Cheaper oil lessens our pain

A report in The Australian says what a difference a week makes.

The spectacular fall in the price of oil — now 24 per cent off its July peak — could mean big changes to some of the capacity cuts airlines had been preparing to make later this year.

Australian tourism is set to be a key beneficiary.

In a week when the Australian Tourism Forecasting Committee released a gloomy forecast for inbound and domestic tourism for this year and next, prospects for the sector are sharply improving as the oil price continues its freefall.

Lower fuel costs will soon lead to the removal of some fuel surcharges, reducing the pain for travellers and supporting growth of demand.

As new aircraft deliveries continue to flow into the fleets of Asia’s airlines they have two choices: grow, or ground older aircraft.

Growth — rather than replacement — is quickly becoming the order of the day and demand in the latter part of the year could exceed expectations.

Lower fuel prices will trigger the next phase of network expansion for some airlines.

Emirates President Tim Clark said this week that if oil prices fell to about $US105 per barrel, Emirates would launch services to Durban, Algiers, Amsterdam, Kiev, Barcelona and Buenos Aires. “We have hundreds of places we can go.”

The same applies for smaller carriers in the region. Virgin Blue chief executive Brett Godfrey said last week: “Even in this current climate as many airlines are reviewing their networks, our team is always on the lookout for potential routes that could do with added competition and where we can make a difference by bringing down overpriced airfares”. Virgin Blue is shifting its aircraft deliveries away from the competitive Australian domestic market, using its leaner New Zealand-based offshoot, Pacific Blue, to mount an aggressive trans-Tasman and Pacific Islands expansion from next month.

Pacific Blue will be targeting the trunk routes between Sydney, Melbourne and Auckland — a timely addition ahead of V Australia’s launch of services to Los Angeles later in the year.

Pacific Blue is much more than a nuisance to Air New Zealand and Qantas in the Australian and New Zealand domestic markets.

The Virgin offshoot’s trans-Tasman foray will eat into a key source of revenue for the New Zealand and Australian flag carriers, not to mention their respective trans-Pacific operations.

The Australia-New Zealand travel market is an important one for both sides, with each country representing the other’s largest tourist market.

In the 12 months to June 2008, there were 967,618 Australian arrivals in New Zealand (+5.2 per cent year-on-year) and 1.12 million Kiwi travellers to Australia (up 1 per cent), according to the New Zealand Ministry of Tourism, and Tourism Australia, respectively.

Competition across the Tasman will intensify as a result of Pacific Blue’s expansion, Emirates’ deployment of A380 capacity on the route from February next year and the re-entry of one or two other fifth freedom carriers.

Thai Airways, for example, is considering suspending non-stop services to Auckland and re-routing them over Sydney-Melbourne. Outbound Australian travel to New Zealand could surge in the latter part of the year and early 2009, while there should also be a steady stream of Kiwis entering Australia, taking advantage of cheaper fares, especially if Qantas, Jetstar and Air New Zealand retaliate against Pacific Blue.

Despite the drop in oil prices, airline earnings should, however, continue to disappoint. Current oil prices are still a massive burden for many airlines.

Some airlines at least will be tempted to adopt a strategic approach and maintain market share — an approach that will be easier as the oil price falls.

In Asia, some carriers, such as Cathay Pacific and Singapore Airlines, are redeploying capacity away from weaker markets such as the US to areas where demand is strong, and maintaining their overall capacity.

Cathay chief executive Tony Tyler said: “We will continue to maintain the integrity of our network, reshaping it where necessary to ensure we fly aircraft to where we can cover our costs and also make some money.”

Cathay Pacific’s “second-phase capacity redeployment” plan to redirect resources from the US to Australia will concern oneworld “partner”, Qantas.

Cathay’s planned four times daily service to Sydney from late October, as well as greater frequency to Brisbane and Perth, is a continuation of a rapid increase in capacity in the Australian market by the Hong Kong carrier in recent years.

All this extra capacity will deliver incoming Qantas chief executive Alan Joyce a further deterioration of the group’s international market share over the next 18 months, particularly as Jetstar remains hamstrung by B787 delays.

Consequently, and despite much of the concern exported from the US and Europe, travellers, airports and the tourism industry in this region could be looking forward to a better end to the year than expected, as the market becomes well supplied with capacity and fares or surcharges.

Overall, the availability of cheap fares triggered by an abundance of capacity will keep Australians flying this Christmas and into the New Year.

Bali and Phuket might give way to some sightseeing in the “shaky isles” and increasing jaunts to Europe via the Middle East or Asia.

For more strategic airline updates, visit www.centreforaviation.com

A Report by The Mole from The Australian