Structural changes in the market a hindrance to aviation's recovery
With the industry beginning to show some early, positive signs of recovery in the form of easing travel restrictions, there is a question of what normal looks like moving forward. Significant developments in the Australian aviation market suggest that “normal” is not going to be what it used to.
Virgin Australia entering into voluntary administration is the biggest development, however, there have been a number of smaller instances that suggest things will not be the same in the short to medium-term of the recovery. Other carriers have already announced aircraft retirements from their fleet for example. Qantas announced it brought forward the retirement of their 747 fleet and there is also sentiment that the future of the A380, which Qantas have 12 in their fleet, is grimmer than ever (https://www.executivetraveller.com/news/qantas-international-fleet-review-a380s-747s).
If administrators can successfully sell Virgin Australia, there are indications its operations could be vastly smaller in size (https://www.executivetraveller.com/news/virgin-australia-could-be-flying-again-in-as-little-as-three-months).
Qantas has also stated that they will be deferring receipt of 3 Boeing 787’s and 1 Airbus A321LR, for LCC Jetstar, until next year and the remaining 17 until after that (https://simpleflying.com/qantas-delivery-deferral/).
For the purposes of this analysis, we will focus on the size of the domestic passenger market in relation to Virgin Australia’s pre-COVID share. The chart below shows historic passenger traffic, both seats and passengers, for the Australian domestic market. The data has been sourced from BITRE and shows the rolling 12-month traffic from Jun-14 to Dec-19. Analysing airline schedule data for CY-19 indicates that VA accounted for approximately 35% of the overall market.
Source: BITRE, airline schedule data
Consequently, in a worst-case scenario, the domestic market would shrink from over 61m passengers to under 40m with the absence of a carrier the size of Pre-COVID Virgin. That said, it would be remiss of us to assume that some of this capacity does not come back, either through a re-invented VA 2.0 or another airline starting up operations.
The following chart demonstrates the size of VA’s current market share in light of the airline, or another entrant, only handling a portion of pre-COVID levels. Three scenarios have been modelled:
Scenario 1 - VA 2.0 and/or new entrant only handles 75% the pre-COVID levels
Scenario 2 - VA 2.0 and/or new entrant only handles 50% of the pre-COVID levels
Scenario 3 - VA 2.0 and/or new entrant only handles 25% of the pre-COVID levels
Source: Redwater Consulting Group Analysis
Key take-aways from the analysis:
VA leaves an exceptionally large hole to fill in the domestic market
They handled over 21m domestic passengers in 2019
It will take some time for this capacity to be filled by either VA 2.0 and/or a new entrant
The domestic market may lose 5-10m passengers in the medium-term until the previous market size can be achieved
There have been indications in the market that VA 2.0 will be smaller airline
Rex has indicated they are considering entering the capital city markets with only a small fleet of aircraft
How long the recovery takes will depend on the competitive landscape and underlying market economics
Airports should brace themselves for lower passenger revenues in the short to medium-term
While some of the incumbent carriers could recover sharply, there simply is not enough capacity in the system to bring passenger levels back to pre-crisis levels in the short-term