Despite Omicron looming as a potential spoiler, Australia’s domestic airline sector is gearing up for a busy summer of flying. On the first day of Australia’s normally busy summer, domestic airline capacity is currently running at just 23% of pre-COVID levels. But airline bosses have their fingers crossed that this will quickly rise as borders reopen and vaccination levels rise.
An OAG webinar analyzing the state of the airline industry in Australia on Wednesday noted there were big sections of the domestic travel airline travel market that haven’t or are not rebounding.
“There were a million seats in November 2019 between Queensland and New South Wales, and there’s now minimal capacity back in there,” says Deirdre Fulton, a partner at Midas Aviation. “Similarly, Queensland to Victoria, another 700,000 seats in a market that is just operating very minimally.”
COVID variant spoilers notwithstanding, Queensland plans to reopen to fully vaccinated New South Wales and Victoria residents in mid-December, and airlines are piling capacity into Queensland in anticipation.
South Australia has recently re-opened to fully vaccinated domestic travelers, and Tasmania plans to re-open mid-December. Western Australia and the Northern Territory remain the outliers. But in the eastern half of Australia, fingers are crossed for a big summer of flying.
Australia’s domestic aviation market was flat before the onset of COVID
And Australia’s domestic airlines will need the shot in the arm. Before COVID and the subsequent travel downturn, interstate and intrastate flying growth in Australia was flat for some years.
“The market doesn’t really talk about it,” said RoyceComm’s Simon Westaway during the webinar. “Domestic aviation travel in Australia, so interstate and intrastate travel in some states, it was flat for five years of passenger growth up until the onset of COVID.”
Whereas domestic passenger numbers chugged along at around 60 million annually over that five year period, the action was in the international market, where passenger numbers rose from 25 million to around 40 million.
After the initial sugar hit over the upcoming summer as borders reopen, domestic flying within Australia will likely settle back into its pre-COVID rhythm – busy but not really growing. That raises questions about the viability of Rex’s current and Bonza’s impending jet services. Is Australia big enough to accommodate five operators flying jets around the country?
“Is that going to create more demand, or is that going to create carnage, and Qantas will pick over the bits at some time in the future? asks Midas Aviation’s John Grant.
“There are too many domestic airlines in the market at the moment,” says Westaway, a former Qantas, Jetstar, and Australian Tourism Council executive. “Australia’s got a very strong domestic aviation industry. It’s in the top ten globally and profitability and performance consistently over a long period of time through regulated skies, privatized airports, and the like.”
The market may be strong, but is it big enough to support the recently arrived airlines running (or planning to run) jet services?
Extra capacity in 2022 promises a short sugar hit
Simon Westaway acknowledges having Regional Express (Rex) and Bonza operate Boeings will add a lot of extra cheap capacity into the market and give it some fast stimulation. But in the longer term, he thinks the skies will be overcrowded.
“Aviation is capital hungry,” he says. “You’re going to have to put a lot of bums on seats and decent yields to make a living, and Qantas has got quite a strong domestic capacity uplift next year.”
Rex plans to have around 12 Boeing 737s in the air by the end of 2022. Bonza wants to be flying by mid-2022 with a few MAX 8s initially. Virgin Australia is also ramping up their 737 fleet to 84 aircraft.
All three airlines are up against the Qantas / Jetstar juggernaut. Virgin Australia recently said it wants back its one-third Australian domestic market share, having lost some of it to the Qantas Group airlines in the last 18 months. The Qantas Group domestic market has peaked as high as 70% since the onset of COVID 19 but normally comes in around 60%. That doesn’t leave much for anyone else.
Rex is very good at its core business – operating regional turboprop flights connecting small towns and regional centers to bigger cities. Disregarding their Boeing adventures, they have a solid niche (and usually profitable) in the Australian aviation scene.
Bonza’s operating model questioned
But new entrant Bonza is an altogether different proposition. Simon Westaway calls the airline’s strategy “bizarre.” Bonza’s CEO, Tim Jordan, recently said he wanted to create brand new markets. His ultra-low-cost airline will skip the revenue rich trunk routes and concentrate on unserved city pairs focusing on regional and leisure destinations.
“To sort of have your strategy based around – we’re just going to grow, not out of the major trunk routes, to avoid the Sydney – Melbourne – Brisbane triangle, I find a strange strategic decision, and that’s simply because of the traditional depth of those markets.”
Gordon Bevan, Head of Aeronautical Development, Christchurch International Airport, says Bonza’s ultra-low-cost operating model has been tried before in Australia and failed.
“The idea of taking people as far as you can for as cheap as you can certainly didn’t work for the Tigerair Australia brand,” he said.
“Coming in super cheap has been tried. The thing about super cheap is that you’ve got to come in hard, and you’ve got to come in with scale. You can’t come in and use it tactically just to block because you’ll never make money.”
Speaking at Simple Flying’s recent Future Flying Forum, Rex’s Deputy Chairman John Sharp said he doubted Bonza will ever take off.
2022 shapes up as a year of excess domestic capacity
Simon Westaway says the anticipated capacity dump onto Australia’s domestic airline market next year may help normalise the market quicker than would otherwise happen. However, he maintains there are not enough people flying to support so many airlines running jet operations.
He points to the all-important business and small business market, which was extremely strong in Australia before COVID. That’s where the money is in domestic flying in Australia. Westaway thinks it may take up to three years to bounce back fully and notes that is a long time in the aviation business.
2022 is shaping up as an interesting year for Australian domestic aviation. If COVID is held at bay and borders open as planned, there should be plenty of planes in the air. The question is – how many people will be in them?
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