DESPITE BUMPS, AIRLINES CRUISING
30 June 2008
Mathew Murphy
AFTER enjoying a sweet spot throughout 2007, airlines have been provided with a sharp reminder in 2008 that they continue to operate in one of the most volatile sectors.
Oil's cost curve has been steadily heading upwards all year and is still sitting near record levels above $US130 a barrel for crude.
Airlines have responded accordingly, delivering repeated rises on ticket prices, cutting routes, axing jobs and altering flying patterns to become more fuel efficient.
A rigorous response from airlines is to be expected, with each $US1 rise in the oil price costing the aviation industry $US1.6 billion ($A1.7 billion) globally.
The International Air Transport Association, which represents 240 of the world's largest airlines, has indicated the sector is heading for a loss of as much as $US6.1 billion this year.
Investors have also lost confidence in airlines. Over the past six months Qantas' share price has dropped about 45%, tumbling to as low as $2.95 and now just sitting above $3 a share. Virgin Blue has been hit harder, losing about 75% of its value over the same period and continues to be a weight around the neck of its major shareholder, Toll Holdings.
Airlines worldwide have acted numerous times this year to pass on costs to passengers. Doomsayers have predicted the end of budget air fares and suggested that fewer people will be able to afford to fly.
But amid all the doom and gloom something strange has happened. Passengers are not only continuing to fly but are doing so in record numbers.
The latest figures on domestic travel shows Australia's major airlines have recorded significant growth on last year; Qantas (up 2.2% on April last year), Qantas Link (up 9.4% on April last year), Jetstar (up 8.6% on April last year) and Virgin Blue (up 15.6% on March last year). Tiger Airways is yet to clock up its first year of flying in Australia.
Australia's two major gateways, Melbourne and Sydney airports, have also reported extra traffic.
Melbourne Airport's figures for the March quarter show a massive 14% jump in domestic travel compared with the same time last year, largely due to Tiger's arrival in November. International passengers grew 3% over the quarter.
Sydney Airport's latest month-to-month figures show the domestic market has increased 6.2% for May, while international growth is 8.2% up on this time last year.
The doomsayers who are forecasting the end of low air fares are ignoring two factors - competition and supply.
"As long as the airlines are adding aircraft to their fleet, and they are doing so en masse this year and next in the Asia Pacific, we are going to see demand grow at reasonably strong rates," says Derek Sadubin, chief operating officer at the Centre for Asia Pacific Aviation."
There is no need to panic just yet. We are going to see the fastest growth in the domestic market this year for many years but it will be profitless growth. There will be a pull back on earnings for the airlines but it is far from being the death of low fares."
Despite a global aircraft shortage and repeated delays in delivery, airlines are starting to receive the aircraft they have on order.
Qantas has firm orders for 204 aircraft, including 20 Airbus A380s, six A330-200s, 69 A320/A321s, 65 Boeing 787s (plus 50 options and purchase rights), 32 Boeing 737-800s and 12 Bombardier Q400s.
Virgin Blue has a total of 42 aircraft on order - 20 Boeing 737-800s, 15 Embraer 190LRs and seven Boeing 777-300ERs.
As those aircraft start to arrive from the manufacturers over the next decade the airlines will need to fill them, so prices will reflect what the market is able to pay.
Competition is also thriving.
Tiger and Jetstar continue to try to trounce each other in the budget leisure market. Internationally, Qantas' virtual monopoly on the Pacific route is set to be challenged by the arrival of Virgin's long-haul carrier, V Australia.
To assess how demand is affected by volatility, history again proves to be our best teacher.
Figures compiled by Melbourne Airport illustrate the "bounce factor", or how demand for air travel navigates its way through turbulence in the sector.
First after the 1973 Arab oil embargo, which led to the high oil prices about 1982-83, then the 1989 Australian pilots' strike, the 1991 collapse of Compass Airlines, in 2001 following September 11 and the collapse of Ansett, and in the subsequent year following the 2002 SARS outbreak.
Passengers took flight again not long after each of these events.
Forward projections estimate passenger numbers at Melbourne Airport to grow to 55 million by 2026-27.
More sombre headlines for the sector should be expected this year but reports of its death are greatly exaggerated.
DEMAND FOR AIR TRAVEL
QANTAS DOMESTIC
Passengers carried - up 2.2% (April 08)
QANTAS LINK
Passengers carried - up 9.4% (April 08)
JETSTAR
Passengers carried - up 8.6% (April 08)
QANTAS INTERNATIONAL
Passengers carried - down 5.4% (April 08)
JETSTAR INTERNATIONAL
Passengers carried - up 38.8% (April 08)
VIRGIN BLUE
Passengers carried - up 15.6% (March 08)
SYDNEY AIRPORT
Domestic passenger traffic - up 6.2% (May 08)
International passenger traffic - up 8.2% (May 08)
MELBOURNE AIRPORT
Domestic passenger traffic - up 14% (March quarter)
International passenger traffic - up 3% (March quarter)
©008 Copyright John Fairfax Holdings Limited. www.theage.com.au
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