13-Dec-2013 11:30 AM

Darwin grows foreign airline links, despite Jetstar's base closure. Even a hub role may evolve now

Analysis

Darwin is seeing a surge in capacity from foreign carriers as demand for international services expand to and from northern Australia, driven by growth in the energy and mining sectors. The increases offset an upcoming reduction in international capacity by Jetstar Airways as the Qantas low-cost subsidiary closes its Darwin base.

Seat capacity between Darwin and Southeast Asia has expanded by about 40% over the last year as three foreign carriers – Indonesia AirAsia, Malaysia Airlines (MAS) and Philippines Airlines (PAL) – have entered. Garuda Indonesia is also now looking at resuming services to Darwin in 2014.

Darwin was previously only served by one foreign carrier, Singapore Airlines (SIA) regional subsidiary SilkAir, which launched services in 2012. Jetstar also operates three international routes from Darwin – Bali, Manila/Tokyo and Singapore – but is dropping Manila/Tokyo and slightly reducing capacity on Bali and Singapore.

Darwin's small but growing international market is served by six carriers

SilkAir, Indonesia AirAsia, MAS and PAL currently operate 16 weekly flights to Darwin, providing slightly over 5,000 weekly return seats. SilkAir accounts for five of these flights while Indonesia AirAsia and MAS each operate four flights and PAL three. All international flights at Darwin are operated with narrowbody aircraft.

Jetstar currently operates 21 weekly international flights from Darwin, providing about 7,600 weekly return seats. This includes nine weekly flights to Singapore, eight to Bali and four to Manila with continuing service to Tokyo Narita.

Australian regional carrier Airnorth also operates nine weekly international flights from Darwin to Dili in Timor-Leste. These flights are operated with Embraer E170 regional jets.

Darwin international capacity (seats) by carrier: 16-Dec-2013 to 22-Dec-2013

Jetstar is to close its Darwin base

On 9-Dec-2013 Jetstar announced it is suspending from 31-Mar-2014 its Darwin-Manila-Tokyo Narita service and reducing Darwin-Singapore from nine to seven weekly frequencies and Darwin-Bali from eight to seven weekly frequencies. Singapore-based affiliate Jetstar Asia will take over the Darwin-Singapore route while Jetstar Airways will continue to operate the Darwin-Bali route following the closure of its Darwin base.

Jetstar currently bases three A320s and 93 employees at Darwin. The aircraft are being moved to Adelaide.

In addition to the 21 weekly international flights, Jetstar operates 33 weekly domestic flights at Darwin on five routes (Adelaide, Brisbane, Cairns, Melbourne and Sydney). But Jetstar is expanding its domestic operation at Darwin to 35 weekly flights, an indication that the Darwin market overall remains relatively strong.

Darwin’s international market also remains relatively strong. But foreign carriers are potentially better positioned to serve this market as they can offer connections beyond their hubs. MAS and SilkAir/SIA are particularly targeting the Darwin-Europe market, on which Jetstar/Qantas is unable to effectively compete, since Qantas stopped serving London and Frankfurt over Singapore earlier this year. All of Qantas' westbound services now connect over Dubai and the carrier has no Darwin-Dubai operation.

PAL has primarily been targeting connections to North Asia, where it can offer a wider range of destinations and match the one-stop product to Tokyo that Jetstar has been offering.

Jetstar blamed in part an increase in competition for the international cuts at Darwin. Total international capacity at the airport has increased by 40% over the last year from about 5,000 weekly one-way seats in Dec-2012 to about 7,000 weekly one-way seats in Dec-2013, according to CAPA and OAG data. International capacity at Darwin will decline to about 6,000 weekly one-way seats as the Jetstar Group cuts its international operation at Darwin by 33%.

While the Jetstar cuts erase about half of the capacity gains from the last year, the four foreign carriers serving Darwin could increase capacity after Jetstar implements its cuts. Garuda is also looking at launching services to Darwin in 2014, providing a further capacity boost despite the reduction at Jetstar.

Darwin is a small market but has growth potential

Darwin has traditionally been a small international market with large seasonal fluctuations as tourists only generally visit northern Australia in the dry season, which runs from about May to September. Darwin has a population of only about 130,000 and Australia’s Northern Territory, which is famous for its natural sites, is sparsely populated with only slightly more than 200,000 people dispersed across a wide area. But increased investment is changing the dynamics of the region’s international market.

The Northern Territory has growing oil and gas and mining industries. Several new exploration projects are in the pipeline, boosting international business traffic.

Darwin also has been selected as a base for the US Marines, which is moving 2,500 troops to the Northern Territory over the next few years. The military build up will further boost the region’s economy, increasing demand for international services.

Given Darwin’s location at the northern tip of Australia, routing international passengers through larger Australian cities is inefficient. As Darwin attracts more international services, such connections become unnecessary.

Southeast Asian carriers serving Darwin are able to supplement growing business traffic with leisure passengers, particularly during the dry season. A large number of visitors to Australia, in particular European visitors, include Northern Territory sites such as Kakadu National Park and Ayers Rock in their trips to Australia.

Southeast Asian flag carriers serve several destinations in Australia and by adding Darwin are able to offer a new option for open jaw itineraries that competitors, including the Gulf carriers, on the Kangaroo route between Europe and Australia are not able to match. Starting or ending Australian holidays in Darwin is attractive as Darwin is closer to Europe than the traditional gateways of Brisbane, Melbourne or Sydney.

Darwin is also within narrowbody range of Southeast Asia, making thin routes viable. The market is still too small to support widebody aircraft, making it nearly impossible for Darwin to attract Gulf carriers.

The narrowbody option gives Darwin an advantage in attracting new Southeast Asian carriers over other secondary Australian cities such as Cairns, which is located in northeast Australia. Cairns is served by Cathay Pacific but has been trying for several years without success to attract a Southeast Asian carrier.

SilkAir started the new Darwin trend, as market opportunities change

Although the SIA group has been involved in Darwin in the past, SilkAir was the first Southeast Asian full-service carrier to recognise the new potential of the city, initially launching four weekly flights in Mar-2012. SilkAir had looked at Darwin for several years but the SIA Group’s partnership with Virgin Australia, which was forged in 2011, proved to be the final swaying point. Virgin Australia codeshares on SilkAir’s Darwin-Singapore service.

While the Darwin-Singapore market is also served by Jetstar, the SIA Group has a different product proposition, focusing on connections to Europe and to a lesser extent other destinations within Asia. SilkAir in Oct-2012 re-timed two of its Singapore-Darwin flights from evening to early morning departures to maximise connections from Europe.

SilkAir’s Darwin service has benefitted from Qantas’ decision to transfer the stopover of London services to Dubai. Qantas codeshares on Jetstar’s Darwin-Singapore service but will stop codesharing on the route as the service is transferred to Jetstar Asia.

Qantas partner Emirates, however, is looking to gain offline access to Darwin by codesharing on the service. This will provide Emirates with a one-stop product between Dubai and Darwin but a less than ideal two-stop product between Darwin and Europe. SIA serves 13 destinations in Europe, all of which connect to Darwin as well as its five other Australian destinations – Adelaide, Brisbane, Melbourne, Perth and Sydney.

The SIA Group has significantly increased capacity to Australia over the last two years, driven by additional frequencies to existing markets and the launch of service from low-cost subsidiary Scoot to Sydney and Perth.

Darwin is also part of the SIA Group’s increased focus on Australia. SilkAir’s four to five weekly flights (the fifth frequency is operated seasonally) accounts for a very small fraction of the group’s total Australia capacity but provides a differentiator with Gulf and European carriers and provides a link to a growing business market.

PAL targets North Asia connections

PAL entered Darwin in Jun-2013, initially operating one daily flight with four frequencies continuing onto Perth and three to Brisbane. The four weekly Manila-Darwin-Perth frequencies were dropped in Sep-2013 but the local Manila-Darwin-Brisbane route has been more successful, particularly the Manila-Darwin sector. As CAPA reported in Aug-2013, PAL has marketed its new Darwin service to the city’s Filipino community and has been able to attract connecting traffic beyond Manila, particular to Japan.

Jetstar’s decision to drop its Darwin-Manila-Tokyo service should further boost PAL sales in both the Darwin-Philippines and Darwin-Japan markets.

PAL also has the opportunity to offer the Darwin market connections to Europe and North America, although it would need to adjust its Darwin schedule to maximise these connections. For now focus is on North Asia connections, which offer PAL a relatively attractive yield.

MAS follows SilkAir/SIA in targeting Darwin-Europe market

MAS is the most recent carrier to enter the Darwin market, launching four weekly 737-800 flights on 1-Nov-2013. The carrier’s decision to launch Darwin at the start of the wet season shows its confidence in Darwin as a year-round market. MAS last served Darwin over a decade ago, in 2002.

Darwin is a logical new route under MAS’ new business plan given the carrier’s increased focus on Australia and regional connections in Asia-Pacific. Darwin is MAS’ sixth destination in Australia, joining Adelaide, Brisbane, Melbourne, Sydney and Perth. MAS has also introduced a third daily frequency to Melbourne and Sydney, using traffic rights made available from the recent extension of the Australia-Malaysia air services agreement.

Of its six Australian destinations, only Darwin is unaffected by controls in the air services agreement, providing further incentive to launch the route as it does not impact MAS’ ability to add capacity in other Australian markets. Other than the main gateways, Australia has an open access policy ("open skies") towards all other cities.

MAS is operating its Darwin flights during overnight hours and the early morning, allowing it to improve utilisation of the carrier’s 737-800 fleet. Higher narrowbody aircraft utilisation rates are a key component of the new MAS business plan.

As in the case with SIA, MAS was keen to provide Darwin as a new Australia option for its passengers heading between Europe and Australia. London, which MAS now serves with two daily A380 frequencies from Kuala Lumpur, is particularly a target for its Darwin services.

MAS and SIA are also promoting regional connections within Asia. The new MAS business plan relies more on regional connections such as Australia-Asia, which are generally more profitable than the highly competitive Kangaroo route, especially from Sydney. MAS has been opening new regional destinations using its expanding 737-800 fleet as well as adding frequencies to existing regional destinations as part of an initiative to thicken its schedule and maximise connections. Transit passengers now account for 40% of MAS’ traffic, up from about 30% to 35% a year ago.

Connections are crucial for the Darwin-Kuala Lumpur route to be viable because Darwin-Malaysia is a very small market. There is a big and growing local market between Malaysia and Australia, which MAS and AirAsia X have been able to tap into in pursuing rapid expansion this year, but there is limited interest in Darwin from a Malaysia point of sales perspective.

Southeast Asian tourists heading to Australia generally do not visit the Northern Territory, which has had more success drawing tourists from Europe. Darwin’s population includes a relatively large portion of Asians but as Darwin overall is a very small city its Asian community is minuscule compared to the Asian communities in Melbourne or Sydney.

AirAsia resumes Darwin-Bali link

The small size of the Malaysia-Darwin market has likely dissuaded AirAsia from launching services between Kuala Lumpur and Darwin. AirAsia would be able to offer connections via its Kuala Lumpur hub but no longer operates onwards to Europe, a key market for Darwin. The route is also perhaps just too long (about five hours) for short-haul affiliate AirAsia Malaysia, which sticks to routes of about four hours or less, and too thin for medium/long-haul affiliate AirAsia X.

AirAsia affiliate Indonesia AirAsia, however, resumed service to Darwin from Bali in Jul-2013. The carrier had dropped Darwin-Bali service in Apr-2012. Bali is only about two and a half hours from Darwin, making it an ideal narrowbody LCC route. While Indonesia AirAsia does not offer a transit product, self-connections are possible to destinations throughout Southeast Asia.

Bali is Darwin’s largest international destination and has been growing, driven by a mix of leisure and business demand. Darwin International Airport stated in announcing the return of Indonesia AirAsia in Apr-2013 that the Darwin-Bali route had almost 70,000 passengers in 2012 and has been a significant contributor Darwin Airport’s 8.5% annual international passenger growth rate since 2007.

“Since the withdrawal of services last year the Darwin market has continued to grow, driven largely by increased resources activity. We always felt that AirAsia Indonesia would resume operations when the time was right, and it’s great news that the flights are returning with a schedule that will suit everyone, including families and the growing FIFO market,” stated Northern Territory Airports Director Airline and Airport Services Jim Parashos.

Darwin to Bali capacity by carrier (one-way seats per week): 19-Sep-2011 to 15-Jun-2014

Garuda considers Darwin and Tigerair Australia and other LCCs are growing; even a hub role may be opening up

Garuda is also now looking to serve Darwin as part of the next phase of its Australia expansion plan. The Indonesian flag carrier already serves Melbourne, Perth, Sydney and Brisbane. Brisbane was launched in Aug-2013. Brisbane is now served from Bali while Garuda’s other three Australian destinations are served from both Bali and Jakarta.

Garuda last served Darwin in 2009 with a link from Bali. The resumption of Bali-Darwin service would make sense as Garuda can offer connections at Bali to Seoul and Tokyo – two large markets for Darwin. Connections to North Asia via Jakarta would require significant backtracking.

Garuda is not considering a Darwin-Jakarta route but is considering serving Darwin from Surabaya or Kupang instead of Bali. Surabaya and Kupang would provide some domestic connectivity and attract some local traffic but they do not have connections to North Asia. As CAPA reported on 10-Dec-2013:

[Garuda CEO Emirsyah] Satar says Garuda is looking at further expansion in Australia including Brisbane to Jakarta and Darwin to Bali, Surabaya or Kupang. Garuda suspended service to Darwin in 2009 but the Darwin market has since become more attractive given the rapid expansion of northern Australia’s oil and gas sector. Singapore Airlines (SIA) regional subsidiary SilkAir and more recently Philippine Airlines (PAL) and Malaysia Airlines (MAS) have all entered the Darwin market. “We are looking at it, but that Darwin traffic won’t be a feeder to the London route,” Mr Satar told CAPA. “It will be connected to Bali or Kupang or Surabaya.”

Bali is the most likely option as it will allow for connections from Darwin to Korea and Japan, growing markets which SilkAir/SIA, MAS and PAL have successfully targeted. Bali is the only Indonesian airport currently served from Darwin, with service from Indonesia AirAsia and Jetstar Airways.

Mr Satar says Garuda is also seeking to partner an Australian carrier to feed Darwin from regional destinations in northern Australia such as Alice Springs. “Before we go in, we need to make sure we can make those connections,” he says.

Garuda would give Darwin the impressive accomplishment of attracting four of Southeast Asia’s five main full-service airline groups in less than three years.

While the closure of Jetstar’s base is a setback, it is not so important in terms of international connectivity. Jetstar is only dropping one route - which a foreign carrier (PAL) has already launched. Darwin also has seen a pick-up in overall LCC capacity as a result of AirAsia’s return to the market and Tigerair Australia's 4-Dec-2013 announcement that it will enter the Darwin market in Apr-2014 with domestic service from Brisbane.

International services for Tigerair are likely as the group has affiliates in Indonesia, the Philippines and Singapore – three of Darwin's main international markets.

Darwin is well positioned to see more international growth from foreign carriers – both LCCs and FSCs – leveraging northern Australia’s rapidly growing economy and its proximity to Southeast Asia.

The airport has in the past optimistically hoped to exploit its geographic position as a mini-hub for Australian operations into Asia and beyond. Until now this was somewhat fanciful, but as LCCs expand with their special service characteristics and for example as the Virgin Australia/Tigerair Australia/SIA Group team explores network options, the prospects for more than point to point service undoubtedly improve.

Background information

Darwin international capacity (seats) by country: 16-Dec-2013 to 22-Dec-2013