High dollar boosts outbound travel

A report by Derek Sadubin of the Centre for Asia Pacific Aviation in The Australian says that the Australian dollar reached its highest level against the US dollar in 23 years this week, providing the conditions for a once-in-a-generation outbound tourism boom from this summer.

Since the start of 2007, the Aussie Belter (the currency formerly known as the Aussie Battler) has risen around 14 per cent against the US dollar – and therefore recorded similar levels of appreciation against currencies pegged to the greenback, including several major tourism destinations in Asia.

The Australian dollar has performed even better against the Indonesian rupiah, rising more than 15 per cent since the start of the year.

Unsurprisingly, travel to Bali is hot again, with airlines ramping up capacity to the resort island this summer.

The main beneficiaries of the predicted surge in international travel will be Jetstar, Qantas and Virgin Blue’s international arms (Pacific Blue and Polynesian Blue).

Jetstar Airways general manager of corporate relations, Simon Westaway, said the airline’s outbound markets were “meeting or even exceeding expectations”.

Extra capacity for the Bali market is being added from 28 October.

“Notably, even our recently reduced Japanese services are showing positive outbound tendencies despite traditionally being overtly inbound in nature,” Mr Westaway said.

The dollar has appreciated over 12 per cent against the yen since the start of the year and interest in Japanese ski packages is on the rise.

“The average outbound Australian traveller knows a better deal is on hand when our dollar rises,” Mr Westaway said.

The exchange rate is also playing a big role in fleet and network planning.

“The medium to long-term prognosis of where the Australian dollar will sit obviously can have an impact on our network and decision-making process around the next growth phase for Jetstar international,” Mr Westaway said.

Meanwhile, budget airline entrants such as AirAsia X and Viva Macau should also benefit from the wave of Aussie travellers heading overseas to take advantage of the strong exchange rate.

Middle Eastern carriers could also expect strong conditions as Europe becomes cheaper.

Budget entrant AirAsia X has enjoyed a “massive start” to its Gold Coast-Kuala Lumpur route, which launches in early November, according to director Tony Fernandes.

Since the service was announced a fortnight ago, the carrier has received 10,000 bookings.

Mr Fernandes said “50 per cent of Aussies are going onwards” to Asia on sister AirAsia’s services from Kuala Lumpur.

Australian carriers also benefit from a reduction in some costs, because fuel, aircraft, spare parts and other items are denominated in US dollars.

As such, first-half profitability for the Qantas Group could be even stronger than earlier projections.

The increasing attractiveness of overseas travel will, however, increase pressure on the Australian domestic and already struggling inbound tourism sectors.

Not only are Australian destinations more expensive, but foreign tourists and packagers have to compete for airline seats with the larger number of Australians travelling.

The Australian domestic air travel market already faces the spectre of falling yields – albeit in a growing market – as airlines increase capacity by around 25 per cent over the next 18 months – a move associated with the entry of Tiger Airways.

This week Tiger unveiled its most aggressive domestic promotion to date, with some one-way fares dropping below $10, in a sign of what’s to come as domestic travel vies with cheap offshore destinations.

Meanwhile, Jetstar will expand to double daily operations on the Melbourne-Perth route from November 15, introducing a daily Melbourne Tullamarine-Perth service.

This is a big departure as it brings the low-cost subsidiary into direct competition with its parent, Qantas, for the first time. Jetstar will launch Sydney-Brisbane in early December.

The Tiger threat is big enough to risk some traffic cannibalisation from Qantas’s mainline to the low-cost unit and relates to Qantas’s “line in the sand” – 65 per cent market share. These moves appear to be strategically planned to head off the expected challenge from Tiger on those routes.

Also in November, Pacific Blue will launch domestic New Zealand services, provoking a major overhaul of Air New Zealand’s domestic operation and a 25 per cent capacity increase by Qantas, coupled with a significant investment to put some of the frills back into the domestic New Zealand market to appeal to corporate travellers.

Unlike Qantas, Air New Zealand will not be able to maintain its market-share “line in the sand” and its proportion of the New Zealand domestic market will steadily erode.

Meanwhile, Virgin Blue (which deferred its ultra-low-cost Australian carrier option in favour of developing the New Zealand domestic strategy) has not suggested it will try to hold its line. Internationally, though, Virgin Blue received good news last week when its plan for 10 weekly services to the US became more certain, as Australia and the US announced their intention to sign an open-skies agreement.

The prospect of increasing US-Australia liberalisation is one of the reasons Boeing unveiled a 31 per cent lift this week in its 20-year forecast for aircraft sales to South Pacific airlines, from 440 to 580.

The stunning upgrade is also attributed to the rising influence of low-cost carriers in the region (contributing to an expanded narrow-body jet forecast), as well as the potential for new aircraft technologies, such as the Boeing 787, to unlock new route opportunities.

According to Boeing, the fastest-growing route area (measured in revenue passenger kilometres) from the South Pacific region over the next 20 years will be to/from southwest Asia (dominated by India), rising an average 11.3 per cent a year.

Next is South America (9.3 per cent), North America (7 per cent), the Middle East (6.9 per cent) and northeast Asia (excluding China, 6.6 per cent). Total growth in the South Pacific aviation market is expected to be 5.4 per cent a year on average, with travel to/from southeast Asia to grow below the average (5.2 per cent) and surprisingly slow forecast growth to/from China (4.6 per cent).

But the centre’s own projections indicate a more significant boost in the Australia-US market than Boeing’s over the next five years.

The soon-to-be-liberalised trans-Pacific route has remained near-dormant over the past decade, with little capacity growth and limited city-pair expansion.

Virgin’s entry to the market in late 2008 and likely codeshares, accompanied by Qantas’s introduction of the A380 and the progressive arrival of Qantas/Jetstar’s B787s, will unlock competition and stimulate considerable new opportunities for higher seat numbers and new route options.

In summary, the short and long-term prospects for international travel in this region are surprisingly strong – for what is regarded as a relatively mature market.

The domestic skies of Australia and New Zealand are also set to boom, albeit with some challenges to profitability.

Ultimately, it’s the travellers who will decide where they draw their lines in the sand this summer and into 2008.

Australians will be the big winners, pocketing good savings, as rivalry intensifies between domestic and international travel options.

Even the tourism industry will pick up some domestic benefits, but tourism prospects for international inbound growth look pale for at least another year.

More Asia Pacific aviation updates are available daily at www.centreforaviation.com

Derek Sadubin is the chief operating officer of the Centre for Asia Pacific Aviation.

Report by The Mole from The Australian