Australia’s airline industry is struggling with high fuel costs, falling consumer spending and dwindling tourism activity. As IBISWorld general manager ROBERT BRYANT explains, competition from low-cost Asian airlines will clip the sector’s wings even furt
By Robert Bryant
Australia’s airline industry is struggling with high fuel costs, falling consumer spending and dwindling tourism activity. Competition from low-cost Asian airlines will clip the sector’s wings even further in the next few years.
It’s been a horror few years for Australia’s airline sector. The industry is always extraordinarily competitive, but sharp increases in jet fuel prices and rising labour and maintenance costs have further eroded margins. Increased competition from low-cost airlines such as Tiger Airlines from Singapore has created more turbulence.
Earlier this year, Toll Holdings decided to gift its majority stake in airline Virgin Blue to its shareholders after being unable to sell the stake at any price. It’s a good illustration of exactly how unloved the domestic airline industry is – and conditions aren’t about to get better any time soon.
IBISWorld estimates that the airline industry will have grown at an average annual rate of 3.6% over the five years to 2008-09, with higher fuel prices and the slower economy expected to weigh heavily on the sector in this current financial year.
The 2008-09 period will prove to be a challenging one for all domestic airlines. While new and higher fees and price increases will bolster revenue, industry-wide staffing cuts may cause a deterioration of service levels, and load factors are expected to be pushed higher as a result of the fall in the number of operating aircraft.
In 2008, business fares appear to have been increased by airlines more than economy and discount fares as the airlines seek to capitalise on business travellers to improve profitability.
IBISWorld forecasts that this industry will grow at an average annual rate of 2.9% during the five year period to 2013-14. Real household income is forecast to increase moderately in 2008-09, allowing for greater propensity for consumers to spend and facilitate travel and tourism.
Oil production is expected to increase in response to the high amounts of capital investment and exploration activity that has occurred over the last few years as a result of historically high oil prices. While the oil price has shrunk in recent months, airlines are likely to retain fuel surcharges on tickets.
The entry of Tiger Airways in November 2007 will have continuing effects on this industry, as it represents a threat to the market share of the low-cost airlines and will increase the level of competition in the industry. Unlike previous domestic airline providers – which have been forced out of business relatively quickly – it is predicted that the three major players Qantas, Virgin and Tiger will maintain their presence in this industry over the outlook period.
Industry revenue growth is forecast to increase throughout the outlook period, but annualised growth will be lower than the current performance period due to an expected slowdown in both the global and Australian economy. A modest growth in value added is expected over the five years to 2013-14. Profitability is expected to fall early in the outlook period, with prolonged higher fuel costs having an adverse effect on airlines.
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IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au
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