CAPA Outlook: State of the Industry September 2022

Transcript

Adrian Schofield:As Marco mentioned, I'll be presenting a fairly brief overview of the Australasia air travel market. As also was mentioned, I'm Adrian Schofield, and I essentially write about airlines for Aviation Week and also for CAPA. So I'll be using some charts from the excellent CAPA database just to provide some background to some of the issues that we'll be hearing about from the real experts over the next few days. So I thought we could start with Australian domestic capacity. Next slide, please. Needless to say, it's been a very turbulent few years for capacity. And as the chart shows, there's been some pretty large swings and dips caused by COVID-19 restrictions domestically and state border closures. So if you look at the yellow line that represents 2020, you can see the initial steep drop during the initial COVID wave. and then the gradual recovery extending into 2021, which is the red line. But these gains were essentially wiped out by the Delta wave that hit from July 2021 onwards. Then there was fairly rapid recovery, and then Omicron hit in early 2022, and you can see that's on the the green line towards the left, and obviously the drop was not quite as severe as it was during the Delta wave. Capacity then recovered to essentially 100% of pre-pandemic levels in April through July of 2022, but after that it's eased a bit, and this is partially due to some of the well-publicised problems that airlines are seeing as they ramp up operations again. So Australia's international capacity has been slower to rebound, as it has been in most countries in the Asia-Pacific region. It remained fairly flat until around mid-2021, and you can see on the red line there, the 2021 line, there's that bump in the middle of the year, and that's mainly due to the travel bubble that was established between Australia and New Zealand that was fairly important to restore some degree of connectivity. But unfortunately, it was fairly short-lived. And we see a more sustained increase starting from around November 2021 on the far right of the red line. linked to the phased border openings continuing through 2022, which is the green line. And again, the increase has levelled off from about July, reaching now 57% of pre-pandemic levels. But of course, capacity doesn't tell the whole story. And for much of the pandemic period, the aircraft that were flying were far from full. And international passenger load factor in the Australian market, represented by the yellow line, was below 50% for 23 straight months, dropping to lows in the single digits. I think it was— it got to as low as 8-point-something percent at one point, and it didn't rise above 50% until March of this year. So domestic passenger load factor has fared much better. The blue line there returned above 50% around July of 2020, and passenger load factors for both international and domestic are now essentially at pre-pandemic levels. So a few slides back, we saw that Australia's international capacity— that's for all airlines serving the market— is at 57%. But we can see here that Qantas Group's international capacity has reached 65%, which is about 8 points difference. And this difference indicates that Qantas— the Qantas international recovery is occurring faster than the overseas carriers in this market at least. And we'll see the Qantas international capacity increase more next year as they return more A380s to service. I think the plan is to return another 5 to service, and they also have 3 more 787s due by June. So turning to New Zealand, which is a market very close to my heart, again, movements in capacity have followed the domestic restrictions and lockdowns in this market. We see that the Delta wave hits slightly later than Australia. Again, that's the red line. And then Omicron again in 2022, we see that dip in the green line towards the left. Domestic capacity is now back up to 91%. And during the pandemic period, there was, of course, very little international feed coming into the domestic network. But this was partially offset by greater domestic tourism. And that is, again, a trend that we've seen in— That's right. in many Asia-Pacific markets. So New Zealand international capacity, we see fairly similar movements in capacity as in Australia's international capacity. We see the Tasman travel bubble effect in mid-2021, which was— it was more heavily geared towards Australia to New Zealand than New Zealand to Australia, I think the airlines were saying. The sustained increase did start later for New Zealand than it did for Australia as border restrictions eased in New Zealand, and capacity has now levelled off at 54% of pre-pandemic levels. This upcoming summer season, we can expect to see an increase as more overseas airlines increase service, and Air New Zealand returns more of its widebodies to service. So in this slide, we're comparing Australia and New Zealand's recovery rates on the left with some other markets. Australia and New Zealand have recovered better than the Asia-Pacific average, as we can see, which is at 43%, and better than the Southeast Asia rate of 44%. And a lot better than Northeast Asia. And of course, Northeast Asia has a much lower recovery rate because it includes markets such as China, Hong Kong, Japan, and Taiwan, which have been slower to remove their international restrictions. An exception to this is Singapore, which has really set the pace in Asia-Pacific in terms of capacity recovery. I don't think there's a market that has recovered quite to that degree so far, as they were early leaders in things like virtual travel lanes, and the government made it a very, very high priority to re-establish international travel. Europe and North America have recovered in terms of international capacity ahead of Asia-Pacific, the Asia-Pacific region, as their border restrictions again were were quicker to be relaxed in general terms. This chart shows visitor arrivals by source market, and in 2019, on the left, China was the leading source of visitors for Australia with a 15% share. In 2021, on the right, the last full year of data, China is 6th with just 2.7%. So that's quite a significant drop. I think this indicates the importance of the China market to Australia and also the effect of China's tight border rules. It's worth noting that New Zealand had the largest share in 2021 by quite a significant margin, again, impacted partially by the travel bubble. So this chart looks at international markets, Australia's international markets, Using a slightly different measure, that of seat capacity. So it accounts a lot better for 2-way traffic flows than the previous chart, which looked at visitor numbers. So in 2019, on the left, China was 6th, Hong Kong was 7th, and Japan was 9th. In 2022, this time, on the right, all 3 of those markets are out of the top 10. China is 12th, Japan is 13th, and Hong Kong is 17th, off the bottom of the list. But I think we can expect to see those 3 markets back in the top 10 again once border restrictions normalise. Turning now to Australian domestic capacity share, you can see from this chart that Qantas now has about 40%, Virgin has 30%, Jetstar around 20%, and Rex has 6%. I looked back and compared this to the same point in 2019 when Qantas and Virgin were at about the same share as they have now. Tigerair, of course, was still there at that point in 2019 with 5 to 6%. Jetstar has risen slightly since 2019, and Rex is also up probably the most, having added its jet services since then. And we'll see some more shifts in the future with Rex planning to build its narrowbody fleet more, and of course Bonza entering the market in the near future and with fairly ambitious growth plans. So this chart looks at some changes to the Australasian narrowbody fleet, and Australasia of course being Australia and New Zealand. For purposes of this chart. The 2 lines represent active and inactive aircraft. So as the active number goes up or down, the inactive one changes proportionately. The region's total narrowbody fleet now stands at 291 aircraft, having reached pre-pandemic levels in April or May of this year. More growth is likely again for similar reasons as in the last chart. Partly due to Bonza entering the market and presumably boosting its fleet and also Rex adding more narrowbodies. So the Australasian widebody fleet has been much slower to return to service. There are now 66 active widebodies versus 107 before the pandemic, giving us a recovery rate so far of 62%. The current plans by airlines are to add another 14 widebodies over the next year, but at least in the medium term, the widebody fleet won't fully recover to 2019 levels. Of course, Virgin Australia has cut all of its widebodies during the pandemic, and Qantas and Air New Zealand have retired some of their older widebodies, some of the 747s obviously, and 777-200s for Air New Zealand. And Qantas has retired or will retire a couple of its A380s that won't return. So just to wrap up, I thought I'd outline a few of the major questions and challenges facing the airline industry at the moment. One of the immediate problems has been resolving the system disruptions that have been capturing headlines lately, such as reliability, baggage, workforce issues. And making sure that these issues don't constrain growth during the recovery period. Another big question is, how long do restrictions remain in important markets like China, Hong Kong, and Japan, but also some minor, more minor travel frictions that are remaining in some other markets? And The third point is self-explanatory. There's quite a few risks out there globally that could— that raise the risk of global downturn or something affecting demand externally anyway. And the final point is there's also some uncertainty, I think, about long-term demand. And demand is strong now due to the pent-up international travel demand combined with the constrained capacity that we have. But what happens when that first wave of pent-up demand eases and capacity returns, particularly next year? I think airlines will have to take this question into account as they formulate their growth and recovery plans. And there's also the question, of whether long-term— if there's been any long-term structural shifts to business travel demand. And I think that's something that we can speculate about that, but we won't really know until more capacity comes back and the travel system normalises a little bit. So I think I'll leave it right there. I hope you found something of interest in that. Obviously, if you have any more questions about that, or if you want to have a closer look at some of that data, or if there's there's something that you think you'd like to see us covering a bit more, please do come see me or drop me an email at that address. So thank you very much. Thank you.

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