The sky is the limit: how airline routes affect Australia’s tourists

Grab a globe of the world and Australia is striking in two ways.

Firstly, and most obviously, we are very large island.

Secondly, aside from our New Zealand cousins, we’re a long way from our major tourism markets.

Because of this – and in contrast to other overseas destinations – international visitors arrive almost exclusively by air. Latest data shows 99.2% of inbound visitors came to Australia by air while just 0.8% arrived via cruise ships.

Managing supply to optimise performance

Figures like this demonstrate that a close relationship between the supply of air services into Australia and international visitor demand are crucial to the performance of Australia’s tourism industry.

Optimising this relationship is also in airlines’ commercial interest. Too few flights and revenues are foregone; excess supply equates to emptier planes and falling profits. Adding complexity to these decisions are revenues generated from freight and from outbound Australian travellers.

In the short term, airlines allow these complex demand-supply relationships to get out of sync. They open up new routes to grab market share, even if it means becoming a loss-leader in the process. In the longer-term, however, profitability trumps revenue and capacity will contract.

Responding to oil prices

While airlines can manage routes they can’t control world oil prices.

Present prices are around $US60 per barrel, far higher than $40–$50 figures that prevailed between 2015–16 and 2016–17. Forecasts show that the $US60 price-point will persist in the short and medium term.

Oil prices represent a large share of operating expenses, with rising costs further complicating the delicate supply-demand relationship.

As prices rise, margins are squeezed and airlines react by reassigning routes and reconfiguring fleets. This is based on the simple principle of keeping as many planes in the air as possible and reducing empty seats.

Data source: Refinitiv

Consequences for Australia

Because airlines operate through an international prism – and because of our long-haul status – Australia is especially vulnerable to this rationalisation.

The consequence is that most airlines will reduce flights to push up airfares over the short term.

In tandem with an economic slowdown, currency devaluations and US–China trade tensions, inbound aviation from China is forecast to grow 6.1% per annum over the next two years on average compared to the long run average growth of 18%. Aviation from Middle East airlines – which currently accounts for a 13% share of total inbound air capacity – is forecast to grow 6.9% per annum versus the long run average growth of 12.8% per annum.

For Middle East carriers there will be a similar pattern of change, but causes will differ. Seat capacity for Middle East airlines – notably Emirates, Etihad and Qatar – have grown substantially in the Australian market over many years. However, the weakened profitability of these airlines over the past two years may inhibit their ability to expand capacity in the short term.

By comparison, the Indian aviation market is expected to grow at a stronger pace, simply because of a much greater take-up of air travel by the country’s middle class. This growth started with increased travel to domestic destinations and is now shifting to more overseas destinations over time.

Forecasts

Predicting the future of aviation is a tricky business. This is especially true in today’s world where growing consumer demand confronts economic headwinds and commercial realities.

Therefore, while we can’t transform our globe of the world into a crystal ball we do have the next best thing.

Tourism Research Australia’s visitor forecasts released on 6 September 2019 are grounded in evidence and are an essential planning tool for these turbulent times.