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Another strong year expected for Australian Aviation in 2005

Travel News Asia 24 January 2005

The fundamentals are in place for “another extremely strong year” for aviation in Australia in 2005.

The Centre for Asia Pacific Aviation in its Outlook 2005 report, released today at the Asia Pacific & Middle East Aviation and Tourism Outlook 2005 conference in Singapore, stated that:

* The local economy remains solid and resilient;
* Passenger volumes continue to grow in new and mature markets, encouraged by attractive fare levels; 
* Both Qantas and Virgin Blue continue to build their service systems and commercial relationships domestically and internationally; and 
* Foreign operators are directing high levels of capacity into the market.

However, the report notes there are warning signs associated with shrinking yields, overcapacity and diminishing profits or losses in some key markets, most notably the Tasman. Jetstar’s growth on trunk routes clearly carries a cost for Virgin Blue and, most likely, for Qantas as well. For the time being, it has thwarted Virgin’s grab for market share and constrained expansion.

“Australia will maintain its progressive liberalisation policy on international routes in 2005, probably securing its first open skies agreement with Singapore and possibly also with the US,” the report says. “The prospect then is for increasing competition, greater integration with Asian markets and additional moves towards carrier consolidation.”

Assuming no substantial upsets to this growth path, some privatised airports which have been anxious to sell down their holdings could find the economic conditions favourable in 2005.

Highlights for 2004 and the year ahead

* The Australian economy is forecast to expand by 3.0% and 3.6% respectively in 2004 and 2005. In December 2004, the Federal Government revised down its forecast for GDP growth for the 12 months ending 30 June 2005 to 3.0%, due to a slowdown in exports and higher oil prices;

* Tourism Forecasting Council (TFC) estimated (15 December) the number of foreign tourists visiting Australia will rise 10.5% year-on-year in 2004 to 5.2 million, with arrivals from New Zealand, Japan, China, India, France and the Middle East growing rapidly. Domestic visitor nights are expected to continue to record marginal growth in 2004, to 298 million visitor nights;

* The rapid expansion of air services and passenger volumes has enabled Australia’s major airports to re-establish high growth levels following the impact of SARS and the Iraq conflict. This trend is expected to continue in 2005, albeit at a slower rate, as international and domestic operators inject further capacity into the market;

* The expansion of low cost operations has however increased the level of confrontation between some of Australia’s privately owned airports. In the process, this has shifted the basis of the airport-airline relationship, in some cases arguably for the better;

* Qantas arguably occupies a pre-eminent position among AAPA carriers to participate in the integration and liberalisation of Asian markets both strategically and financially, following its record 88.8% higher net profit of AUD648.4 million for the 2003-04 year. However, the airline still faces considerable challenges, not least in its home market;

* 2005 will see an escalation of the competitive tension between Australia’s two major operators, Qantas and Virgin Blue, as both carriers undertake an aggressive expansion fleet and service programme. In particular, it will be a litmus test for Qantas’ ambitious low-cost strategy. Its three LCC ventures, domestic Jetstar, Jetstar Asia and Australian Airlines are all due to substantially scale up their market presence with the addition of more routes and new aircraft during the next 12 months. While Jetstar Asia and Australian are integral components in Qantas’ plans for a closer engagement with Asia, the group is investing additional capital and resources in growing its international long-haul services to the US and Europe (via Hong Kong and Singapore);

* Qantas will decide in mid-2005 on a USD4-8 billion replacement of its ageing B747-400s, either B777s or A340s.

“Despite its overall robust position, Qantas needs to address the loss-making Tasman and New Zealand markets, falling domestic yields (albeit at a more moderate rate) and excess capacity on interstate routes,” the report says. “Its pursuit of further operating economies, especially through the devolvement of operations to cheaper overseas markets, also threatens to immerse the airline in industrial strife.

“One almost immediate issue for Qantas in 2005 is the potentially daunting prospect of SIA realising its plans to gain entry to the South Pacific route to the US via Australia, and additional growth from Emirates to Australia and New Zealand.”

* Virgin Blue is likely to continue to evolve as a hybrid operation in 2005, as it seeks the middle ground, straddling Qantas and Jetstar. Virgin Blue is at a crossroads in its development. The impact of Jetstar and high fuel prices was reflected in a 2% fall in Virgin Blue’s net earnings for the six months to end September. This followed a much more buoyant 47% increase in earnings to AUD158.5 million for the 2003-04 financial year.

See other recent news regarding: Centre for Asia Pacific Aviation

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