Outlook 2017. Amid continued global uncertainty, what lies ahead for aviation in this region. China may be the key (Part 1 of 5)

    As 2016 draws to a close, in a series of five Q&A reports, the Blue Swan Daily, in conjunction with its parent CAPA – Centre for Aviation, reviews the past year for aviation in the Australia Pacific region and what lies ahead for 2017.

    In an uncertain world, from the disruption of Brexit to the likely confrontationalist attitudes of a Trump administration, and instability in many parts of the world, from Russia to the Middle East to Asia, Australia and New Zealand’s aviation sectors are mostly in rude health, with liberal policy settings and globally high service levels. Yet each of the main airlines in Australia and New Zealand still relies heavily on its domestic markets.

    China has asserted its relevance in world aviation recently and over the past couple of years its airlines have rapidly expanded into the two south Pacific countries. With 2017 declared the ‘China Australia Year of Tourism’ by China’s tourism bureau, continued substantial activity can be expected in that market.

    Qantas’ 787 Perth-London service plans have made clear the role of the long haul medium size equipment, but aside from the innovative elements, retaining a cost focus and keeping the basics under control will be key to the future.

    In this first of four Q&A reports, we look at: What has been the standout development of 2016 in this region, Qantas’ turnaround and how Virgin has fared in comparison.

    In Part 2 we will assess Virgin’s revolving door of ownership and how its new Chinese owners will likely reshape the airline’s strategies in 2017. We also look at what the main focus for both Qantas and Virgin will be for 2017.

    Part 3 will look at the evolution of Qantas’ China strategy and where this leaves Air New Zealand’s services to that region. We ask the question: Will the Australia-China market continued to boom?

    In Part 4 we will look at Air New Zealand’s focus on its domestic business and North America in 2017.

    Finally, in Part 5 we will look at the our region’s overall outlook for 2017, including the continued commercial value of loyalty programmes as well as the dawn of a series of ‘firsts’ including the long awaited start of 787-9 services by Qantas and non-stop flights to Europe as well as to the US.

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    Question 1: What has been the standout development of 2016 in the region?

    CAPA: In a word, China. But 2016 has been one of the more eventful years for this region. As a result, Australia and New Zealand enter 2017 on a very different level from 12 months previously.

    The impact of China

    If any evidence were needed of the aviation future of both Australia and New Zealand, 2016 was the year when China’s future impact on aviation and tourism really started to become apparent. China’s tourism bloomed, largely on the back of Chinese airlines adding significant capacity and service into the South Pacific.

    Much of the traffic between China and Australia/New Zealand has been carried on intermediate airlines like Singapore Airlines and its subsidiary Scoot, by AirAsia X and others.

    But by Jan-2017, there will be seven Chinese airlines serving Australia and five to New Zealand – in each case also with two Hong Kong based airlines. And now both Qantas and Virgin Australia are embedded in solid partnerships with Chinese airlines. Air New Zealand meanwhile had moved away from its Chinese relationship in favour of a stronger Singapore Airlines partnership.

    Qantas enjoying the fruits of its turnaround

    Another vital development, not just compared to 2016 but since the global financial crisis, is that Qantas has been revelling in a very successful turnaround. After the lows of 2011 and a domestic competitive bloodbath, the Qantas Group has seemingly become a solid and sustainable story, now looking forward to a new future marked by 787s, due to arrive in the new year.

    Historically, Qantas for too long had rested on laurels of a strong domestic market offsetting mounting international losses and overall inefficiency, and a bloated cost structure. With a sustainable commercial base, Qantas has turned to new cabin products, aircraft, routes and branding with a modified logo and livery to enter 2017 revitalized and ready to take advantage of the structural changes and consequent gains made over the last 24 months.

    Qantas’ biggest gains under its turnaround programme, fortunately (or unfortunately) coincided with the collapse in fuel price. The investment community has failed effectively to separate out the tailwind of fuel cost savings from ex-fuel cost savings –  reflected in Qantas’ share-price which has ended the year just short of AUD3.50, an improvement on the lows of early July at AUD2.60 but below the AUD4 plus level on which it started the year.

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    Question 2: How has Virgin Australia fared in comparison?

    CAPA: Virgin’s transformation under CEO John Borghetti has become more expensive than expected and produced a yield premium lower than budgeted. This alone is a dangerous combination and has been aggravated by Virgin’s significantly larger competitor Qantas’ successful restructuring.

    This is of course not the first time in Virgin’s history that the airline has had to confront Qantas’ ability to adapt. Qantas’ response to Virgin in the early 2000s was the establishment of its own LCC, Jetstar which confronted head on Virgin’s then advantage in terms of cost structure.

    The Virgin of 2016 is almost unrecognisable with that of 15 years ago, with the Virgin Australia brand continuing to take rival Qantas on head to head, particularly in terms of product, albeit it’s come at a significant cost. Virgin’s falling financial metrics were sufficiently destabilising throughout 2016 even before they spilled over into the boardroom and created a nearly six month long revolving shareholder registry.

    In Part 2 we will assess Virgin’s revolving door of ownership and how its new Chinese owners will likely reshape the airline’s strategies in 2017. We also look at what the main focus for both Qantas and Virgin will be for 2017.