CAPA Outlook | State of the Industry September 2023

Transcript

Simon Elsegood:Good morning everyone. It's good to see so many faces here bright and early in Brisbane. I am the Centre for Aviation's Head of Research, and if you don't know what that means, it's basically I'm a specialist generalist. I'm sort of paid to know what's going on in the industry and hopefully I can illuminate some of what we see CAPA sees going on in the next 15 minutes or so. So taking the view from 30,000 feet or 30,000 feet plus, global capacity is basically fully recovered. Congratulations, we've done it. We can all go home. Hmm, not really. The recovery is very lumpy. Between market to market, whether it's country market, region, reason for travel, fare type, the recovery is, is incredibly variable. The Asia-Pacific is at about 98 to 99% seat capacity recovery. That doesn't mean that passengers are at 98 to 99%, but airline seats are almost back where they were This time in 2019. However, there is a huge variation between the domestic market and the international market. Large domestic markets across the Asia-Pacific have done incredibly well. Australia is above 95%. China is above 100%. India is above 110%. Vietnam is above 115%. People want to travel, and when they're offered the opportunity to travel, they will take it. However, we can't say the same thing in the domestic market. Across the Asia-Pacific, we're looking at regional capacity being at about 80% of what it was in 2019. A big part of that story is North Asia. North Asia was largely closed off to international travel until early 2022. Japan and South Korea then reopened their markets progressively, and from the middle of 2022, we've really seen international travel accelerate. But the big change has been the reopening of China. However, Chinese capacity is still nowhere near what it was this time in 2019. So on a typical week In September 2019, around 6.5 million seats would have been operated to and from China. Last week, 2.2 million seats were operated from China. So that gives you an idea of the scale that needs to be recovered in the Chinese market. It is coming back. We've just seen 2 announcements from China Southern. and China Eastern. We've heard that China is relaxing the last vestiges of its outbound travel restrictions. There are still impediments. One of the things is that the Chinese airlines and the Chinese tourism agency has done an incredibly good job of promoting the domestic tourist market. The Chinese want to travel, but they're doing it domestically. They're much more comfortable travelling within their own borders or to Macau or Hong Kong rather than visit— going internationally. There are some geopolitical concerns. Trans-Pacific traffic in particular is well down on where it was. And there's also lingering concerns about COVID Even though most of us have sort of put it out of our mind, it's not really affecting our travel, other markets are different. So globally, we see interest in travel is elevated well above 2019. This is Google's flight search data. And December 2022 was when China announced they would be reopening to international travel. And we see global searches for international flights shoot through the roof. They went up around 45% in the space of a month. They peaked at about 20% above 2019 levels. And since then, we've gradually seen things turn down. Capacity wasn't there, so people were discouraged. The ability to travel wasn't there, so people were discouraged. In addition, Global economic slowdown is starting to be felt. COVID is no longer the concern. Wallets are the concern. The cost of travel and the value that people are getting through the travel journey, not just your airfare. It's everything from your Uber to the airport, the price of a sandwich at the airport concession, what you have to pay for on the flight, what your accommodation costs, what you're paying for services, what you're paying for events. All of these things are contributing. They all hit people in their hip pocket. Air travel is fundamentally related to disposable income. When inflation increases, as we've seen in the last year and a half, disposable income drops. If people don't feel comfortable, they're not going to travel. So, The global economy grew remarkably quickly in 2022 and 2020— in 2021, 2022, coming down from a huge low. We've seen growth above 6%, but it's two-speed. We have advanced economies that are only growing slowly. The EU and the US are forecast to grow at about 1.5% this year. We have avoided the recession that a lot of people forecast, which is Fantastic news, but growth is still slowing. It will probably slow through to the first quarter of 2024 before gradually taking off again. Inflation remains persistently high, particularly core inflation. It's sticky. This is related to the monetary tightening that we've seen, the supply chain disruption. All of these things that you've all heard about are still contributing to high high prices, and this has important implications. Wages, real wages are going up. In the US, real wages are now going up for the first time in something like 45 years. But across large parts of the rest of the world, real wages are still in decline, and that has implications for consumer spending. And also from China, signals are mixed. China has been the engine of global growth. In the last 10 years, China has been responsible for about 50% of the world's growth in GDP. But post-pandemic, post-lockdown, China is not growing as rapidly as we expected. There are problems with the real estate market. There are problems with consumer confidence. There are problems with consumer spending. Hopefully, the Chinese government will get a handle on some of these things, but until that happens, the prospects for 2024 for rapid growth are not what they were. Airlines themselves are facing intense cost pressures. Yes, fuel prices have come down, but that's only temporary. The forecast, the long-range forecast for fuel is for prices to go back up. Depending on what kind of airline and how they operate, fuel can be anywhere from a third to half of an airline's expenses. So a 10% or a 20% increase in the price of fuel is going to have a huge impact on the cost to do business. And the outlook is for price growth. So this is from the US Energy Information Agency and the EIA, and their forecasts are that global jet fuel prices will— are about $125 a barrel at the moment, and they'll be $115 a barrel by the end of next year. However, the upside risks are substantially more. Global oil demand is at all-time record highs. Global oil inventories are now at the lowest levels we've seen since the '80s. And the other half of the equation is labour costs. Labour is about 25%, maybe 35% of an airline's costs. And labour markets remain particularly tight. Airlines are having trouble getting staff, hotels are having trouble getting staff, airports are having trouble getting staff, everyone's having trouble getting staff. This forces wages up, there is elevated mobility, there's also a desperate skills shortage in the industry, particularly around pilots, engineers, cabin crew, that sort of thing. Also in the background, we have financing costs. Trying to tame inflation means monetary tightening, raising interest rates, which makes the costs of debt more expensive. Airlines took on huge amounts of debt to survive the pandemic. They now have to start to pay that debt load back. That's really, really difficult when interest rates are going up. And sustainability is going to add to costs. increasingly. Yes, we all want to be sustainable. Yes, we all want to hit net zero. That's going to come at a price. New aircraft are expensive. Sustainable aviation fuel is expensive. Upgrading your technology does not come cheaply. Some good news. Global business travel is basically back, sort of. When you account for inflation, Global business travel spending will probably be back to full around 2025, maybe very early 2026. Headline spending will be back next year. The air travel component of that will be about 28% to 30%, somewhere around there. So global travel spending on business this year will be somewhere around $1.4 trillion US. Next year it will be somewhere around $1.6 trillion. And it will go up by about $150 billion a year every year following. Also, regional international business travel is coming back. Finally, as borders have opened, we've seen these markets an initial very quick acceleration. So typically to get from 0 to 50%, International inbound has been about 12 months. To get to, um, from 50% to about 70% has been another 6 to 8 months, but international business travel tends to stick at the moment at about 60 to 70% of where it was in 2019. Now, some of that is seasonal, some of it is situational. We've just had the Northern Hemisphere summer, People wanted to travel for leisure, not for business. We will see business travel start to come up again as the shoulder season approaches. But some of this is structural. We still don't know how much, but there is a definite substitution towards technology. Business travel budgets have been slashed. People really enjoyed the savings they got during the COVID 'cause they didn't have to fly people everywhere. Your accountants are desperately trying to retain those savings. Um, and there are encouraging signs emerging around the meetings, conventions, entertainment industry, particularly incentives and hybrid working arrangements. People want to meet the people that they're working with if they've never met before. So we're seeing fly-ins where everyone gets together. We're seeing more travel because of the way that people work has changed. For businesses, cost remains the major concern. Somewhere around 75% say cost is their main concern around travel. And then worker safety, which has elevated since the pandemic, is also one of the major concerns. Turning to Australia, I won't go too hard on this. You guys have probably all been reading the paper and watching the news, so you know what's going on. Australia, our local market, has seen more action in the last 12 to 18 months than we have in any time since about the end of the GFC. So huge changes are coming, but it remains an imbalanced duopoly. Qantas controls about 60% of the market, Virgin controls about a third, and the rest of the airlines squabble for 10%, roughly. We have our very first independent low-cost carrier in this country since Impulse Airlines in the shape of Bonza. Starting small, it's 4 aircraft I think in operation with 27 routes. Those are pretty much predominantly leisure routes. Bonza is only competing with other airlines on 2 of its routes at the moment. To put that into context, there are only 8 routes in Australia where there are 3 or more airline groups competing. Half of all passengers in Australia travel on a route where there are only 2 airline groups that operate. It is an imbalanced duopoly in this market, and Qantas and Virgin are the big boys in the room. They have significant refleeting plans that's going to keep that duopoly going, at least for the foreseeable future based on future fleet plans. The domestic market has sort of come back into balance and this has brought fares down, although some fare classes remain significantly elevated. So here is a long-term look at fares over the last decade or so. We see this huge spike around July, August last year leading to fares being about 45% higher by December than what we're used to. They've since come back down as supply and demand and capacity has come back into the market. Fares have come down commensurately. Compared to 2019, things are about 10% higher than where they were, and they're sort of levelling out at the moment. The other big thing that people have been complaining about is operational performance. This is still not back where it was pre-pandemic. On-time performance is about 50% worse than it was. A large part of this is a shortage in pilots, engineers, and other operational disruptions. We are very far away from things in Australia. We tend to be last cab off the rank when it comes to maintenance. Like, getting things to Australia is physically difficult. So we've seen cancellations and delays. We've seen long queues. We've seen lost bags. We've seen people waiting for hours on customer service lines. To get their refunds that are owed to them. All these sorts of things. So consumer attitudes towards Australian airlines, which weren't great in the first place, are shifting downwards very quickly. Winning back that trust and rehabilitating Australian airline brands is going to be a really difficult task. I wouldn't want to do it. It's not something that's going to be fixed overnight. It is something that has to— that will come from operational excellence, from recognising the needs of the customers and from anticipating where the market is going to go and what demand is going to look like in the next 6 months, in the next 12 months and beyond that. Airlines will need to listen to their customers better, otherwise they won't solve this reputational problem. And that is about it as far as we go.

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