CAPA Outlook | State of the Industry September 2024

Transcript

Simon Elsegood:Hello. That was a very young me up on that slide there. I'm afraid I've developed a few grey hairs in the last 5 or 6 years. I can't possibly think of any reason why that may have been. I'm Simon Elsegood. I'd just like to say thank you very much to Cam and Paul for that very enlightening talk. There's so much going on in this market that it's so good to get high-level perspectives on what's happening. So I'm the head of research at CAPA, which basically means that I get to play with all of CAPA's data and see what's going on. And unfortunately, I do look at a lot of Excels and I do make a lot of graphs. And I get to say the most dangerous thing you can say at a conference, which is I am an analyst. and I have a PowerPoint presentation. So where are we now? This is a graph of system-wide seat capacity in Australia. I'm going to be mostly focusing on Australia in this talk because there's been a few things happening in the market in the last 12 months. So we are at about 93.5% occupancy. of pre-pandemic capacity, that is 2019. That sounds pretty good until you realise that this time 12 months ago when I also gave this talk, we were also at 93.5% of system-wide capacity. That's not to say that a lot hasn't gone on in the interval. 6 months ago, we were at 98.5% and we were trending very strongly up to be at full recovery before the end of the year. However, we've had a few speed bumps, shall I say, in the domestic market. So right around April, we saw Australian capacity sit for more than a month at above pre-pandemic levels. At that point, we had 4 carriers who were operating mainline jet operations, or 4 groups, I should say. And then we saw capacity plummet, come back up again, and then it dropped down. At the moment, we're sitting at about 92 to 93% of pre-pandemic levels in the domestic market. So what happened? Well, Bonza went into administration. We cheer a startup here at CAPA. It was really good to see Bonza come into the market, try something different. It was a novel approach operating large 737 MAXs on predominantly regional routes. Um, and the, the target was to, to grow the market, to operate routes that were either underserved or served by one airline only, or to develop all new routes and sort of grow the Australian domestic market. Unfortunately, Bonza racked up something like $133.5 million of losses. losses in a little over 12 months of operation and it had multiple problems on an operational front that meant that it just couldn't continue as a business. So Bonza went into administration at the end of April and we saw about 35,000 to 40,000 seats a week taken out of the Australian domestic market. That's actually not a huge amount. The domestic market We see about 1.1, 1.2 million seats a week. But a few months after that, we had Rex entering administration. So Rex was operating a fleet of about 8 aircraft on 13 capital-to-capital Golden Triangle style routes. And it couldn't continue with its mainline operation. Right. And that pulled another 35,000 to 40,000— a little bit more, about 45,000 to 50,000 seats out of the domestic market. So combined, those 2 airlines controlled a little bit more than 5% of the Australian domestic market. Their demise— they're very different airlines. and they went into administration for very different reasons, but there are a few similarities. Both carriers reported that they had trouble with staffing numbers, particularly around pilots and engineers. Both airlines reported troubles with their supply chains, particularly maintenance. And both airlines reported that while they had a very good sort of impact on route development and driving down fares and that sort of stuff, that they didn't have sufficient scale or capacity to compete with the incumbents. What we saw with Rex and Bonza was sort of a rebalancing a little bit in the domestic market. We had Uh, in the immediate COVID recovery period, we had a huge spike in airfares, particularly in the best discount economy, which is kind of your go-to standard. It's the fare that everyone wants to get. It's the cheapest fare that you can get. Um, so we saw that shoot up very, uh, very, very rapidly in 2022. It's since come down and fares have continued the main to, to slide downwards. So in the last 12 months, domestic airfares have come down about 5%. That means that your sort of round-trip airfare, you're saving about $14 on a domestic round trip. We're seeing a little bit more resilience in the full flexible market. So people are still willing to pay a premium post-COVID for more flexibility in their flights. People are still worried about cancellations. People are still worried about operational on-time performance. And so people are still willing to pay a little bit of a premium to have a bit more security. Business class fares have— the movements have been more muted, but we've seen actually quite a substantial growth in business class fares, particularly on capital-to-capital routes in the last 6 to 12 months. The end result is that it's been really, really good for domestic operating margins. The last couple of years have been a bit of a sugar rush for Australian airlines. We've had Qantas reporting about $1.3 billion in profit. We've had Virgin Australia making its first full-year profit in 11 years. And then while Rex suffered losses, on an operational level, it pretty much turned things around. Rex and Virgin Australia here are first half results, but the trends have actually been slowly, slowly going upwards in the last 6 months, so you can take those as fairly indicative of where they're going to end up for the full year. But things have slowed down a bit. Domestic fares are coming down. There's been Some growth in unit revenue, some growth in yields, but it's down at around the sort of 2 to 3%, not the 5, 10, 15% we saw in 2022 and 2023. Turning a little bit more to operational performance. This has been the bugbear in the post-COVID era. This was— these are cancellations. So you can see a couple of big spikes around the initial lockdowns with COVID-19 and then the Delta wave and subsequent worries and concerns there. When I take these big spikes out, we still see that cancellations are running at an elevated level. So for the last 6 months, cancellations have averaged 3%. or just under 3%. To put that into context, cancellations in the 2010 to 2014 period averaged 1.8%, and cancellations in 2015 to 2019 averaged about 2.1%. So if you look at it historically, we see— we still see about a 50% increase in the number of cancellations that domestic customers are having to deal with. We've seen some improvement in the last couple of months, sort of cancellations have headed back towards that 2% historical level, and hopefully they will keep trending downwards. Now, this is not to say that airlines are to blame for this. This is a system-wide issue. It's, as I've referenced, Workforce shortages, it's air traffic control, it's issues outside of airlines' control, it's supply chain, it's weather, it's all sorts of one-offs. But we're still seeing on-time performance that is substantially below historical levels. And this has led to significant amounts of dissatisfaction with customers. It's funny, when you talk to passengers, people are very happy about the service they get onboard an aircraft. In fact, customers are really delighted with the experience in flight, but everything else that is around that travel journey, dissatisfaction is growing. And as a result, we've seen significant harm to airline brands. in Australia. Qantas used to be one of the most valuable brands in the country, and in the last 4 or 5 years we've seen that brand value tumble. That's through a few own goals as well, but it's also the, the sort of the general post-pandemic difficulties that everyone has experienced. In a response to this, we've seen the Australian Aviation White Paper released. I hope everyone's read all 240-odd pages of it and all 56 policy initiatives. The big one is the Australian Aviation Ombudsperson. This is not a European-style punitive arrangement. It's going to be much more like the US-style arrangement. Consultation is still ongoing, so there's a lot of grey areas. They will have a relationship to the ACCC and will have the ability to recommend actions to the ACCC. But what we're not going to see is a European-style regulation imposed on Australian airlines. The ombudsperson is going to have a whole lot of tasks ahead of it though. Once it's sort of— once it's formed— I had some notes. I think you're good. The priorities are going to be met to outline a passenger bill of rights and then to really make sure that people are aware of what they're entitled to and what they're not entitled to. And the other thing that's going to be oversight and monitoring. Australia has a very, very good aviation safety regime. Our competition monitoring has not been as comprehensive. Yeah. We've seen the ACCC being tasked with monitoring the domestic market for the last couple of years, and the Australian White Paper points to a lot more competition monitoring, performance monitoring coming in in the next few years. So switching to the international market, it's actually been in aggregate remarkably stable. We're at about 94.5% versus 2019, and we've been there or thereabouts for the last 7 or 8 months. That is not to say that individual markets are not performing at very, very different speeds. So here are some of our best performing markets. You've got Japan, which is now about 22% above what it was pre-pandemic. We've got Indonesia, particularly Bali, which remains perennially popular, which is about 17% above pre-pandemic levels. And we've also got Thailand and Singapore. And what we're seeing is there are significant jumps up and down in capacity. These are still some of Australia's 10 largest markets, but individual airlines jumping into the route, jumping out of it, are swapping capacity to a substantial degree. Thailand's a really good example. They've added services to Perth, they've increased frequencies, and all of a sudden capacity on that route went from about 20% below pre-pandemic levels to a few percent above pre-pandemic levels, and then when they saw the Australian market was performing well, they doubled down and further increased capacity. There are also some underperformers in the markets. China is probably the most notable example, so this is combined China and Hong Kong performance. It's still down around 20%. if not a little bit more. It's slowly been coming back, but as we heard from Cam, Qantas has exited the China market, but there is still a huge amount of capacity that's actually operating to and from Australia and China. There are about 134 weekly services with 8 Chinese carriers. We found that Australia's Australia is mostly an inbound market for Chinese tourists, VFR travellers, leisure travellers, and they have a strong preference for their local airlines. So it's difficult to compete in that market for an Australian airline. The US market was looking very, very strong, although that was mostly United Airlines putting a whole lot of transp— specific capacity into the market and has then found that market's been underperforming and taken almost all of that capacity out of the market. Australian carriers, obviously we're missing Virgin's international 777 operations, but even so, that's mostly US carriers dropping capacity. And then the UAE, we've seen Emirates Aneta had underperforming what they were on pre-pandemic levels. The indications for 2025 are that those 2 airlines are going to significantly increase Australian capacity, so we should see getting back to 2019 or above in the first half of the year. And Malaysia is a bit of an up-and-down market. It seems to go through very seasonal pulses. if you will, uh, we're lacking quite a lot of capacity from AirAsia in that market. Um, one of the keys in international travel is business travel volumes. Australia was one of the markets where business travel actually kicked off quite quickly. Um, we saw sort of a jump up to about half of pre-pandemic levels. It's since stabilised at around 70%. What we're seeing is that the policies that companies put in place during COVID that have been very sticky, their layers of additional approvals and the sort of extra scrutiny on travel budgets has not gone away. And the result is that we're seeing a lot less solo, sort of your road warrior style traveller who's going to go in, do a day or two and then leave. And that's being increasingly replaced with larger groups who are travelling for extended or more extended periods of time, 3, 4, 5, 6 days, trying to get multiple things accomplished in the one trip. Australia is also doing reasonably well in the regional context. So here we have New Zealand, Japan, and Taiwanese business travel arrivals. All of those are sort of somewhere around 60% to 70% back on where they were. Again, the slow recovery of the Chinese market is really not helping. There are probably 5 million Chinese business travellers that are missing, still missing from the international market. International travellers spend a lot of money in Australia. The estimate last year was they spent somewhere around $4 billion on airfares, accommodation, car hire, food, you name it. That looks really good. It looks like this year we're going to exceed pre-pandemic levels. We've got these bigger groups staying for longer periods and doing more, they're going to spend more money. The only problem is that once you adjust for inflation, things don't look quite so rosy. We've all experienced the cost of living crisis. Inflation has been higher than it's been in decades. So once you adjust for inflation, we're still missing somewhere around $500 million a year out of international business traveller spending in the Australian market. So what's the outlook? Well, short term it's actually pretty good. We're expecting to see a big spike in international capacity with the transition to the, the winter schedule around the end of October. The domestic market is a bit more up and down, but we're seeing it moving towards sort of 97%, 96% of pre-pandemic levels by the end of the year and then very hopefully moving as Qantas and Virgin take on— take delivery of more aircraft, we see them moving towards pre-pandemic levels and then building slowly and incrementally beyond that. There is a substantial amount of new capacity coming into the market. While older aircraft are exiting, we're seeing increased densification of Australia's domestic fleet. So you're seeing 717s with 110 seats replaced with A220s with 135 seats. We're seeing 737-800s with 180 seats roughly being replaced with 737 MAXs with a few more seats or A321s with 200 or more seats. So replacing like for like, if you get rid of a 737 and replace it with an A320, you're seeing a 10% jump in seats on the same route. We're also going to see those aircraft deployed internationally. So the 321LR and XLR have huge, huge ranges, so they put large parts of Asia, all the way up to North Asia, into range of a narrow-body aircraft with a substantially lower unit operating cost than your typical wide-bodies, A330, or roughly on parity with a 787. What in the longer term, though, We're seeing growth slow down. So this is growth 5-year average since the aviation market in Australia was deregulated at the start of the 1990s. So we had a huge spike in growth, slow— a slowdown. We hit the— just before the GFC, and then we had another slowdown after the GFC. And that's the 5-year average. see. In the last 5 years, we've seen the domestic market— sorry, in the 5 years before COVID because COVID makes things weird, we saw the domestic market grow at about 1.5% per annum. We saw the international market growing at between 4% and 5% per annum. And that trend sort of looks to continue. When we look at the long-term projections, for what passenger traffic is going to do in Australia. This year we're going to see about 100 million people flying around Australia. So we're going to see about 60 million domestic passengers and we're going to see about 40 million international passengers inbound and outbound. The long-term forecast is for domestic traffic to grow somewhere between 1.8 and 2.6%, about 2, a little bit over 2%. That's compared to the previous 30 years where the domestic market grew at about 4.5%, so halving the previous 3 decades' rate of growth. The international market is looking a little bit healthier. We're not just relying on Australian outbound, we're relying on international inbound as well. So we see that growing at somewhere around 3% per annum, plus or minus about 0.4%. That will see a lot more international capacity added into Australia, a lot more airlines who are going to come into the market. We have around, in a given year, there is around 180 different international airlines that will operate to Australia. The market fundamentals, just touching on the domestic market, we're a low-growth population. We're looking at about 1% to 1.5% per annum for the next 25 years, and we're actually a relatively low-growth economy. So the forecast is for the Australian economy to grow at somewhere between 1% and 2%. for the next 20 years. Now, that's obviously not going to be 1% or 2% every year. It's going to be up and down, but the market fundamentals are that we are going to be a much slower growth market in the next 20 years. And that concludes that. Thank you. Thank you.

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