Rapid Chinese carrier growth in Australia impact Cathay, SIA, Scoot and AirAsia X

The rapid expansion of Chinese carriers in the Australia market has impacted other foreign airlines which traditionally compete in the Australia-China market. Cathay Pacific and Singapore Airlines (SIA) have been the most impacted in terms of pure traffic volumes but Southeast Asian LCCs, particularly AirAsia X and Scoot, have been the most impacted in terms of potential traffic as previously held aspirations for attracting significant Australia-China traffic have become unrealistic.

While Australia-China traffic has grown rapidly over the last few years, nonstop capacity growth has grown even faster. Therefore, a higher portion of passengers travelling between the two countries are now flying via intermediary hubs in other countries.

In the fiscal year ending Jun-2017, BITRE reported a 24% increase in Australia-China traffic to 2.81 million. However, Chinese visitor numbers to Australia in FY2017 increased by a more modest 10% to 1.26 million.

This indicates that over the last year a significantly larger portion of Australia-China passengers have been flying on direct flights. It is impossible to make an exact calculation as there has been some growth in Australian visitor numbers to China and in sixth freedom traffic carried by Chinese carriers. However, both these segments of the market remain relatively small and it is clear the trend is that more Chinese visitors are flying to Australia on direct flights.

This is a natural consequence of the rapid growth in the number of routes, which have led to a much bigger share of Chinese visitors to Australia having a nonstop option. In Dec-2017 there will be 35 nonstop routes from Australia to China, connecting 16 cities in China with Australia.

There are still dozens of highly populated Chinese cities that do not have nonstop links with Australia. For these passengers, the total transit time to Australia via a Chinese hub is often similar to the total transit time via another Asian hub. However, the lowest fare generally wins out as Australia-China is a price sensitive market and the rapid expansion of Chinese carriers in Australia means Chinese carriers are more aggressively pursuing this traffic.

For example, AirAsia X has noticed it has become more difficult to attract Australia-China traffic as Chinese competitors have expanded in Australia. Intensifying competition in the Australia-China market was a major contributor in AirAsia X’s recent decision to reduce capacity to Australia. Essentially AirAsia X would have to price well below cost to grow Australia-China traffic – and or even to maintain the traffic it now has – making a reduction in Australia capacity a sensible move.

AirAsia X offers connections from Australia to 15 cities in China, including six cities which are served by AirAsia X and nine by short haul sister airline AirAsia. Of these 15 cities, 12 now have nonstop services from Australia including all six of AirAsia X’s Chinese destinations (Beijing, Chengdu, Chongqing, Guangzhou, Hangzhou, Shanghai and Xian).

Cathay Pacific and Singapore Airlines (SIA) also has been impacted by the rapid growth of Chinese carriers in Australia. Cathay Pacific and its sister regional airline Dragonair offer connections from Australia to 21 cities in mainland China. Of these 21 cities, 15 now have nonstop links to Australia.

Singapore Airlines and its regional subsidiary SilkAir offer connections from Australia to 11 cities in China, all of which now have nonstop services to Australia. SIA low cost subsidiary Scoot has begun competing in the Australia-China market over the last couple of years. Scoot serves 16 cities in China, including seven smaller destinations which do not have nonstop links to Australia. However, most of these cities are in parts of China that require relatively circuitous routings to reach Australia via Singapore.

In FY2017, Cathay Pacific was the largest one-stop competitor in the Australia-China market with a 10% share of total bookings, according to OAG Traffic Analyser data. Singapore Airlines was second largest with a 4% share followed by AirAsia X with a slightly over 1% share and Scoot with a slightly less than 1% share.

Overall sixth freedom competitors accounted for less than 20% of total Australia-China bookings in FY2017. Chinese carriers accounted for slightly more than 70% share of Australia-China bookings in FY2017 while Qantas accounted for nearly 10%.

A year earlier, in FY2016, sixth freedom competitors accounted for a larger 23% share. The number of total Australia-China bookings increased by 12% in FY2017 but the number of passengers carried by sixth freedom competitors decreased, leading to an approximately 5ppts decline in market share.

While Chinese carriers have been expanding in Australia for the last several years, it only over the last year that they have started to take market share from sixth freedom competitors. In FY2012 sixth freedom competitors accounted for roughly the same share of the total Australia-China bookings as in FY2016. Comparing visitor number growth to Australia-China nonstop passenger growth it is also clear the decline in market share by sixth freedom competitors is a recent phenomenon as essentially the expansion by Chinese carriers has started to outpace the overall growth rate in the market.

This trend will likely continue given the continued rapid expansion by Chinese carriers in Australia. Chinese carriers are aggressive competitors and are poised for potential further market share gains as their cheap fares and growing number of nonstop options woo Australia bound Chinese travellers.

AirAsia X, Cathay Pacific and the SIA Group must decide between reducing capacity to Australia or finding another sixth freedom market to replace their Australia-China traffic. Accepting very low below cost yields would be another option but hardly a sustainable one.