CAPA Live: Australasian aviation market update

Summary:

• COVID-19's second wave boosted the importance of flights within Australian states.
• Domestic recovery stalled, but should increase as states reopen borders.
• Domestic capacity rebound has generally been stronger in New Zealand.
• The COVID-19 crisis has sparked airline moves that will shake market balance.

Second wave interrupts Australian recovery

The chart below, drawn from CAPA and IATA data, shows domestic traffic trends for Australia, as measured in RPKs.

As you would expect, we see domestic traffic plummeting pretty dramatically when COVID-19 restrictions first hit. Services were reduced to basically a skeleton network, propped up to some extent by government support.

From around May-2020 we start to see domestic traffic beginning to rebuild slowly. But the slight rebound plateaued and began to fall again from Jul-2020. This was due to the second wave that hit Victoria most severely and caused new state border restrictions to be introduced.

Australia domestic RPK growth: 2017 to Aug-2020

Source: CAPA and IATA.

Routes within state borders have become more important

Domestic traffic has been largely supported by routes within states, rather than the historical trunk routes.

So Cairns-Brisbane is in the unusual position of being the busiest route in Australia at the moment - for domestic or international. For the week of 5-Oct-2020, only two of the top 10 Australian routes involved interstate flights.

Australia top 10 routes (systemwide) as measured by weekly seats, week of 5-Oct-2020

Source: CAPA and OAG.

State border relaxations will lift domestic capacity

This next chart is from CAPA data, showing international and domestic capacity with projections.

Domestic capacity is dark blue, international is light blue. It also shows daily new COVID-19 cases in red.

From this chart we can see the second wave spike as well as the much more encouraging recent trend line for new cases. As cases have come down, we've started to see more states lift their domestic border restrictions. This has led airlines to increase interstate flying with a corresponding uptick in domestic capacity projections.

Further relaxations are likely by Dec-2020.

Australia weekly seat capacity (with projections) and daily new COVID-19 cases

Source: CAPA and OAG.

Domestic recovery has forged ahead in New Zealand

In New Zealand, meanwhile, we see that the rebound in domestic traffic has been much stronger.

After an initial lockdown in Apr-2020, most restrictions were removed. There have been temporary reversals since then, with travel restrictions reimposed in Auckland during late Aug-2020 and early Sep-2020, but capacity has generally been trending upward toward pre-COVID-19 levels.

New Zealand weekly domestic capacity, measured in seats

Source: CAPA and OAG.

Narrowbody aircraft dominate Australasian fleets

Australasian capacity trends are largely mirrored in the chart below, which examines trends in the Southwest Pacific active aircraft fleet. You can see that the active percentage plummeted as most aircraft were grounded, and it has gradually increased, primarily driven by domestic aircraft.

This means most active aircraft at the moment are narrowbodies, turboprops etc.

Most widebodies will be grounded for some time yet - at least three years in the case of Qantas's A380s. Air New Zealand has also put most of its Boeing 777s in long term storage.

FSC, LCC and regional airlines: fleet in service vs inactive fleet for Southwest Pacific

Source: CAPA Fleet Database.

COVID-19 has prompted big changes among Australasian airlines

There have also been some key developments for airlines that will shift competitive dynamics in the Australasian market

First of all, Virgin Australia's sale to Bain Capital means that it will remain a force in the domestic market, although it will be smaller. It won't be a player on long haul routes for the immediate future, as it has dropped its current widebody fleet.

However, it does intend to operate short haul international routes using its narrowbodies. An eventual return to long haul is also on the cards.

A major question yet to be resolved is what happens with Virgin Australia's Boeing 737 MAX orders, and whether these will be reduced, or some switched to 787 orders. Virgin is still in talks with Boeing about the MAX orders, and more news on this is expected by the end of the year.

For Rex there is an opportunity on Australian domestic trunk routes

Another development is the emergence of a new player on domestic trunk routes, as Rex (Regional Express) plans to introduce a fleet of Boeing 737s for this purpose.

The airline has plans to lease six 737s to serve the Sydney-Melbourne-Brisbane triangle, and intends to build up to 10 aircraft. Rex plans to begin on 1-Mar-2021 with the Sydney-Melbourne route, which was one of the world's busiest domestic routes before COVID-19.

This is a pretty big move for Rex, as until now it has operated turboprops on regional routes. However, it has recognised an opportunity with the two major players in the domestic market in a weakened condition.

Trans-Tasman travel restrictions begin to loosen

Lastly, there have been significant moves towards restoring trans-Tasman travel between Australia and New Zealand. Until very recently it was looking as if this wouldn't happen this year, but now Australia has taken the first steps by allowing travellers from New Zealand to enter New South Wales and the Northern Territory without quarantine.

This is not yet a true travel bubble, because New Zealand has not reciprocated by allowing Australians to enter without quarantine. But the New Zealand government is considering such a step and there is hope that it could occur in some form before the end of 2020.

Qantas and Jetstar have already launched additional flights in the New Zealand market. A broader opening would provide a major shot in the arm for airlines on both sides of the Tasman.