Australia’s domestic and regional market situation – a review

Transcript

Jayne Davey:It's great to be back in Adelaide seeing people face to face, live in person, and to be kicking off day 2 of the CAPA event. Now, Hans and myself from ASM Australasia have been asked to come and present a market overview, a domestic and regional market overview. looking at the trends and behaviors that are emerging coming out of the pandemic. I think we've all got the gut feeling that we are definitely on our way out and through the pandemic, and but what do the stats tell us? And we've taken a deep dive into some of the data to have a look at what those stats are telling us. But before I jump into the presentation, we'd like to pose a question to you guys through the slido.com app that we, we showed yesterday. So the question is, what do you think will happen to domestic demand recovery levels over the next 12 months? Are they going to rise and go beyond pre-COVID levels, remain the same, reduce by 10% or less, or reduce by more than 10%? So if you can answer that, and then throughout the presentation later on, we'll, we'll put up the results.

Hans Mitterlechner:Thank you.

Jayne Davey:So jumping into the presentation, the first slide I thought we'd look at is the, the traffic recovery from the pandemic. Now, this is looking at traffic. And you can see sort of the normality of 2019 and then the craziness that ensued afterwards. You can see that the fall-off-the-cliff moment from March 2020, that sort of, you know, the grab the pearls, the fall-off-the-cliff moment that happened, then the gradual incline back up, recovery, and then wham, Delta happened and we fell back off that cliff again. A slight recovery again, and then Omicron happened. And now we're sort of gradually coming out and through of the pandemic, and currently with traffic we're about 4% where we were before the pandemic, so 96% back to where we, we were. Now we wanted to look at where that recovery comes from, and so we, we, we split it into 3 main categories. Uh, we've got Australian— um, sorry, we've got capital city airports, uh, we've got leisure airports, and the leisure airports are made up of airports like Cairns, Ballina, Gold Coast, Sunshine Coast, and the like. And the resources are the, obviously, the Townsville, the Port Hedlands, the Kurathas. And we split it into these 3 sections. And as you can see, it's definitely the leisure airports, the leisure demand that's driving this recovery. Already at the beginning of the year, we were 82% of recovery, and now towards June, we're already at, we're above recovery levels, we're at 120%. The resources sector, um, started a little lower at the beginning of the year but is again already back up to pre-pandemic levels. And it's the capital city airports, um, that are lagging behind. At the beginning of the year, only half of the, the traffic recovery was back, and then back to around about 95% levels, um, as we, uh, as we hit June. Now I thought it'd be interesting to look at what the network development activity has, has been, um, happening, and, and I, I I'm not really a fan of the word unprecedented, but I think that it does fit the bill here. It has been unprecedented. There's been a hell of a lot of network development activity going on. Obviously, we had Tigerair exiting the market, and then we had Rex coming in with the jet markets. So you've got the Sydneys, the Melbournes, the Brisbanes, the Canberras, but also some regional markets entering as well— the Port Macquarie and the Coffs Harbour. So lots of activity from Rex. But the most amount of activity I'm finding, uh, Kash and his team here, has been the, been the Qantas camp. Uh, 26 new markets gained, um, from Qantas. And this is a snapshot looking at the first half of '22 versus the first half of, of '19. So there's, there'll be, you look at, there'll be some missing in that, but that's just the snapshot to get the comparison. So there's been a lot of activity going on, and it's continued. The trend will continue as we get Bonza entering into the market later this year. I think they've got, uh, 27 new destinations due to be launched. So this, this is only going to continue. And, um, yeah, it's been a very, very busy time for network development teams in the domestic, uh, domestic market. So we've looked at traffic recovery and we've established that that's, um, almost back to pandemic level, pre-pandemic levels at just 4% under. There's a lot of network development happening. Let's look at capacity now. And this is looking, um, at the second half of 2022, and this is what's currently filed. And it's a similar pattern to the traffic ones where you've got the, the drop off the cliff and then the climb back, the Delta, the Omicron. But if you look at the, um, the top part, you can see another little dip occurring, and that's due to all the labor shortage issues that we've seen and airlines reducing, um, capacity and the cancellations that we've seen. So that's taken a little bit of a hit. But what's currently filed at the moment, um, we're looking at November, December this year, we're going to get back to pre-pandemic levels for capacity. But that second half is— the average is expected to be 8% lower than that same period during 2019. So we've got 4% lower in traffic and 8% lower in capacity. There's starting to be a picture, um, shown here that we'll, we'll go on to in more detail in a second. And then we did the capacity. We split by the same 3 segments: the capital cities, the leisure, and the resources. And again, it's leisure destinations that are expected to benefit the most. This is what's currently filed going forward, so the, the latter half of 2022. And leisure airports are— well, they're, they are back to higher than pre-pandemic levels, the same as resources, a little bit more stable, back to 100%. And then the capital city airports are gradually predicted on current filings to get there, as I say, by November, December. And then I thought we'd look at market share, which is always interesting, sometimes controversial outlook. And we looked at July 2019 versus July 2022, and the main difference is Tigerair being exited out of the market, and that market share was Pretty evenly distributed, to be honest with you, between, um, Virgin gained 2%, Qantas gained about 2%, and then Rex gained about 3%. Um, so not much going on in the market share, capacity market share world. But I think the burning question that, well, is on my mind, and it was discussed a lot in yesterday's, um, day 1, um, is what's happening to airfares. Um, there's a gut feel that airfares are going up. I know internationally they certainly are. I mean, all of one, but I flew to the UK recently and my ticket price was way above what I would normally have paid prior to the pandemic. But what does that look like in the domestic market? Are we, are we experiencing these, these rises domestically as well? So we've looked at it in a couple of different ways. We looked at it from BITRE, and if anyone knows that the airfares in BITRE, they look at 3 weeks in advance. So it's not the actual average fare booked, it's 3 weeks in advance. And we split it by business, and you can see that, um, it's coming down, and then they're starting— the price is starting to go back up. The same for the restricted economy, starting to go back, and then it's a little bit more unpredictable in the discount. So it's interesting, there are trends emerging, but there's not really any conclusions that we can, we can draw from the BITRE data. So then we turned to Sabre. And we looked at July 2019 and we produced some yield curves. And you can see Qantas is on the top with the most expensive fares. The industry average is that dark blue line. And then Virgin Australia— Virgin Australia and Jetstar are tracking fairly closely to each other and also to that industry average. And then Tigerair on the bottom. So this is a kind of picture that you kind of expect to see. And then we did the same for July 2022, and Tigerair was dropped out and Rex was, was put back in with their jet services. It's a little bit of a different picture being shown. You've got Qantas still on the top on that red line, the industry average, and then you've got Jetstar and Virgin both under the industry average, but Virgin Australia actually tracking below Jetstar fares. So their fares are tracking closer to Jetstar than they are to, um, to Qantas, which is obviously an interesting insight. And we then compared those 2, um, to industry averages from July '19 to July 2020, and the gut feel was right, you know. And the, the picture that I painted before with traffic coming back quicker than capacities coming back, keeping up, um, it's going to have an impact on airfares. And from the stats here, it says that difficult to give you an actual percentage with the, with the yield curve, but between 8% and 20% more expensive domestic airfares now than they were 3 years ago. So leave you that thought, and I'll pass you over to my colleague Hans, who's going to move on to the competition.

Hans Mitterlechner:Good morning, everyone. Thank you, Jane. I'm going to start talking about competition, which is a fascinating topic— aviation and competition. I think most of us agree that it's a very dynamic relationship. If you have too little competition, airlines are tempted to underserve and overcharge. If you have too much competition, airlines are basically falling over. It's a very, very dynamic thing, and I think we can mostly agree on that. What I don't agree with is a statement that Alan Joyce recently made. He said that he thinks that Australia is one of the most competitive aviation environments in the world. I just disagree with that, and I go back in my own history to tell you what I think. I started 28 years ago. Child labor is a terrible thing, I know. And I started in Chicago at United Airlines as a network planner. The boss of my boss of my boss— it's a very layered company, many, many levels, and still is, I think— he asked me, Hans, what are you doing here? What are you doing in aviation? You just did an MBA. You could do financial services, consulting. Why aviation? And I said, well, I love its transparency and I love the competition. They looked at me and said, I agree that it's very competitive. That's not likable. That's a problem in our industry. And competitive it was. We had 8 major carriers, 5 of which are not here anymore: Continental, Northwest, America West, TWA, and so on. We had Southwest Airlines being strongly established and a couple of other low-cost airlines kind of, you know, biting at our feet already. That's competition. From there, I joined British Airways in 1997. Completely different environment. There was at least 4 airlines in the UK: BA, British Midland, B-Med. Every country had its own flag carrier except, I think, Andorra and Liechtenstein and maybe San Marino. Then we had low-cost airlines, you know, EasyJet and Ryanair were there already. And then on top of that, with the train. Now, now this is competitive. And then in 2001, about 21 years ago, I came here and and joined Qantas. I worked as a transplant between Qantas and BA, working for both Alan Joyce here and Robert Boyle back in the UK. And within a very, very short time, I realized this is a strange country. It's very different from anything else I saw. Australians seem to be in love with big things. I mean, there's bananas and there's prawns and there's, you know, these sheep and so on, but also big companies. Australians seem to love large companies, which leads to very interesting outcomes. So competition was not as established here in many areas as in other parts of the world. I point to terrestrial TV, I point to supermarkets and, you know, fast-moving consumer goods, but also aviation. And aviation, in my mind, hasn't changed as much in the last 20 years. This picture appears very colorful, but we all know that orange and red is actually one color. that the dark blue and the light blue is also one color. The last 20 years— and I only have 15 here because my data doesn't reach back further than 2005— we had, you know, this kind of development. Now, if you change the picture to, you know— oops, wrong direction— and just show percentages, the last 20 years have seen a continuity or a sequence of duopolistic and oligopolistic market structures. And oligopoly is basically a non-perfect competitive market because there's a little happening. What's interesting is the very end of that. And with Rex kind of joining the jet markets and with Bonza about to come in with very, very expansive and ambitious, ambitious plans, you know, it's interesting. It's going to happen. Now, I have an inquisitive mind, and when I came here, and I saw this picture of duopoly and oligopoly, I asked why. And the old logic was we are too big for 2 airlines and too small for 3. That was 20 years ago. This chart is 20 years long. 20 years ago, uh, compared to 2019. In 2019, we had a third more population, we had 28% higher GDP per per capita on real terms, and we had aviation, domestic aviation traffic about twice as much as 19 years earlier. So please keep this in mind, this picture, how we have grown in the last 2 decades. The question is, does Australia need more competition? Um, now the ACCC is an interesting vehicle, um, and, uh, is not there to tell us what they need or want. ATCC is governed by the Competition and Consumer Act of 2010, uh, and, uh, asked to look into cases if asked to do so, or doing it, uh, by their own initiative. In 2020, the Treasurer mandated, so to speak, the ATCC to monitor activity in domestic aviation market, to monitor fares and profits and costs. Uh, in doing so, the ATCC publishes reports. I think it's quarterly. And one such report was published last week, and I saw 2 very, very interesting statements in there. And one is that the importance of competition is illustrated on the Canberra city market. When Rex exited, Virgin immediately raised their fares. The other one is that they will not wave through the idea of Qantas buying the remaining shares of Alliance Airlines, again because of competition problems, potential problems in regional Queensland. So whilst the ACCC cannot demand more competition, they very much point towards the, uh, benefits and importance thereof. Sorry, my, my mouth dries up. Does Australia need more competition? Australia is many things. It's an interesting country. Number 6 in the world in terms of size, the 13th largest economy, and 56th in terms of population. There's 25 million of us. That's not a whole lot. So interestingly, we're the 7th largest domestic aviation market, and we always are in that kind of bandwidth here— 7th, 8th, 6th. That's where we usually end. This is 2019 data, and I think it's most interesting that whilst we are in this market, we're the only one With less than 3 competing carrier groups in 2019. Everyone else has 3, 4, or more. We have just 2. Keep this in mind, please. The next one is on a city pair level. We all know that we have 2 massive markets here. When I worked at Sydney Airport, every single presentation we made to investors and so on, we always said, look at us, we have 2 of the most important markets: Sydney-Brisbane, Sydney-Melbourne. Again, very interesting. Out of the top 20 city pair markets in the world, there's only 3 with 2 carrier groups: Sydney-Brisbane, Sydney-Melbourne, and Tokyo-Osaka. Mind you, there's 32 high-speed, high-speed rail services in each direction between Osaka and Tokyo every day. So somehow we stick out here, don't we? If you take these 3 things I told you to keep in mind, it's develops a very, very interesting picture. Do we need more competition? Now, English is my second language, so I looked up need. It's an important word. Need stands for the— I don't want to misquote that. It stands for a requirement of something very important or essential that is more than just aspired. So it's basically something that you can't do without. Going back to what I said before, by 2010, Australia only had one non-terrestrial TV provider. Foxtel was allowed to merge with Austar, and quite quickly Australia had the most expensive cable TV in the world. I think we needed kind of, you know, technological advance to enable kind of streaming services. When I paid 2012-13, I paid $150 a month, I think, for Foxtel including the EPL package. Now I pay about $15 or $16 a month for Netflix, right? And I get the EPL via my Fox— via my Optus phone subscription. I save about, I would say, 3 quarters of what I paid just about 10 years ago. I think competition was needed in this context. In terms of the supermarkets, I think Woolies and Coles were very much able to feed Australia. We didn't need Aldi, but when Aldi came into the market, I think we were all better off. We got a solid low-cost provider, plus Coles and Woolies were actually kind of rattled up and they kind of, you know, upped their game quite, quite significantly. Now, where does aviation sit? If you go back to the 3 pictures I showed you before, make up your own mind, but I think it's really in the very beneficial kind of category. If these 2 new competitors would stay in the market, and fingers crossed they do, I think we are better off with. So my personal opinion is we certainly kind of would be better off. Outlook. Now outlook is a tricky thing. 3 years ago, I would give you outlooks with a lot of gravitas and and you know you know what do you say conviction? It's much more difficult these days, right? I mean, the world is a very very tricky place, and we've seen. this in many facets over the last 3 years or so. Even now it's difficult. I mean, who would have thought 9 months ago that we'd have a war in Eastern Europe, that we would have, you know, energy prices going through the roof and so on? I'll show you a couple of pictures to kind of paint the direction for this industry in the next year or so. Now this is, this is pretty ugly, isn't it? We all know that we have currently, I think, 6 6.1 was the June measure, going up to 7.5 most likely by the end of this year. Inflation is ugly, and we all know that our real wage growth doesn't kind of keep up with that. That has triggered the RBA to do things, and we have now interest rates at— I don't want to misquote— is it 2.35% right now, with expectation to go up to 3.5% before the end of this year? Naturally, We all see, and most of us have a mortgage to pay, and most of us have to put fuel in cars, and all of us go shopping. We all see those pressures in a very, very real way. Usually, when interest rates go up, the currency benefits, but not in this case because all interest rates go up. All the RBAs, or all the national banks or reserve banks, increase their rates. The dollar doesn't do much in our benefit, which means it doesn't save us from increasing fuel prices. So, so it has come down a little bit, the fuel price, but it's still at a very, very high level. Very relevant aspect for aviation. Uh, some good, some good news. Uh, resources prices have been generally up and are still kind of not in a bad way. They're still at the level of 2013, which is the time when things go— went crazy in the Pilbara. Another good news is that we had a very strong reporting season on the ASX just in the last few months. I don't want to read everything that's stolen from ComSec, sorry, but the last red bar at top, that is basically profits by companies. The lower one is the dividends paid at the same time. You see there's a disparity. Companies are very profitable by and large, but they pay fewer dividends, which is, I think, a reflection of risk aversion and something of a kind of a looming problem out there. Now, a summary. It's always bad to have this kind of wordy slides, so I put them into colors like a you know traffic light system other way around somehow. We have done extremely well in the last six months. If you think back, today is the 14th of September, 2022. Where were you a year ago? Most of you were locked up in your home or in your state. I guess I was locked up in Perth in hotel prison doing time for coming back to Australia. So it was a very different place 12 months ago. 6 months ago, WA opened its borders again. So we've done very well in just 6 months recovering that much. The problem that we see is that this market is driven by very much by leisure these days. How long can this be sustained? Household incomes will be squeezed. Uh, and that's a problem that we all will see. Um, and, uh, the forward schedules kind of point towards more competition in the market, and usually these 4 things don't sit well with each other in aviation. Thank you very much.

Jayne Davey:Thank you.

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