A version of this article appears in the August 25 issue of Aviation Week & Space Technology.
Australia’s airline sector is primed for a major shake-up as several low-cost carriers (LCCs) from Southeast Asia queue to enter this lucrative market. However, serious doubts are being raised as to whether there is enough demand to sustain the expected influx of international LCC service.
The Australian market is already a vital source of long-haul traffic for some of the world’s largest airlines, such as Emirates,and . But the latest wave of growth is coming from the other end of the spectrum. Newly established long-haul LCCs plan to open routes from Australia to their Southeast Asian hubs, connecting to key international markets in North Asia.
While long-haul LCCs have been slow to catch on elsewhere, they are emerging as a force in Asia. In many cases, Australia has a crucial role in their strategies. Two such carriers—Malaysia’sand Singapore-based Scoot—have already made significant inroads in Australia, and locally based LCC Jetstar also has a long-haul offering.
Peter Harbison, who heads the CAPA Center for Aviation, estimates that as many as 10 Asian LCCs are preparing to enter the Australian market in the next 12-18 months. The list includes Cebu Pacific from the Philippines; Citilink, Batik Air and Lion Air from Indonesia; Vietnam’s VietJet Air; Jin Air from Korea; Thai joint venture NokScoot; Malaysia’s Malindo; andX franchises in Thailand and Indonesia.
Even if some do not follow through with their route plans, there will still be dramatic changes for the Australian international market, Harbison said, speaking at CAPA’s Australia Pacific Aviation Summit.
One of the major implications is that the long-haul LCCs are beginning to develop their bases into connecting hubs. So for markets like Australia, a greater share of traffic to and from North Asia will be on newcomers instead of the familiar flag carriers, and it will be via a range of different connection points in Southeast Asia.
“In the future, much of the long-haul traffic will come from intermediate gateways,” Harbison says. This means “there will be changing flows in this market.” Traffic to China, for example, will increasingly be carried on so-called sixth freedom flights via other countries.
Asia is a natural market for Australia, both for geographic and demographic reasons. Jetstar CEO Jayne Hrdlicka cites statistics showing that more than a quarter of Australia’s population was born overseas, and a third of these immigrants are from Asia. Asian nations also account for six of Australia’s top 10 trading partners, and seven of the top 10 inbound travel sources. This helps explain why Asian routes are so important to the Jetstar Group’s strategy.
Australia’s booming economy has attracted a lot of new airline service over the past decade, particularly from Asia. There are now 23 Asian airlines serving Australia compared to 14 in 1992. However, the high rate of growth is now outstripping demand, an effect exacerbated as the economy has cooled. This trend does not bode well for the carriers still planning to join the party.
In recent years Australia “has seen international airline capacity growing well ahead of . . . passenger movements,” says Mike Mrdak, secretary of the Australian Department of Infrastructure and Regional Development. International seat numbers are up 8% year-over-year, versus a 6% rise in passengers. “You don’t have to be an economic expert to see that this is not a recipe for increasing profitability,” Mrdak notes.
In the past 12 months, Malaysian carriers have increased their capacity on flights to Australia by 40%, while passenger growth has been only 16%, according to Mrdak. He says a capacity oversupply is also apparent in the Singapore and Indonesian markets. The entry of LCCs on international routes has seen some long-haul airfares drop to levels comparable with short-haul domestic fares.
Airlines are beginning to make adjustments to this situation. In recent months a number of airlines, particularly Asian carriers, have opted to “slow or step back from ambitious growth plans” in Australia, Mrdak says. In some cases they are either switching to lower-capacity aircraft types or cutting flights on certain routes.
Two of the most important players in the long-haul LCC sector—Scoot and AirAsia X—are planning further growth in the Australian market. But executives from these carriers emphasize that while Australia remains a good long-term bet, conditions will be tough in the immediate future.
Scoot—a subsidiary of Singapore Airlines—links three Australian cities to its Singapore hub, with connections to a range of destinations mainly in North Asia.
Scoot will be adding significant capacity to its network beginning next year, thanks to its scheduleddeliveries. CEO Campbell Wilson indicates Australia is very much on its radar for additional service.
The airline is also forming a joint-venture long-haul LCC in Thailand, in cooperation with Nok Air. This carrier—expected to launch by the end of this year—will initially focus on North Asian destinations, but will subsequently establish Australian routes, Wilson says.
The new Bangkok hub will be particularly useful as a connecting point for Australian traffic headed to North Asia. Because it is two hours flying time beyond Singapore, some thinner routes that are not viable from the Singapore hub would be practical from Bangkok.
Wilson says the foreign LCCs that have entered the Australian market generally did so when the economy was performing very well, but none have entered since the economy began to slow.
“Australia has been a tough place to operate in the last year or so,” Wilson says. This has manifested itself in decisions by some international airlines to reduce frequencies, change to smaller aircraft, or pull out of some city pairs. “But it’s cyclical—it will come back.”
For both outbound and inbound travel, this market “has a huge number of advantages, and it will always retain those advantages,” says Wilson. “These swings at the margin obscure what is a very positive chain of [long-term] growth.”
Regarding the influx of so many potential newcomer LCCs, Wilson notes that entering a market is very different from succeeding in and staying in a market. “There are always going to be [airlines] that jump in and out,” he says.
AirAsia X also has a strong presence in Australia, with routes to five cities from its Kuala Lumpur base. Like many LCCs in the region, AirAsia X is establishing hubs in other Southeast Asian countries by setting up joint-venture franchises. Australia will be a major focus for some of these new carriers.
Thai AirAsia X began operations in June, and it will be followed by Indonesia AirAsia X before the end of this year. The Thai carrier is initially focusing on North Asia and probably will not fly to Australia until late 2015 or early 2016, but the Indonesian startup will be targeting Australia from its launch, says Stuart Myerscough, AirAsia X’s head of Australian commercial operations.
Indonesia AirAsia X will start with one or two routes to Australia from its hub in Denpasar, Bali, Myerscough says. These flights will initially connect to AirAsia’s short-haul network, but the carrier will eventually offer long-haul connections to the north. The airline also is expected to use Jakarta as a hub to connect Australia and North Asia.
The original Malaysia-based AirAsia X operation has an “early-mover” advantage in the Australian market, although this will erode as the new entrants mature, says Myerscough.
AirAsia X has recently boosted its capacity to Australia significantly and is now in a consolidation phase. Such a capacity surge will naturally set back the financial performance of any route until traffic demand can be built up again, Myerscough admits.
Myerscough observes that while several other long-haul LCCs have expressed an intention to launch service to Australia, whether they actually follow through is another matter. “Who else is going to enter, and when, is still debatable,” he says.
There has been “a definite softening” in demand in the Australian market recently, Myerscough notes, although he echoes Wilson in emphasizing that this is “somewhat cyclical” and will pass.
“Can the Australian market handle an additional 10 LCCs? I think in the long term the answer is yes,” Myerscough believes. However, he says certain challenges must be addressed for this level of growth to occur.
A “massive emerging middle class” in countries such as Indonesia, China and India means there will be a large reservoir of inbound travelers. But it could be more difficult to ensure that there is sufficient outbound Australian traffic to support new services.
Myerscough points out that while Australia has strong outbound flows, the current capacity is meeting demand—or slightly exceeding it in some markets. “I don’t think we’ve built the outbound market enough yet to absorb” the expected influx of LCCs, he says.
Transport infrastructure in Australia will be another factor. Some airports are already slot-constrained, thus obtaining attractive flight times is difficult, says Myerscough. Domestic transportation networks—including public transport and rail—may also be a bottleneck for increased visitor numbers.
Finally, Myerscough notes that affordability will be important for the potential leisure traffic that will arrive on the LCCs. Australia is among the global leaders in terms of dollars spent per visitor, and this is either because it is drawing more higher-yield travelers, or because it is relatively expensive, says Myerscough. If Australia is not viewed as affordable it may be difficult to attract the emerging travel markets in Asian countries—and while there are vast numbers of potential passengers, leisure travel options across the Asia-Pacific region are increasing as well.