport and railway stations for departing passengers. All public transport services were to be suspended, effective 10 am local time 23-Jan-2020, according to an announcement from the city's coronavirus command centre.

For a city of 11 million people that is a big ask.

But the risk of spreading the disease calls for stern measures. An incoming China Eastern flight from Wuhan to Sydney on the morning 23-Jan-2020 was carefully monitored on arrival and one passenger was determined to be a coronavirus risk and isolated.

Other cities in China, where cases have occurred, are being subjected to less stringent restrictions.

Airline share prices reflect the level of perceived risk

Uncertainty can be just as damaging as the reality.

For the moment, the extent and virulence of the new virus remains an unknown, although events are moving quickly. With the lingering experience of SARS and the damage to airlines - with many air services in Asia reduced to 40% load factors and worse for a period of weeks - the financial damage can be intense.

The next few days will provide a better picture; but the early signs are not encouraging.

During the months when SARS spread across Asia, many Qantas services into the region operated half full for lengthy periods. Qantas' operations in Asia are not as extensive as they were in pre-Jetstar 2003, but the combination of the triple whammy of a soft domestic economy, the bushfire impact and now the coronavirus inevitably softens investor attitudes to the airline.

(All is not grim for Qantas however; reduced international flying by its foreign competitors benefits its international market strength, and a tourism campaign has begun to encourage Australians to turn to domestic tourism in the wake of [hopefully[ the worst of the fires, in order to help the recovery of affected regions.)

Qantas' share price is down almost 10% this month

Cathay Pacific is inevitably close to the epicentre of the disease and suffered greatly in 2003, coming within days of ceasing operations altogether, as passengers feared flying to or from Hong Kong. That memory will be top of mind as events unfold.

Cathay Pacific's share price is down almost 10% this week

China Southern's share price is down almost 8% this week

Even before the external events, Australian air passenger traffic was sliding

As Australia's economy stalled in 2019, the propensity to travel drifted to neutral. Neither of the two major airlines showed any inclination to add capacity either, preferring to focus on profitability.

Without fare stimulation, weak demand translated to near-zero growth, even after the relatively modest annual growth of the preceding years (meanwhile, the US and Europe were enjoying 5-10% annual growth).

Australia domestic passenger traffic 2013-2019

The story was similar internationally. The predominantly outbound market lost its previous resilience and a lower Australian dollar acted as a disincentive to foreign sixth freedom airlines, who in many cases chose selectively to reduce capacity or services.

At the same time the previously rapid expansion of Chinese airlines slowed in 2019.

Australia international passenger traffic 2013-2019

The financial impact of the bushfires is hard to estimate, but the ATEC estimates an AUD4.5 billion cost

The Australian Tourism Export Council (ATEC) reports that a survey of its members suggests at least a tourism damage bill of AUD4.5 billion due directly to the effects of cancellations in the short and medium term. The Council represents most of the major tourism-related industries, from airlines to hotel groups.

A planned Tourism Australia campaign to promote international inbound tourism (featuring Kylie Minogue) has been delayed until after conditions improve. Although often overstated, the bushfire impact remains extensive and it would have been inappropriate and ineffective to continue.

Tourism Australia has quickly launched new domestic and international marketing campaigns

According to Tourism Australia the domestic AUD20 million campaign "will encourage Australians to holiday in Australia and provide support specifically to affected communities and regions, but also more broadly support to the entire industry that is affected by this downturn."

The international marketing campaign, for which AUD25 million is being "redeployed from its existing marketing budgets and campaigns", is designed to "protect and restore Australia's reputation as an international tourism destination, by reinforcing to global audiences that Australia is safe and open for business."

There's also to be a programme to host international media, bringing them to Australia "to see firsthand that most of Australia is unaffected by fires, open for business and welcoming visitors".

The Australian government has long failed to support a tourism industry that has pervasive economic and social benefits

International tourism, despite being Australia's largest employer and second or third largest earner of foreign exchange, is the poor cousin in Australian politicians' eyes. The industry doesn't attract the political recognition that the mining and agricultural industries are able to generate. It is simply taken for granted that the business will continue to grow, stimulating employment and regional development.

Unlike in neighbouring New Zealand, where habitually the Prime Minister is directly responsible for the Tourism portfolio, more often than not Australia's tourism industry isn't even represented in cabinet, or if so, is wrapped in with several other "minor" responsibilities. And the chief marketing body, Tourism Australia, is meted out a paltry sum to compete in an increasingly noisy and competitive international marketplace.

You don't know what you've got till it's gone…

There could just be a silver lining for the country's beleaguered tourism industry, much of which is suffering - either directly, or by being swept up in the global belief that "Australia is on fire". There are many stories of would-be tourists cancelling entire visits, even where their trip would not have been fire affected or is well into the future.

Faced with a foreign exchange loss of billions of dollars as tourists stay away, there is just a chance on this occasion that the Canberra government could be awakened to the pervasive value of tourism to the economy, right across the nation.

Bandaids will not be sufficient to recover the lost ground on this occasion. The fearful combination of natural and health challenges is likely to linger for some time, indeed well beyond the time when they have been resolved. Reputation and brand are long term facts of life and restoring an image of Australia that is attractive and competitive globally will not be achieved in a few months and because of a quick marketing campaign.

Australia's 2020 outlook for aviation and tourism is now likely to be muted

Neither the bushfires nor the extent of the Wuhan virus has yet been resolved. Their residue will be cancelled forward bookings, however fast things return to "normal".

Much of the damage has already been entrenched, so there will be a need for sustained and coordinated remedial action if the anticipated losses are to be avoided.

Meanwhile, the impact on the already soft economy will be pervasive. It will show in the national GDP figures, but importantly, because of the shape of this industry, the damage will be felt widely.

Airports will show low or even negative growth across the country, although financially the private operators will be compensated by the effects of very low interest rates on their usually substantial debt burdens. The major airlines will suffer the effects of slower growth, but their hold in the valuable domestic market is such that these should be offset by higher yields.

The accommodation and surface transport sectors will probably be worst hit, after already serious damage in the past two months.

But for now, the key drivers remain continuing bushfires and the still-unknown seriousness of the Wuhan coronavirus.