Just as its relative isolation has allowed atypical flora and fauna to develop, Australia’s geographical position and demographic spread has facilitated the development of a distinctive aviation industry.
A study by Oxford Economics reports that aviation contributes $79.6 billion (AUD 75.6 billion) or 6.1% of GDP to the domestic economy. It supports more than 800,000 Australian jobs.
In addition, it is a vital link for the cultural and social life of a country that has deep connections with many western and Asian countries. Underlining this is a Tourism in Australia IBISWorld Industry Report, released in 2012, that said the strong Australian dollar was driving the number of Australians taking overseas trips. From the current figure of 30% of the population, it predicts that 50% of Australians will travel internationally every year by 2017.
The benefits of Australian aviation do not end there, however. It could be argued that the importance of air transport in the country means Australia has facilitated solutions in which the industry as a whole may be interested.
The airline business model
Australian carriers face an operating environment that most carriers would recognize. Competition is fierce, hub airport infrastructure is behind air transport growth predictions, and taxes and charges threaten aviation’s ability to provide social and economic benefits.
Australia has also opened up to extra capacity from some key rapidly developing markets. Middle Eastern and, more recently, Chinese carriers have capitalized on this to expand their market footprint and intensify competition on international routes. Australia is an increasingly attractive business for these carriers, which have successfully tapped either their home markets and/or sixth freedom traffic flows transiting their home markets to bolster their market share.
Both Qantas and Virgin Australia have also taken advantage of the opportunities presented by more open access. “Qantas has grown Jetstar’s international operations and Virgin Australia is building a global airline from the alliances that this policy facilitates,” says Andrew Drysdale, Executive Director Mentor Aviation Services and Senior Visiting Fellow at the University of New South Wales.
Independence and coordination
Qantas has been the mainstay of Australian aviation for more than 90 years. Its main competitor used to be the now defunct Ansett. It is Virgin Australia that is now challenging Qantas, both domestically and internationally.
“The Qantas and Virgin Australia models are good examples of potential ways forward for an industry keen on consolidation,” explains Ian Lorigan, IATA Area Manager for the South West Pacific. “Neither model is true consolidation, but consolidation-lite. They are more like strong commercial tie-ups that will allow the participants to survive and perhaps thrive in a global industry.”
Qantas has a low-cost subsidiary, Jetstar, which is proving very successful. Alan Joyce, Qantas CEO, puts the success of Jetstar down to merging independence with coordination. Although Jetstar has its own brand and IT systems, for example, a “Flying Committee” ensures cooperation with its parent airline. Jetstar is doing so well that in 2013 it looks set to overtake Qantas in terms of passengers carried to and from Australia. The Jetstar brand has become a familiar one in the Asia-Pacific region with Jetstar Hong Kong—a joint venture with China Eastern—the latest to take to the skies. The Jetstar Group also comprises Jetstar Japan, Jetstar Asia (based in Singapore), and Jetstar Pacific (based in Vietnam).
As Jetstar continues to expand, Qantas has re-evaluated its international strategy, spurred on by an $889 million (AUD 844 million) loss in its last financial year. The airline has countered this by working with Emirates Airline to funnel the all-important kangaroo routes through Dubai, unleashing Emirates’ vast network into the bargain. This gives Australian travelers a one-stop connection to an array of European destinations, many of which would previously have needed two stops.
The Australian Competition and Consumer Commission released its draft determination in late December 2012, proposing a five-year authorization for the partnership. A final decision is expected in March 2013, with the partnership pencilled to start the following month.
Work has already begun, with coordinating technology systems and frequent flyer benefits discussed and an operational base for Qantas now established in Dubai.
Emirates President Tim Clark says there has been an enthusiastic response from customers to the Emirates and Qantas partnership. “The feedback reinforces what a strong match the two brands are for each other.”
The deal also provides a glimpse beyond the walls erected by alliances. Partnering with Emirates will mean an end to kangaroo route agreements with Qantas’s oneworld partners British Airways and Cathay Pacific. This suggests greater fluidity in airline strategy than was previously the case.
On the domestic front, Virgin Australia provides the main competition to Qantas and is a growing force internationally. Virgin Australia has taken a different approach to dealing with its commercial environment by agreeing to equity stakes with various airlines. The airline represents a vital foot in an important market for its partners. Virgin Australia has worked its way around the 49% cap on foreign ownership of airlines with international service by splitting into two legal entities—one for domestic services and one for international services.
The combined airline is partly owned by Air New Zealand (19.9%), Abu Dhabi’s Etihad (10%), and Singapore Airlines (10%). Virgin Australia in turn has sought regulatory approval to acquire SkyWest Airlines based in Perth and a 60% stake in Tiger Airways Australia, a subsidiary of Singapore-based Tiger Airways. The deals appear to hold promise for all involved. Etihad, for example, has reported a 16% improvement in revenue year-on-year from its arrangement with the Australian carrier.
Virgin Australia CEO John Borghetti says the Tiger Airways Australia deal is “good for the consumer and also very good for jobs.” He notes that when Virgin previously entered a new business market or regional area, fares dropped by 20% to 30%. Borghetti says the deals would increase jobs at Virgin, Tiger and SkyWest, as well as in related industries such as tourism and hospitality.
“Whether or not the models [implemented by both airlines] are the way to a sustainable future, the important thing is that both airlines are pushing the boundaries in very creative ways,” says Peter Harbison, Executive Chairman at the Centre for Asia Pacific Aviation. “I do see them as two very interesting and important options for today’s major airlines: one the full-service airline with a hybrid, non-unionized, low-cost subsidiary; the other a quasi-virtual international model, with a string of tailored, bilateral alliances.”
Drysdale also sees the business models as a step in the right direction. “Indeed without this innovation it is difficult to see how, given the high cost base and constrained market size in Australia, their airlines could compete over the longer term,” he says. “They bring Australian and New Zealand domestic feed to the table and receive European and American feed in return.”
But he warns that the China and India feed is still missing. “The growth in India and China is well understood, but the Australian carriers’ strategies to address this are not yet clear and there is a danger of too little too late,” he says. “The real growth lies in new city pairs and new markets and for the Australian carriers there will be opportunities within the ASEAN region. It is here that Jetstar can add real value to the Qantas group. Virgin Australia is yet to enter this arena, but we can be sure John Borghetti is not overlooking the opportunities.”
Whatever the business model, factors outside the airline’s control still bring their weight to bear on growth opportunities. Australia’s infrastructure issues have a familiar feel and the solutions may yet herald the shape of things to come.
On the air traffic management (ATM) side, the news is positive. AirServices Australia has according to most observers, although it has had labor issues. Nevertheless, the air navigation serviced provider has implemented or trialed several new initiatives that offer major savings for airlines and the environment.
The organization won IATA Eagle Awards in 1999 and 2005 and the challenge now is to take its strong performance levels to the regional and global stage. As Asia pushes for greater ATM coordination, AirServices Australia has the necessary expertise to take a leadership role.
On the ground, Australia, like many other countries, is struggling to improve airport capacity. This lack of capacity could severely limit air transport growth. The development of Australia’s main hub, Sydney, has been the subject of a 20-year-plus debate. Harbison says that nothing comes even mildly close to the Sydney problem in terms of importance. “The cost to Australia and Sydney’s economy of failure to act on a second airport is matched only in scale by the pusillanimous responses of self-interested politicians,” he says.
The lesson may finally be sinking in, however. A study is underway on a proposed second airport for Sydney and the current facility is confident that it can handle enough flights to keep airlines satisfied through 2033. It reports that only 61% of slots are in use and there is plenty of space to improve upon the more than 35 million passengers it serves.
With a new airport yet to be determined, along with the land purchases, environmental studies, and approval processes that would follow, 20 years could soon pass, so there is a clear need for urgency.
Sydney’s Master Plan has been fast-tracked by the government and is now due in July 2013. The main idea is to consolidate the existing three terminal set-up into two terminals, which will allow for a capacity increase and improved transport links to the city and hinterland. But with an approval process to go through once the Master Plan is published, no decision is expected on any building plans until at least early 2014.
Other upgrades at Australian airports are on the cards. Perth has experienced a huge surge in traffic thanks largely to a mining boom in Western Australia. A second runway and terminal expansion are being pushed to an early conclusion so Australia doesn’t miss out on any revenues from the mining industry.
To head off congestion problems Melbourne also has a new runway pending, as has Brisbane. The second runway at Brisbane won’t be operational for some time, however, because it involves a mammoth 20-year project to extend the runway out into the bay. Both of these projects are being funded entirely by the private sector, a factor that has brought its own challenges.
Although the Brisbane runway project has passed all the requisite environmental studies, it is not without controversy. It seems private financing has a sting in the tail for airlines in the form of pre-financing. The new runway is an extraordinarily expensive project and airline charges are expected to be raised significantly.
“The government is insisting on the runway,” says Vinoop Goel, Head of Infrastructure & Government Relations, Asia-Pacific, IATA. “But the airport won’t build without pre-financing, which requires today’s users to pay for a service they don’t benefit from today. The government must look at ways to pay for the runway given its impact on the region’s economy.”
Pre-financing is against ICAO principles and, with the support of IATA, airlines are fighting this. Qantas CEO Alan Joyce has said the airline objects to paying for infrastructure that in effect will allow more competitors to enter the market through an improvement in capacity.
Other industry charges are also being heavily scrutinized. With the clock stopped on the European Union Emissions Trading Scheme (ETS) the debate on the possible solutions will turn many eyes to Australia. The country doesn’t have an emissions trading scheme because there is no trading of permits as such. Instead there is a straightforward domestic carbon tax that came into force in 2012. At $22 (AUD 21) it is above current world prices.
How the carbon tax will be rationalized should an ICAO global market-based measure come into existence remains to be seen. Obviously airlines will only want to pay for their emissions once. Politics may, for a change, prove a boon. It is expected that opposition parties will win an Australian federal election later in 2013 and a key platform is to abolish the carbon tax.
Also in 2012, the government increased the passenger movement charge by 17%. This is a flat fee of around $58 (AUD 55) for all departing international air passengers. Making connectivity more expensive hurts both jobs and the economy. A downturn in the demand for trans-Tasman services is plainly visible and research into the impact of this passenger charge has been commissioned by two government agencies.
“It’s certainly not going to go away, however damaging it is to Australia’s tourist trade,” says Harbison of the passenger movement charge. “If only a near 20% increase in the charge meant better customer service!”
Drysdale believes the real problem lies in a high cost base and Australia’s wage structure in particular. The only possible solution, he suggests, is for Australian unions to rise above their historic dogma and embrace productivity gains.
“Wages will not reduce and the government has proved incapable of reducing the cost burden it has created for its companies,” he says. “Because their costs are lower, the airlines from the region will grow faster and take market share from the Australian carriers.”