Theme: Grow sustainable air connectivity (2014)

New Zealand is an island - 99% of international visitors arrive by air - and so connectivity is crucial. As we grow value together, the Tourism 2025 framework prompts us to strengthen the relationships, partnerships and collaborations that sustain, expand and extend our visitor pipelines.

 

Introduction

(This document was created for the launch of Tourism 2025 in March 2014. It is not updated. See Tourism 2025 - Two Years On for the latest information on the growth framework.)

The 2025 outcome

Recognising that 99% of our international visitors to New Zealand arrive on a plane, individually and collectively we are aligned in support of the airlines and airports, finding effective ways to grow sustainable air connectivity focusing both on securing existing linkages and on exploiting new opportunities.

How we're getting there

  • We're taking a much closer interest in our aviation environment and in airline economics and as a result we are having better conversations about sustainable air connectivity.
  • Understanding that if the airlines succeed, the whole industry benefits, we are collaborating in support of the air connectivity we have and the air connectivity we need, both international and national.

 

Executive summary

Connectivity with markets is crucial to any country’s tourism strategy. 99% of visitors to New Zealand arrive by air so the aviation sector is a fundamental driver of tourism. However, a focus on aviation has been lacking. No robust public reporting of air capacity exists and airlines have come and gone, with capacity growing at 1.6% over the 5 years to December 2013 – below the global average.

Air connectivity is characterised by large revenues offset by equally high costs. It requires a number of players to come together, including airlines, airports, the Ministry of Transport, Tourism New Zealand and others.

New Zealand’s isolation, coupled with a large number of uncontrollable factors influencing the operating environment, have resulted in New Zealand routes achieving comparatively lower yield returns than other international routes to competing tourism destinations. So, in general, airlines are not highly motivated to grow capacity into New Zealand and the tourism industry struggles to gain momentum.

To grow tourism, we need long-term growth in air capacity. New Zealand must become an attractive destination for airlines to deploy their highly mobile capital. To achieve this, we need to:

  • grow demand among higher value visitors
  • increase volumes of visitors

Seasonality is impacting the sustainability of air services and achieving year round demand is a fundamental challenge. Success of existing and future services hinges on the ability of the industry to improve shoulder and off-peak periods. The annual average occupancy on flights to New Zealand is 75.4%. This is below global averages and driven by soft loads throughout the off-peak period. Creating demand for these seats can rapidly increase visitor numbers without significant change to existing infrastructure.

Value is achieved by improving the mix of fare classes sold. Selling more of the upper fare classes in every cabin will improve the value of the overall load and increase the likelihood it will cover costs. Therefore trade flows become very important as corporate traffic is the greatest driver of high class (and in particular, premium cabin) demand.

The best outcome is to increase demand at all fare levels so there is a collective lift in both volume and value. The industry can support this lift by developing products that target segments which are most valuable to the airlines.

Increases in passenger numbers would bring many benefits. It would benefit tourism operators on the ground – the businesses that provide experiences, goods, transport and accommodation to our visitors. Most importantly, increasing the proportion of high-value visitors coming to New Zealand will improve the economics of airlines and on the ground operators. New Zealand will become more appealing in the competitive international market for air capacity.

We suggest a recipe for new market development (and the ongoing review of new and existing markets). The recipe steps through identification and establishment, where demand for New Zealand as a destination is ramped up through indirect connections. The subsequent steps involve preparation, commencement of operations and monitoring; acknowledging that the whole process can be over two years in the making. The exact method for optimally growing air capacity for the benefit of NZ Inc. may vary by market and will require robust analysis based on the circumstances which exist at that time.  

Finally we clarify that New Zealand will have its strongest opportunities for growth in the Pacific Rim and new markets will need to be fostered.

A collaborative approach, including working closely with the public sector to remove existing barriers, will propel the tourism industry on its growth trajectory to 2025.
 

Summary of key findings 

  • New Zealand lacks a robust public data system to accurately capture monthly and annual totals of aircraft capacity operated by both international and domestic carriers.
  • Because of our isolation we need to grow long-haul disproportionately faster than the global trend; as well as using direct services, there is an opportunity to grow long-haul visitors by better leveraging existing direct (same flight number) one-stop services via Australia such as existing Emirates and China Airlines capacity.
  • Load factors into New Zealand have lagged the international average by two to three percentage points over recent years; this presents the first opportunity for growth before investment in new capacity is needed.
  • To successfully grow new routes, a range of different organisations need to coordinate and collaborate.
  • There is an opportunity to capitalise on the surplus of domestic capacity, particularly during the summer tourism peak period, in order to spread international tourism demand to the regions.
  • Trans-Tasman services have been unique in enabling regional airports to have international connections to Australian hubs, giving one-stop access to vast array of destinations. However, most trans-Tasman services do not provide a return that covers the cost of capital invested. Regional services are most at risk. There is very low growth in Dunedin and Rotorua capacity while Hamilton and Palmerston North no longer have international services.
  • There is a large volume of unused capacity throughout the winter when Northern Hemisphere visitor flows ‘down under’ soften and load factors on 5th freedom carriers drop to 43% - 66%.
    NB: 5th freedom carriers are airlines carrying revenue traffic between foreign countries as a part of services connecting the airline's own country, e.g. Emirates’ Auckland – Sydney leg as part of Auckland-Sydney-Dubai (direct, one-stop service) (Wikipedia). 
  • All airlines actively review route profitability. Foreign based carriers have higher mobility of assets than New Zealand based carriers. New Zealand routes need to outperform profitability of routes to other countries to minimise exits and provide growth opportunities.
  • Opportunities exist for the tourism industry to collaborate and rally behind New Zealand’s air services. However, the industry must determine who will be involved, what resources will be required (where will these come from) and what will the focus be?
  • Filling existing capacity is the quickest way to secure sustainable capacity. Achieving an 83% load factor will translate to 500,000 more visitors with little infrastructure investment required. Half this growth can come from our closest market: Australia.
  • The best outcome is to increase demand at all fare levels so there is a collective lift in both volume and value.
  • Direct, non-stop services present the best opportunity for New Zealand to grow new and existing markets. Some markets are already daily and thus the challenge is achieving higher value demand, year round. Other existing markets such as Korea, Malaysia and Thailand need modest demand stimulation to achieve the daily target.
  • New growth will come from developing Pacific Rim countries where New Zealand has only seasonal or direct one-stop services (e.g. Indonesia and Taiwan) as well as markets to which we are yet to establish any direct services, particularly Asia and Latin America.

 

 

 

Air connectivity growth has been soft and uneven

New Zealand is an island nation dependent on airline connectivity.

Of New Zealand’s 2.6m annual visitors, 99% come by air (Ministry of Business, Innovation and Employment - International Visitor Arrivals). Auckland (AKL) and Christchurch (CHC) are the key ports connecting New Zealand to the world, with a total of 21 countries served by direct, non-stop services.

Domestically 26 ports are served connecting small regional centres with domestic hubs AKL, CHC and Wellington (WLG). Note: scheduled services to Masterton will cease from February 2014.

 

Terminal Christchurch International Airport Ltd compressed

Photo: Christchurch International Airport Ltd

 

Australia accounts for nearly two thirds of international services and connects six New Zealand cities to Australia.

Direct, one-stop services (using same flight number) operate via Australia and the USA, giving easy connections to three other countries. In most cases these are ultra-long-haul markets which cannot currently be served by commercial aircraft in a single flight.

There are no existing reporting mechanisms of total seat capacity operated to/from New Zealand collated by a single source; however analysis of schedules data gives a reliable insight. Analysis shows capacity is currently 6.6 million seats annually (source: Diio-Mi schedules analysis, Tourism 2025 team analysis).

KEY FINDING: New Zealand lacks a robust public data system to accurately capture monthly and annual totals of aircraft capacity operated by both international and domestic carriers.

New Zealand’s level of connectivity relative to other countries can be viewed in different ways:

  • Connectivity by global network nodes: 142nd internationally (The Air Connectivity Index – World Bank: Jean-Francois Arvis & Ben Shepherd). This looks at connection times between New Zealand and every other point in the world – on average, our journey times are longer than the average journey time from other countries to any point in the world.
  • Connectivity per $ billion of GDP: 6th internationally (Oxford Economics: Economic Benefits from Air Transport in New Zealand). This demonstrates that for a relatively low level of GDP, New Zealand is as well (if not better) connected than many developed nations, despite the lack of strong economies close by.

Whatever the measure of New Zealand’s strength of connections, the trend for air capacity growth in recent years has not been positive:

  • annual inbound capacity peaked in March 2012 at 6.8m seats
  • the withdrawal of Qantas (AKL-Los Angeles), Aerolineas Argentinas (AKL- Buenos Aires), Royal Brunei (AKL-Brunei) and reduction of Korean Airlines (AKL-Seoul) have all contributed to the reduction  
  • Christchurch had a big reduction in Trans-Tasman capacity following the earthquakes and this has offset other Tasman growth
  • domestic capacity is currently in line with 2009 levels, having dropped significantly in 2010 when Pacific Blue ceased domestic operations (the two incumbents have since grown to replace the Pacific Blue capacity)

Domestic air capacity growth has been on trunk routes between the main cities (Auckland, Wellington, Christchurch, Queenstown and Dunedin). Demand is primarily driven by corporate and public service demand, with international visitors a small proportion of total traffic.

Internationally, New Zealand is vulnerable to reductions in air capacity due to the small volume of airlines based in New Zealand and New Zealand’s low population limiting the growth in outbound traffic. The Ministry of Transport lists 18 passenger airlines as operating to/from New Zealand; however only Air New Zealand and the Virgin Australia subsidiary Virgin Australia Airlines (NZ) are New Zealand based.

All carriers want routes to be profitable and will shift capacity if a route is under-performing. It is much easier for foreign carriers to move their capacity to other countries since they do not have a full base (domestic hub, engineering, head office, etc.) in New Zealand. A change that shifts air capacity to other markets has negative flow-on impacts for the New Zealand aviation industry, the wider tourism industry and the economy as a whole.

It is in the best interests of New Zealand’s tourism industry that airlines achieve sustainable profits on our routes.

plane-grow-fig1.jpg

Connectivity provides benefits to tourism and the wider economy

The aviation industry is significant in its ability to serve the economy as a whole. A study by Oxford Economics found that the New Zealand aviation industry contributes $7.6 billion through the output of the aviation sector and its supply chain. The industry also supports 79,000 jobs directly and indirectly (Oxford Economics - Economic Benefits from Air Transport in New Zealand)

The air transport sector is heavily (and mutually) dependent on tourism:

  • direct value added to GDP from tourism is $7.3b
  • ratio of direct tourism sales as a proportion of total air transport output was 0.89
  • aviation expenditure accounts for 24.7% of international visitor expenditure (Statistics New Zealand - Tourism Satellite Account 2013

We are falling behind global growth trends

Globally, air connectivity has risen at a 4.6% compound annual growth rate (CAGR) over the five years to 2013 (Diio-Mi schedule analysis, Tourism 2025 project team analysis). During this same period, international seat capacity into New Zealand has risen at just 1.6%. While much of the growth has been in short-haul (Australia and Pacific Islands routes), most of the growth has been driven by increased 5th Freedom capacity on Trans-Tasman services. This capacity could arguably be grouped as long haul (as it continues to destinations such as Dubai and Taiwan). Taking this approach, long-haul capacity has grown at 2.2% and short-haul 1.0% CAGR.

plane-grow-fig2.jpg

While global air connectivity is predominantly short-haul, the rate of growth for global long-haul capacity has been 4.5%, only slightly below that of short-haul growth. However, with only one strong economy in New Zealand’s short-haul range, New Zealand needs to grow long-haul disproportionately faster to keep up with the rest of the world’s growth.

KEY FINDING: Because of our isolation we need to grow long-haul disproportionately faster than the global trend; as well as using direct services, there is an opportunity to grow long-haul visitors by better leveraging existing direct (same flight number) one-stop services via Australia such as existing Emirates and China Airlines capacity.

The average inbound load factor (the proportion of occupied seats on each aircraft) has fluctuated between 71% and 75% in recent years and is currently 75.4% (Diio-Mi schedules analysis, Statistics New Zealand, Tourism 2025 team analysis). Outbound load factors are also soft and harder to influence given New Zealand’s small population and lack of year round demand.

KEY FINDING: Load factors into New Zealand have lagged the international average by two to three percentage points over recent years; this presents the first opportunity for growth before investment in new capacity is needed (Boeing - Current market outlook 2012).

Globally, air connectivity forms just one way of how travellers move around. New Zealand’s isolation means there is no option to travel here by road or train, and sea arrivals are limited to a small volume of cruise passengers.

Lifting connectivity is an enormous challenge

New Zealand is isolated geographically and a structural challenge that cannot be altered is distance to key markets. Most routes are characterised by long distances (between nine and 14 hours) making them high-cost to operate. However, demand is ‘thin’, emphasised by the low number of carriers operating. This challenge is compounded by dual destination visitors:

  • travellers want to save time/money by visiting ‘down under’ countries in a single trip
  • airlines operating long-haul routes to New Zealand will only carry the traveller on one leg
  • for any passenger who doesn’t make a return trip, the airline needs to find another traveller to occupy the return leg

Growth in New Zealand’s airline connectivity to some of the world’s key developing markets has been in decline. Long run growth is impacted by carrier exits, natural disasters and fragile economies. New Zealand must work hard to increase demand and drive market share improvements that will lead to sustainable growth in air capacity.

plane-grow-fig3.jpg

To match the ambitions of the Tourism 2025 framework, New Zealand will need to grow air connectivity. Our forecasts suggest New Zealand will need an additional 30-34 international services per dayby 2025 (currently 71%). This is based on average 250 seat aircraft, operating at 80% load factor (five points above current loads) and takes account of both inbound and outbound growth.

The benefit lies with the industry

Clearly airlines have an important job in managing the large flows of revenues and costs to support their own economics. There is a variety of research that shows airlines are less profitable than many other industries (MBIE – Tourism Sector Report, International Air Transport Association (IATA) - Profitability and the air transport value chain). However, New Zealand tourism needs good airline connectivity. Therefore, it is in the tourism industry’s interest that the economics of flying to New Zealand are relatively better than other competing destinations.

The profit generated by the aviation industry from visitors travelling to New Zealand is very low, certainly when taken in comparison with the wider tourism industry. Clearly there is a mutual benefit in the tourism industry working with the airline industry to drive increased value. There is an immediate opportunity to lift volumes by increasing utilisation of existing capacity, but for air services to be sustainable, airlines must have access to a pool of demand that matches the supply of seats. This means demand for economy, premium economy, business and first class seats. In addition, demand needs to be weighted towards the fare classes that make the service profitable.

There have been several examples where the industry has not rallied behind air services which have subsequently been cut.  Some examples are Air Asia X and Royal Brunei.

Royal Brunei Airlines Boeing 787 Dreamliner compressed

Photo: Royal Brunei Airlines B787 Dreamliner

Air Asia X compressed

Photo: AirAsia X

 

plane-grow-fig4.jpg

Link to graph source - IATA

In the year that Air Asia X operated, Malaysian arrivals lifted 73% but dropped back considerably following the exit of Air Asia X (Statistics New Zealand).

Of course in some cases, service cuts may be outside of the control of the industry.  Nevertheless, it is in the industry interests that the case for maintaining existing services is strong. 

The airlines must make a profit by filling their seats with the necessary level of healthy yielding demand so that the service is enduring and the growth in visitors ongoing. Profitable airlines will have the incentive to invest more capital in New Zealand and the growth will continue without relying on public funds to support the bottom line.

 

How to grow air connectivity

First step: Cooperating to compete

International aviation is not a free market and airlines operating to New Zealand are regulated by air service agreements issued by the Ministry of Transport. On many levels the aviation sector and wider tourism industry must cooperate to compete on a global scale. This may involve engaging to generate higher value demand in a new market, or supporting airline alliances as airlines seek to strengthen connecting traffic and make up for a lack of presence in foreign markets. While there may not always be full agreement on how to achieve growth, there can be alignment around the principles of sustainable connectivity.

The collaboration of many industry players as part of the Tourism 2025 growth framework is a great opportunity. Existing air connectivity has been built on ad hoc collaboration and key agencies working together but in isolation of a wide reaching strategy.

Some small initial changes to data collection and information sharing would provide much greater insight and support more targeted growth of key visitor markets. It would also help de-risk new air connectivity services as there is greater understanding and agreement on the size of markets. The Insights theme of Tourism 2025 identifies the market profiling and measurement of key performance metrics that is required to drive and track progress, and it is important to note that the aviation sector will play a key role as both source and user of these insights. For greater collaboration and further understanding of the market we have identified a need for:

  • airlines to provide actual capacity data operated to/from/within New Zealand so there is an accurate record of supply to match the existing demand (arrivals/departures) data
  • Statistics New Zealand to release visitor arrivals by carrier to allow better understanding of visitor flows, including dual-destination movements and new route cannibalisation impacts
  • creation of a strategic aviation working group that can lead an informed and coordinated industry approach to key issues relating to air connectivity

Second step: secure existing capacity

The primary objective for the industry must be to ensure the existing direct, non-stop services to, from and within New Zealand remain viable and continue to connect the country to its current 14 long-haul and 10 short-haul destinations. The simple economics is that for capacity to be sustainable, airlines need to achieve equal or better returns on operations to New Zealand relative to competitive destinations.

Improving economics can be simplified to key changes:

  1. Increase passenger volumes to reach international benchmark load factors.
  2. Improve value so that every seat occupied in every cabin is covering its cost.

Increase passenger volumes on existing services

The significant cost of operating air services can be best overcome by spreading the cost widely. Boeing identifies average load factors for North America carriers being in the range of 81-83% (Boeing - Current market outlook 2012: World regions). If the load factor on inbound capacity lifted from 75.4% to 83% it would translate to an extra 500,000 arrivals. The growth can be achieved with minimal additional cost or infrastructure investment but needs to be achieved at, or above, current yield levels. The challenge, as the graph below demonstrates, is that the bulk of arrivals will need to come in off-peak periods.

Using the robust data available from the Australian Bureau of Infrastructure, Transport and Regional Economics (BITRE), which accurately captures both Trans-Tasman seat capacity and passenger data together, this example can be portrayed on a month by month basis.

plane-grow-fig5.jpg

Link to graph source

Clearly an underlying issue is seasonality. Therefore growth needs to be achieved throughout the year in order to reach the annual target of 83%. Trans-Tasman provides an excellent example of the challenge to fill existing capacity. Monthly visitor volumes need to increase by a range of zero (no growth required in December) to 51,000 (required in May) to reach the 83% load factor goal.

KEY FINDING: Filling existing capacity is the quickest way to secure sustainable capacity. Achieving an 83% load factor will translate to 500,000 more visitors with little infrastructure investment required. Half this growth can come from our closest market – Australia.

The Australia opportunity makes sense to target:

  • Australia is two-thirds of all international capacity
  • every year there are 1 million empty seats
  • they are our closest market and require almost no facilitation efforts to travel to New Zealand (e.g. no visa, language or driver’s licence barriers).

The key challenges to filling seats are:

  • overcoming seasonality
  • increasing dual destination demand
  • creating price stimulation by decreasing the passenger movement charge (Australia departure tax)

To overcome these challenges we will need a collective approach extending good existing work in these areas. Driving greater coordination of off-peak targeting and working to an industry aligned strategy will help address seasonality. The Target for Value theme of Tourism 2025 details specific initiatives such as building up Meetings, Incentives, Conferences and Exhibitions (MICE) segments that can help address seasonality.

Collaboration will need to come from both sides of the Tasman; therefore an aligned New Zealand industry will be more productive in making progress with our Australian counterparts.


Improve value of passenger mix

Airlines sell seats in different cabin classes, which is very transparent given the product differences associated with each cabin (first/business/economy, etc). However, within each cabin, seats are sold at different fare classes. These are the various price points an airline releases its seat inventory at. The highest fare class in each cabin will always be available for purchase (as long as there are seats unsold). Lowest fare classes may only be offered when purchasing many months in advance of departure, or as part of a promotion. As the flight departure date nears, airlines that have not sold a sufficient number of seats are forced to try to sell tickets in the lower fare classes. Doing so drags down the average fare paid per passenger and in some cases the average fare drops below the average cost per seat.

The following diagram illustrates this challenge using an example long haul route, with fares and load factors based on a typical scenario for a new or ‘at risk’ route.

plane-seating-chart.jpg

The outcome of the mix of traffic detailed in the diagram is listed below. The total revenue generated when summing the fare classes and cabins is not enough to cover costs.

Cabin

Fare class

PAX

Seats

% of aircraft load

Ave. Fare $US

Revenue $US

Economy

Low

86

232

34%

$714

$62,000

 

Mid

61

24%

$832

$51,000

 

High

32

13%

$968

$31,000

Premium

 

13

22

5%

$1627

$21,000

Total

 

192

254

76%

$856

$165,000

 

Cost

 

$173,000

 

Profit / Loss

 

$8,000

To break even, the airline requires one of the following increases in volume:

Cabin

Fare class

Additional PAX required

New total

New aircraft load factor

Economy

Low

13

99

81%

 

Mid

11

72

80%

 

High

9

41

79%

Premium

 

6

19

78%

(Note: assumes no change in average fare for each particular fare class)

Small changes in passenger volume or value (selling more seats in higher fare classes rather than increasing prices) can quickly turn around a negative result. Airlines are forced to benchmark price levels to market conditions and competing destinations. Therefore, demand generation is the most achievable strategy to improve the economics to secure sustainable connectivity.

KEY FINDING: The best outcome is to increase demand at all fare levels so there is a collective lift in both volume and value.

Third step: establish new routes where demand profile underpins supply

To grow air connectivity sustainably we must first grow demand

For airlines to operate routes that are sustainable in the long-term, they require consistent demand from passengers who will fly at a price that covers costs and delivers a profitable return on investment. Maintaining and growing demand for passengers to travel to New Zealand is a critical factor in airlines maintaining or increasing the capacity they operate to or from New Zealand.

Route economics, be it existing services or new direct capacity being planned, are reliant on strong demand profiles which are built over a long period of time. Ongoing investment in markets is necessary to ensure the supply of air connectivity remains sustainable:

New Zealand will gain most from air links being established on routes that are able to grow, bringing increasing volumes of visitors and generating an ever-increasing brand presence for New Zealand as a destination.

The ideal new market

The ideal new market has a strong matrix of:

  • healthy state of economy at both ends of the route
  • strong city to city demand
  • good country to country demand (with good domestic/regional connectivity)
  • strong partners with deep networks at the other end of a route
  • segments which can be targeted to gain competitive advantage

The industry must find a way to collaborate and grow the demand for point-to-point markets before the introduction of a new service. When a new service is introduced, pre-existing services must be monitored and demand stimulated on other origin/destination flows so that the air services of both the new and old routings of passengers continue to be sustainable. 

Based on discussion with key industry players, we have developed a ’recipe’ for the successful implementation of new routes and the ongoing monitoring that needs to occur at an industry level to ensure new and existing connectivity links are sustainable.

recipe-for-sustainable-connectivity.jpg

The value of a new direct service to New Zealand is lost if the new route comes at the expense of an existing direct service. In addition to achieving sufficient loads and a fare class mix that yields enough revenue to cover costs, the demand must not be cannibalised from existing routes. Therefore, the industry must shift to a more engaged view of New Zealand’s connectivity portfolio.

KEY FINDING: New direct services must not undermine existing services – it is important to generate new demand to avoid simply shifting the directional flows of existing traffic.

While we see an opportunity for increased collaboration, there will always be an element of market competition that remains. Airlines will seek to gain first mover advantage where there is a commercial opportunity, however this will be just one element of the full economic assessment being conducted by airlines before commencing new operations.

In some instances competition law may prevent information sharing, or individual organisations may choose not to share data they consider to be commercially sensitive. We advocate that these issues be addressed early so that there is a clear understanding amongst stakeholders as to how collaborative progress can be achieved.     

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Where are the future opportunities?

The immediate opportunities exist in markets where New Zealand has some direct services but is where demand is not at sustainable levels. The following table identifies countries and routes where there is currently insufficient demand to sustain year round daily services.

Several markets already have frequency close to daily services. Frequency and arrivals volumes for non-stop long-haul services that are not daily year round:

Route

Country

Current annual average weekly services
(7 = daily)

Current annual arrivals (YE June 2013)

Other ports served within same country

AKL-Vancouver

Canada

4

35,553

-

AKL-Santiago

Chile

6

29,992

-

AKL-Denpasar (Bali)

Indonesia

1

7,901

-

AKL-Osaka (Kansai)

Japan

2

21,776

Tokyo (Narita)

AKL-Tokyo (Narita)

Japan

5

54,257

Osaka (Kansai)

CHC-Tokyo (Narita)

Japan

1

9,546

Osaka (Kansai)

AKL-Kuala Lumpur

Malaysia

6

76,507

-

AKL-Seoul

South Korea

5

69,307

-

AKL-Bangkok

Thailand

5

60,170

-

 

Note:

  • Arrivals count is based on Statistics NZ ‘Total passenger movements by closest overseas port’ series
  • Bali services: seasonal services during the winter only
  • Japan services: Air New Zealand has ceased AKL–Osaka (Kansai) services from 28 September 2013, but will continue to run a programme of 29 charter services from New Zealand (AKL and CHC) direct to various points in Japan throughout the 2013-14 summer.

Source: Diio Mi/Statistics NZ/Tourism 2025 Team analysis

The table demonstrates that there are several opportunities where only a modest increase in demand is required to reach daily services. Adding capacity to existing routes is a lower risk for airlines relative to establishing new, untested markets. Individual markets will have their own unique mix of inbound, outbound and through traffic that will need to be achieved to make the service sustainable. These numbers will depend on the type of aircraft being used (volume) and the yield being achieved from different from each passenger segment (value).

Achieving the daily frequency target will create a launching pad for wholesalers to offer a wider range of itineraries and increase the flexibility of travel periods, improving the ease of access for consumers. In 2014 both Santiago and Tokyo services are scheduled to increase to daily, meaning the next opportunities are Bangkok, Kuala Lumpur, Seoul and Vancouver.

If more demand can be created from these markets and at sustainable yield, airlines will be willing to increase frequency. Both Korean Air and Malaysia Airlines already operate daily services during December and January so the industry must rally to generate greater demand in off-peak periods, to achieve the sustainable year round daily service.

Looking further forward, New Zealand must target growth economies with increasing number of middle class consumers. The Global and New Zealand Outlook theme of Tourism 2025 has identified regions forecast to have the greatest growth in household incomes.

plane-grow-fig7.jpg

Link to graph source

Tourism New Zealand has already aligned with a number of these growth markets and its strategy is to develop the India, Indonesia and Latin America markets. New Zealand has existing direct links to Chile (through Santiago) and Indonesia (through Bali); however, further work is needed to develop Indonesia services to daily, and add new Asian and South American destinations.

While countries such as India and Brazil are out of range for current aircraft (including the Boeing 787), New Zealand should not forget about markets where non-stop services are not possible. New Zealand has strong visitor flows from countries such as Germany and the UK and in some cases direct, one-stop services (‘through flights’ with same flight number) are a way to connect these ultra-long-haul markets. However, these can be highly challenging; resources (both industry marketing and airline assets) can be better targeted at non-stop services. If carriers operating to New Zealand have strong code share and alliance partners, consumers are able to embark on journeys that connect seamlessly through international hubs onto direct services into New Zealand. This is an equally valid way to grow visitor numbers from ultra-long-haul markets.

Developing nations within the Pacific Rim (which are in range of direct services) present the best opportunity for growth:

  • Indonesia: achieve year round direct, non-stop services; grow to daily (currently operates twice per week and only in winter)
  • Taiwan: achieve direct non-stop services; grow to daily (currently only operates via Brisbane and Sydney)
  • Philippines: achieve direct non-stop services; grow to daily
  • Vietnam: achieve direct non-stop services; grow to daily

Furthermore, stimulation with direct services can only partly fill the plane. New Zealand must grow demand through targeting and positive visitor experiences prior to the commencement of the service. Base demand needs to be at a point where stimulation will bolster loads to the target range (approx. 80-83%) and at a yield that makes it worthwhile for the airline to maintain and grow the route.

KEY FINDING: Direct, non-stop services present the best opportunity for New Zealand to grow new and existing markets. Some markets are already daily and thus the challenge is achieving higher value demand, year round. Other existing markets such as Korea, Malaysia and Thailand need modest demand stimulation to achieve the daily target.

KEY FINDING: New growth will come from developing Pacific Rim countries where New Zealand has only seasonal or direct one-stop services (e.g. Indonesia and Taiwan) as well as markets to which we are yet to establish any direct services, particularly Asia and Latin America.

air new zealand2
Photo: Air New Zealand

 

 

Simplified overview of NZ aviation

Many agencies are instrumental in making connectivity happen

Aviation is not a free market. Airlines need an operating licence to be able to carry passengers (and/or cargo) both domestically and internationally. Licences are issued by government based on the principle that states have complete sovereignty over their airspace (David Duval - The Principles of Market Access: The Aeropolitics of Ownership and Control).

For international air services, an Air Service Agreement (ASA) must exist between governments to permit air services by designated country carriers. ASAs have historically been used by governments to:

  • regulate the safety of airlines operating in a state’s airspace
  • regulate the amount of foreign investment permitted in local airlines
  • promote economic or diplomatic links with foreign nations
  • protect the financial operating environment for local airlines

ASAs serve as an enabler for tourism in New Zealand. Both direct and indirect services require the approval by the countries being linked with an air service that can bring visitors to the country. Furthermore, size and geographic position mean point-to-point demand between the two countries often needs to be complemented by connecting passengers from other locations.

In New Zealand, regulation of aviation and the management of ASAs is the responsibility of the Ministry of Transport (MOT). However, a number of other agencies become involved alongside the private sector players (airlines, airports and tourism bodies).

New Zealand has a comparatively liberal air services policy. The International Air Transport Policy pursued by the MOT states ‘New Zealand will pursue a policy of putting in place reciprocal open skies, except where it is not in the best interests of the country as a whole’. In addition, the policy update of 2012 added provision for ‘granting approval for extra-bilateral services pending the putting into place of new or expanded air services arrangements’ and ‘favourable consideration to authorising operations by foreign airlines into Christchurch ahead of negotiations’(MOT- International air transport review policy statement).

ASAs are an enabler of air connectivity and the MOT’s liberal approach has generally allowed airlines to address ASA regulatory restrictions as a secondary consideration following commercial decisions, rather than vice versa. The industry supports the MOT’s approach.

The following diagram maps out at which stage various organisations become involved.

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This table clearly demonstrates that the big players in making new air routes happen are the airlines and airports assisted by the government’s International Air Transport policy. There is a big opportunity for the tourism industry to work with these organisations in planning and helping to build market demand using indirect routings prior to the commencement of new services. For some parties, this may simply mean aligning marketing efforts towards markets where direct air links exist and keeping abreast of where new services are being launched.

The smaller agencies (Airways, Aviation Security Service (AVSEC), Civil Aviation Authority (CAA)) play a critical role on the day of operation. For tourism, these agencies help to make the first and last hours a visitor spends in New Zealand a positive experience with a unique Kiwi flavour. It is also important to note that the cost element of providing these services is generally passed directly onto the visitor so New Zealand must strive to benchmark itself against its international competitors by providing seamless border experiences.

The government agencies listed in the table above conduct public consultation in reviewing their policies, operations, or charges. The tourism industry is an important stakeholder, particularly in the MOT’s ASA policy, but input into these policies is generally limited to airports and airlines.

KEY FINDING: To successfully grow new routes, a range of different organisations need to coordinate and collaborate.

Multiple market segments have unique drivers

New Zealand aviation can be segmented into four main areas of operation where unique market forces play out: domestic, Tasman, Pacific Islands and long-haul. The following sections detail competitive and economic structure of each of these market groups.

Domestic: competitive trunk alongside wide-reaching regional services

New Zealand’s domestic aviation market is characterised by two carriers – Air New Zealand and Jetstar. A handful of other small operators connect a small centre to a main ‘hub’ airport (e.g. Air Chathams/Great Barrier Airlines/Sounds Air) or connect two small centres (e.g. Air Napier: Napier-Gisborne). However, these are very small volumes compared to the jet and turbo prop networks of nationwide operators.

Jetstar A320 landing in Christchurch

Photo: Jetstar A320 landing in Christchurch/Jetstar

Quick facts:

  • Air New Zealand’s domestic network connects 26 ports via 54 different routings (includes Masterton which will cease operations from February 2014) (Air New Zealand media release 4 Sept 2013)
    • jet services connect the main centres on ‘trunk’ routes: Auckland (AKL), Wellington (WLG), Christchurch (CHC), Dunedin (DUD) and Queenstown (ZQN)
    • turbo props connect regional ports under the Air New Zealand subsidiary brands
  • Jetstar operates on five trunk routes
  • the domestic market is historically unable to support more than two carriers - Origin Pacific and Pacific Blue have both been forced to cease New Zealand domestic operations in the past decade when three airlines have attempted to coexist (The Star Online - Origin Pacific ends passenger services; Virgin Australia press release 16 Aug 2010)
  • domestic capacity peaked at 7.6m one-way seats in 2008 (15.2m total)
  • capacity is currently 6.8m one-way seats (13.6m total) or 90% of the 2008 peak
  • the five year CAGR to 2013 is just 0.1% (remaining carriers have now all but replaced the capacity lost when Pacific Blue ceased operations in 2010)
  • seat capacity is highly seasonal:

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    • lows in January/February and May/June
    • during these months, capacity drops by as much as 16% of the October (max) total
    • domestic capacity highly reliant on business demand

KEY FINDING: There is an opportunity to capitalise on the surplus of domestic capacity, particularly during the summer tourism peak period, in order to spread international tourism demand to the regions.

Tasman: competitive and dynamic

Trans-Tasman air services are the most competitive and dynamic of all routes connecting New Zealand to the world.

Quick facts:

  • seven different brands operating including three ‘5th freedom’ carriers
    • note: 5th freedom carriers are airlines carrying revenue traffic between foreign countries as part of services connecting the airline's own country (Wikipedia)
    • note: one of the seven brands, Jetstar, is a wholly owned subsidiary of Qantas
  • two Alliances operating:
    • Air New Zealand/Virgin Australia
    • Qantas/Emirates
  • hubs of AKL and CHC are well connected to the Australian hubs of Sydney, Melbourne and Brisbane
  • WLG and ZQN also have multiple airlines operating and are connected with high frequency to three key Australian hubs
  • AKL linked to Perth with daily services, new seasonal direct, non-stop service between CHC and Perth commenced in December 2013
  • Rotorua and Dunedin have direct, non-stop services to Australia but low frequency
  • AKL is linked to regional Australia ports Adelaide, Cairns, Gold Coast and Sunshine Coast

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Note: graph includes 5th freedom long-haul capacity operating one-stop trans-Tasman services.

  • five year CAGR for inbound capacity from Australia is 2.0% with over 4.1m seats annually
  • steady reductions in CHC–Australia capacity since 2011 earthquake have offset growth on other trans-Tasman routes

KEY FINDING: Trans-Tasman services have been unique in enabling regional airports to have international connections to Australian hubs, giving one-stop access to vast array of destinations. However, most trans-Tasman services do not provide a return that covers the cost of capital invested. Regional services are most at risk. There is very low growth in Dunedin and Rotorua capacity while Hamilton and Palmerston North no longer have international services.

The relatively strong growth in trans-Tasman services has been in part driven by the presence of 5th freedom operations. These carriers, namely China Airlines, Emirates and LAN Chile, are primarily interested in operating to Australia but schedule choices (driven by time zones) create an opportunity to do a ‘middle of the day’ return trip across the Tasman, between overnight long-haul services to/from Australia. The 5th freedom capacity is having a variety of impacts on the market:

  1. There is a surplus of capacity over and above existing demand (evidenced by weak load factors) (Bureau of Infrastructure, Transport and Regional Economics (BITRE), Australia).
  2. Surplus capacity is having a dampening effect on prices, leading to unsustainable returns. It also means there is little or no room to decrease prices to stimulate new demand.
  3. The high level of Trans-Tasman air connectivity is allowing New Zealand to benefit from Australia’s robust 6.3% growth in air capacity as passengers can easily connect onwards to/from New Zealand.

KEY FINDING: There is a large volume of unused capacity throughout the winter when Northern Hemisphere visitor flows ‘down under’ soften and load factors on 5th freedom carriers drop to 43%–66%.

Seasonality affects Tasman air connectivity services as with all air connectivity. However, the combination of outbound and inbound plus the strength of the inbound ski market means there are multiple peaks throughout the year. Capacity (and demand) is high in April, July and October but by far the most dominant peak is in December as a result of the high VFR (visiting friends and relatives) movements at Christmas time. The softest periods are May/June and to a lesser extent August. airlines incur massive losses during these periods, which raises a risk that the airline may exit a route entirely and reallocate the year round capacity elsewhere. This can be seen in the recent exit of Jetstar from the AKL – Cairns market.

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Link to graph source

The oversupply of capacity has led to the creation of two new bilateral Alliances. Airlines are using this structure to increase their collective network reach and access distribution channels outside of their home market. It is an effort to generate new demand and make the existing supply of air capacity sustainable. Alliances are regulated by the MOT in New Zealand and the Australian Commerce and Consumer Commission in Australia (approval must be granted by both agencies and to date alliances have only been approved for limited spans and with conditions). It is important for the industry to support alliances as a long-term means to more sustainable connectivity.

Trans-Tasman accounts for over 60% of international seat capacity and there are close to 1m unused seats each year. Thus, a strong case can be made for targeting above average growth from Australia:

  • target niche segments to help drive out seasonality e.g. fly/cruise (can boost shoulder periods), conference and events, retirees, long weekend travel, adventure tourism
  • target dual-destination traffic from long-haul markets to capitalise on the growth of long-haul services into Australia and leverage the high volume of Trans-Tasman capacity
  • continue existing momentum from regional campaigns (especially around new routes: CHC-Perth and AKL-Sunshine Coast)
  • use alliances to support dissemination of visitors throughout the regions
  • passenger movement charge (AU departure tax) is identified as a price barrier – potential for industry to work together with Australian counterparts in lobbying government to reduce or eliminate it for Trans-Tasman departures

Pacific Islands: small but important

The Pacific Islands is a small volume (9%) of international air capacity into New Zealand, but warrants discussion because its characteristics set it aside from the Australian market and long-haul routes.

Quick facts:

  • nine islands are connected to NZ with air services, mostly operated by two carriers (Niue and Norfolk Island served by a single carrier). Note: count is limited to islands within six hours flying time, thus it excludes Hawaii
  • Cook Islands, Fiji and Samoa are the only significant sized routes with frequencies at or above daily
  • markets are predominantly New Zealand (outbound) leisure traffic or VFR (visiting friends and family) in both directions
  • CAGR from 2009 to 2013 is 2.1%

While the volumes of Pacific Islands capacity (and indeed visitors from this region) are very low, these routes are significant for two reasons:

  1. North American visitors can travel to New Zealand on direct, one-stop services, currently offered via Fiji, Cook Islands and French Polynesia.
  2. Pacific Islands are attractive destinations for Northern Hemisphere residents to visit as a dual destination itinerary, in conjunction with New Zealand.

Long-haul: key link to powerhouse economies

Long-haul capacity is the key link that joins New Zealand to the powerhouse economies of the Northern Hemisphere. However, the major challenge is that these routes require large, expensive capital assets with substantial annual operating costs with relatively thin traffic volumes.

Only Los Angeles, Singapore and Hong Kong have more than daily frequency of services. It is hard for airlines to adjust capacity if there is a shock and demand isn’t covering the cost of supply. In some cases the airline can down-gauge (use a smaller aircraft) but the alternative is to cut frequency, thereby negatively impacting New Zealand’s connectivity.

Quick facts:

  • 17 long-haul routes to 11 countries are operating with direct, non-stop services
    • Air New Zealand has exited the AKL–Osaka route, effective 30 September 2013
  • there are direct, one-stop services (same aircraft / same flight number) to five countries: Taiwan, Thailand, USA, UK, UAE  (Thailand and USA also have direct, non-stop services)
  • three long-haul routes have more than one operator
  • Cathay and Air New Zealand have a bilateral alliance on the Auckland–Hong Kong route
  • 2009 – 2013 CAGR is 0.3% (or 2.2% including one-stop capacity through Australia)
  • 55% of long-haul capacity is not operated by New Zealand based carriers

Direct, one-stop services are generally the same aircraft and flight number for all legs of the journey. Airlines choose to fly to New Zealand with one-stop services due to:

  • lack of demand to sustain a non-stop service, and/or
  • inability to operate a non-stop service due to distance
  • opportunity to appeal to segments of ultra-long-haul travellers who want to minimise stop-over time and remove complexity of multiple check-ins

One-stop services are challenging to operate as airlines need market presence in multiple locations and many ASAs aligned to permit operations. Therefore, tourism relies on the collaboration of both the public and private sector to establish these air links with ultra-long distance markets.

The long-haul seasonal peak is strongly weighted towards the Christmas / New Year period with December and January capacity well ahead of other months.

KEY FINDING: All airlines actively review route profitability. Foreign based carriers have higher mobility of assets than NZ based carriers. New Zealand routes need to outperform profitability of routes to other countries to minimise exits and provide growth opportunities.

To succeed, airlines need a mix of inbound, outbound and cargo

Inbound visitors are crucial to New Zealand tourism, but for airlines, the economics of making a route work is wider than this. Airlines generally schedule services as return trips and therefore need to fill the plane in both directions. From New Zealand’s point of view the mix of traffic is described as:

  • Inbound: residents of foreign countries travelling to New Zealand
  • Outbound: New Zealand residents travelling overseas

Home carriers typically carry stronger proportions of outbound than inbound traffic. This is true for Air New Zealand – the company captures 49% market share of New Zealand resident (outbound) departures, but only achieves a 33% share of the inbound market. (Statistics New Zealand).

This statistic is driven by the home carrier’s market presence – Air New Zealand is more well known, has greater loyalty and the widest distribution network in New Zealand, and thus achieves high market share in the outbound segment. Air New Zealand is less strong in this sense in foreign markets and hence has a lower market share of inbound travellers.  Equally, foreign carriers benefit from an established brand presence, sales distribution networks and frequent flyer communities in their home markets.  

For markets to be sustainable, airlines need a year round mix of inbound and outbound but may lack the resources or market knowledge to reach both segments. There are a number of initiatives that can assist airlines to overcome this hurdle. In some instances, it may be large scale, bilateral airline alliances, such as that between Air New Zealand and Cathay, which require regulatory support. In other instances competitive capacity may deliver greater stimulation. Or it may be smaller marketing initiatives and ‘understanding the customer’ education is necessary.  These are initiatives that the tourism industry can engage in, further promoting the need for collaboration and coordination across the industry (both private and public sector) in order for New Zealand to complete on the world stage.

KEY FINDING: Opportunities exist for greater collaboration within the tourism industry to rally behind New Zealand’s air services. However, the industry must determine who will be involved, what resources will be required (where will these come from) and what will the focus be?

In addition to passenger traffic, airlines carry cargo as a further source of revenue. Air cargo is generally high value, express goods and often of a perishable nature. For this reason, even the smallest aircraft can carry cargo on regional New Zealand routes, e.g. mail and seafood. The following table shows how air freight is of significant value to airlines operating to/from New Zealand, despite being only a fraction of the total exports / imports for the country.

 

Weight (t)

% share

Value ($M)

% share

Exports

Air Freight

104,151

0.3%

4,997,795

10.8%

Sea Freight

35,373,038

99.7%

41,154,859

89.2%

Imports

Air Freight

92,062

0.5%

9,125,023

20.6%

Sea Freight

19,006,472

99.5%

35,179,235

79.4%

Note: Exports are "free on board" (the value of goods at New Zealand ports before export) and include re-exports. Imports are "value for duty" (cost including insurance and freight).

Source: Statistics New Zealand

Therefore, cargo can provide valuable top-up revenue alongside the core business of commercial passenger flights and needs to be considered in the context of any discussion about sustainable air connectivity. While generating freight business may not be the focus of the tourism industry, there is certainly an opportunity to help facilitate the economic links between airlines and businesses, thereby strengthening the case for airlines to increase air connectivity to, from and within New Zealand.

The market environment is highly volatile

All airlines face a tough operating environment with low margins. (Source: MBIE - Tourism sectors report). The operating model is high revenues offset by high costs and there are a number of volatile elements that make airlines susceptible to rapid erosion of profit margins. In a recent Investor presentation, Air New Zealand contrasted the controllable and uncontrollable elements that impact the airlines’ operating environment and ultimately profitability:

Controllable

Uncontrollable

Brand

Exchange rates

Culture

Fuel price

Fleet

Global economic conditions

Network

Natural disasters

Product

Weather

Safety

 

Fuel a key cost driver

Fuel prices have a massive bearing on airline economics. In the past two years fuel has averaged approximately $US125 per barrel (Air New Zealand Annual Financial Results 2013, Air New Zealand). This is below the peak it reached in 2008 but still well ahead of post GFC levels. On long-haul sectors, fuel can account for around half the cost of operating and is a commodity outside the airline’s control. Foreign exchange further accentuates the fluctuations.

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Link to graph source

Our isolation generates high costs

Long-haul airlines operating to New Zealand must overcome a range of challenges. Wide-body aircraft are most efficient in sectors in the range of 8000–12,000km (10-14 hours). However, the per departure cost for a journey of this length is in the range of $150k - $350k (depending on the size of the aircraft). A single daily return long haul service costs well in excess of $100m a year to operate. Therefore, airlines can lose large amounts of money quickly if they operate sectors with insufficient demand or low yielding revenue traffic.

Further cost and complexity incurred in establishing offshore base

On the ground costs depend on the level of investment an airline is willing to make into the foreign market. A low frequency / low number of operations into a particular port will likely lead to an airline outsourcing many of the ‘on the ground’ requirements (check in staff, ground handling, engineering, sales, etc.). But as an airline builds presence in a market, it needs to increase the brand presence and resilience. Building an offshore team can be time consuming and costly. In some instances, this cost can be mitigated if there is an alliance partner that is familiar with and has synergies with the foreign carrier’s brand.

New Zealand routes are lower yield than global averages

New Zealand routes are comparatively low yielding relative to other similar length long-haul markets due to the significant leisure based nature of the traffic.

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In addition, where there is insufficient point-to-point demand, airlines use connecting passengers to ‘top-up’ the aircraft and minimise the number of empty seats. However, the amount of revenue these passengers contribute to the sector is low and drags down the average fare on the sector. Airlines are therefore forced to limit this lower yielding traffic.

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This yield challenge for connecting traffic explains why airlines need strong point-to-point markets, particularly when launching new routes. Connecting traffic will dilute the revenue and can often cause sectors to become unprofitable despite high load factors.

New Zealand primarily connects to international hubs

Hubs are airports that have a large range of connectivity options. AKL is New Zealand’s strongest hub, attracting 90% of long-haul capacity. Hubs help top up point-to-point demand which is vital on almost all of New Zealand’s long thin routes. CHC is the only other port with long-haul flights, but the only year round service is to the hub of Singapore.

When point-to-point demand is large enough, more services may bypass the AKL hub and operate direct to other parts of New Zealand. Equally more services from AKL to non-hub foreign ports may become viable. The timing of this depends on the underlying aviation economics and the potential for sustainable services.

Returns to airlines globally have been low

There is extensive research on the highly competitive nature of the airline industry and the long run fall in price of air travel (International Air Transport Association (IATA) - Profitability and the air transport value chain). The combined impact of rising fuel costs, falling prices and increased competition has resulted in very weak returns for the airline industry. IATA research suggests “even at the top of the cycles over the past 20 years, the industry on average has never managed to generate returns that meet what investors would normally consider the minimum for a competitive industry”(IATA - Profitability and the air transport value chain).