What's in store for Queensland's mining-centric airports?

With commodity prices starting to pick up again and talks about increases in mine production volumes, I thought examining the relationship between coal and passenger traffic at Queensland’s resource focused airports would be helpful and hopefully yield some interesting findings.

To provide some background for those unfamiliar with the sector, Queensland is one of Australia’s, if not the world’s, largest coal-producing regions. The Bowen Basin, shown in blue on the map, is the most prominent coal mining area in the State and most active in terms of number of mine sites. From an airport perspective, the region is serviced through the east coast ports of Townsville, Mackay, Rockhampton, Gladstone, Emerald, and Moranbah. The latter two are located directly in the Basin itself. Other smaller airports also service direct charter flights, but I’ll restrict the analysis to this portfolio for the purposes of the analysis. The region is known primarily for its production of metallurgical coal, or coking coal, which is used in the steel making process. Thermal coal deposits, used for electricity generation, are less prominent in the region, being more abundant in southern parts of the country. Note: Map image sourced from Queensland Globe.

Airport Passenger Growth

The chart below illustrates the annual passenger traffic at each of these airports for the last 10 years. The range of airport traffic volumes varies considerably, with Townsville Airport the largest, handling approximately 1.5m passengers in FY-17, to Moranbah at approximately 120,000 passengers in the same period. The next chart presents a growth index of the data to better illustrate growth trends. Note that Moranbah was removed from the analysis as the growth curve was extreme relative to its peers given its small base, however its overall pattern remains similar to those shown.

Source: BITRE

The resources boom is evident in the growth patterns of each of the airports, with sharp increases occurring in FY-10/11, peaking two years later, and declining from there. As a summary, the next graph illustrates the aggregated passenger growth rates for all airports.

Traffic and Coal Relationship

Annual coal production volumes (coking and thermal) for the Central and Northern regions of Queensland have been plotted below for the last 10 financial years. The Southern region has been omitted as the airports covered in this analysis lay well outside this area. Volumetric increases are notable in the 2010 financial year, with notable declines in succeeding years, due largely in part to weather-related shutdowns during those periods, followed by gradual increases over the remaining periods. The average annual price for coking and thermal coal, also shown on the graph, appears to act as a leading indicator for coal production, which makes intuitive sense, by at least a year. Interestingly, although significant price declines occurred from FY-13 to FY-16, production volumes over this period were increasing steadily.

Source: Qld DNRME

I’ve graphed the year-on-year growth rates for airport passengers and coal production volumes to see if there was any discernible pattern between these two variables. The following graph illustrates the findings. What is interesting in the comparison is that the overall shapes of the growth curves are very similar, although offset by one year. This is likely a result of the lag in the consumption of labour and the length of the production process from run of mine (ROM) to saleable coal. Unfortunately, with production rates running ahead of passenger traffic, its use as a leading indicator is somewhat limited.

Doing the same analysis with year-on-year price changes presents a similar picture, albeit with a more aligned/leading indicator relationship. I’ve scaled the price growth changes to 25% of their original size to better illustrate the relative shape of the curves.

I would urge caution prior to inferring that coal prices/production volumes are the only indicator of traffic growth at the selected airports. The larger airports in the analysis would inevitably have other demand drivers that also affect their traffic. Townsville, for example, would likely have a more diversified demand base given its underlying population size, tourism appeal, and extraneous factors such as the major Australian Defence Force presence in the area. Virgin Australia’s retirement of the E-190 and reduction of its ATR-72 fleet certainly would also have an impact on capacity levels operating to these airports as well. That said, and without undertaking a significant statistical regression analysis, at a high-level, there appears to be some reliable indication that movements in coal production volumes affect passenger volumes for these airports.

Looking back over the data, the sharp up-tick in coal export prices in FY-17 certainly suggests better times are ahead for the region’s airports, at least in the short term. Metallurgical coal prices are back at levels seen during the resources boom (FY-10 to FY-15), with Thermal coal not too far off. It is likely then that mine production levels would continue to increase to take advantage of these prices and therefore help drive an increase in passenger traffic.

What does the short-term look like?

Reading any airline press release in Australia in recent times and you’ll be hard pressed to not find mention of an increase in resource sector flying. Alliance Airlines, a major charter operator for the resource sector stated this in their recent half yearly results and went so far to say that “the resource sector will continue to generate increased activity in the second half of the year,” (Alliance Airlines Half Year Results Summary: 31 December 2017). Other airlines have made similar comments. Certainly, the sharp increase in coal prices and continued upward momentum in production volumes support these statements.

Perhaps it’s prudent to ask then whether the airport industry is about to undergo another resource boom induced traffic spike? I suspect that this time ’it’s different’. While I firmly believe that resource airports will halt their decline in the short-term, and the most recent monthly data from BITRE indicates Townsville and Mackay airports are growing on a rolling 12-month basis, significant year-on-year increases are not likely to re-appear. In discussing this article with mining industry colleagues, there seems a consensus that inefficiencies that naturally worked their way into the system during the boom have to some degree been reduced. Doing more with less. The fact that production has been increasing as passenger traffic has been declining is evidence of this. Of course, I’m not suggesting resource-driven traffic won’t re-appear, however I feel we’re in a ’regression to the mean’ scenario, at least for the short to medium term.