CAPA Aviation Outlook

Transcript

Peter Harbison:So I want to talk about the outlook generally and some of the realities of the Australian market at the moment, focusing particularly on the Australian market. So first of all, the big picture. The balance of probabilities We're at an interesting stage now and I think you all sort of feel this. We've had— we're coming off a pretty positive time. Traffic has been enormously high over the last 2 years, 2 or 3 years, right up in double digits, which is remarkable internationally. Just unprecedented really, except for when you're coming out of a real slump and we haven't been doing that recently. That's been combined with profits and that's also really unusual to have the the combination of high traffic and profits for the airlines. And it's largely because oil prices have been way down. Last year this time they were about low $40. Today they're pretty close to $80, down about— today about $74. So the basic point is that things aren't going to get any better, but are they going to get worse? And if they do, how much worse are they going to get? The positives we're looking at are world GDP and traffic growth, and the two are connected, joined at the hip, and I'll show you that in a moment, are still strong. Airlines are still reporting good margins and good profits, and there's a chance that fuel might be— oil prices might be stabilising. They've come off the $80 level, as I mentioned, per barrel, and they're down to around the low $70s. Thank you. and Mr. Trump is talking about pumping out a whole lot more, so maybe they'll stay down there. That's on the upside. On the downside, oil prices are still high, and to some extent the impact is just starting to seep through. Those carriers which had hedged their fuel prices are starting to move out of that hedge and actually they have to face higher fuel costs. And fuel is anything from sort of a quarter to a third of total cost of operating. So it's pretty important where fuel prices are. The other feature is that aircraft orders have peaked. Now usually, if you look at the cycles over the decades, when aircraft orders peak, you get the highest number of aircraft orders, that means something bad's going to happen. But not yet. They haven't stayed there. One of the things that's been caused by this, that's been created by this high traffic growth, which has been accommodated by, which has been generated by lower fares, is that a lot of that traffic is quite price sensitive. So that means that if prices do have to go up, you might see quite a slowing quite quickly in traffic levels. And then you've got the Trump risk. This is the real unknown and it pervades everything. I'll give you one little example. Farnborough Airshow was on a couple of weeks ago, which is where a lot of orders are announced, and one of the things that was exceptional there— there were quite a lot of orders— a lot of the airlines and leasing companies did not want their names to be disclosed as orders, and that's because they're concerned about any repercussions that might come from the US because of the whole supply chain, because of who they're buying the aircraft from. And so it's sort of— it just gives you an idea of how the risk and uncertainty that Trump creates permeates just about everything. So we can't ignore it. And obviously the trade war threat, if it's a real one, is something we have to watch out for. So let's watch out for that one. That's probably the biggest danger we have. One I mentioned before too, supply and demand. This is a pretty wavy old chart but it goes back 20-odd years, 30 years and more than that actually, 50 years, yeah. 50 years. But the blue line— I'm not sure if— oh yeah. I can't show it. The blue line is the RPKs, the revenue passenger kilometres. That's basically how much is flying around. The black line is GDP. And as you can see, they tend to stick pretty close together. When they don't, they tend to adjust pretty quickly as well. So let's just— Can you just go back one slide? close in on this bit, which is where we're at now. So you see that the supply— supply side, the blue line— is going up and GDP is still down. Now, the forecast for GDP growth is pretty good this year. It's about 3% globally. And if we just hone in on that little bit, we get the feeling that there is quite a gap there. So 2 things can happen. One is that the traffic levels go down, capacity levels go down, which is unlikely because there's a lot of— there are a lot of seats out there. So you either reduce capacity, GDP increases faster than we're expecting, and/or airline profits are reduced. So it's sort of an interesting phase we're moving into. Turning to Australia particularly, This is a bit hard to see, but basically the top lines there are on the left Qantas, on the right Jetstar, and you see the domestic growth levels over the last 5 or 6 years on the top lines. And you can see that things are actually pretty flat. There hasn't been a lot of growth. On the left at the bottom is Qantas International, which is showing some growth now. Jetstar, which has pretty much stabilised over the last 3 years. So just a sort of broad picture of where we're looking at. On the Virgin side, the major competitor, Virgin is actually growing domestically. Tiger has shrunk and sort of reformed itself. And there are only a couple of years there because that's the only— that's only when Virgin bought the whole airline. So Tigerair now— It's a private company. falls entirely under Virgin Group. I suspect that'll change a bit in the near future, and I'll talk about why in a moment. Domestic market shares. There's been a lot of talk about this over the last few years. Qantas is just under 60%, and Virgin's reasonably strong, still around 37%, the Virgin Group. Where that heads we don't know, but it's probably not going to change an awful lot from that because there isn't a lot of change in the domestic market. One thing that's happened because of this stabilisation in capacity and the amount of supply in the market has been that domestic fares have started to trend upwards. So we're seeing— these are indicators of course, and the indicator crossed over back in 2000 at 100%. And since then, business class is down to about 95%, or 95% in the indicators. Restricted economy, which is the cheapest, is 82% of those levels. And discount economy is right down. But again, they're all starting to trend up a little bit as, you know, as you well know, we've been through the air wars, capacity wars, and things are starting to move up a little bit. That's pretty positive for the airlines in a lot of ways. This is a joint issue we made with CWT, and there's a brochure around that you can pick up on your desks, I think, on your tables. All of the economy fares on the East Coast major city pairs are up year on year. The red bar is means more than 5%, which is quite significant in fact, isn't it? And business class fares on the 2 routes that were covered, or the 3 routes that were covered, 2 of them were down and Sydney-Perth is up. Might be a bit of an aberration. Internationally, the Australian market share, Australian carrier market share is actually fairly low. Qantas has now got about 25% of the market internationally. Virgin's got another 6 or 7%. And relatively that's low compared with, say, New Zealand. Air New Zealand has over 40% of the total market. Neither of those things is all that important from a consumer point of view and from a tourism point of view because what you really want in a market is a nice vibrant competitive competitive market, particularly where you've got local airlines that are actually making money. So pretty much everybody's happy in those circumstances. Looking a bit closer in at Virgin and the Virgin Group, just a few questions which I'm not going to answer now but I might ask John Borghetti. Tigerair will probably start trans-Tasman in 2019 which will make some— make for interesting competitive formulae. There's been a lot of talk about Virgin Group privatising. That's probably not going to happen even though only a small part of it is actually public and the very large array of owners on the left there are in various states of positive or negative operation themselves at the moment. Singapore Airlines is probably performing the best of the lot. And that sort of again raises the hoary old issue of whether Singapore Airlines will actually bid to take total control of Virgin. I think they will one day, but who knows? The world changes. Qantas, as I mentioned before, been adopting a fairly cautious approach to growth, but the financial performance is strong, and I think that's, that's a very important part of of being there. This is its share price for the, for the, what, 7 months of this year? Pretty, pretty solid performance, and that is a result of making some careful decisions on capacity in the market, supply and demand, getting that balance right, and moving towards the important thing of actually being a sustainable business. in its own right. One big thing just happened recently. In came Air New Zealand, divorced itself from the Virgin Group in terms of the Australia-New Zealand partnership, and that will make quite a big difference. It's quite a game changer in the Australia-New Zealand market. We have yet to see what's going to happen, but there are some quite significant codeshares just in the process of being announced. Their schedules were published just this week for the period beyond October. And it is going to make quite a difference to the market, although Virgin is still, to a lesser extent, a partner on a codeshare basis. That's just our headline from yesterday that the partners' codeshare partnership will begin in late October. Which does change the way you'll be buying tickets. But it also means, going back to what I was saying before, that Virgin now, without its close joint venture with Air New Zealand after October, is going to have to start expanding both in terms of capacity and in terms of new routes coming up. And you've probably seen that Virgin's already announced a Newcastle route to Auckland, which is pretty interesting. So there's a bit of change going on there. Thank you. The important thing though is that airlines are starting to become investment grade. That's because they are becoming more cautious and it's really only happened in the last 2 or 3 years that a number of airlines have been able to make a return on invested capital, ROIC as it's frequently called, and we've got some ROIC stars here. Alan Joyce is one of them, Willie Walsh who's a big proponent of it, and Doug Parker from American Airlines too. They're the rock stars at the moment who are leading this process to try and make the airline industry sustainable. But it does imply a lot more care in allocating supply and taking some new strategic directions in, in terms of partnerships, in terms of just making sure you are really in a position to be making money. So no more capacity wars unless they can avoid it. One of the other big things that's happening is the new aircraft that are coming. Now I'm not going to get too technical about this, but the big thing I want to talk about, the big difference I want to establish, is between so-called narrow-body and wide-body aircraft. Wide-body aircraft are the big ones that have got 2 aisles. narrow-body aircraft are the 737s, A320s that have one aisle down the middle. Why is that important? Well, first of all, there are a heck of a lot of them coming in this market in the next 5 years. Over 4,500 are ordered in the Asia-Pacific market and many of those in Southeast Asia and across into the Indian subcontinent. That means a lot of change. But what is also happening with these aircraft is that they can fly much longer distances. So instead of just flying 1 or 2 hours, they're now starting to fly 5, 6, 7, 8 hours quite comfortably from a— comfortably from a technical point of view anyway. But it does mean that you're going to start flying much longer distances in narrow-body aircraft. The good news in it is that these narrow-body aircraft can serve much smaller markets. So you can actually fly nonstop instead of going through a hub on these smaller aircraft. So Jetstar, for example, has got some of these long-haul narrow-body aircraft coming, so-called A321neo Long Range, LR, and its initial sales statement earlier this year when this was announced was that they'd be using them on Bali and thereby freeing up the wide-body 787 Dreamliners to do more of the international long-haul flying. Now it'll be interesting to see how they use those because those aircraft can go further than that. They don't just have to go from Sydney and Melbourne. So I might ask Garrys that this afternoon just to see what the most recent plans are. But anyway, there will be changes. There'll be a lot of changes in the next 5 years in terms of routes and in terms of the aircraft you're flying on. A bit about tourism. This really struck me a couple of weeks ago when the ABS published some jobs data. Tourism is still invisible. And the good thing about tourism, given that we're going to have 15 to 20 million tourists coming into this country, international tourists, by the end of 2030. It's a really important part of job creation. The important thing is that they are AI-resistant. There's a lot of talk about how artificial intelligence is going to destroy jobs. For tourism, that's not really the case because you need people, and therefore it is going to be the job of the future, and there are lots of different jobs. You can't really read these very closely but the second one down there in terms of job creation is mining. As you can see, it's actually pretty tiny but nowhere on that list is tourism because tourism doesn't have a discrete shape to it. In fact, it covers a whole lot of these different things. Just think about all of those different activities that are affected by tourism. And the point I'm making here is that as long as it's not in that list, it doesn't get the sort of political attention that's needed to make the right investments, both in terms of physical investments but also in terms of just the whole preparation for having an influx of tourism, which is a real waste. And I think it's a real shame because it affects all of us in this room. Yeah. and the national economy in a big way. So just to throw some numbers, tourism— this is domestic and international— is going to be worth about $150 billion in terms of spend in less than 10 years' time. The mining industry exports in the last full year that we've accounted was about $63 billion and creates a whole lot less jobs. but it gets all the attention. One of the important things in this is that we have a liberal aviation policy. Now what I've got there is 2 lines. This is the difference between Canada and Australia in the China market. Going back to 2008, 10 years ago, we were pretty much similar in terms of the amount of seats that were flying from China to our country and as well as from China to Canada. In the 10 years in between, as you can see from that, Australia established open skies with China. That made a big surge in seats because we allowed a whole lot more Chinese airlines, a lot more capacity into the market. The impact of that, and these are very comparable markets in many ways, The impact of that was a difference of $2.5 billion a year into the Canadian national economy. We got $2.5 billion more directly into the Australian economy as a result of that liberal aviation policy. So we don't want to change that. We've got a good one. Quickly about China. It's grown enormously fast, as we know. And inevitably it's starting to slow a bit. 12% this year is projected. This is the capacity growth. And as we can see from this, the tourist growth itself relates very closely to the amount of seats you have in the market. It's not unusual. But at the same time, the load factors on those aircraft are actually still pretty low, around about 80% by normal standards. So there is room for growth. But I think the tourist growth is actually lagging a bit behind the capacity. China's not the only market that's grown and the only potential. Vietnam is a big one, very close to us, and you're going to see probably quite a lot of those narrow-body aircraft flying on that route. India is a bit more difficult to serve, but it's a big market and it's grown 3 or 4 times over the last decade. Philippines too is a big growth market, both inbound and outbound. Quickly about some of the other things we're going to discuss over the next couple of days. Changing distribution patterns. How many of you in this room would feel competent to stand up and describe what NDC is? National Distribution Centre. OK. I'm not going to even try and do it. Ian Haywood will give you a bit more about it tomorrow. But this is the IATA attempt to move the industry forward in terms of the way the product, the ticket basically, is distributed to the customer. And there's a lot of change in the air. This is probably the most important single issue that's going to influence the industry over the next decade. It's really turning it on its head. Pretty hard to understand. There's another guy in this game too, that's Google. This is an interesting statement from Doug Parker, one of my previous rock stars. He said the other day, we noticed that, and of course in the US, Southwest, if you can read that, Southwest is the big airline that doesn't charge for bags. So what Google has picked up is a way of actually Adding that charge, if they ask the passenger if they want to carry a bag, check a bag, they ask the passenger and if they do check that, then Google adds $20 onto American's fare, which is fair enough because that's what I have to pay. That hasn't really been happening in the past and Google's just doing that automatically. It does change things as Doug is saying there. It's going to change the way they think. Yeah. And this is what happens if you just plug in a Sydney to London request on Google now. It's growing every day, it's improving every day, you watch it. Incidentally, on China Airlines, $1,000 to London peak time isn't a bad price. That's another issue. And that's what happens when you go to the next page. So you actually— you can't book on Google, But it's starting to push you through very quickly and give you a whole lot better information. Lots of options in there. And I want to finish with Sydney's second airport, which we'll be talking about later this morning, but which I refuse to call Western Sydney Airport because it needs to be Sydney's second airport. And what it really needs is a fast rail link to the big city. Yeah. It's not just going to serve Western Sydney, or if it does, it's not going to work very well. Why I've talked about it being dead in the water is that this is the way the man who really developed the concept of so-called aerotropolis talked about Banjarees Creek if it doesn't have a fast rail link when he was talking to us earlier this year. Peter, So I'll leave you with that little sort of controversial tidbit, and we'll move on to our next session.

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