Melbourne Avalon Airport: AirAsia X to spike new growth phase

Summary:

• Avalon Airport has attracted its first international airline, AirAsia X, which will launch services from Kuala Lumpur later this year.
• The airport aims to attract AirAsia X services from Indonesia and Thailand in future, as well as other international airlines.
• Avalon Airport has only handled domestic passengers since Jetstar launched operations in 2004.
• Avalon Airport is keen to grow domestic traffic by attracting other domestic airlines, such as Tigerair Australia.

Avalon Airport CEO Justin Giddings discusses the launch of AirAsia X service, the rapid construction of an international terminal, and opportunities to attract other new international and domestic routes

Source: CAPA TV.

Jetstar has been Avalon Airport's main airline tenant since 2004

Avalon is Australia's fifteenth largest airport, handling 800,000 passengers in 2017. It is the only airport among Australia's top 20 that is served by only one airline.

Jetstar Airways has served Avalon since Jun-2004, a few days after the Qantas LCC subsidiary began operations. Jetstar was the first airline to operate scheduled passenger services from Avalon Airport, which was purchased by Linfox from the Australian government in 1997, and has been the primary tenant of the domestic passenger terminal since it opened.

Avalon has been served by other airlines in the past. Tigerair Australia served Avalon in 2010 and 2011 and, most recently, the regional airline Jetgo Australia briefly operated a service to Avalon in 2016.

AirAsia X finally gives Avalon an international airline

Avalon Airport has tried for several years to attract another significant airline tenant as well as an international service. In Feb-2018 it succeeded with both these objectives as Avalon and AirAsia X announced a 10-year deal that will result in AirAsia X moving its Kuala Lumpur-Melbourne flights to Avalon by the end of 2018.

The launch date for AirAsia X's new Avalon service will be set later, once the airport is able to determine when construction of a new international terminal will be completed. For years Avalon has had several designs for an international terminal on the shelf, ready to be implemented as soon as it secured a tenant. AirAsia X has selected a design that Avalon initially did for another airline, for a small terminal that can be constructed in approximately only six months.

Ironically the move to Avalon will come at about the time AirAsia X marks its tenth anniversary of serving Melbourne. The long haul low cost airline began operations in Nov-2007 with Gold Coast its very first destination, and added Melbourne Tullamarine along with Perth in Nov-2008. Sydney was added in 2012.

Avalon is a positive story for AirAsia X in Australia, after several setbacks

Melbourne is currently AirAsia X's largest market in Australia, with two daily year-round flights compared to a recently reduced schedule of 11 weekly flights to Sydney and seven weekly flights to both the Gold Coast and Perth.

Melbourne was the only Australian market that was not reduced in Feb-2018 when AirAsia cut back from twice daily services to Melbourne and Sydney and 11 weekly flights to the Gold Coast.

See related report: AirAsia X slashes capacity to Sydney, Perth and Gold Coast as focus shifts from Australia to Asia

Avalon Airport CEO Justin Giddings told CAPA TV on 1-Mar-2018 that AirAsia X's commitment to Avalon and the new international terminal "signals a reinvestment by AirAsia into Australia. They have had their ups and downs a little bit but I was able to convince them that coming into Avalon will give them a really high brand profile, which is something I think they needed at this time."

While Avalon has been courting AirAsia X for several years, Mr Giddings noted that a breakthrough had occurred at the CAPA Australia Pacific Aviation Summit in Aug-2017, when Avalon Airport had a meeting with AirAsia X Malaysia CEO Benyamin Ismail.

AirAsia X weekly frequencies from Australia to Malaysia: Sep-2011 to May-2018

Source: CAPA - Centre for Aviation & OAG.

New Kuala Lumpur service to drive 60% traffic growth for Avalon

AirAsia X's initial schedule of two daily flights from Kuala Lumpur will generate 560,000 annual seats for Avalon Airport. Avalon Airport expects the service to generate approximately 500,000 passengers for Avalon in 2019, driving an approximately 60% increase in total passenger traffic.

AirAsia X could eventually surpass Jetstar as the airport's largest tenant. Mr Giddings is confident that in the future Avalon could support AirAsia X services from Bali and Bangkok or Phuket, which would be operated by the group's affiliates in Indonesia and Thailand.

More flights from Melbourne beyond the initial two daily frequencies are also possible. AirAsia X intends to pass on to passengers the cost savings generated from moving airports, which should in turn stimulate demand.

Passenger mix to stay the same as AirAsia X shifts Melbourne area airports

AirAsia X's move to Avalon is purely cost driven. Mr Giddings told the CAPA Global LCC Summit that the airport could be the lowest cost airport in the world.

Avalon's costs and charges are significantly lower than Tullamarine's. AirAsia X will also benefit from using a small terminal designed to facilitate a very efficient flow of passengers. Turnaround times will be reduced compared to Tullamarine, where one of AirAsia X's flights now sits for three hours due to a lack of check-in gates.

Avalon does not expect that there will be a significant change in the mix of passengers AirAsia X now has on the Kuala Lumpur-Melbourne route. Essentially AirAsia X will carry the same 500,000 annual passengers, with a similar point of sale split for Victoria, Kuala Lumpur and beyond destinations.

Most passengers arriving at Avalon will make their way immediately to Melbourne. The private coach company SkyBus, which has provided a shuttle service linking Avalon with Melbourne since early 2017, is adding capacity at Avalon with new double decker buses to meet an anticipated increase in demand.

SkyBus also now has services from Avalon to Geelong and the Great Ocean Road. Geelong is 20km from Avalon Airport and the beginning of the Great Ocean Road is 40km away. The Melbourne central business district is 55km from Avalon Airport, a drive of less than an hour except during the busiest times.

Avalon will try to encourage visitors arriving on the new AirAsia X flight to head straight to Geelong or the beach communities along the Great Ocean Road. Mr Giddings pointed out that the Great Ocean Road attracts over 5 million visitors per year. However, the airport recognises that most visitors to Victoria also want to experience Melbourne.

A large proportion of Great Ocean Road visitors are day trippers to Melbourne, although the beachside communities along the road (which is over 200km long) also attract overnight visitors.

Avalon to attract Chinese visitors via new AirAsia X service

AirAsia X's Australia flights now attract significant numbers of visitors from Malaysia. There are 400,000 Malaysian visitors to Australia annually and Victoria is a particularly popular destination, given the large Malaysian community in Melbourne. Melbourne is especially popular with Malaysian students.

AirAsia X also carries on its Australia flights significant traffic from China and India, both of which are fast-growing source markets for Australia. Chinese visitor numbers to Australia increased by 13% in 2017, to 1.4 million, and Indian visitor numbers increased by 15%, to 300,000. Melbourne and the Great Ocean Road are aspirational destinations for Chinese and Indian visitors.

Mr Giddings said that one-stop flights to China, where AirAsia and AirAsia X serve 15 destinations from their Kuala Lumpur (KL) hub, are particularly attractive. "That's the big thing I like about AirAsia", he said. "It is not just about KL, but 130 beyond destinations that can pull through and bring down into Avalon and the Great Ocean Road."

AirAsia X and its short haul sister airline AirAsia also offer connections beyond Kuala Lumpur to several destinations throughout Southeast Asia. Some of the Southeast Asian destinations served beyond Kuala Lumpur attract significant visitor traffic to Australia, while some of the markets are attractive to Australians heading abroad for holidays.

Avalon also targets outbound Australian traffic

Avalon believes it is well positioned to attract Melbourne area residents heading overseas for holidays because of the SkyBus service from the Melbourne central business district and the airport's ample parking. Mr Giddings referred to SkyBus' launch of an Avalon-Melbourne service in early 2017 as "the biggest single change to growth for Avalon" in nine years.

Mr Giddings pointed out that most of Avalon's domestic passengers are heading to or from Melbourne. The population of Geelong is less than 200,000 and the communities along the Great Ocean Road are much smaller, whereas Melbourne's population is approximately 4 million.

Avalon Airport believes that over time it can attract services to several popular outbound international tourist destinations: Fiji, Hawaii and New Zealand are high on its list, as well as Thailand.

The airport also aims to attract a Gulf airline, which would provide connections to Europe, although this is a longer term objective.

Avalon's open skies status could attract Qatar Airways and Fiji Airways

In particular, Avalon's open skies status as a secondary airport could make it attractive to Qatar Airways, which is currently unable to add capacity to Melbourne Tullamarine due to limitations in the Australia-Qatar air services agreement.

Qatar Airways recently launched services to Canberra with a stop in Sydney, which enabled it to increase capacity to Sydney without needing more traffic rights. All of Australia's air services agreements cap the number of seats at the four main gateways of Brisbane, Melbourne, Perth and Sydney. However, flights to any secondary destination, even if they are tagged with one of the main gateways, do not count towards the cap.

Fiji Airways could also be attracted to Avalon by its open skies status. Fiji Airways is currently not able to add capacity to Melbourne during peak periods as it is already fully utilising capacity available to Fijian airlines under the Australia-Fiji air services agreement.

Fiji Airways is not advocating for an expanded bilateral, which could lead to more LCC competition in the Australia-Fiji market. Avalon therefore potentially provides an option for expanding in the Melbourne market without opening up the risk of new LCC competition on the Melbourne-Nadi route.

Jetstar not likely to launch international services from Avalon

Jetstar could also launch services from Avalon to Fiji. Jetstar currently serves Sydney-Fiji and plans to add a small number of frequencies on this route in late 2018 using the last available seats for Australian airlines in the Australia-Fiji air services agreement.

There is no spare capacity in the bilateral to support a Jetstar service from Melbourne to Fiji - a route now currently only served by Fiji Airways and Virgin Australia. Avalon-Fiji would be an available option for Jetstar, but at this stage Jetstar is not interested in launching international services from Avalon.

The new basic international terminal, which Avalon is building over the next six months, is more likely at this point to attract foreign airlines other than Jetstar.

Jetstar's Avalon traffic grows, but network shrinks

Jetstar's domestic traffic has grown significantly at Avalon over the past two years, but most of the growth has been driven by load factor improvements. The number of flights Jetstar has operated at Avalon has not grown for nearly two years, and Jetstar's network at Avalon will shrink on 24-Mar-2018 when Hobart is dropped.

In 2017 Jetstar's passenger traffic at Avalon was up 10%, despite flat capacity. Its average load factor increased by nearly 10pts, to approximately 85%.

Capacity on the core Avalon-Sydney route has increased only slightly since 2014, when Jetstar introduced a fifth daily flight. Jetstar currently operates 36 weekly flights from Avalon to Sydney and is adding two more frequencies, for a total of 38, from late Mar-2018. Jetstar added one frequency in late 2017, resulting in the increase from 35 to the current 36 weekly frequencies.

Jetstar also operates one daily flight from Avalon to the Gold Coast, which was launched in late 2015, and three weekly flights from Avalon to Adelaide, which was launched in Mar-2016. Jetstar is expanding Adelaide to four weekly flights in late Mar-2018.

The two additional frequencies to Sydney and one additional frequency to Adelaide will not result in any overall growth for Jetstar at Avalon because the additional flights come at the same time as the suspension of Hobart, which is now served with three weekly flights. Avalon-Hobart was initially launched in Mar-2016, with four weekly flights.

Jetstar's overall Avalon operation will be flat at 49 weekly departures throughout 2018. It also maintained 49 weekly departures throughout 2017, after pursuing some growth in 2015 and 2016.

Jetstar Airways weekly departures from Avalon Airport: Sep-2011 to Aug-2018

Source: CAPA - Centre for Aviation & OAG.

Avalon aims to grow domestic network

While Avalon-Hobart struggled during off-peak months, Avalon Airport believes there is sufficient demand for the route to be restored. Avalon Airport is also aiming to restore a link with Brisbane, which was dropped by Jetstar in 2014. The airport believes restoring service to Perth, which was dropped by Jetstar several years ago, is less likely.

A new link to Canberra is also high on Avalon's target list. Mr Giddings said a regional airline is now considering the launch of services from Avalon to Canberra. There is strong demand for a service to Canberra from several big national businesses that have headquarters in Geelong.

Most of Avalon Airport's passengers now come from Melbourne or are heading to Melbourne. However, there would be significantly more traffic from Geelong and the Great Ocean Road communities if Avalon were successful at attracting more domestic routes - and more airlines.

Mr Giddings said the market should be able to support 1.4 to 1.5 million domestic passengers per annum, compared to the 800,000 that Avalon Airport is now handling with the current 49 weekly flights.

Avalon is keen to attract Tigerair Australia as well

With Jetstar not planning to grow its Avalon operation, despite high load factors, the airport is trying to woo Tigerair Australia back. Tigerair could provide a second option on the core Sydney route and potentially launch new destinations such as Canberra and Brisbane.

Tigerair would also help Avalon attract more international LCCs. For example, connectivity with Tigerair contributed to Cebu Pacific's recent decision to launch services to Tullamarine instead of Avalon. Cebu Pacific and Tigerair Australia are both members of the Value Alliance.

Avalon has a potentially attractive offering to foreign LCCs, given its extremely low costs and new basic international terminal, facilitating quick turnarounds. Its ability to attract more airlines will naturally hinge on AirAsia X's success.

If AirAsia X proves that Avalon can be a viable alternative without the airline losing passengers to rival Malaysia Airlines, which continues to serve Tullamarine, other airlines are more likely to follow.