CAPA State of the Industry | July 2025

Transcript

Simon Elsegood:Well, good morning everyone. I hope we're all refreshed, we've had our coffee, and we're feeling energized for some data. I'm CAPA's Head of Research, which means basically I sit and I look at a lot of spreadsheets, I read a lot of reports, And I draw a lot of graphs and I thought because I have to do it, you guys are going to have to suffer along with me for a bit. So here is the state of the industry. This is mostly focused on the Australian market. So we were about 160 million passengers last year, which sounds really good. Growth of 6.5%. Very, very positive. Still coming back from the long shadow of COVID Domestic market of about 120 million. Growth 3.5%, still gathering momentum. We're still seeing a supply-constrained market in the domestic sphere. International passengers going gangbusters. So we're up 15.5% roughly. We're starting to see a lot of strong— well, we're seeing strong outbound continuing, and we're really seeing a return from a lot of our traditional markets with really strong inbound growth. However, it's a big but, COVID does cast a long shadow. Last year, there was still about 4.2 million passengers missing from market. By missing, I mean they just weren't there, they weren't flown. So where are they? Where are they missing from? Well, mostly the domestic market. There's about 4 million passengers that didn't fly in 2024 that would have flown in 2019. We're seeing this bounce back in the first few months of this year. That gap is closing, but it's still not quite closed. Now, part of that, the drop down in February and March, some of that was related to some one-off weather conditions. And we— when we look at capacity forward, we see domestic capacity getting back towards 100% by about the end of the 3rd quarter of this year. Now, most of these passengers are missing from our biggest routes, the Golden Triangle, Sydney, Melbourne, and Brisbane. Across our top 10 routes, 2.5 million passengers weren't flying in 2024. And across our top 10, we're missing about 3.3 million, which actually means that regional and remote aviation, because it's such a small proportion of Australian traffic overall, is suffering even more than our mainline. So when we turn to the Golden Triangle airports— Sydney, Melbourne, and Brisbane— we see Sydney in particular has been heavily impacted. Melbourne's down. Brisbane is down. But Perth is an outlier. Perth has recovered substantially. We saw traffic ease off in Perth in 2016, 2017, 2018. We've since seen a huge return of international travel, a large return of interstate and intra-regional, and what else? And we've also seen the fly-fo market in Perth kick off in a huge way in the last 3 or 4 years, and that has contributed to a massive increase. in overall travel. Um, a few other outliers we see, uh, Sunshine Coast, Newcastle, and many of the smaller airports have expanded their connectivity. We're seeing more leisure travel into a lot of these smaller secondary and regional airports outside of the big state capitals. Um, international market was only down about 250,000 passengers. last year. That's really important for Australia. It's really important for tourism. It's also really important for the domestic market, as a lot of those tourists will fly on to secondary destinations across Australia. So those gateway airports are doubly important because they also serve to funnel passengers into secondary destinations. So international passengers were about a quarter of a million short. It's Australian origin and destination travel that has generally led the recovery. Not every market has performed well, but Australians, as we've heard, Australians love to travel, and the Australian propensity to fly internationally has only increased since the pandemic. We all got cooped up here and we decided that we wanted to fly to Bali, or we wanted to fly to Vietnam, or we wanted to fly to Thailand. So when we look at our major markets, our largest market, international market, is New Zealand. It's still down. Trans-Tasman travel has still not recovered. That's a bit of a combination of slowness on both ends. What we are seeing though is there's a bit of a surge out of New Zealand in the last 6 months, and there's a little bit of reciprocal growth of Australia. Singapore, we've seen strong growth in sort of a 6th freedom hub market with a lot of Australians looking at Singapore as their way to access the rest of the world. We now have, you know, Qantas's major 6th freedom hub is there, and so it's contributing to strong growth out of Singapore. Indonesia is a very, very strong leisure market. We've seen huge growth in into Bali. Lots of additional airlines coming into that market. But on top of that, we're seeing more sort of travel into Jakarta and other secondary destinations in Indonesia. The China market is down, still down about a quarter, but we had 80% arrivals growth from the Chinese mainland. The notable feature of that market is there are now no Australian airlines operating directly into mainland China. So it is exclusively operated by Chinese carriers. US is still down by nearly 30%. Very, very interesting market. We've seen capacity seesaw up and down. Lots of seasonal capacity additions that have then been taken away, mostly on the side of the US carriers. So we see Delta, American, United, pushing capacity into the market when it's quiet in other regions and then taking it out and, and concentrating on their transatlantic or some of their other transpacific routes at other times of the year. Currency remains a major issue. It's very expensive for Australians to fly to the US, which is cutting down on outbound travel a little bit, but in the last few months we've started to see a bit of a transition. Outbound travel was up about 5% or 6% in May and looks like it'll be about the same in June. And then Hong Kong, Malaysia, and the UAE have mostly been the result of changes with local airlines, how they're structuring their networks, where they've decided to put their priorities in their recovery post-pandemic. UAE is a very important connecting hub for Australia. We're seeing sort of Emirates really ramp up capacity in the last 6 months, and it's pretty much back to where it was pre-pandemic. One of the features that we've seen though is the success of smaller markets, particularly in Southeast Asia, but also in Western Europe. These markets are growing rapidly. We've seen Portugal, Spain, Greece, Italy, Double digits sort of capacity growth in the last 12 months, some of them 25% or 30% uplift. Similar story with Southeast Asian destinations, Thailand, Vietnam, Indonesia, obviously all doing really, really well in terms of both outbound growth and now increasingly inbound growth as well. Australia remains a perennial popular a perennially popular destination internationally. People want to come here. There are perceptions around price. There are perceptions around accessibility in terms of being able to get to the country. So these are things that we need to address with our sort of messaging and our marketing more than actually making capacity available. A note on business travel. Front of the aircraft is obviously the most profitable part of the business for airlines. And we've seen a structural decline in business travel globally since the pandemic. The move to video conferencing technology has obviously reduced the need to travel. We've also seen an increase in the sort of, complexity and the layers of approvals that need to be met for business travel, particularly with large corporates. Large corporates are also much more sensitive to things, to duty of care issues and issues around sustainability. So we're seeing sluggishness in the large corporates, but small and medium enterprises are making up some of that ground. So what we're seeing is about 50,000 to 60,000 business travellers less per year, and that may be a sort of permanent feature of the market going forward. There's really been very, very little upwards movement in business travel since mid-2023. Now, back to the domestic market. I've been saying this for a while, we're back to 2018 almost in terms of traffic and in terms of the structure of the market. The 2 big dominant airline groups handled 95% of passengers or a little over 95% of passengers last year. That translates to 90% of Australian domestic passengers have a choice of 2 airline groups wherever they fly. Just— that's it. Just 2 groups. And the other 10% of passengers don't have a choice. They fly one airline group or the other, pretty much, or you fly one of the small regionals when you're accessing regional or remote destinations. This is— has created a very stable domestic market. Yes, there's a lot going on, but in terms of the overall shape and structure of a competitive market, It's very stable and this has translated into massively improved profitability in the last few years. Airlines managed to take a lot of costs out of their business during the pandemic and operating profits have gone up as a result. So we've seen the last 2 years, we've seen both our major airline groups make operating and net profits. The last time that happened, was '06-'07, '07-'08. So it's really been almost 20 years since we've had 2 profitable airline groups in this country. One of the issues you might think this presents is market concentration, which would lead to higher fares. We did see substantially higher fares elevated through 2023 and into 2024, but we're really seeing that that high fares come off. So in the domestic market, we've seen a downturn, particularly in flexible economy. Now part of that is because of the way Virgin Australia has structured its fares, but part of that is genuine reductions. Business fares have come down, domestic business fares, and then there's been a little bit of an acceleration in demand as airlines— as businesses deal with uncertainty. Uncertainty drives people to communicate, which means that you need to get out and you need to talk to your partners, you need to talk to your customers, you need to talk to everyone. And we've seen significant changes in international markets. So what do I mean? Well, second half of 2024, the beginning of the second half of 2024, we were seeing prices into the Middle East elevated by as much as 55%. Prices into Europe elevated by as much as 40%. Those have started to normalise. So a lot of those fares came down by as much as a third over the second half of the year, and then most fares are down another 10 to 15% over early 2025. So big changes in the international sector because more capacity is coming into the market. More airlines are returning. They're bringing back more flights. and it's increasing the supply. One big issue that remains is operational performance. Post-pandemic, we're still seeing elevated levels of delays. So domestic cancellations were about 2.5% of flights. Now, some of that is obviously things like weather. You can't stop cyclones from hitting the coast. You can't stop tropical lows from arriving, and those create lots of delays and lots of cancellations. But delays are still elevated. Flights departing, you know, nearly 20% of flights still leave more than 15 minutes or they don't arrive within 15 minutes of their scheduled operating time. A big part of this is a persistent shortage of workers. So the Australian aviation workforce is actually probably bigger than this. It's more like 100,000, but this is the the data that I could get out of Skills Australia. So when we break this down, about 80% of the workforce is with airlines and 20% is with airports and other specialists. But a gap has emerged, and it's a gap of about 8,000 to 10,000 workers, and it's pretty much all on the airport side and the maintenance side as well. So technical staff, are difficult to come across. There's long lead times with training. They're expensive. It's a familiar reprise. So what's happened is this is a huge spike in aviation vacancies. So this is the data from Skills Australia, and this is the number of jobs that are essentially jobs that are open in the aviation sector. So end of 2022, Well, end of 2021, really, we start to see this increase. It peaked at about a 370% year-on-year increase at the end of 2024. We've started to see some things come down. There's been a few improvements, but it is a difficult and persisting problem. It is gonna take time to fix. We have an ageing workforce in the sector. The average age in the transport sector as a whole is 39 years old. The average age in the air transport sector is higher than that, about 42. We are recruiting fewer young people. So that means that our workforce is only going to age. There are also abundant opportunities for trained professionals from Australia. to serve overseas. So we're seeing Asian carriers picking up large numbers of pilots and cabin crew and technical staff. We're seeing staff moving to the States and staff moving to Europe. This is not just an Australian problem. We see shortages pretty much across the world. There are shortages in Asia. There are shortages in Europe as well. So it's up to— it's going to take a lot of effort to fix this problem, and there's no guarantee that that gap will close. So we're going to have to learn to do more with less. Another big problem where Australia is sort of a representative issue is fleet supply. So airlines have not been able to get the aircraft that they want to increase capacity and grow their networks. It's a major supply on growth, major constraint on growth. We're in the midst of a generational update in terms of the domestic fleet. So Virgin is gradually, progressively replacing its 737-800s with 737 MAXs. Jetstar is replacing its A320ceos with A320 and A321neos. And then we are seeing generational uplift in the widebody fleets is due to come in in the next few years. One of the interesting things is that pre-pandemic Australian airlines operated about 80 widebodies. That's down to about 60 to 65 now. Hopefully in the next few years we should see that number go up and possibly as Qantas's Project Sunrise aircraft arrive, we'll see those numbers actually maybe approach 100. So there are about 200 new aircraft due for delivery in Australia out to 2030, provided OEMs keep their delivery timelines. But OEMs are still struggling to lift production. So if we— if global aircraft production had stayed level with 2018, which was the last record year, an additional 3,000 aircraft would have been delivered. That's in a global fleet of about 30,000 to 32,000 commercial aircraft. If production had continued at the previous 10-year growth rate of about 3.5%, then an additional 5,400 aircraft would have been delivered globally over that period. And OEMs are still trying valiantly with There's supply chain issues and all sorts of things to get production where it needs to be. The other issue is sustainability. So Australia has big global commitments towards emissions reduction and net zero. Australian aviation emissions are growing. They're growing as a total amount and they're growing as a proportion of Australia's emissions. At the end of the '80s, Aviation was about 1.2% of Australian emissions. As of last year, aviation was about 5.2% of total Australian emissions. That's because air transport has doubled and then doubled again, but Australian emissions are actually on a decline. So if aviation emissions keep going up while everyone else is going down, that proportion is only going to grow. Further, SAF is sort of the big lever to reduce emissions. We're poised, we're on the cusp of an energy transition in this country, but Australian airlines are reliant on foreign production sources to access SAF. There is no commercial-scale SAF production really at the moment in this country. So this is global SAF consumption with Australian SAF consumption at the bottom. And if you can't see it, I'll zoom in. It's that much. Australian airlines consumed 8 billion litres of jet fuel last year. We burned 10 million litres. 10 million litres. of SAF, which was all sourced overseas. So the big thing with SAF, it is investment, time, policy, and leadership are the criteria for SAF success. Between 2000 and 2019, this country invested $30 million in biofuels production. That's it. Between 2020 and 2023, we invested $32 million in biofuel production. Over the next 5 years, $250 million are earmarked for biofuel production, and $1.5 billion is earmarked for low fuel— low carbon fuels overall. So as we start to scale up production, we will start to see commercial viability, and we'll start to see an increase in SAF use. Really quickly, the long-term perspective. Passenger traffic doubled in the last 20 years. Over the next decade, we're going to add another 40 million passengers. About 2/3 of these, 75% of these, will be in the domestic market because it is very, very big. Growth of about 2% to 2.5%. Growth is limited by fundamentals, population. Mm-hmm. Economics growth, capacity. The international market has substantially more upside. So 2.5% to 3%, that's a fairly conservative estimate. What we see is that we are on Asia's doorstep. It's the fastest growing middle class in the world. China, India, Indonesia, Vietnam. Yeah. That— those populations combined is 3 billion people. What happens when they start to travel? Australians fly on average 4.5 times per year. In the Indian market, it's less than 0.1 time per person per year. What happens when that gets up to half a time or 1 time or 2 times per year? We need to open our doors to welcome global aviation. Yeah. and to welcome more passengers. All right, well, that concludes my outlook. So thank you very much for your attention. Thank you.

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