MARKET CHARACTERISTICS

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2 Contents 1 EXECUTIVE SUMMARY 3 2 INTRODUCTION 7 3 METHODOLOGY 11 4 MARKET CHARACTERISTICS 13 5 AIRPORT CASE STUDIES 22 6 SWOT ANALYSIS 36 7 THE KEY CRITERIA FOR INTERNATIONAL AIR SERVICES 39 8 ADDITIONAL CONSIDERATIONS 43 9 AIRLINE DRIVERS CONCLUSIONS AND ACTIONS 52

3 FIGURE 2-1 PROJECT VISION... 7 FIGURE 2-2 KEY AVIATION DRIVERS FOR AUSTRALIA IN FIGURE 3-1 STAKEHOLDERS FIGURE 4-1 MARKET VISITATION FIGURE 4-2 STOPOVERS BY MARKET FIGURE 4-3 CHINESE VISITATION GROWTH FIGURE 4-4 CHINESE VISITATION BY DESTINATION FIGURE 4-5 TIER A AIRPORTS: DOMESTIC PASSENGER TRAFFIC FIGURE 4-6 TIER A AIRPORTS: INTERNATIONAL PASSENGER TRAFFIC FIGURE 4-7 TIER B AIRPORTS: DOMESTIC PASSENGER TRAFFIC FIGURE 4-8 TIER B AIRPORTS: INTERNATIONAL PASSENGER TRAFFIC FIGURE 4-9 LOAD FACTORS FIGURE 5-1 MARKET POSITIONING OF TIER B AIRPORTS FIGURE 5-2 ADELAIDE INTERNATIONAL ROUTE NETWORK FIGURE 5-3 ADELAIDE INTERNATIONAL PASSENGER GROWTH FIGURE 5-4 ADELAIDE INTERNATIONAL FLEET MIX AND AIRLINE MARKET SHARES FIGURE 5-5 CAIRNS INTERNATIONAL PASSENGER GROWTH FIGURE 5-6 CAIRNS INTERNATIONAL FLEET MIX AND AIRLINE MARKET SHARES FIGURE 5-7 DARWIN INTERNATIONAL ROUTE NETWORK FIGURE 5-9 DARWIN INTERNATIONAL AIRLINE MARKET SHARES FIGURE 5-10 DARWIN INTERNATIONAL CARRIER TYPE AND FLEET MIX FIGURE 5-11 GOLD COAST INTERNATIONAL ROUTE NETWORK FIGURE 5-12 GOLD COAST INTERNATIONAL PASSENGER GROWTH FIGURE 5-13 GOLD COAST INTERNATIONAL AIRLINE MARKET SHARES AND FLEET MIX FIGURE 5-14 QUEENSTOWN AIRPORT INTERNATIONAL PASSENGERS FIGURE 5-12 NORTH AUSTRALIAN TIER C AIRPORTS INTERNATIONAL ROUTE NETWORK SPANNING FIGURE 5-13 SOUTH AUSTRALIAN TIER C AIRPORTS INTERNATIONAL ROUTE NETWORK SPANNING FIGURE 7-1 RUNWAY LENGTHS BY TIER AIRPORTS FIGURE 7-2 FLEET MIX OF CURRENT INERNATIONAL OPERATIONS TO AUSTRALIA FIGURE 8-1 REGIONAL AIRPORT HURDLES FIGURE 8-2 AIRPORT RELATED CHARGES FIGURE 8-3 HURDLES FOR CIQ PROVISION AT REGIONAL AIRPORTS FIGURE 9-1 AIRLINE CLUSTERS FIGURE 9-2 AIRLINE DECISION-MAKING FIGURE 9-3 SOURCES OF PASSENGERS TO ENHANCE SUSTAINABILITY... 50

4 FIGURE 9-4 AIRLINE CHECKLIST FOR NEW ROUTE POTENTIAL FIGURE 10-1 ROLES OF KEY STAKEHOLDERS IN ACCESS DEVELOPMENT TABLE 2-1 CATEGORIES OF AIRPORTS... 9 TABLE 4-1 TIER A AIRPORTS: PASSENGER GROWTH RATES TABLE 4-2 TIER B AIRPORTS: PASSENGER GROWTH RATES TABLE 6-1 TIER A AIRPORTS: SWOT TABLE 6-2 TIER B AIRPORTS: SWOT TABLE 6-3 TIER C AIRPORTS: SWOT TABLE 7-1 CRITERIA FOR ATTRACTING INTERNATIONAL SERVICES... 40

5 1 Executive Summary Subheadingt The Department of Resources, Energy and Tourism, on behalf of the Tourism Access Working Group, has undertaken substantial investment into understanding how regional airports in Australia can overcome the challenges and impediments to attracting international air passenger services. Particularly, this investment has included a three stage project titled The Regional Airports Project, which was developed to investigate the reasons behind the limited uptake from foreign airlines of the regional bilateral air services packages (or The Packages 1 ) developed by the Australian Government. Stage One of this project identified potential issues affecting the use of the Regional Packages. This Stage One research was completed by Aspirion Consulting and concluded that awareness of the Packages themselves is low amongst foreign airlines and a limited understanding exists of the benefits the Packages provide to airlines and regional Australian airports. The solutions identified from Stage One focused on improving the marketing and communication of the benefits of these Packages and a more hands-on role from the Government with airline network planning departments. Stage Two then developed the communication strategy and collateral for promotion of the Regional and Enhanced Regional Packages to target foreign governments and carriers. Stage Three, this project, focuses on factors that drive airlines to make decisions on new international air services and recommendations to regional airports and governments to overcome the challenges and impediments to attracting international services. In the course of this work, Airbiz has consulted extensively with airlines, airports, State Tourism Authorities, aviation industry suppliers as well as other Australian Government Departments, involving 22 one-to-one interviews. Quantitative research into historical performance at airports in Australia and overseas as well as case studies into successful regional international airports (and those without international services) has also been completed. This analysis has resulted in a clear picture of 1 The Packages are defined as follows: 1. The Regional Package unlimited capacity and access from overseas countries to international airports other than the four major gateways of Sydney, Melbourne, Brisbane and Perth. 2. The Enhanced Regional Package additional capacity into the four major gateway airports where services pass through, in one or both directions, a regional airport. 3

6 destination and regional airport requirements needed to attract new international air services. It has also highlighted the role and performance of the Packages and Government s role in facilitating the ongoing growth of regional air services dispersion in Australia. Core Finding The most important finding of this Stage Three study is that the Packages are in themselves not a sufficient reason for an airline to begin a new route but that airlines will only decide to fly to a region if the business case to do so is commercially viable. Overwhelmingly, the airlines interviewed reinforced that unless a new route will be profitable and the destination meets certain key criteria, then it is irrelevant if the Packages exist or not. Those key criteria, determined through the interview process and essential in determining route profitability, are outlined below; 1. Does the destination have an iconic tourism appeal? 2. Is the destinations market catchment (population) 100,000+ people? 3. What is the potential for the outbound passenger market 4. Is there year round demand and what are the 5 year growth forecasts? 5. Is there a broad passenger mix (Business, Leisure, Visiting Friends and Relatives (VFR)) and potential for connecting domestic traffic? 6. What is the destination s geographic position in respect of a potential route, what is the appropriate aircraft type and does airport infrastructure match? 7. What are the airport s costs to the airline to operate? 8. Is there a whole of community approach to supporting a new route (airport, local government, community, State government)? Through the course of this study we have identified that the criteria listed above should from part of any Airports business proposal to an Airline. In addition, it still considered that the Packages are effectively achieving their intended role in that they are creating an environment conducive to growing international air services direct to regional airports, removing bilateral impediments and facilitating air services, where they are commercially viable. Secondary Findings The study further highlighted other important considerations in removing barriers to growth. First, that a destination can increase and develop its international visitor numbers without initially having to attract a direct international air service. The ongoing importance of domestic flights to enable connectivity for regional airports beyond the established gateway airports will continue to be an enabler for growth of international visitors to regional Australia. Improving these connections can then build traffic towards a critical mass of international visitors required to eventually achieve a direct and sustainable international service. Second, regional airports generally have a higher cost per passenger than gateway airports. This is due to a reduced opportunity to achieve economies of scale in core services such as airport management, fuel, air navigation costs, Customs, Immigration and Quarantine (CIQ) and the relativity of costs of other support services at regional airports versus economies of scale at gateway airports (such as catering and ground handling costs). Third, that there is limited awareness of the Packages by foreign airlines. Actions Stemming from these findings and the consultation process this study has identified a range of actions that airports and governments (Australian state and local) can undertake to effectively address those issues identified above and assist in developing the core finding with potential customers (Airlines). Airports Case studies and consultation has indicated that an Airport should; Leverage off strong established international flows with domestic connections to capital city gateway airports and to build domestic frequency and capacity. The long term goal, for some airports, would include building a business case for international direct services by tracking international connections and passengers on domestic flights to demonstrate a sizeable 4

7 market exists with good growth potential. It will be crucial to emphasise the benefits arising from domestic connectivity and the increased choice in connecting destinations for outbound travel as well as the increased visitor markets able to access the destination. Build a business case around the tracking identified above and invest in targeted marketing before attracting new international air services and when the market has matured, work towards the goal of long term sustainable direct flights. Include in a business case for a route how it will be sustained through lower seasonal periods (identifying actions to reduce seasonality) and how it can draw feeder traffic and not just rely on point-to-point traffic. Demonstrate in a business case what the forecast for the growth of a route will be over five years, and how that growth is going to be delivered through expanding passenger markets and the passenger mix, as the route matures. Provide appropriate infrastructure (runway length, passenger processing ability (Customs, Immigration, Quarantine) and aircraft parking positions in particular), understanding market opportunities and matching infrastructure to aircraft types are also core actions. Specifically, what type of carriers is the airport likely to attract (i.e. low cost or full service or a mix) and how can the airport best tailor their product offering to match? Opportunities at regional airports are around long term strategies, starting with building international visitor markets on domestic flights first to establish a business case for demand. It is key to note that airports need to first understand what drives the targeted airline and how their destination, market profile and infrastructure will fit in that airlines framework and strategy. Market forces dictate that regional airports must achieve critical mass in order to be sustainable and that every party has a role to play in marketing the destination and the opportunity in order to assist regional airports to achieve appropriate levels of market demand and drive down the (lack of) economies of scale. Government Case studies and consultation has indicated that governments at all levels can assist regional airport growth in the following areas; Economic development agencies have a role to play, in aligning strategies and initiatives with the airport s plans and considering the airport as a central pillar of the region s economic opportunity for expansion. Further, economic development agencies can co-ordinate the local economy s role and local business s participation in the airport s growth. For example, collecting and tracking growth in key business segments that will support new services as well as identifying freight opportunities. Tourism organisations, industry and partners can assist through destination and airline co-operative marketing, to drive demand and have that demand flow through to increased seat capacity. The provision of market research to assist smaller airports who do not have the budget or people resources to track their potential growth in international visitors. Also, being present at airline meetings (where requested by the airport) and attracting reciprocal government and tourism support from the corresponding foreign destination will show a united business case and help to build confidence within the airline. Government and its agencies have a role to play in infrastructure provision too, as not all infrastructure and facilities and services are under the control of the airport. Air navigation aids and services and CIQ facilities and staff resourcing are necessary to the airport s international opportunity. The key is to have a policy framework that enables tailored local solutions dependent on the airports needs, particularly in respect of the size of CIQ infrastructure required (for example, stakeholder feedback suggested that more Quarantine desks are required to be built than are actually used and these desks are built at the expense of the airport). Consultation with local operators on tailored local needs would go a long way to improving costs in this area. Consider Principle 2 in the National Passenger Facilitation Committee (NPFC) Provision of Government Services New International Airport (the Guide) which suggests a five year commitment is required from an airline to operate a route, which is 5

8 an unrealistic period for an airline to be able to commit to in a commercial environment. Consider Principle 3 in the National Passenger Facilitation Committee (NPFC) Provision of Government Services New International Airport (the Guide) which states no airport should experience unreasonable barriers to entry into the market. Stakeholder feedback indicates the current practice could in itself be deemed a barrier, in that CIQ services are not in place and many challenges need to be overcome to achieve designation. Successful regional destinations have enjoyed the full support of all levels of local tourism, government, product and local businesses to build an attractive airline business case. It is not just about tourism but instead a whole economic development plan to support access growth. Usually driven by the airport, the collective group of stakeholders target various levels of the airline, travel trade and business to develop a series of key messages to the airline and commence building the story of market demand. In most cases, the conversion of a new international air service can take 3-5 years from idea conception and first approach to operation of a viable new airline service. Thus, a long-term strategy and supporting investment is needed. State Tourism Organisations and Regional Tourism Organisations also need to embrace the need for outbound travel to ensure sustainable air services for the long term. The Australian Government s key role is to ensure a framework exists that will reduce the hurdles for regional airports to attract and operate new international air services. There is a need for Government to work closely and consult with individual operators under an objective of cost reduction. The most relevant for Government assistance can be tailored solutions for CIQ to match individual airport needs, partnering with airports and regional communities to incentivise new flights by discounting the Passenger Movement Charge (PMC) for the initial start-up phase (normally seen as 12 months) for a new route. The recommendations of this report focus on commercial criteria considered by airlines in network and route planning and how this is relevant to regional airports in Australia. Airlines will only fly to an airport if it services a region and/or destination that possess key commercial criteria that enable and support long term sustainable flights. Continuation of the Packages is essential to ensure the environment supports market-driven decisions and to remove any hurdles or barriers to airlines commencing new international air services to regional airports. Future investment should be focused less on building awareness of the Packages and more on governments partnering with regional airports which can demonstrate that a profitable business case exists for new international flights, by providing research and marketing support to demonstrate market demand exists and can be sustained and by removing hurdles around physical operation and facilitation of flights. 6

9 2 Introduction FIGURE 2-1 Source: Airbiz Identify key challenges PROJECT VISION Subheadingt Describe key elements for attracting international airlines to regions Recommendations for growth The Department of Resources, Energy and Tourism, on behalf of the Tourism Access Working Group, has undertaken substantial investment into understanding how regional airports in Australia can overcome the challenges and impediments to attracting international airline services. Particularly, this investment has included a three stage project titled The Regional Airports Project, which was developed to investigate the reasons behind the limited uptake from foreign airlines of the regional bilateral air services packages developed by the Australian Government. This report is for Stage Three of this project and discusses factors that drive airlines to make decisions relating to new international air services. Core Finding The core finding from this Study is that airlines will only decide to fly to a region if the business case to do so is commercially viable. Therefore an Airport should provide a clear business case, addressing key criteria, in support of its proposal for international operations. Key feedback from airlines illustrating the importance of the commercial business case includes: Market demand is the number one driver for a new route decision. Where is the demand coming from currently and can it be stimulated into the future? [Airline] The [Packages] are not part of our consideration set, if we know we can profitably operate a route, we will seek permission at that point [Airline] Therefore this report discusses information critical to developing a coherent business case and addressing key airport and airline decision making criteria. The report is structured in a way which; First illustrates the current aviation environment within which airlines and airports operate, key in developing the business case, Secondly identifies, issues and challenges that airports face in attracting international airline services, Third it presents airport case studies where relevant airports have secured international air services, and Finally determines through analysis and consultation the ways airports and governments can work to improve the potential for development of international airline services. 7

10 2.1. Project Vision Figure 2-1 on the previous page outlines the project vision for Stage 3. At the conclusion of this report the reader should be aware of how airlines decide on a new route, the challenges and commercial realities for regional airports wanting international air services, where regional airports can position themselves and how they can work with key stakeholders to grow international visitors to their region Australia s Current Aviation Environment Australia s aviation environment is dynamic and reflective of the macro trends in the Australian economy. Typically, aviation growth travels in seven to ten year cycles, led by economic conditions, airline restructuring and natural events. The most recent cycle has been driven primarily by leisure demand stimulated by lower prices delivered by low cost carriers (LCCs) for discretionary travel and tourism. In contrast, Australia s current aviation environment can be characterized by the polarizing of air service growth to mining destinations (e.g. Western Australia) versus high volume leisure destinations (e.g. Gold Coast, Queensland). Regional Australia has recorded steep growth spikes in remote destinations responding to mining company logistical needs to fly-in and fly-out (FIFO) employees. Of the ten fastest growing domestic routes in 2011, nine featured resource rich regions or hubs, such as Perth, Karratha, Brisbane and Mackay. Both Qantas and Virgin Australia are focused on the corporate market and high yielding traffic as well as capturing this explosion of FIFO travelers. At the other end of the spectrum are Jetstar and Tiger Airways who are focused on leisure and high volume tourism destinations. In addition, Jetstar is targeting Australian outbound travelers to New Zealand and Asia. Jetstar is currently the high growth capacity airline for Australia, being the only major airline adding significant new aircraft (and thus additional seat capacity) into the Australian domestic market in the period. Alliances and airline partnerships are evidently the way of the future. Both Qantas and Virgin Australia joined with major Middle Eastern and Asian carriers in the past 12 months to facilitate network expansion without having to purchase new aircraft. By strategic partnering with airlines servicing Europe, Asia, America and the Middle East, Australian domestic networks can effectively feed and connect Australian and foreign travellers to an expansive network at a more effective cost. Alliances and partnerships will play an increasingly important role in the selection of both domestic and international air services to regional airports in Australia, Figure 2-2 illustrates this current aviation environment. Polarising corporate & leisure International growth driven by Middle East & Chinese Carriers in past 2 years Regional domestic traffic explosion due to mining FIGURE 2-2 KEY AVIATION DRIVERS FOR AUSTRALIA IN 2012 Source: Airbiz Capacity growth domestic is mainly with Jetstar Alliance - Reliance Leisure capacity declining, better bang for buck elsewhere 8

11 2.3. Categories of Airports in Australia The terminology used to categorize airports in Australia for consideration of potential international access varies between government, airports and tourism representatives. Table 2-1 outlines the categories used in this report to describe gateway or capital city airports, regional airports currently with international air services and regional airports with small volumes or no international air services. Tier A Tier B Tier C 2.4. Regional Growth in Domestic Services Regional airports in Australia have experienced significant growth at key resource rich and iconic tourism destinations. This has put pressure on existing airport and supporting infrastructure (in particular accommodation rooms available in mining towns) and also raised the aspirations of some regional airports and municipal councils to investigate options for direct international air services. Key feedback from airlines illustrating the importance of an airport having existing critical infrastructure and services include: Gateway Airports TABLE 2-1 Sydney Melbourne Brisbane Perth Source: Airbiz Regional International designated with existing international services and permanent Customs, Immigration and Quarantine (CIQ) Gold Coast Adelaide Cairns Darwin CATEGORIES OF AIRPORTS Regional Airports without existing international services and/or permanent international designation and/or CIQ Sunshine Coast Port Headland Canberra Hobart Townsville Broome Melbourne Avalon Newcastle All other airports Regional airports with sizeable domestic flights and capacity are generally less cost (to operate to) as they have direct and other support services already in place (i.e. ground handling and catering) [Airline] 2.5. International Services to Capital City vs. Regional Airports Most regional airports with existing international services have recorded solid growth in international passengers over the past five years. This has been mainly due to new long haul low cost carriers and the increase in Chinese visitor demand for Australia. These carriers work to lower cost bases than full service carriers, look to new ways of stimulating demand and have presented opportunities to airports such as the Gold Coast, who previously only had short-haul international services to New Zealand. The Gold Coast has recorded a compound average annual growth rate of 33% in international passenger movements (inbound and outbound) from 2000 to Whilst international services to the regional airports have increased substantially in the past 10 years, it is essential to put this growth in perspective. Tier A or Gateway capital city airports account for 92% of all international seats to and from Australia. Tier B or regional airports represent only 8% of total international seats. Reasons why gateway airports have historically serviced the majority of international passenger movements are discussed later in this report. Looking to the future, regional airports will likely increase the total number of air services operating to their airports, however gateway airports will also continue to grow and will most likely always maintain the major market 9

12 share of international airline capacity to Australia. This report will demonstrate that a key to growth for regional airports is to leverage off domestic connections to capital city gateway airports and to build domestic frequency and capacity with, for some airports, the long-term goal of building a business case for non-stop international services by tracking international connections on domestic flights and demonstrating a sizeable market exists with good growth potential. Furthermore this report will show that success is dependent on meeting key airline commercial imperatives as well as developing a clear niche for the destination and matching market demand to the right airline partner and route development opportunities Key Stakeholder Feedback The following identifies key feedback from stakeholders through the consultation process. Cost Comparison - Regional Airport vs. Capital City Airport Many stakeholders perceive that operating an international air service to a regional airport provides a cost advantage over a capital city airport. Airbiz has conducted numerous studies into this perception and the evidence consistently demonstrates that regional airports are more expensive for international airline operations when considering unit costs of operation. Unfavourable cost of operation for an airline is the number one issue confronting regional airports. Many of these costs are beyond the control of airport management, including fuel, air navigation costs and the relativity of costs of other support services at regional airports versus economies of scale at gateway airports (such as catering and ground handling costs). There is no simple cost advantage for international airlines to fly to a regional airport in Australia. An airline indicated the importance of year round sustainability by saying: Regional airports do not really have any cost advantage compared to Capital City airports and it is more difficult to attract multiple passenger segments. I always ask, how is my aircraft going to be filled 365 days a year? [Airline] Bilateral Regional Airport Packages While limited awareness was evidenced during stakeholder consultations for Stage Three of both the Regional Entitlements Package and the Enhanced Regional Package, it is clear that this limited awareness is not a true hurdle for attracting international air services to regional ports. Feedback around the Enhanced Regional Package was particularly negative from all airlines. This is based on the historical evidence within the airline industry that triangulation reduces the overall profitability of a route. Thus the triangulation concept will never be appealing because it is not commercially viable. Triangulation without cabotage rights results in a dead-leg for the short sector of any route with a stop over, making the overall route unviable. Triangulation also means a reduction in the quality of the service offered to passengers, whereby the airline does not adequately service either of the two ports on the route and offers a less attract product than a competing airline who is operating a non-stop service. 10

13 3 Methodology 3.1. Stage 3 Methodology The Airbiz approach to investigating this study has been to combine a hands-on approach to regional international airport development with quantitative data analysis supported by findings from stakeholder interviews and qualitative assessment. The approach is based on extensive experience in attracting new international airline services to regional airports. Multiple case studies of airports with various degrees of success and experience in attracting international air services were examined. The methodology is: 1. To identify existing market characteristics and appropriate airport considerations and actions. 2. To analyze the characteristics of the three tiers of airport groups though a SWOT analysis,; Tier A: Capital City (gateway airports), Tier B: Successful international regional ports, Tier C: Regional ports without current international flights. 3. Quantitative analysis of airport performance. 4. Case studies of relevant airports and destinations. 5. Identifying essential and desirable criteria for regional airports to attract sustainable international services. 6. Interrogation of the drivers of airline decision making by identifying the issues and positioning of regional airports through airline interviews. 7. Conclusions and actions. Publicly available data was sourced from a range of organisations including the Tourism Research Australia, the Bureau of Infrastructure, Transport and Regional Economics (BITRE) and others. Sabre Airport Data Intelligence Analysis was also used in the quantitative analysis. In addition, Cairns Airport (North Queensland Airports Ltd) granted permission for the reference to the results of a study completed by Airbiz in May 2012 looking at the total cost for an airline operating to a regional airport versus capital city airports. A half-day workshop was held with representatives of the Department of Resources, Energy and Tourism on Thursday 14 September 2012 to 11

14 discuss findings and recommendations from the first draft Stage 3 report. Feedback supplied by the Regional Sub-committee of the Tourism Access Working Group has been included in this report Stakeholders Twenty-two stakeholder interviews were conducted over the months August/September Airbiz held discussions with a further five individual stakeholders on air service development requirements in the past six months which are relevant to this project. A range of views are represented in these qualitative interviews that have been incorporated throughout this report. Stakeholders who were interviewed are outlined in Figure 3-1. Airports Queensland Airports Ltd Cairns Airport Airlines AirAsia X Air New Zealand Others Department of Infrastructure & Transport Customs Informal Interviews Virgin Australia Darwin Airport Etihad Tourism Australia Adelaide Airport Jetstar SATC Canberra Airport Scoot AirServices Sunshine Coast Airport Cebu Pacific* Tourism WA Gold Coast Airport China Eastern Airlines* Tourism NT Townsville Airport Singapore Airlines* Tourism Qld Tiger Airways Queenstown Airport Qantas Airways* TTF FIGURE 3-1 STAKEHOLDERS *These stakeholders have been consulted on air service development by Airbiz within the past six months. Source: Airbiz 12

15 4 Market Characteristics In order to assess the potential for international air service opportunities it is important to understand the core market dynamics within which the Airports operate, this section defines those core market characteristics Importance of Outbound Travel to Aviation Sustainability The significance of the Australian resident outbound market cannot be underestimated in this study. Inbound visitation continues to grow at a steady, relatively mature rate. However seat capacity growth in recent years has been primarily led by the Australian outbound market, driven by an aspirational desire to travel overseas. This has in part been motivated by price levers applied to the market by LCCs such as Jetstar and AirAsia X, putting Asian and New Zealand airlines within reach of a wider consumer market, coupled with a higher Australian dollar giving consumers confidence in their spending power while overseas. Tourism is typically focused on visitors but for airline sustainability, the broader the appeal of a route to different markets, the lower the risk profile of the route. A mix of Australians and international visitors, travelling for a broad range of regions including business, leisure and education will give an airline confidence to grow a route. Therefore a route with a skew towards a strong leisure visitor market only highlights a risk exposure for an airline. Having a good sized population base (usually accepted as 100,000 people or more) and/or a local resident population with a high propensity to travel has three core benefits to an airline in that it: 1. Maintains airline load factors; 2. Reduces seasonality; and 3. Offsets risk of one source market dropping in demand International Visitor Market Trends The following key points illustrate the existing international market trends. New Zealand is the No 1 source market for Australia, however the market has been relatively static for the last 8 years at 19-20% market share. 13

16 YE Mar00 YE Mar01 YE Mar02 YE Mar03 YE Mar04 YE Mar05 YE Mar06 YE Mar07 YE Mar08 YE Mar09 YE Mar10 YE Mar11 YE Mar12 Visitors The Japanese market has more than halved over the past ten years, from 612,000 in 2002 to 311,000 in 2012, and from 16% to 6% market share. The Chinese market has grown from the smallest to the second largest, with significant growth in the past three years. 156,000 Chinese visited ten years ago, to 530,000 in the most recent year (2011), increasing market share from 2% to 10%. The Malaysian and Singaporean visitor markets have exhibited steady growth over the past five years, as capacity has been added from those markets. How these markets behave as they mature can give an indication of what the expectation is for the Chinese market in the next five years. Figure 4-1 depicts the volumes and trends for visitation by various markets since ,200,000 1,000, , , , ,000 0 FIGURE 4-1 Volume of visitors from selected markets New Zealand Hong Kong (SAR of China) Malaysia MARKET VISITATION Japan Singapore China (excludes SARs and Taiwan Province) Source: TRA International Visitor Survey reporting data from April 1999 to March International Visitor Travel Patterns As visitor markets evolve, wholesalers and consumers become more confident and experienced in visiting Australia. The potential for visitors to visit only one destination (mono-destination travel) increases over time, as repeat visitation generates travel beyond the major gateways/capital cities. Decreasing the complexity of itineraries and increasing travel to one or two centre s only is a market of significant interest to regional airports, as direct services become viable, particularly as part of a hub operation. For example, Jetstar successfully operates the largest volume of seat capacity in the Australia-Japan market, to Gold Coast and Cairns Airports only. Popular Japanese stopovers such as Sydney are served on domestic sectors, with the regional airports serving as the hubs, dispersing Japanese visitors to the capital cities over a domestic network. On this basis, the evolution of markets such as Japan, which now features a majority mono-destination profile, highlights future opportunities for regional international airports. As Chinese consumers become more familiar with the regional destinations, demand will increase and reach a point at which direct flights as part of a one or two centre itinerary become viable, and regional airports can target a market with huge potential for growth. Cairns Airport has recently achieved this with China Southern and China Eastern Airlines. Multi-stop itineraries also have a significant impact on the way international airlines service Australia. Australia being an end of line destination and a long flying distance from key source markets (other than New Zealand) means that most international travellers seek to experience multiple destinations while on their visit to Australia. This results in high use of domestic flights by international travellers to access desired iconic destinations. Furthermore, most visitors only have a short period of time to visit Australia and multiple regions and thus domestic air travel and connectivity is essential. This is a major driver behind the key partnerships of Virgin Australia and Etihad/Singapore Airlines and the Qantas-Emirates relationship. Access to regional destinations via domestic flights enables Etihad for example to offer its Middle-Eastern core customer group codeshare options (and thus seamless travel arrangements) from Abu Dhabi through to Cairns, Canberra or even Ballina. Figure 4-2 illustrates the mean number of stopovers by selected markets. 14

17 YE Mar00 YE Mar01 YE Mar02 YE Mar03 YE Mar04 YE Mar05 YE Mar06 YE Mar07 YE Mar08 YE Mar09 YE Mar10 YE Mar11 YE Mar Mean number of stopovers by selected markets Similarly, but not to the same volume, Queensland destinations have also increased Chinese airline capacity over the past 5 years, with direct capacity to Brisbane from November 2010 and to Cairns commencing from October This growth has been founded on market demand and solid consistent increases in Chinese visitors to key tourism destinations in Tropical North Queensland and South East Queensland. Comparisons of level of visitation and growth rates to various Australian centres by Chinese visitors are shown in Figure 4-3 and Figure 4-4 illustrating the significant growth achieved across the ports analysed % 20% Chinese visitor 10 year AAGR to selected major destinations 16% 21% 17% 15% 13% New Zealand Japan Singapore China Malaysia FIGURE 4-2 STOPOVERS BY MARKET 10% 11% 10% 11% Source: TRA International Visitor Survey reporting data from April 1999 to March % In determining which international source markets to target, regional airports need to identify and understand these types of market dynamics in order to present a coherent and relevant business case to potential airlines. The following is a brief case study which illustrates how Cairns Airport was able to identify and understand these types of market dynamics and subsequently attract a direct and sustainable international airline service. 0% FIGURE 4-3 Sydney Melbourne NR/GC Brisbane Tropical North Queensland CHINESE VISITATION GROWTH Experience Perth Adelaide Source: TRA International Visitor Survey reporting data from April 2001 to March % ACT 4.4. Case Study: Chinese Visitor Dispersal and Australian Airports China is Australia s fastest growing international source market. To date, airline capacity has been focused on Sydney and Melbourne. In particular, Melbourne s recent growth reflects market demand for Chinese visitors to Victoria (including business links and visiting friends and relatives traffic (VFR)) plus the strong emphasis Melbourne Airport has placed on the Chinese market with publicly stated targeted business development initiatives. 15

18 YE Mar00 YE Mar01 YE Mar02 YE Mar03 YE Mar04 YE Mar05 YE Mar06 YE Mar07 YE Mar08 YE Mar09 YE Mar10 YE Mar11 YE Mar12 350, , , , , ,000 50,000 0 FIGURE 4-4 Chinese visitors to specified major stopover destinations Sydney Melbourne NR/GC Brisbane Tropical North Queensland Experience Perth Adelaide ACT CHINESE VISITATION BY DESTINATION Source: TRA International Visitor Surveyreporting data from April 1999 to March 2012 Cairns Airport Case Study China Cairns Airport was able to build a business case for direct Chinese traffic based on a 21% average annual growth rate of Chinese visitors to the destination over the past 10 years (travelling on Cathay Pacific and domestic connecting flights via Sydney, Melbourne and Brisbane). This demonstrates the importance of building international visitors over domestic flights first, tracking this to build a business case, investing in marketing before attracting new international air services and when the market has matured, working towards the goal of long term sustainable flights International Carrier Alliance Significance It is important to note that overseas carriers operate in regional (Asia-Pacific) and in the wider global markets, of which Australia is only a relatively small part. Travel in North America and Europe is of greater volume than Australia. This, airports in Australia are more in competition with other international destinations than their counterparts at home. Furthermore, travel within Asia, and to Russia, Africa and South America has greater forecast growth potential than to Australia. However, Australia is a significant market to selected foreign carriers, albeit an end-of-the-line market. The ability for carriers such as Virgin Australia, Qantas and Air New Zealand to grow in a global market is now most likely enabled through alliances and consolidation with carriers with different geographic positioning and significant fleet orders, as reflected with the alliance proposed between Qantas and Emirates, and the shift in focus for Qantas from serving Europe through Dubai. With a similar arrangement in place for Virgin Australia with partners Singapore Airlines and Etihad, the potential for Middle Eastern carriers to serve regional international airports directly has declined. Both Emirates and Etihad will now access regional international airports through the domestic networks on Qantas and Virgin Australia respectively (Adelaide excluded, which launches direct Emirates services in November 2012). As a consequence of this industry consolidation, airlines will be more sustainable as risk is spread and the ability to serve markets by proxy is extended. As a consequence, the potential for direct flights to service some regional markets has declined, such as the seasonal Middle Eastern visitor market to the Gold Coast (July-September). This market still has the chance to fly direct to Brisbane and take a ground transfer, or connect over Sydney or Melbourne on a domestic flight. Whilst this may appear negative for regional international airports, it clarifies the airlines focus on opportunities in Asian markets, closer to home. It is therefore important that as a regional airport begins to build a market and by proxy construct a business case, it considers the alliance situation of airlines it is proposing to target. The airport should take care to identify the available routes that the target market must utilise to arrive at the destination and also the airline alliances available to those passengers. This involves understanding the travel trade dynamics Historical Passenger and Capacity Growth The volume of international capacity at the gateway airports is highly significant with 92% of international seat capacity being concentrated at Sydney, Melbourne, Brisbane and Perth. International capacity has grown at an average annual rate of 4.6% p.a. over the previous 12 years. However 16

19 Millions growth at regional airports has been greater, at 5.6% p.a., albeit off a lower base. Historical trends can be characterised as follows: Tier A (Gateway) airports have critical mass in international operations and find growth relatively easy to absorb (although capacity constraints are present at some gateway ports in peak operating times of the day) Tier B (Regional airports) are at a different point in a growth curve and are still heavily impacted by the addition of one or two new services. However with significant domestic operations and existing international operations, they have the potential to grow internationally. Tier C exhibits more challenges in developing/growing international services, which will be examined in more detail elsewhere in this document Two-Way Domestic Passenger Traffic - Tier A Tier A Capital City Airports Figure 4-5 and Figure 4-6 depict historical trends for domestic and international passenger traffic at Tier A airports over the period The reduction in domestic traffic in 2011 is mostly related to Tiger Airways ceasing operations (as determined by CASA) in July 2011 and then recommencing services with a reduced fleet and restrictions in place. Table 4-1 summarises compound annual growth rates (CAGR) at the four Tier A airports. Internationally, Melbourne and Perth Airport s success in growing their international markets is marked, at 7.1% growth each BRISBANE MELBOURNE PERTH SYDNEY FIGURE 4-5 TIER A AIRPORTS: DOMESTIC PASSENGER TRAFFIC Source: SABRE Airline Intelligence

20 Millions Millions Two-Way International Passenger Traffic - Tier A Tier B Regional International Airports Figure 4-7 and Figure 4-8 depict historical trends for domestic and international passenger traffic at Tier B regional international airports over the period Table 4-2 summarises CAGR at the Tier B airports. Domestically, the impact of Tiger Airways cessation in 2011 can be noted, particularly for Adelaide and Gold Coast Airports Two-Way Domestic Passenger Traffic - Tier B BRISBANE MELBOURNE PERTH SYDNEY FIGURE 4-6 TIER A AIRPORTS: INTERNATIONAL PASSENGER TRAFFIC Source: SABRE Airline Intelligence Airport Growth Rates (CAGR) CY ADELAIDE CAIRNS DARWIN GOLD COAST SUNSHINE COAST Domestic International Brisbane 5.5% 5.5% Melbourne 4.6% 7.1% Perth 7.9% 7.1% Sydney 3.6% 3.3% FIGURE 4-7 TIER B AIRPORTS: DOMESTIC PASSENGER TRAFFIC Source: SABRE Airline Intelligence Internationally, the individual airport s trends illustrate the Qantas Group s decision to cease its Australian Airlines hub at Cairns, and then invest with Jetstar in Cairns, Gold Coast and Darwin. TABLE 4-1 TIER A AIRPORTS: PASSENGER GROWTH RATES Source: SABRE Airline Intelligence

21 Two-Way International Passenger Traffic - Tier B 500, , , , , , , , ,000 50, ADELAIDE CAIRNS DARWIN GOLD COAST FIGURE 4-8 TIER B AIRPORTS: INTERNATIONAL PASSENGER TRAFFIC Source: SABRE Airline Intelligence Airport Growth Rates (CAGR) CY Domestic International Adelaide 4.5% 7.1% Cairns 4.2% -2.6% Darwin 4.2% 5.6% Gold Coast 8.5% 33.7% Sunshine Coast 11.1% n.a. TABLE 4-2 TIER B AIRPORTS: PASSENGER GROWTH RATES Source: SABRE Airline Intelligence Comparison of the growth in Tier A and Tier B airports illustrates that the decreased risk associated with broader passenger mixes at Tier A airports is appealing to airlines focused on yield as their major metric. In respect of international traffic, the graphics clearly illustrate the volatility of international services at Tier B airports It is this volatility that an airline might find unattractive and it is this volatility that an Airport should attempt to reduce through building international connections on domestic services in the first instance Sustainability by Airport Tier and Load Factors In considering a new international route airlines will consider what load factor needs to be achieved in order to make a route profitable. Unless this route can be shown to achieve an airline determined load factor, it may not be considered a viable route (unless subsidized by government). Full service carriers typically require a minimum average load factor of 75% for international flights, while Low Cost Carriers target an average load factor of 80% to see a flight as commercially viable. Average load factors reported by BITRE for Tier A, B and C airports are highlighted in Figure 4-9. Tier A airports have consistently recorded strong load factors around 75% while Tier C are much lower. For Tier C airports, there may have been operational impacts or restrictions on the airline services causing the low load factors in the graph below. For example, some Custom, Immigration and Quarantine (CIQ) restrictions on the number of passengers able to be processed or payload restrictions based on the length of runway at the airport may mean that the airline can only sell a restricted number of seats. This data highlights the significant challenge for Tier C in accessing a fair go. Airlines are highly risk averse in the current climate and any new route opportunity should be considered by the Australian Government for start up subsidies, if deemed in the national interest. 19

22 85% BITRE International Airline Activity Load Factor by first/last port 80% 75% 70% 65% 60% 55% 50% 45% 40% SYD MEL BNE PER ADL OOL CNS DRW TSV PHE NRK Total Tier A Tier B Tier C Tier A Tier B Tier C Totals FIGURE 4-9 LOAD FACTORS Source: BITREInternational Airline Activity Report 2011 In developing a business case Airports should consider and illustrate what load factors may be achievable, this will require consideration of airline, passenger volumes, aircraft types and available airport infrastructure (which will be addressed later in tis report). Therefore this chapter has illustrated four core components for consideration by regional airports; 1. Identifying international passenger source markets and volumes, 2. Initially connecting international passengers via domestic services and airline alliances and building these instead of a straight move towards direct international services unless the market can be shown to clearly exist, 3. The volatility of international passenger services at Tier B vs. Tier A airports, and 4. Consideration of achievable load factors on routes. 20

23 21

24 5 Airport Case Studies This section examines case studies of selected Tier B airports in Australia and their relative success in developing international services. The lessons from these studies will reinforce those core components identified at the end of Chapter 4. The airports analysed are; Adelaide Airport Cairns Airport Darwin Airport Gold Coast Airport 5.1. Market Positioning of Tier B Airports The strength of all four Tier B airports is; They know their market, They have defined their market position (illustrated below), and They have a clear marketing proposition to airlines, backed up by existing international services and appropriate infrastructure. Adelaide A-typical, the outbound market Gold Coast The low cost hub Darwin The Northern Australian hub Cairns The hybrid hub FIGURE 5-1 MARKET POSITIONING OF TIER B AIRPORTS Each of the Tier B airports has managed to sustain a level of international capacity. However, some have also witnessed the cancellation of flights where the market dynamics and conditions have not been sustainable. 22

25 Evidence for these case studies has been taken from both secondary data sources and qualitative stakeholder interviews Adelaide Airport (ADL) A-typical of regional internationals Adelaide differs from the other three Tier B airports as the majority of its international services are sustained by strong outbound travel (approximately 60% of passenger movements are locals) based on a larger population size. The direct catchment area of Adelaide Airport is estimated to be over 1.26 million people, including Adelaide city and surrounds. This accounts for 77% of the population of the State of South Australia. Having a solid population with a high propensity to travel builds confidence and reduces seasonal fluctuations for Adelaide. In addition some of the key characteristics of Adelaide s international airline market are: All full service airlines Majority wide-body aircraft Limited geographical advantage i.e. limited short-haul opportunities due to its geographical location Limited awareness of destination South Australia currently when compared to other high volume tourism destinations; and Strong VFR market (based on the population s high propensity to travel). The international flight network from Adelaide is shown in Figure 5-2 Historically, international passenger movements have grown at an average annual growth rate of 7.1% (2001 to 2011) this is illustrated in Figure 5-3. Only 8% of total passenger movements at Adelaide Airport are international passengers. Thus the bread and butter market for ADL is domestic. FIGURE 5-2 ADELAIDE INTERNATIONAL ROUTE NETWORK

26 FY12 EST 700,000 Adelaide Airport International Passenger Movements FY01-FY12 Adelaide Airport Fleet Mix % 16% 600, , , , , ,000 84% 100,000 0 Regional Narrow Wide FIGURE 5-3 ADELAIDE INTERNATIONAL PASSENGER GROWTH Note: FY12EST: Singapore Airlines and Malaysia Airlines expected to increase capacity Source: BITRE Traditional full service airlines have operated to Adelaide over the past 10 years and Emirates has announced daily flights from November Due to Adelaide s geographic location, the majority of aircraft types operated to the region are wide-body aircraft with large seat capacity to fill for each flight rotation, making it an ongoing challenge to sustain flights with reasonable load factors. Carriers to Adelaide operate to key Asian hubs and now Dubai to service the outbound population of Adelaide and South Australia as well as facilitate inbound arrivals. Figure 5-4 illustrates the aircraft mix and airline market share at Adelaide. The core learning from this case study is that growth in international services at Adelaide has been driven by significant support from a large local outbound market allowing airlines access to a significant market on outbound flights. FIGURE 5-4 Adelaide Airport International Carrier Market Share % 4% 25% 12% 2% 12% 11% Qantas Cathay Pacific Virgin Australia Air New Zealand Malaysia Airlines Singapore Airlines Emirates ADELAIDE INTERNATIONAL FLEET MIX AND AIRLINE MARKET SHARES Source: Sabre Airport Data Intelligence

27 FY12 EST 5.3. Cairns Airport (CNS) The iconic inbound tourism destination The success of Cairns as an international airport has been driven primarily by tourism market trends. In particular, the Japanese market has had the greatest influence on international passenger results based on the strong market share of Japanese visitors to Tropical North Queensland. This one market has decided the highs and lows to date of international passenger trends at Cairns Airport. Cairns peaked with its highest recorded international passenger movements in FY2005, supported by a boost to Japan capacity by Qantas s then subsidiary, Australian Airlines. Unfortunately, the Japanese market has recorded a continuous decline in numbers to Australia and Cairns has been negatively impacted by this factor, as shown in Figure 5-5. However, with the destination now focused on developing the Chinese market and spreading the risk of exposure to one major market, Cairns Airport has recently announced both China Eastern Airlines and China Southern Airlines launching new services direct to China from October While China Southern flights are only seasonal at this stage, this initial commitment by the airline augers well for the future development of the Chinese market to Cairns. Cathay Pacific, while not operating directly to mainland China, has had a considerable role to play in the development of Chinese visitation to the region, and has enabled Cairns Airport management to track the historical growth and forecast demand for Chinese visitors accessing the region for leisure travel. International traffic is significant to Cairns Airport and contributed up 13% of total passenger traffic in FY ,000, , , , , , , , , ,000 0 FIGURE 5-5 Cairns Airport International Passenger Movements FY01-FY12 CAIRNS INTERNATIONAL PASSENGER GROWTH 510,977 Note: Australian Airlines cease operations August 2007, Jetstar commence operations 2007 Source: BITRE Airport Traffic Data FY02-FY12 Specifically, Cairns Airport can be described as: Located in a predominantly inbound leisure destination with strong destination brand awareness and iconic appeal, Smaller population and thus limited outbound passengers potential, Highly seasonal market due to weather conditions, A regional hub for Papua New Guinea, A Japanese traffic hub with Jetstar (linking to Gold Coast), Broadest mix of carrier types and aircraft types compared to any other regional international airport, One of Australia s most mature international market destinations (in regards to product development) and inclusion in itineraries (Reef, Rock, Opera House). 25

28 The mix of international carriers to Cairns is relevant to discuss. Although it is an inbound leisure destination, and thus attracting lower yields for airlines, full service carriers have operated now and historically based on visitor demand for Tropical North Queensland (specifically Reef) experiences. However, other than Cathay Pacific Airlines which has a solid freight market to support revenue and access to a growing Chinese market, the trend for Cairns is towards more low cost carrier services with Jetstar now dominating the mix at 48% market share. For Air New Zealand, the sustainability of Cairns has improved with the Virgin Australia partnership now topping up load factors through a combined airline service where previously the two carriers were individually not profitable operating two brands and two aircraft types to Cairns. This is another example of how airline alliances are changing international services to regional ports. With regard to fleet mix, Cairns is just out of reach to most Asian hubs with narrow body aircraft types. Therefore 65% of aircraft flown to Cairns are wide body. The future of narrow body aircraft types with the A320 NEO and B737 MAX represents a great opportunity for the destination to now target Asian hubs with the right sized aircraft mix to sustain all year round flights (where many business cases for wide body aircraft with double the number of seats cannot be sustained to certain markets). Again, this will be a great marriage of geographic location, airline product mix and destination appeal for Cairns Airport in the future. Figure 5-6 illustrates the aircraft mix and airline market share at Cairns. The core learning from this case study is that growth in international services at Cairns has been a result of having an iconic destination able to support a largely inbound and seasonal market, with significant domestic connectivity to support seasonal fluctuations. 2% 3% Cairns Airport Fleet Mix % Cairns Airport International Carrier Market Share % 15% 23% Regional Narrow Wide 12% 9% 48% Cathay Pacific Air New Zealand Jetstar China Eastern United/Continental Regional FIGURE 5-6 CAIRNS INTERNATIONAL FLEET MIX AND AIRLINE MARKET SHARES Source: Sabre Airport Data Intelligence

29 FY12 EST 5.4. Darwin Airport (DRW) The North Australian hub International passengers are now a key market for Darwin Airport, accounting for 15% of all passenger traffic. Darwin is also a Qantas Group dominated port (79% market share). Virgin Australia and alliance partners, Silk Air and SkyWest, account for 19% of seats, with the majority provided by Virgin Australia. Other carriers are Vincent Aviation, Skytrans and Alliance Airlines in the domestic market (regional airline passengers make up 9% of Darwin s total traffic). Air Asia Indonesia operated in the international market to Bali until September 2012, when it ceased operations. 400, , , , , , ,000 Darwin Airport International Passenger Movements FY01-FY12 252,214 50,000 0 FIGURE 5-8 DARWIN INTERNATIONAL PASSENGER GROWTH Source: BITRE Airport Traffic Data FY02-FY12 FIGURE 5-7 DARWIN INTERNATIONAL ROUTE NETWORK 2012 Darwin Airport can be characterised as follows: North Australian hub (targeted market positioning promoted by Darwin Airport and Northern Territory Tourism), Strong destination awareness in international markets, however it has a niche appeal (i.e. product is set up for short stays on a multi-stop itinerary for the majority of markets as well as a fly/drive market based on the fragmented location of tourism product throughout the Northern Territory. That is, Darwin itself is a base for tourism dispersal), Smaller population (estimated 127, 000 people in Darwin and 232,400 people total in the Northern Territory), Strong seasonality due to weather conditions (i.e. wet season over summer), South East Asian hub for short haul traffic from Australian capitals (that is airlines connect traffic to Darwin from capital city ports to connect to short-haul flights to Asia to counteract seasonality), 27

30 No wide body aircraft currently fly to Darwin due to the thin nature of route demand, meaning it is more profitable to fill smaller aircraft types with the level of passenger demand and also the cost advantage for airlines to use short-haul aircraft. This is also an opportunity for Darwin. Strong LCC presence, highly competitive environment, Geographical advantage Darwin s ability to facilitate short-haul aircraft due to its proximity to key Asian hubs. This is particularly important compared to other Australian destinations to Asia. Darwin Airport Carrier Mix % 13% Darwin Airport International Carrier Market Share % 13% 80% 7% Regional LCC FS Darwin Airport Fleet Mix % FIGURE 5-10 DARWIN INTERNATIONAL CARRIER 11% TYPE AND FLEET MIX Source: Sabre Airport Data Intelligence % Regional Silk Air Jetstar AirAsia FIGURE 5-9 DARWIN INTERNATIONAL AIRLINE MARKET SHARES Source: Sabre Airport Data Intelligence 2012 Figure 5-9 and Figure 5-10 illustrates the aircraft mix and airline market share at Darwin. The core learning from this case study is that growth in international services at Darwin has been a result of its geographic location in reach of short haul narrow body aircraft from major Asian hubs and its destination awareness in international markets. 89% Regional Narrow Wide 28

31 5.5. Gold Coast Airport (OOL) The low cost hub Gold Coast Airport s key strength is its very clear position in the market as a low cost carrier hub. Approximately 78% of all seat capacity is supplied by low cost carriers with Air New Zealand and Virgin Australia delivering the only full service international product. Gold Coast is a good case study of an airport with a track record in shorthaul international services to New Zealand which was built up based on strong market demand for the destination from New Zealand travellers. Building on these short-haul flights, Gold Coast Airport had a clear vision of tapping into long haul markets, facilitating direct flights from key international source markets with a high volume of international visitors to the iconic tourism destination. The development of long-haul at the Gold Coast was a product of a long term vision, targeted marketing, cooperative support from the local tourism authority, and investment in appropriate infrastructure (runway extension and terminal) based on a solid business case. Sustainable international flights were possible for the Gold Coast based on a foundation of volume tourism product infrastructure (approximately 13,000 accommodation rooms), substantial marketing in key international source markets from tourism products (i.e. theme parks) and a growing outbound population base. Furthermore, the ability for airlines to tap into the Brisbane population base due to supporting road infrastructure connecting Brisbane to the Gold Coast with an eight lane highway, built confidence in carriers abilities to siphon Brisbane residents to travel to the Gold Coast (along with reduced airport parking initiatives) to support year round wide body airline services. FIGURE 5-11 GOLD COAST INTERNATIONAL ROUTE NETWORK

32 FY12 EST 900, , , , , , , , ,000 0 FIGURE 5-12 Gold Coast Airport International Passenger Movements FY01-FY12 NZ operations only Runway extension March 2007 AirAsia X November 2007 Jetstar Japan late 2008 LCC Terminal opened December 2010 GOLD COAST INTERNATIONAL PASSENGER GROWTH Source: BITRE Airport Traffic Data FY02-FY12 771,700 Scoot commences June 2012 In summary, the key strengths that aided the Gold Coast s rapid growth in international flights were (and still are): Clear market position as a low cost hub (internal mantra unashamedly focused on leisure ), Strong destination with broad appeal to a mix of core markets (the Gold Coast was a key stop on major Asian market itineraries to Australia), High penetration of low cost carriers due to the destination s ability to attract high volume leisure travellers (high volume of accommodation stock meant overall package prices to the Gold Coast were lower than some competing destinations, it also meant the destination could handle large volumes of arriving passengers), Gold Coast Airport built the terminal offering to meet the airport s targeted market position as a LCC airport (i.e. single level terminal with integrated domestic and international facilities enabled reduced operating costs and flexibility of operations to aligned with LCC needs), and Management willingness to work with airlines to aggressively market flights and seek to reduce the total cost of operating to Gold Coast Airport vs. competition. As a result of the above strengths, Gold Coast Airport attracted its first long haul international airline in Air Asia X in October 2007 to/from Kuala Lumpur. Air Asia X built its services initially around attracting both inbound Malaysian visitors and Australians travelling outbound from other Australian ports (i.e. passengers connecting via other airlines at Gold Coast from Sydney, Melbourne and Adelaide who wanted to take advantage of lower airfares to Asia). From this initial success, Gold Coast has been able to now establish itself as a hub for Japan (with Cairns) and offer a point of difference to Brisbane Airport (i.e. Singapore Airlines at Brisbane vs. Scoot at the Gold Coast). In 2011, international passenger numbers represented 14% of total Gold Coast passenger movements. Given Gold Coast Airport s geographic position to New Zealand (i.e. 3 hours flying time to most airports), the mix of fleet is both wide-body and narrowbody aircraft. Having this mix facilitates frequency to New Zealand ports and sustainability in non-peak periods. On the other hand, wide-body aircraft are needed to operationally reach Asian hubs. While the runway extension to 2,500m has enabled long haul flights, some aircraft are still payload restricted. 30

33 Passengers Gold Coast Airport Fleet Mix % 39% 5.6. Queenstown, New Zealand (ZQN) Growing a seasonal destination to a year-round product Queenstown Airport recorded 1.09 million passengers in FY2012, putting it at a similar traffic level to Mackay, which is Australia s 14th busiest airport. Investment and a partnership approach continue to be central to Queenstown s success, with destination marketing the core driver of demand. 61% 250,000 Queenstown Airport International Passengers FY ,000 Regional Narrow Wide Gold Coast Airport International Carrier Market Share , ,000 50,000 8% 12% % 10% FIGURE 5-14 QUEENSTOWN AIRPORT INTERNATIONAL PASSENGERS Source: Queenstown Airport Annual Reports FY2005 FY % Virgin Australia Air New Zealand Jetstar AirAsia X Scoot FIGURE 5-13 GOLD COAST INTERNATIONAL AIRLINE MARKET SHARES AND FLEET MIX Source: Sabre Airport Data Intelligence While Queenstown has only a small population base for outbound travel at approximately 22,000 people (Census 2006), it has been able to grow sustainably year on year through its iconic tourism destination status. Queenstown is an example of an inbound visitor destination, in a highly seasonal environment due to weather conditions, that has attracted multiple airline carriers through a very active local community working together to build a brand profile. Known as New Zealand s active and adventure capital, Queenstown has worked to reduce seasonality by creating new reasons for international visitors to the destination. Adding to its well established reputation as an ideal ski town, Queenstown tourism has added other adventure sport activities to its resume in shoulder and non-ski seasons 31

34 such as mountain biking and hiking. While airlines do fluctuate capacity depending on the season, the airport has increased overall international passengers by 29% on average per annum over the past 5 years to June Similarly to the Gold Coast example, infrastructure facilitated by both the airport and airlines were also required to drive the success of international flights to Queenstown. Investment in Required Navigational Procedures (RNP) gave airlines confidence to commit to the destination and expand schedules with reduced risk of diversion during poor weather Tier C Airports: Lessons learned Previous analyses of Tier C regional airports in Western Australia, Tasmania, Queensland, New South Wales and Australian Capital Territory where short and periodic spells of international services have occurred, allow some consistent experiences to be shared and subsequent lessons learned. Successful strategies compared against key reasons for international services being ceased, often after a short period of operation, are described below. Successful Strategies Community investment and long term vision, for example in the case of Sunshine Coast, Building charter flights with a long term plan to attract scheduled flights. Defining a clear market position and brand. Key Reasons for Cessation of Services Having only one major source of passengers limited options to source passengers from additional markets to maximise sustainability all year round Runway infrastructure length and required capital investment without existing international flights, Geography position and distance to source markets and whether these markets can be sustained with wide body flights versus short haul aircraft types, Population size, Accommodation stock and tourism product investment, Ability to facilitate flights with CIQ the higher cost of using CIQ on a trial basis or restrictions based on CIQ resources (for example in Port Hedland where BITRE reported a 41% load factor in 2011, however this was due to payload restrictions). Key Lessons Learned Combining the learnings from the Case Studies of Tier B airports and those discussed for Tier C airports the following are key lessons that regional airports should consider in developing international markets. Importance of a mix of passenger source markets The broader the passenger mix, the more sustainable the route will be, and the level of risk exposure for airlines is reduced. For regional airports where traffic is more likely to be point to point only, the market for point to point services must be very strong as the ability to support the route with feeder hub traffic from before, beyond and bridge traffic is less likely to be available, particularly for LCCs who have a greater affinity with regional airports. That it is not to say that an airline might not able to develop a hub operation to support a route, (as Jetstar in particular has done), however such operations require time to mature and are not typical of the pure LCC model. For regional airports, the key learning is to include in a business case for a route how it will be sustained through lower seasonal periods and how it can draw feeder traffic and not just rely on point-to-point traffic. Further, regional airports need to be able to demonstrate in a business case what the forecast for the growth of a route will be over five years, and how that growth is going to be delivered through expanding passenger markets and the passenger mix, as the route matures. Underwriting services to seed international flights not always sustainable Start-up airlines can be motivated by other agendas as opposed to a longterm presence at a regional destination. This can result in an initial enthusiasm by community stakeholders when a business case does not support an all year round source of passengers and thus flights enter a market for a short period and then cease. When a flight starts and suddenly stops in a regional community, a negative and cautious mentality is left towards any new airline services with the community feeling nervous about purchasing tickets in the future. (e.g. in 32

35 the case of Townsville Airport flights with Strategic Airlines from Townsville to Bali). Long term marketing focus Even in the case of Gold Coast Airport, Air Asia X increased flight frequency to daily, which was only shortly sustained, and flights were then pulled back to five per week. This was due to the large number of seats per flight required to be filled (380 each way which is 138,700 seats p.a. each way or 277,400 in total). Other factors such as Air Asia X increasing the number of flights to Australia with services to Melbourne, Perth and Sydney also generated competition for Gold Coast as a destination within their core source market from Malaysian and intra-asia. Gold Coast was successful originally due to the business case proving profitable as well as a significant five year marketing package collectively funded by the airport, local tourism organisation, State Tourism and State Government. Case studies of Tier C Airports In reviewing the history of sporadic international scheduled services at Tier C airports, there are two broad clustered markets: Northern and Southern outbound markets. Northern Outbound Markets Townsville, Port Hedland and Broome have all experienced scheduled international services, primarily to Bali. These markets are characterised by small aircraft, sometimes regional turbo prop, a single outbound destination with a strong appeal to Australians and low volumes of travel, once or at best twice weekly. FIGURE NORTH AUSTRALIAN TIER C AIRPORTS INTERNATIONAL ROUTE NETWORK SPANNING The three airports share a geographic advantage of being within a relatively short flying distance to Bali, enabling the services to be operated by smaller-gauge aircraft, right sized to the relatively small populations of the three towns. Of the three ports, Port Hedland currently enjoys what has become an established, scheduled twice weekly service with SkyWest to Bali. The service is operated on a Fokker 100, seating less than 100 people. Demand for the flight is primarily driven by the resources community in Port Hedland, travelling outbound. It is expected that there is a high degree of repeat travel among the passenger base, with awareness of the destination high in what is a small community. In building to a twice-weekly scheduled service, Port Hedland experienced Bali services with three different carriers over a number of years. Previous services by Merpati Nusantara and Strategic Aviation were operated with larger aircraft, suggesting the market could not sustain the B737/A320 gauge, but is right-sized with SkyWest s Fokker 100. This market is viable because of the relative proximity and short flying time between Port Hedland and Bali. Further, the scheduling of the service on a weekend represents efficient aircraft utilisation for SkyWest, enabling the airline to utilise its assets on days of the week when it experiences lower demand. 33

36 Strategic Aviation operated a once-weekly Port Hedland-Bali service from August 2010 to March Broome also experienced scheduled flights to Bali with Ansett on a relatively small aircraft (Bae146 seating 73) from April 2000 to July Townsville has a long-term history of international flights, prior to the development of Cairns Airport s international terminal in the 1980s. In more recent years, Strategic Aviation operated scheduled Bali services from December 2010 to October 2011, initially commencing with twice weekly services, then declining to once weekly prior to cessation. The aircraft utilised was an A320 aircraft which was connecting and refuelling at Townsville, while travelling from Brisbane to Bali. The service was primarily motivated by a need to refuel the aircraft and as such was not commercially sustainable for long term operations. Southern Outbound Markets Canberra Airport and Hobart Airport have experienced limited international scheduled direct services in the last ten years. Greater geographical challenges exist for southern markets in accessing international destinations, given the geographical disadvantage of typically requiring a larger gauge aircraft to service a direct international route, and the challenges in filling that aircraft on a year-round basis, for a service to be considered permanent. As a result, the southern markets are characterised by seasonal flying, either in summer or winter depending on the market they are primarily serving. FIGURE SOUTH AUSTRALIAN TIER C AIRPORTS INTERNATIONAL ROUTE NETWORK SPANNING Hobart experienced two brief periods of international operations by Singapore Airlines, of three flights in December 2002 and four flights in November/December The purpose of the flights is not known, but the timing suggests they were focused on bringing inbound visitors to Tasmania, visiting during the summer months. The gauge of aircraft operating the services were both wide bodies, an A340 seating 250 in 2002 and a B777 seating 288 in Canberra had a direct, twice weekly scheduled service to Fiji with Air Pacific from July 2004 to October The flight was able to operate with a short-haul B737 aircraft, seating 127, which reduced one major challenge in filling a wide body aircraft. However the flight did not return to the Air Pacific seasonal schedule the following year. The impact of Sydney Airport on the Canberra outbound market as a substitute for direct services from Canberra will be significant, given its greater choice of international destinations, flight timings and frequencies. Tier C specific case study learnings The case studies above primarily represent travel by an outbound Australian market only, to a leisure destination which is both popular and represents a clearly understood and well defined tourism offer to Australians. Of all five case studies, Port Hedland represents the only successful service, with continuous travel now in place for over two years, from August

37 until the present day. Port Hedland s population should be considered too small to sustain an international service, but three key factors contribute to the success of the service: high repeat travel by a small number of individuals (based on the desire to travel between shifts for resource industry workers) the small gauge of the aircraft (less than 100 seats) and the relative proximity/short flying time between Port Hedland and Bali the benefits the airline experiences in aircraft utilisation outside of their peak demand period The circumstances of the Port Hedland-Bali service are unique to the resources industry and it is considered unlikely to be replicated as a model elsewhere. 35

38 6 SWOT Analysis This section draws out and summarises the core characteristics of successful regional international airports as well as capital city airports and provides regional airports without international flights an understanding of what traits are necessary to build direct international services. These analyses have been undertaken merging lessons identified in the previous chapters with stakeholder interviews. This analysis is presented overleaf. 36

39 6.1. Tier A: Gateway Airports A Strength, Weaknesses, Opportunities and Threats (SWOT) analysis for Tier A airports is summarised in Table 6-1. The analysis has identified that gateway airports continue to dominate due to the pure marketing mix of high volume passengers and purpose of travel, sources of connecting traffic and economies of scale to reduce airline operating costs. TABLE 6-1 TIER A AIRPORTS: SWOT 6.2. Tier B: Regional Airports with International Services The SWOT for Tier B airports is summarised in Table 6-2. Tier B airports tend to have a higher population base and/or an iconic inbound tourism destination or strategic geographic location (i.e. hub potential). Strengths Weaknesses Strengths Large population base (over 1 million people) Business traffic to improve and sustain higher yields Economies of scale to reduce airline costs Connecting feeder traffic to enable daily demand (domestic) Reduced seasonality due to the mix of passenger segments Ability to sustain competition Multi-daily frequencies possible Proximity to infrastructure Multiple on-airport services to support airline operations (i.e. Competitive ground handling, catering, engineering facilities, MRO) Destination awareness and desirability from foreign carriers Critical mass of CIQ presence Ground transport options/onward public transport More extensive retail and duty free offer aligned with consumer expectations Full service carriers to gateways are more likely to have MOUs in place with Tourism Australia, and have a marketing plan in place for the route with significant funds committed by multiple industry partners. Threats Airlines play off regional incentives as leverage to reduce capital city airport costs Other overseas international destinations aggressively incentivizing new flights Weaknesses Highly competitive market Slot restrictions at peak times of day Can have bilateral restrictions Constant pressure on infrastructure More difficult to offer deep discounts for new airlines and start up flights due to existing agreements with airlines Less flexible with charges overall Do not work as closely with local stakeholders and community compared to regional airports Curfew (where exists) Opportunities Ability for multiple daily frequencies and long term sustainable growth Local airline partner connectivity and traffic feed Capitalize on confidence of larger destination with existing track record in the current economic environment when airlines are risk averse Located in a high growth regions (i.e. Population growth) Proximity to a destination with high awareness and appeal High volume tourism potential Ground component infrastructure (i.e. Accommodation room stock and other tourism product) Proven track record for international services now established Runway length capability Already have CIQ facilities A well established domestic market meaning other on-airport services were available (i.e. Fuel and ground handling) Very community and local stakeholder focused ability to work together to support new routes and build airline confidence Aggressive and commercially savvy airport management Threats Economies of scale at capital city ports Competition from other international cities and destinations that are proven markets Regional ports seen as higher risk in times of global economic pressure particularly for foreign carriers Pressure to innovate and continuously stimulate the market to ensure growth potential of passengers to avoid losing services to capital city ports Significant infrastructure investment needed to allow further growth High portion of lower yield leisure passengers Cannot stimulate growth beyond a ceiling due to the size of the population base Hard to sustain competition, accelerated growth into similar markets can translate into cannibalization Higher cost of other on-airport service providers Limited cargo potential Highly seasonal Higher costs for airlines based on low economies of scale Peak hour infrastructure pressure inability to grow (i.e. DRW and OOL) Consumer expectations of international passenger experience (extensive retail/duty free options) More limited ground transport options/public transport Opportunities Growth in short-haul (where geographically feasible) is better due to right sizing of aircraft Secondary market status to prove the market exists (i.e. Ability to track passenger flows over existing major gateways located nearby) Ability to incentivize new airlines and services with flexible pricing agreements Build on hubbing to translate to feeder traffic (i.e. OOL and DRW) potential for tourism and industry partners to align to work co-operatively on a long-term marketing plan, with funding in place to support the route and drive demand to support the growth of the route in the future. The plan and the funding required should be tailored to the airline s model, and should be matched to the profile and fit for the airline and the frequency of services 37

40 TABLE 6-2 TIER B AIRPORTS: SWOT 6.3. Tier C: Regional Airports without International Services The SWOT for Tier C airports is summarised in Table 6-3. It is evident from the analysis that opportunities at Tier C airports exist in long term strategies, starting with building international visitor markets on domestic flights first to establish a business case for demand. The cost disadvantage due to limited existing services will always create a major hurdle for Tier C airports versus Tier A and Tier B airports. Strengths Destination potential and local community vision Existing domestic services and growth Threats Cost of attracting new flights and the investment required by airports, councils and partners Lack of confidence from airlines to sustain flights Opportunity cost for airlines to take a risk to an airport with no international services or proven market vs competing/ higher profile destinations globally Higher costs of operating international flights (due to lack of economies of scale) results on a higher airfare price and thus impacts competitiveness of the destination and demand Weaknesses Low population base with limited growth Low awareness internationally of destination icons and product No existing services to build confidence that flights can be sustainable Runway length (too short) Ability to invest and sustain commercially experienced management team Reliance on State Tourism Partners to provide business development Smaller product availability (ie. tourism accommodation room stock) Limited awareness of regional tourism features in international source markets Lower yield potential for airlines (with the exception of Canberra which has a high percentage of corporate travel) Opportunities Build community and local stakeholder partnerships and develop a long term strategy to attract airlines Support the development of existing markets over gateway airports to grow the business case for direct services Grow international passenger via domestic services to prove a market exists and have future potential Focus on building common-rated fares over major gateways and code-sharing Positioning the destination with future airlines and partners with a long term view Whole of destination economic development plan (i.e. looking at 5-10 years what industries can drive access looking beyond tourism to business, education and other industries) TABLE 6-3 TIER C AIRPORTS: SWOT 38

41 7 The Key Criteria for International Air Services t The preceding chapters have identified a range of criteria an airport needs to consider in development of a business case for international services. The material has discussed building a market through existing domestic connections until it is of sufficient size and stability to warrant consideration for direct international services. This chapter merges those key criteria into a checklist that should be addressed when an airport proposes a new airline service. It then discusses relevant core aspects of this checklist required to deliver a tailored and sustainable business case Criteria (Checklist) for Attracting International Services To summarise the preceding analysis, stakeholder consultation and above SWOT analyses into relevant items for regional airports, the following checklist of criteria has been assembled. This checklist will enable a clear comparison of gaps in an airports current commercial profile, essential criteria for an airline business case and additional desirable criteria which aid the profitability and therefore potential for a new international route. The checklist is designed to identify current selling points for airports as well as outline long term route development strategies. Essential Criteria Market size proven potential through existing domestic connections and international visitor volume or ability to demonstrate enough passengers exist to fill a daily flight within 3 years Destination appeal & awareness (iconic pull) Population of both city pairs (100,000 plus) High volume inbound (if mostly leisure market) Destination infrastructure & ongoing investment Growth (or potential growth) in economic development within the region Existing airport infrastructure for narrow body services as a minimum (runway Desirable Criteria Mix of passenger segments to offset risk (i.e. Business, visiting friends and relatives and holiday traffic) Geographic location close to international markets which can be accessed utilising a narrow body aircraft Aircraft sector lengths are shorter giving greater aircraft utilisation Operational capacity to operate narrow body international aircraft Local propensity to travel (outbound market size) Freight Ability to build a hub to offset seasonality long-term (i.e. Domestic growth/feeder traffic) 39

42 and terminal capacity) Growth in domestic flights to facilitate connectivity and multi-center itineraries for international visitors Year round sustainability TABLE 7-1 Support services for airlines based at the airport (i.e. Catering, fuel, competition in ground handling, freight forwarders) Aggressive investment in marketing and airport incentives for start-up operations Established relationships with travel trade to build itineraries Access to capital for ongoing airport infrastructure investment Government support (CIQ and Tourism) CRITERIA FOR ATTRACTING INTERNATIONAL SERVICES An airline identfied the following as being key decision making criteria when considering a new route: Our commercial checklist is along the lines of: 1. Current market size. How much is flying indirectly? What is the OD (Origin and Destination) market? Consider how much we could stimulate with a direct flight. 2. Population size on both sides needs to be around 100,000 people plus. 3. Domestic connectivity potential? 4. What links the two cities together? Businesses and trade? 5. Mix of passenger segments. 6. Cargo potential. 7. Operational aspects (ie. runway length). 8. Distance of the route. Narrow body versus wide body? Sector length and ability to fill and operationally handle the appropriate aircraft size. 9. Seasonality. [Airline] 7.2. Destination Based on the case studies, a regional airport s destination should have an iconic status and key features that cannot be found elsewhere (in Australia), for example: Gold Coast: theme parks, casino, beach, a broad mix of product ideally suited to a family leisure visit, Cairns: the Great Barrier Reef, rainforest, unique natural attributes and casino availability, Darwin: gateway to Kakadu, unique natural attributes, gateway to the Northern Territory. The destination requires sufficient infrastructure on the ground to be wholesaler-ready for mass market visitation, e.g. sufficient room stock, activities, entertainment and access to shopping and food and beverage choices. The destination should be positioned and marketed well overseas, such that overseas wholesalers and consumers have awareness of the destination and its attributes. In addition, continued product development and investment, such that consumers continue to have compelling reasons to visit, and that the destination keeps pace with development of competing destinations overseas. Key feedback from airlines illustrating the importance of the broad appeal of the destination, first and foremost was: If it s a brand new route with no historical data, the decision for market growth potential is based on destination appeal. How does the destination appeal to our core customer segments? Is there a mix of segments (ie. business, visiting friends and relatives and leisure, students?). If a route is heavily weighted toward leisure traffic then more marketing investment from the destination is needed for the business case. [Airline] 7.3. Local market The local population would ideally be sufficiently large in volume that it can generate some form of outbound travel in terms of business, leisure or VFR travel. The catchment of the region requires an economy which is healthy and has growth potential, in that its residents have disposable income for travel and/or potential new industries or growth opportunities to continue to drive growth, inclusive of population projections for growth. A catchment with universities or educational institutions will be attractive to airlines, as international student travel generates multiple annual trips by 40

43 students, their families, and establishes long term repeat visitation opportunities. The local outbound market should have both a propensity for travel and an interest in the city pairs/connections available or proposed as destinations from the regional airport. The population should ideally have a profile of historical immigration, which can drive a degree of two-way VFR travel, with locals returning to their country of birth, or their relatives visiting them. As previously noted, an outbound market is key to spreading risk for the airline, and the greater the depth of that market, the greater the reduction in risk. A market which relies on inbound tourism visitation is too high risk in the current climate, compared to a market with a mix of local and visitor travel for business, leisure, education or VFR. Key feedback from airlines illustrating the importance of the outbound market in underpinning a strong two-way travel market was: Local propensity of travel as well as population is a key consideration for outbound growth [Airline] to establish its position and proposition with consumers from the outset of services in November Local marketing included running radio promotions and visible outdoor marketing on bill boards and bus shelter advertising. Local consumers quickly adopted the carrier, embraced the destinations and business model, and promoted the carrier through word of mouth marketing Infrastructure Requirements A number of factors impact which markets can be reached from an airport, including the length of the runway, any obstacles impeding usage of the full length of the runway, the aircraft proposed to operate the route and its maximum take-off weight. Taking all these factors into account, a regional airport will have a range circle of destinations within reach for each aircraft type. Most of the airports which have experienced international flights in Australia have a runway minimum length of 2,400m. Sunshine Coast s development plans envisage extending the current runway length, which is not sufficient to facilitate direct services to Auckland, without payload restrictions Niche Offsets A lower population and seasonal destination can be offset or compensated for, by favourable geography. An airport located within short haul reach of an international market (New Zealand or South East Asia) can act as a hub for outbound travel with short haul aircraft, operating more economically than a wide-body aircraft, and better suited to a smaller market in volume terms. Aircraft can be be routed from larger population markets typically found at state capitals, hubbing through a regional airport to the overseas market, e.g. Melbourne-Darwin-Bali. A hub operation can be specifically marketed to support forecast trough periods for the point to point market, to supplement the market and support year round operations to be sustainable, e.g. outbound Japan ski travel marketed for the northern hemisphere winter to Sydney and Melbourne residents, supporting travel over Cairns during the wet season. Finally, a carrier with a strong fit to the demographic of the local catchment may excel. Air Asia X has been strongly supported by Gold Coast Airport catchment residents, in part because it engaged in extensive local marketing 41

44 Sydney Melbourne Brisbane Perth Adelaide Gold Coast Cairns Darwin Canberra Avalon Townsville Broome Newcastle Hobart Sunshine Coast E A320 A321 B767 A330 B787-8 B787-9 A340 A350 B777 B747 A380 Runway Length (m) Seats & MTOW Engines Current Runway Lengths 600 International Fleet Serving Australia (Current & In Design) Tier A Tier B Tier C FIGURE 7-1 RUNWAY LENGTHS BY TIER AIRPORTS Narrow body Wide body Source: Airbiz Engines Seats MTOW 7.6. Available Aircraft (Fleet) Figure 7-2 outlines the current and planned aircraft fleet (seating capacity, Maximum Take-off Weight (MTOW) and number of engines) of airlines operating to and from Australia. The majority of capacity is provided by wide body aircraft. This is important to acknowledge in the analysis of a viable business case as many regional airports do not have the runway capacity to service these aircraft types. FIGURE 7-2 Source: Airbiz FLEET MIX OF CURRENT INERNATIONAL OPERATIONS TO AUSTRALIA Due to infrastructure costs and market dynamics regional airports are generally better suited to narrow body or smaller wide body aircraft which are lighter and better suited to the shorter runway lengths that generally exist at Tier C airports. These are key in selecting potential international markets and airlines for business case development. 42

45 8 Additional Considerations Following an airports consideration of the key criteria identified previously there are a range of additional factors to business case development Regional Airport Hurdle Chain When developing a business case for an international service, a series of hurdles needs to be overcome from the time of presenting a business case through to conversion and ability to physically operate the services, these are summarised in Figure 8-1. The first two in the chain have already been discussed therefore here we focus on the third hurdle, charges and cost. Market sustainability & profitability First & Critical Hurdle (95% of the decision) Airport infrastructure Cost of provision of international services (to the airline) FIGURE 8-1 REGIONAL AIRPORT HURDLES 8.2. Cumulative Impact of Charges: Catastrophic for Regional Airports The impact of charges at regional airports as illustrated in Figure 8-2 cannot be underestimated. The base cause is the issue of economies of scale associated with lower volumes of passenger throughput compared to gateway airports. 43

46 Some aspects of costs for regional airports are the same as gateway airports, i.e. the absolute cost of passenger screening equipment. However when the cost is translated to a per-passenger basis, the impact on regional airports is disproportionate. In addition, other major costs for regional airports are more expensive than gateway airports, such as AirServices Fire and Rescue Services and the cost of fuel. Both of these costs result from lack of economies of scale in operations at regional airports. The impacts of both scenarios are the same, regional airports are less competitive than the gateways on a per passenger cost basis. The result is more profound than merely a disproportionate cost. When market conditions are factored in, and the lower volume of demand at a regional airport is incorporated in the financial model, (resulting from a greater reliance on point to point traffic and reduced diversity in the passenger mix), then the overall impact is a significant barrier to entry. It is not just regional airport feedback which reflects the cost impost for Regional Airports. Airline feedback also reflects the disproportionate cost for operating to regional airports. Key stakeholder comments to support this are documented below from a mix of airline interviews: Regional airports don t really have a cost advantage. There is no cost advantage to operate to a regional airport they are generally more expensive Other aviation support services are more expensive generally at regional airports (ie. catering, fuel, ground handling ). Airlines are more risk averse since the GFC. The price of fuel is making it tough for regional airports. Those that would have been marginal before can now be unprofitable. The main barrier for regional airports is that if it s not already a designated international airport the cost of CIQ reduces the profitability potential of the route Capital city airports get economies of scale for on airport support services such as catering Regional airports with sizeable domestic flights and capacity are generally less cost as they have direct and other support services already in place It is vital that all parties involved in this project are cognisant of the impact of the cost of operation at regional airports on their competitiveness against the gateway ports. Market forces dictate that regional airports must achieve critical mass in order to be sustainable and that every party has a role to play in marketing the destination and the opportunity in order to assist regional airports to achieve critical mass and drive down some of the (lack of) economies of scale. The airport itself has a central co-ordinating role, making all partners aware of the benefits and airline criteria needed in growing the opportunity for economic and regional development from expanded air services. Further the airport has the majority responsibility for raising capital and investing in infrastructure to facilitate international services and opportunities for growth. Economic development agencies have a role to play, in aligning strategies and initiatives with the airport s plans and considering the airport as a central pillar of the region s economic opportunity for expansion. Further economic development agencies can co-ordinate the local economy s role and local business s participation in the airport s growth. In particular, the development of business links with future international connections and freight product investment. Tourism organisations, tourism trade industry and partners can assist through destination and airline co-operative marketing, to drive demand and have that demand flow through to increased seat capacity. Importantly, providing insights and market intelligence from international offices regarding travel distribution packages and products. Tourism has a role in building demand through ensuring the destination is included as a key stop-over point in relevant international market itineraries. I don t believe a state government s role is to market regional airports. The state government s role is to create an environment, a framework and remove barriers to entry [State government tourism organisation] Government and its agencies have a role to play in infrastructure provision too, as not all infrastructure and facilities and services are under the control of the airport. Air navigation aids and services and CIQ facilities and staff resourcing are necessary to the airport s international opportunity. Possible trade links with the corresponding international Government offices are particularly important for new emerging markets (ie. China). Providing support through enabling senior representatives to participate in airline negotiations will also add confidence and priority to a business case. 44

47 Finally it should be acknowledged that the relative cost of aeronautical charges at airports is determined not just by economies of scale, but where the airport is in its pricing cycle. Airports typically negotiate pricing with their carriers in five year phases, dependent on their infrastructure investment plans in that five year period. FIGURE 8-2 Carbon tax (Dom only) En routes charges Air Services location specific charging Checked bag screening LAGS screening Passenger screening Passenger Movement Charge Fuel cost Airport s Charges AIRPORT RELATED CHARGES 8.3. CIQ Provision for Tier C Airports From the outset, this report wishes to acknowledge there is no lack of commitment from Customs, representing the National Passenger Facilitation Committee (NPFC) to resourcing opportunities for Tier C airports. Within existing policy, NPFC is doing all it can to guide and facilitate opportunities for Tier C airports, and stakeholders have noted local support from CIQ representatives. Despite the commitment shown by the NPFC, there is a gap between Tier C stakeholder experiences of challenges in resourcing CIQ and the provision of services offered under the NPFC Provision of Government Services New International Airports (the Guide). However, there is potential to consider a variation to the Guide, to reflect the opportunity for seasonal international services (as opposed to permanent). The Guide s overarching focus is on clarifying the criteria for expanding international services where they are deemed to be possible and/or in the national interest. Clearly policy parameters have to be set for the NPFC, however some of the principles and guidelines are open to interpretation and do not make provision for seasonal services (beyond a short term charter scenario), expecting all services to be permanent. Principle 2 suggests a five year commitment is required from an airline to operate a route, which is an unrealistic period for an airline to be able to commit to in a commercial environment. Principle 3 states no airport should experience unreasonable barriers to entry into the market. Stakeholder feedback indicates the current practice could in itself be deemed a barrier, in that CIQ services are not in place and many challenges need to be overcome to achieve designation. In summary, it is not the role of this report to suggest what the solution is, however the gap between what existing policy is able to offer and stakeholder expectation is clear. A recommendation is to enable a policy that includes close consultation with local communities to provide tailored CIQ solutions. This is discussed in further detail in the Conclusions and Actions chapter of this report. Figure 8-3 is included below, to illustrate the hurdles in CIQ provision at regional airports under the current policy guidelines and their implications for a Tier C airport with an international business case for review. 45

48 Perception Implication Idea If no existing CIQ resources exist, must be imported, charged at cost, in addition to PMC charge Barrier to entry Unrealistic requirements for accommodation and facilities dictated to airports, which are then not staffed/utilised Challenge to CIQ in resourcing trials and identifying the tipping point for permanent services (recruitment, training, language skills etc.) Passenger Facilitation Committee exhibits great commitment to support airports Difficult to establish services and prove the market, chicken & egg Challenge is in risk-based infrastructure & staff resourcing, particularly in trial stage, and associated costs Tailored CIQ solutions and services based on a case by case basis FIGURE 8-3 HURDLES FOR CIQ PROVISION AT REGIONAL AIRPORTS 46

49 Pure Low Cost Full Service/Legacy 9 Airline Drivers Subheadingt Further developing the key criteria discussed and additional considerations, this chapter examines airline drivers in decision making and the selection of new routes. It is critical to put on the airlines shoes and understand their product, strategy and where the potential new regional route will fit in their network planning Airline Clusters Airlines serving Australian airports can be broadly grouped into three clusters, as follows: 1. Pure low cost carriers, typically serving point-to-point and selfconnecting traffic, 2. Full service carriers, but not in a formal alliance, and 3. Formal alliance carriers: Jetstar sits outside the clusters, as low cost but with informal alliances. No alliance Informal alliances Formal alliance member FIGURE 9-1 AIRLINE CLUSTERS 47

50 The proportion of these clusters serving Australia has also been changing over the last decade, moving from being all full service long haul carriers (Qantas, Air New Zealand, Singapore Airlines, Cathay Pacific, Malaysia Airlines, Thai Airways) to a substantial increase in both Middle Eastern carriers and low cost long haul airlines (i.e. Air Asia X, Jetstar and Scoot). Full service and Middle East carriers do not normally operate to regional airports (with the exception of Adelaide Airport) Significance of Hub Carriers The current trend in aviation is for cautious, risk-averse approach into alliances, consolidation and risk-sharing on routes through virtual networks and feeder traffic. In this environment, regional airports should focus their attention on two markets: 1. Their established domestic carriers and better aligning their domestic capacity to key hubs with international connections, and 2. The carriers they have a clear fit with and strong business case for sustainable international services with growth potential. There is not huge fleet growth beyond the major hub carriers, and as identified earlier, the potential for Middle Eastern carriers to enter regional international ports has declined with industry consolidation and partnerships. Through codeshares with Emirates, Qantas will be able to serve 30 points in Europe over Emirates network, as opposed to the two destinations they have served directly in recent times. For regional airport stakeholders, it will be crucial to emphasise the benefits arising from domestic connectivity and the increased choice in connecting destinations for outbound travel as well as the increased visitor markets able to access the destination. are operated using larger wide-body aircraft (e.g. A380) and their success is founded on hubbing and connecting traffic before and beyond their home hub markets Airline Decision Making Airlines think global. Australia is only one small part of most foreign carrier s networks and all Australian airports are competing on a global scale with alternative international destinations. Australia does have a disadvantage to many Asian, American and European countries in that it is a long flight sector and thus has higher fuel costs than short-haul intra-asian or intra-european flights. It is important for all airports to be cognisant of the fact that airlines will be asking themselves what is the opportunity cost of flying to Australia versus a competing international port? In particular, an airline will run through the following decision-making tree or process in choosing where to place additional air capacity. THE MARKET THE YIELD POTENTIAL OPPORTUNITY COST OF AIRCRAFT ELSEWHERE IN NETWORK AIR SERVICE RIGHTS NETWORK/ALLIANCE FIT STRATEGIC/COMPETITIVE/PO LITICAL CONSIDERATIONS 9.3. Shift of Hubs from SE Asia to China and the Middle East There is a growing trend for global hubs towards moving north and west away from the traditional Kangaroo Route from Australia to Europe via hubs at Singapore, Hong Kong, Malaysia and Bangkok to new hubs in emerging economies of China (Canton Route) and the Middle East (the Falcon Route). This shift in hubs will impact regional airports as the routes over new hubs THE COSTS FEEDER TRAFFIC POTENTIAL FIGURE 9-2 AIRLINE DECISION-MAKING GROWTH POTENTIAL 48

51 Based on experience and airline interviews for this project the following describes how an airline approaches a decision to fly to a new destination: The Market: What is the mix of passenger segments and who will potentially fill the plane? That is, is there a mix of business travellers (who pay a higher airfare), visiting friends and relatives (VFR) traffic and leisure traffic? What other segments can assist in maintaining all year round demand with reduced seasonality? These segments may be connecting traffic from domestic flights and those travelling for education or events. Is there a directional balance between inbound and outbound travellers? Does the size of the local population at the destination support sustainability? Overall, the market must be able to show a historical trend of growth, the destination show potential for growth (including population growth and economic investment) and more importantly, be able to fill the aircraft type selected for a daily flight in the long term? Do the market characteristics fit the airline model? This is key airports need to think of themselves as a product like any other (compare to the Technology Industry or Retail). Does the destination product match the airline product? For example, a predominantly leisure market should be targeting airlines which focus on leisure with a lower cost base. Key feedback from airlines illustrating the importance of the market and passenger mix to the viability of a new route was: If it s a brand new route with no historical data, the decision for market growth potential is based on destination appeal. How does the destination appeal to our core customer segments? Is there a mix of segments (ie. business, visiting friends and relatives and leisure, students?). If a route is heavily weighted toward leisure traffic then more marketing investment from the destination is needed for the business case. [Airline] Key feedback from airlines illustrating the importance of the wholeof-region support for a new route was: The whole community works together in the regions better. This builds confidence and support and this enthusiasm can have a positive impact for those regions with a smaller marketing budget [Airline] The Yield Potential: Where are the passengers coming from and what level of airfares are they likely to pay? Is there evidence of existing yield or corporate anchors in the destination (i.e. head offices or subsidiary offices where passengers will have a high propensity to travel and will be willing to pay flexible and business class fares?). Key feedback from airlines illustrating the importance of a route having a long-term yield potential and growth profile was: We take a long term (3 year at least) profit position. There are a host of drivers specific to long-haul, network and full service carriers that may be different to low cost carriers. Overwhelmingly, market demand is the most important consideration to start a new service. We want to know how is the demand being served? Where is it coming from and can it be stimulated in the future? How can yield be stimulated? [Airline] The Costs: What is the cost comparison to fly to this destination versus competing destinations? Does the cost profile match the yield potential in order to derive a sustainable profit? Analysis of all costs are included here from direct costs (the actual cost of operating the service from point A to point B including airport, airport support services, navigation, fuel, staffing cots) to indirect operating costs aircraft leasing and head office costs proportioned to that route. Opportunity cost of aircraft elsewhere in the network: What potential profit do competing destinations offer compared to this route? 49

52 Can the airline achieve high aircraft utilization for this route vs. competitor? What other traffic can the airline capture by operating this route vs. a competitor? What other competition exists to the destination vs. competition? Where does the core home market want to travel to? Risk analysis of a new route for that aircraft type. Air Service Rights: Does the airline have rights to fly to the destination and if not, are they obtainable? Feeder Traffic Potential: Is there an ability to capture top-up traffic through alliances and partnerships as well as the carriers own domestic passengers in the home market. How can the airline reduce seasonality and load factor risk by capturing multiple sources of passengers? Network Alliance Fit: Is this a strategic route based on the airlines alliance partnership? Does this route contribute additional value to the overall airline network by capturing new markets and feeder traffic? Aircraft utilisation is key here and timing of the schedule suitability to how that aircraft is used for the rest of its working day or week. Strategic/Competitive and Political Considerations: Most airlines would see this as only a small weight to the final decision. Airlines which are partly government owned or controlled are more likely to have this factor as a consideration on the final route chosen (after the commercial imperatives are met). If there are two competing airports for an aircraft service and if both have similar profit potential, this factor of strategic importance and political relevance will influence the final decision. Growth Potential: Can the airport business case demonstrate long term growth potential for this route? What is the forecast passenger numbers over a 5 year period? For some full service carriers (i.e. Middle East carriers in particular), if a route can demonstrate a profit is potentially viable within 2-3 years, the airline may be willing to take the risk and invest in a new route that may not be profitable in the first 12 months. Again, the overriding driver for a new service will be market sustainability and profitability. FIGURE 9-3 Network feed from alliance partners Bridge, Before & Beyond traffic Network feed from shorthaul network Traffic sourced over a hub Point to point traffic SOURCES OF PASSENGERS TO ENHANCE SUSTAINABILITY 50

53 9.5. The Ultimate Airline Check List Building on the airline decision making process discussed above, airlines furthermore seek the following criteria in a destination to aid in this decision. We earlier outlined a check-list for regional airports to compare their destinations against in order to understand their potential route development opportunities and which areas need further development to achieve the ultimate goal of international air services. Figure 9-4 looks at what an airline might consider a checklist in route selection, this should be considered when an airport assesses a route business case. It is important to note that each airline has their own individual set of criteria and benchmarks for a new route opportunity. However, these criteria above represent an overlap in essential elements to a new route business case discussed with both full service and low cost carriers. Low cost carriers will have more emphasis on volume and a low cost base compared to a full service carrier. Thus it is key to note that airports need to first understand what drives the targeted airline and how their destination market profile and infrastructure will fit in that airlines framework and strategy. There is not one size fits all. In recognising that tailored decision making criteria is existent in airlines, evidence shows that 95% of an airline s decision to operate a new route will be based on the route s profitability potential and sustainable long term growth in the market. Population 100,000 + Network fit: High aircraft utilisation Target 80% load factor FIGURE 9-4 High propensity to travel Preference for: lower seasonality Regional's need disproportionate incentives: lower cost of operations and charges to compensate for lower volume and limited passenger segments AIRLINE CHECKLIST FOR NEW ROUTE POTENTIAL Sustain daily operations with demonstrated potential to increase frequency Preference for: year round operations Brand new route with no historical data: the destination appeal and volume of tourism becomes most important criteria 51

54 10 Conclusions and Actions Subheadingt This report has identified a range of issues that airports, local stakeholders and all levels of government need to consider in order to develop international services at Tier C Regional airports. We have illustrated that airports and governments need to develop a sound business case structured around a solid market understanding coupled with addressing a range of key criteria. An airlines core consideration is the profitability of a new route and while regional airports will struggle to compete in areas such as per passenger costs, they can nonetheless work to develop international passenger markets through domestic connections, building these up towards a significant volume where the business case becomes enticing to an airline. Combining this with addressing the key criteria discussed, core airline drivers and developing a community wide approach to route development will assist in presenting a strong business case to any potential airline. This chapter summarises the key findings from this study and details actions that airports and governments can undertake to develop the growth of international passengers at regional airports that is in addition to the ongoing existence of the Packages discussed at the outset of this report Addressing the Challenges A Regional Airport and its relevant local and state governments can address the challenges to growth in the following ways; Clearly define its market positioning what unique competitive advantages can regional ports deliver to potential airlines?; Define and target a mix of passenger source markets; If these don t currently exist, what is the long term strategy to build these markets via domestic flights and other sources?; Work intimately with a local stakeholder groups with clear targets; and Select relevant markets with potential for long term growth. Overall, the major disadvantage that regional airports possess is the ability to compete on cost and revenue sources of passengers compared to capital city airports. From a cost perspective, the challenge is lowering the average cost per person for an airline to service that destination compared to economies of scale achievable at gateway airports and also the choice of service providers for other airport services are limited (ie. ground 52

55 handling operators). On the revenue side, gateway airports have access to a greater number of passenger sources and a greater mix of yield opportunity as they have larger population bases, increased domestic connecting services and generally more business travellers. Couple this with a higher level of tourism product volume (ie. More accommodation rooms available) and regional airports need to have a stand out offer for an airline and demonstrate their niche opportunity and ability for growth to attract a new airline service. This is achievable if the desire and cohesion exists as has been demonstrated in the Airport Case Study section of this report The Role of Individual Stakeholders in Addressing Challenges As previously highlighted, successful regional destinations have enjoyed the full support of all levels of local tourism, government, product and local businesses to build an attractive airline business case. Usually driven by the airport, the collective group of stakeholders target various levels of the airline, travel trade and business to develop a series of key messages to the airline and commence building the story of market demand. In most cases, the conversion of a new international air service can take 3-5 years from idea conception and first approach to operation of a viable new airline service. Thus, a long-term strategy and supporting investment is needed. State and regional tourism organisations also need to embrace the need for outbound travel to ensure sustainable air services for the long term. In practise, this could mean drawing on reciprocal relationships with other international tourism organisations from source markets, creating introductions for airports to meet government officials and build relationships with relevant foreign parties. It is important to clearly identify all the passenger source markets possible, who can influence those potential passengers to travel and how can partnerships work to either invest in marketing, awareness, reciprocal support and business ties between the two destinations connected by an air service. FIGURE 10-1 ROLES OF KEY STAKEHOLDERS IN ACCESS DEVELOPMENT The Performance of the Regional Packages It is important to note that while the findings of stakeholder consultations reinforced the conclusion of Stage One of the Regional Airports Project, (i.e., that there is limited awareness amongst airlines of the Packages), the reality is that the packages themselves will not generate new international air services to regional airports. Overwhelmingly, the commercial viability and sustainability of the air route itself to the destination is what generates new international air services. Thus, it is not really relevant if airlines are not fully aware that the packages exist or of their specific details as most airlines will make a decision to fly to a regional port if it represents a profitable business case 53

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