CAPA State of the Industry | July 2026

Transcript

Simon Elsegood:My name's Simon Elsegood. I'm the head of research at CAPA. That means I get to sit and look at a lot of spreadsheets, basically. And I get to say the most dangerous sentence at a conference, I am an analyst and I have a slide deck. I will get right to it. State of the industry, what's going on? So Australia is a huge market. We really kick above our weight. We rank between Korea, South Korea and France, a nation that is twice our size and triple our size in terms of population, in terms of total flights. A domestic market of about 60 million, 61 million over the last 12 months, that's growing roughly at trend, a little over 2%. Okay. An international market that's roaring ahead, nearly 45 million passengers, up 8.5%. International has been the big strength of the Australian market for the last roughly 3, 3.5 years since COVID We saw the domestic market take off and then we've seen after that it's sort of the, the growth smoothed out and international just continues to grow really strongly. Recent events That's kind of notwithstanding. Domestic travel is now roughly at parity with pre-pandemic levels. Finally. A little bit up, a little bit down month to month. We're just kind of treading water, but the international market is growing really, really strongly. So our domestic market. Big city routes, big capital city routes, about 37.5 million passengers growing slightly below trend over the last 12 months. Regional routes doing a little bit better, up 2.5% roughly, nearly 20 million passengers. Remote routes, small market but growing really, really strongly. Australia is in the middle of a mineral boom, another mineral boom, and so macroeconomic conditions have been generally favourable for airline growth. We've seen real GDP growing above 2% for the last 4 quarters, and that's the first time since the Since about 2023, that's happened. Inflation has spiked, but last year it was within RBA targets roughly, particularly once you take out volatilities like fuel. And household spending's generally been growing. In real terms, it's up about 1% a quarter. Consumer confidence, which actually weighs really, really heavily On people's decisions to travel. Travel is an expense. Travel is a— the word escapes me— discretionary spending. It had peaked, getting up to sort of 3-year highs before crashing at the start of the year. The Middle East conflict is obviously what's causing this. So it's hitting capacity, it's hitting airline costs, and it's going to hit airline profits. We are in the middle of the biggest oil supply crisis since the 1970s. I'd love to stop living through once-in-a-lifetime events. Could someone please make that happen? We've had oil peak above $250 a barrel Australian, although we've seen pressure ease and then rise back up again as blockades have come back into place. Jet fuel refining margins, though, are at record highs. Typically, refining margins are about $15 to $20 a barrel. We're seeing refining margins above $65 a barrel. That's causing huge financial stress for airlines because jet fuel comprises about 25% to 30% of the cost base of the major Australian carriers. Um, It's not so much the price though, it's the rate of the increase and the decrease. We've seen, we saw in 2008 and '09, and we saw in '22, '23 that airlines can absorb very high fuel costs and even manage to do so while maintaining profitable operation. What they can't deal with is the price of oil doubling in the space of 4 weeks or halving in the space of 4 weeks. We've been very lucky in this country because our airlines have been very sensible and they have hedged their fuel purchases. Qantas and Virgin roughly hedged about 90% or a little over 90% of their crude purchases for the first half of this year. And Virgin was very wise, or perhaps very lucky, and it hedged about 71% of its refining margins. Wow. Qantas hedged about 15%. So as a result, Qantas is forecasting a half-year increase in its fuel bill of somewhere in the order of $600 to $800 million. That's a huge increase. There's a 25 to 30% increase in the carrier's fuel costs. So despite all the positives and negatives, we've seen growth progressively slow through 2026. And forward capacity suggests that seats are going to remain below 2025 levels for most of the rest of the year. This is based partially on filed forward schedules and partially on predictive models. One of the good things is that average airfares haven't really been showing the impacts yet. Airlines have definitely increased fares on some routes, but they've also added sales on others. Where we're seeing the greatest fare impact is on price-insensitive routes. So routes with heavy corporate travel, routes with heavy government travel, high-end luxury premium-focused routes. And then where we're seeing the, the smallest impact is price-sensitive routes. A lot of leisure-focused routes. We've seen average fares sort of rise and fall recently. Regional fares have sort of risen and consistently stayed above pre-pandemic levels. There's a lot of operational costs that regional airlines are bearing that they weren't bearing prior to the pandemic— supply chain, workforce shortages, fuel now as well. Regional carriers tend to not have the financial muscle to be able to hedge like the big boys. And remote fares, despite the strength of the market, have actually been roughly steady, matching pre-pandemic levels. There's been some strong public sector support in that. We've seen regional route promotion schemes, we've seen airports adding incentives to add regional routes, and we've seen fare cap schemes like in Western Australia. Our domestic market remains incredibly concentrated. So 94% of seats, 98.5% of ASKs. And if you flew in today, 90% of people flew on a route that one of the 2 major airlines competes on. This steady growth, relatively static market means domestic airline profitability has been really high and high margins for the major carriers. We're talking 15 to 20%, which is really unusual for the airline industry where historically margins have stayed below 4%. When you talk about airline industry profitability, generally the global airline industry makes less money than Apple does. Let that sink in. Apple, one company, makes more money than the rest of the world's airlines combined. What this does though is it raises the potential potential for new entrants, and we have 3 of them potentially sitting in the audience right now. Zink Airlines, Koala Air, and Vietjet. I'm not going to speak about, uh, their plans or strategies. Um, there's a lot up in the air, so to speak. I will say that market entry promotes growth and it lowers airfares. A Treasury estimate was that when you add a new carrier to a route, it lowers fares by 5 to 10% in the short term. And it produces a long-term effect of slowing airfare price growth. It also stimulates traffic between 2% and 3% in the short term and up to 10% in the long term. The other thing that's going to stimulate traffic is Western Sydney Airport. This is the most significant aviation infrastructure project in Australia in 40 years. Cargo operations launched yesterday, so— 2 days ago. Congratulations. And the first passenger services are due to take off in about 3 months' time. The initial capacity for the airport, design capacity, is 10 million passengers and roughly 200,000 tonnes of cargo per annum. The plan is for Sydney Airport, for the Western Sydney Airport, to expand to about 8 million passengers by 2030, initially primarily domestic, serving other capital cities, regional routes. We've seen QantasLink will be one of the first carriers out of there, Jetstar, and obviously Qantas itself. And then we've seen Air New Zealand and Singapore Airlines announce international services from the airport. But the growth is projected to be international. So traffic is expected to double at the airport by 2040, and international is expected to take over. Our major airports, did pretty well over the last 12 months. They added 2.4 million passengers, growth of 2.3%. Sunshine Coast and Gold Coast growing well above trend. Leisure-focused routes have been doing really, really well. Routes to smaller airports have been doing really, really well. Melbourne has been meeting the average. Unfortunately, there's growth at Sydney is slow and so is Cairns while Canberra is going backwards. Looking back pre-COVID, the biggest shock that the airline industry has ever had, we're still missing a little over a million domestic passengers from our major airports. It's a million people a year less paying fares, you know, spreading those costs out over more people. The vast majority of this loss is at Sydney and Melbourne. There are a multitude of reasons. There's more direct services to other international ports, so fewer connecting routes. There's been a little bit of a dive in business traffic. That's a structural thing post-pandemic. And we've seen the Golden Triangle, those 3— Brisbane, Sydney, Melbourne— the 3 sort of big routes shrink. Melbourne-Sydney used to be the 2nd largest air route in the world by passengers. It has now dropped to 9th. All, by the way, all 10 of the 10 largest air routes in the world are located within the Asia-Pacific. Sorry. Just go back. One of the things is we're pretty happy culturally with our airlines. We came off a very bad— airlines came off a very bad period post-COVID due to operational issues, a few political headlines, but financial considerations remain the main disincentive to travel. 40% of people won't travel on an airline 'cause they say it's too expensive. Even though airfares are pretty much flat with where they were 6 or 7 years ago. About half of all passengers that travel report that they've suffered some disruption in the last 12 months. Australians travel a lot. About 58% of Australians travel by air in a 12-month period and 75% of us will have travelled by air in any 3-year period. Australians fly in aircraft, are more likely to fly in an aircraft than they are to get into an Uber or a bus or ride a bike. We love to travel. But a quarter of passengers are unsatisfied with how their airline or their airport have handled their disruptions. The good news on this front is flight delay rates are improving after hitting some pretty bad levels in 2021, 2022. Cancellations are kind of back to where they were long-term average, but regional and remote operators have been still hit the hardest. One of the big issues behind this is workforce. So we're still 5,000 to 6,000 people on average short of where we should be. Primarily that's technical and sort of high-investment training roles, pilots, engineers, maintenance staff, that sort of thing. We saw gender balance worsen in the industry. Normally it's about 30-70. It worsened to about 80-20 immediately post-pandemic, but that is coming back. Aviation sector vacancies are easing, but they're still really historically high. So this is kind of a proxy. This is the number of aviation job advertisements that are online. The good news is though that the industry is investing in training. So workforce— this is workforce certification enrolments are up 135% compared to pre-pandemic levels. An actual Sort of completions are up by 75%. Now looking at the international market, being driven by inbound, our outbound traffic was up about half a million people in the last 12 months and our inbound was up about 800,000 people. We've got lots of new carriers and lots of new routes. We— there are now somewhere around 200 international routes that are operated to and from Australia. Short-term returning residents, the big growth has been in short to medium-haul leisure and budget-friendly destinations. That cost of living crisis is still making things difficult, but we want to travel. We really, really want to travel. And Vietnam is a great case in point. We've seen Vietjet come in and offer a whole lot of capacity, and we've had more than 75,000 new passengers to Vietnam in the last 12 months. We've got— sorry, I've missed something here. China travel has been supported by very strong outbound growth. The Chinese outbound market is now about 167 million people. That's up from pre-COVID levels. Australia is viewed as a safe country, not just safe physically, but safe politically. That may not always be the case though. As we see with Japan and India, if there are political disagreements, then the Chinese market can drop very, very sharply. Australian inbound to the US is down. It's the Trump effect, unfortunately. We've seen inbound travel being very, very slow into the US. actually going backwards in the last 12 months. We've seen Thai travel fall, civil unrest, and the UK travel is sort of being dropped because Australian airlines and international airlines are offering more direct connections into other airports that aren't London Heathrow or Gatwick. Short-term foreign arrivals, inbound international's up about 8%. Mainland China outbound tourism, So we've seen UK travel up and down. That's inbound. It's mostly events-driven. So things like the Lions Tour, the Ashes, that kind of thing sees a huge spike in arrivals and then it drops off. The New Zealand market is benefiting from improving conditions at Air New Zealand. So they've had a lot of difficulties with supply chain and those are slowly being resolved. The Indian market is down, but this is an interesting case. There's not a lot of direct connectivity There's only 3 routes between Australia and India. So a lot of this is connecting through secondary markets like Malaysia, Hong Kong, and Singapore, and it's possibly masking actual growth. US outbound is growing, particularly premium travel. So a lot of Americans are spending a lot of money to travel places. The Middle East crisis in the international Sort of perspective. So the Middle East accounts for about 10% of Australian seats and nearly 20% of ASKs. So that's 1 in 5 sort of units of travel to and from Australia. But capacity dropped off 75% in the space of a month. The drop to Australia has been proportionally larger and more rapid, and the recovery has been slower. We're still down about 25%. whereas the rest of the world it's only lacking about 6%. What we haven't seen though is a significant substitution to other transit hubs. There's really been no massive jump in capacity for a couple of reasons. Basically, we're capacity limited and we're also bilateral limited. The travel impacts are starting to show though as international fares have increased. We've started to see growth slow and it's now turned negative. One of the other things is the Middle East is incredibly important for premium travel. It's about 1 in 6, 1 in 7 premium seats operated to and from Australia go via the Middle East. But the corporate travel market in Australia is structurally diminished. It's down roughly 25% compared compared to pre-pandemic levels. There's a lot of reasons behind this, but basically business travel has changed. People travel less. There's less volume, but people tend to spend a lot when they get there. So bigger, fewer bigger trips. So an estimated $43 billion was spent in corporate travel in Australia. Airlines get about a quarter of that roughly, and Australian airlines probably get about 2/3 of that all told. Nominally, business travel dollar for dollar is up 26%, but when you adjust for inflation, it's pretty much flat on where it was pre-COVID. So while we're nominally spending more money, in actuality, in real terms, The needle has not moved. And the structural changes haven't just occurred across volumes, but also reasons for travel, booking patterns. We're seeing both earlier bookings and late-minute, last-minute bookings due to uncertainty. Some people want— and changes in budgets. We're seeing people trying to lock in lower costs early or delay, delay, delay until they have to buy because they don't know what's going on, because they don't know where they can fly. Finally, I'll turn to fuel security. So this is the biggest fuel shock we've ever gone through, or at least in my lifetime. Australia used to be an oil exporter. When the International Energy Agency was formed in 1979, Australia was counted as a net oil exporter, but since the 2001 peak, we've seen Australian oil production fall dramatically, and we've moved from a net exporter of jet fuel to a net importer. We now import about 85% of our jet fuel, which means we're highly reliant on foreign markets, particularly South Korea, Singapore, and China. And we have no public stocks of fuel. We are one of the few countries in the world where there is no strategic reserve of fuel. At the moment, there are about 833 million litres of jet fuel stored around the country. That's 32 days of stocks. The International Energy Agency's minimum stockholding obligation, which we are sort of exempt from because we are technically, or were technically, a net exporter when the rules were formed, is 90 days. And fuel security is more than just airlines being able to take off and landing. It can help mute price increases and supply shocks. And Australia has a huge role to play in the rest of the region. We are the biggest country in the South Pacific, and we are a very, very important political and strategic partner. So fuel security is not just security for us, but it's security for our region as well. Well, that concludes what I had to say. I would like to encourage you to enjoy the rest of the, the conference, and thank you very much.

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