Aviation Performance in NSW

Aviation Performance in NSW 2015-16 November 2016 This report by Tourism Futures International for Destination New South Wales reviews the operating environment and aviation performance of Sydney and NSW over 2015 and into 2016. Key Findings International Traffic Performance: Sydney Airport is Australia s major gateway for international visitors, securing 40% of total international arrivals to Australia in 2015. During 2015, 3.0 million international visitors arrived in Australia via Sydney Airport, up 7.4% on the previous year. Sydney s top 5 source markets (China, NZ, USA, UK/Ireland and South Korea) accounted for 55% of all visitors; the next five (Japan, Singapore, HK, India and Canada) accounted for 17%. China is the major growth market for Sydney Airport with a compound annual growth rate of 15.9% over the five-year period 2010 to 2015. During 2015, China contributed almost one-third (32%) of the increase in visitor arrivals to Sydney. China was followed by the USA, contributing 17% to visitor growth, Korea (8%) and India (7%). Of the 44.8 million seats operated to/from Australia on scheduled international passenger services during 2015, Sydney Airport accounted for a stable 39.5% (17.7 million seats). Seat utilisation at Sydney Airport was 82.2% (including transit passengers). Domestic Traffic Performance: The 14 major Sydney interstate competitive routes accounted for 41% of the total Australian domestic passenger traffic in 2015. Of the higher passenger volume routes, growth was strongest on the Sydney/Melbourne and the Sydney/Cairns routes, while passenger numbers on the Sydney/Perth route continued to decline. Overall passenger numbers on the 14 major routes increased by 1.6%. By the end of 2015, the number of routes connecting Regional NSW to Sydney had fallen to 24 (from 47 in the final quarter of 2000). Fourteen of the Sydney intrastate air routes were deregulated and 10 were regulated The top 8 Sydney intrastate routes (all deregulated) accounted for 82% of the NSW air routes to and from Sydney Airport in 2015. The average annual passenger growth over the past five years has been strongest to Ballina, Armidale and Tamworth. Of the 10 regulated routes, growth over the past five years has been strongest to Moree.

Sydney International Inbound and Outbound Performance Figure 1 shows the international visitor arrivals at Sydney Airport over the period from January 1995 to March 2016. It also shows some of the key aviation and non-aviation events that have had an impact on worldwide and Australian air traffic. Three new full service carriers launched Sydney services - American Airlines from Los Angeles, ANA from Tokyo (Haneda) and Xiamen Airlines from Xiamen and Fuzhou. Early 2016 saw the entry of Qatar Airlines into Sydney. Figure 1: Sydney Airport Visitor Arrivals, January 1997 to March 2016 Source: ABS visitor arrivals data. Significant developments over 2015 and into 2016 include: Air India ended its daily triangular service from Delhi to Sydney and Melbourne from May 2015, and introduced nonstop services to each port in both directions. Sydney B787-8 services increased from three weekly to four weekly in June 2015. Xiamen Airlines commenced a thrice weekly B787-8 service from Fuzhou in November 2015, and a twice weekly Xiamen service in December. Hainan Airlines commenced a seasonal service from Xi an, operating December 2015- March 2016. The airline previously operated to Sydney during 2011-12. ANA commenced a daily B787-9 service from Tokyo (Haneda) in December 2015. American Airlines commenced a daily B777 Los Angeles service in December 2015; Qantas reduced its services on the route from 14 to 10 times weekly, with a further decrease to daily services from April 2016. Qantas commenced 4 times weekly B747 services to San Francisco in December 2015 (last served this route in 2011). Services increased to 6 times weekly by February 2016. China Southern commenced a thrice weekly A333 service from Shenzhen in January 2016 (adding to existing services from Guangzhou). Qatar commenced a daily B777 service from Doha in March 2016. The service is to be upgauged to an A380 from September 2016. 2

AirAsia X Sydney/Kuala Lumpur services increase from daily to 11 times weekly in June 2016 and to twice daily from October 2016. Most notable has been the rapid increase in services from China. In 2010, three mainland Chinese airlines (plus Qantas) were operating regular scheduled services to Sydney from the 3 major Chinese gateways. In December 2015, six Chinese airlines were operating services to Sydney from 7 Chinese cities. In terms of major country-contributors to visitor arrivals in Sydney during 2015, the top 5 source markets for visitors were China, NZ, USA, UK/Ireland and South Korea which accounted for an aggregate 55% of all visitors with the Top 10 accounting for 72%. China s increase to be the top market is extraordinary given it represented just 5.5% of Sydney s inbound markets in 2005. Over 10 years, visitor arrivals from China have recorded a compound annual growth rate of 13.3% (Table 1). Table 1 summarises Sydney s performance in its major visitor source markets over the past five and ten year periods. Over the five year period, 2010 to 2015, overseas visitor arrivals to Sydney have increased at a compound annual growth rate (CAGR) of 3.9%. Since 2010, Sydney has increased its share of Australian arrivals from Japan, Singapore, Malaysia and the Philippines. Sydney Rank 2015 Table 1: International Visitor Arrivals to Sydney, Growth and Australia 2015 compared with 2010 and 2005 Market Aust 2015 Five-year Comparison 2015-2010 Ten-year Comparison 2015-2005 CAGR 5Yr Aust 2010 Chg in Share (ppt) CAGR 10Yr Aust 2005 Chg in Share (ppt) 1 China 43.7% 15.9% 48.0% -4.3 13.3% 45.6% -1.9 2 NZ 33.1% 1.2% 35.7% -2.7 1.6% 34.1% -1.0 3 USA 55.7% 2.5% 65.0% -9.2 2.0% 63.2% -7.5 4 UKI 38.5% -0.8% 42.1% -3.5-2.0% 45.3% -6.8 5 South Korea 66.4% 0.6% 67.4% -1.1-2.0% 73.2% -6.8 6 Japan 36.2% 0.5% 30.6% 5.6-2.9% 24.0% 12.2 7 Singapore 28.4% 10.6% 25.2% 3.2 6.6% 24.1% 4.3 8 Hong Kong 43.0% 4.6% 49.6% -6.5 2.2% 48.7% -5.7 9 India 36.9% 11.7% 37.0% -0.1 9.1% 54.8% -17.9 10 Canada 58.4% -0.8% 66.4% -8.1 1.7% 65.6% -7.2 11 Germany 41.1% -1.0% 49.8% -8.7 0.8% 48.6% -7.5 12 Malaysia 20.8% 19.2% 13.1% 7.6 6.1% 24.0% -3.3 13 Indonesia 40.3% 4.5% 41.3% -1.0 7.4% 36.6% 3.8 14 France 44.9% -0.6% 53.6% -8.8 4.0% 55.1% -10.3 15 Taiwan 37.6% 5.9% 41.7% -4.1-0.6% 46.9% -9.3 16 Philippines 53.3% 16.5% 43.0% 10.4 10.1% 54.1% -0.7 17 Middle East 37.3% 0.1% 41.4% -4.1 2.9% 45.6% -8.3 18 Thailand 42.3% 1.0% 43.1% -0.7-0.6% 47.7% -5.4 Other 42.3% 2.2% 46.1% -3.8 3.4% 47.9% -5.6 Total 40.4% 3.9% 43.0% -2.5 2.6% 42.7% -2.3 Notes: CAGR Compound Annual Growth Rate; ppt Percentage Point Change. Totals may not sum due to rounding. Source: ABS and TFI. Figure 2 provides a rolling 12-month sum of international short term visitor arrivals and resident departures 1 at Sydney Airport from January 1995 to March 2016. Note the extent to which the Australian resident growth has outpaced visitor growth since 2004; the visitor share of total residents plus visitors fell from 58% in 2000 to a low of 43% by 2012. This outbound travel 1 International Short Term Visitor Arrivals and Resident Departures: overseas visitors whose intended stay in Australia is less than 12 months, residents who intend travelling overseas for less than 12 months. 3

growth has been built upon strong growth in the Australian economy and incomes, the high value of the Australian dollar (which at the same time, discourages international inbound travel to Australia) and by the entry and increased penetration of low cost carriers into the Australian international market. In turn, the economic developments were influenced strongly by the mining boom fuelled by strong growth in China in particular. With the end of the mining investment boom and fall in commodity prices, the value of the Australian dollar has fallen against many currencies. As a result, outbound travel by Australian residents has slowed while international visitor arrivals have grown at a faster rate over the same period. Over the 5 year period to 2013, resident departures from Sydney had grown at an average annual rate of 6.4% compared with average annual growth of only 2.0% in visitor arrivals to Sydney. Over the last 2 years, 2014 and 2015, the average annual growth in resident departures from Sydney slowed to 2.4% while visitor arrival growth increased to 6.4%. By 2015 the visitor share of total residents plus visitors had gained three percentage points on 2012, to 46%. Figure 2: Sydney Airport Visitor Arrivals and Resident Departures, January 1997 to March 2016 Source: ABS Overseas arrivals and departure data. Figure 3 ranks markets by the addition of visitor arrivals from and resident departures to each market via Sydney Airport for 2015. Visitor arrivals are shown on the right hand side and resident departures on the left hand side of the chart. Figure 3 shows the significance of outbound flows for many of the major markets. For the USA, the ratio of residents departing Australia to visitors arriving is around 1.6:1, that is, for every two visitors arriving from the USA there are over three Australian resident departures to the USA. This trend is even more evident for the holiday destinations of Indonesia (3:1), Thailand (5:1) and Fiji (10:1). In comparison, the resident departure to visitor arrival ratio is relatively even for New Zealand, while the Chinese market is dominated by visitor arrivals at a ratio of over two arrivals for each resident departure to China. The top 5 destinations for residents departing Sydney - USA, NZ, UK/Ireland, Indonesia and China - accounted for around 47% of resident departures in 2015. For departures out of Sydney airport over the five-year period to 2015, the strongest growth has been in travel to the Philippines, Japan, India, Singapore and Indonesia. 4

Figure 3: Australian Resident Departures Overseas (by Main Destination) and Overseas Visitor Arrivals (by Country of Residence), to/from Sydney Airport, 2015 Sydney is Australia s largest gateway for visitor arrivals (40.4% market share), followed by Melbourne (24.8%) and Brisbane (15.1%). All cities with the exception of Adelaide and Darwin reported an increase in visitor numbers during 2015 compared to 2014. Sydney is also Australia s major gateway for resident departures (37.9% market share), followed by Melbourne (25.4%) and Brisbane (14.4%). These top three cities, along with the Gold Coast and Cairns, reported an increase in resident departure numbers during 2015 compared to 2014. In terms of aviation capacity, of the 44.8 million seats operated to/from Australia on scheduled international passenger services during 2015, Sydney airport accounted for a stable 39.5%. A total of 17.7 million seats were provided at Sydney with 82.2% of seats utilised (2.0 percentage points up on 2014). The low cost carrier (LCC) share of total Australian international seats has increased over time, from 4% in 2006 to 12% in 2010 and to 18% during the first quarter of 2016. Over the same period, the LCC share of Sydney international seats has also increased from 3% to 5% to 10%. Jetstar had commenced its first international services from Sydney in 2005, followed by AirAsia X and Scoot in 2012 and Cebu Pacific in 2014. The aggregate LCC shares for Australia is expected to continue to increase as new Asian LCCs add longer aircraft types and add longer-haul services. 5

Sydney Domestic and Regional Performance Figure 4 shows the domestic passenger movements at Sydney Airport over the period from January 1997 to March 2016 along with some of the key events impacting on Australian domestic passenger demand. The figure also shows the passenger seat factors on competitive interstate domestic routes to Sydney. Note that from the time of the collapse of Ansett, through to the introduction of the domestic LCCs, Virgin Blue (now Virgin Australia), Jetstar and then Tiger (now Tigerair Australia), the airlines have managed capacity to ensure relatively high passenger seat factors (of over 78% and up to 81.1%). During difficult operating periods, the airlines have reduced capacity when necessary. Figure 4: Sydney Airport Domestic Passengers and Interstate Passenger Seat Factors January 1997 to March 2016 Source: BITRE data. Figure 5 shows the rolling annual sum of passenger numbers on intrastate domestic routes to/from Sydney for the period from 1997 to the December quarter of 2015. The figure also shows the number of ports connected to Sydney via regular air services. Note that in 1997, there were 42 routes connecting Regional NSW to Sydney and 32 routes following the collapse of Ansett. By the December quarter 2015, the number of NSW regional routes to Sydney had fallen to 24. 6

Figure 5: Passengers on Intrastate Domestic Routes to/from Sydney and Number of Operating Routes, Rolling Annual Quarters 1997 to December Quarter 2015 Source: TFI based on Transport for NSW data Table 2 shows seats and passengers on the major Sydney competitive interstate and intrastate routes during 2015. The 14 major Sydney interstate competitive routes accounted for 41% of total Australian domestic passenger traffic in 2015 and for 38% of seats provided across Australia. The top 2 routes, Sydney-Melbourne and Sydney-Brisbane, accounted for 56% of the passengers carried on the competitive Sydney interstate routes and the top 6 routes for 87%. The fastest growing Sydney interstate routes for 2015 were the smaller routes where growth is over a low base; to/from Ayers Rock and Hamilton Island. Of the larger routes, growth was strongest to/from Melbourne, up 4%, while passenger numbers to/from Perth declined by 2%. Overall passenger numbers on the 14 major routes increased by 1.6%. Eight of the largest Sydney regional routes are competitive with at least 2 airlines operating for most of during 2015; up from 6 routes in 2013 following the entry of Regional Express to Armidale in March 2014 and the entry of Virgin Australia to Tamworth in May 2015. Sydney- Ballina was the fastest growing of the major regional routes in 2015. An additional 16 Sydney smaller, non-competitive, regional routes were operational during, or for part of, 2015. Transport for NSW data indicates that these routes accounted for around 18% of passengers on Sydney-linked intrastate air services during 2015. 7

Table 2: Seats and Passengers on Major Sydney Competitive Interstate and Intrastate Routes, Year-end December 2015 Sydney to/from: Interstate Routes Number 000 Passengers Change on 2014 Total Number 000 Seats Change on 2014 Total Pax Load Factor Melbourne 8,613 3.6% 36.7% 10,589 5.2% 36.2% 81.3% Brisbane 4,476 0.6% 19.1% 5,603 0.2% 19.2% 79.9% Gold Coast 2,618 0.9% 11.2% 3,134-1.6% 10.7% 83.6% Adelaide 1,831 1.0% 7.8% 2,340 0.6% 8.0% 78.3% Perth 1,761-2.1% 7.5% 2,241-1.2% 7.7% 78.6% Sum of Sydney Interstate Routes Intrastate Routes 23,471 1.6% 100.0% 29,244 1.2% 100.0% 80.3% Ballina 358 11.9% 22.5% 439 6.4% 19.3% 81.6% Coffs Harbour 335-2.7% 21.1% 444-2.3% 19.5% 75.4% Albury 217-3.7% 13.6% 336-0.8% 14.8% 64.7% Dubbo 187-5.0% 11.8% 293-2.8% 12.9% 63.8% Port Macquarie 185-1.3% 11.6% 268 0.6% 11.8% 69.2% Wagga Wagga 184-0.7% 11.6% 290 4.1% 12.7% 63.6% Armidale (a) 125 7.8% 205 9.0% 60.8% Tamworth (b) 95 153 62.4% Sum Above excl Armidale & Tamworth 1,467 0.5% 100.0% (c) 2,070 0.8% 100.0% (c) 69.5% Note: Individual routes shown are restricted to those with an average exceeding 8,000 passengers per month where two or more airlines operate in competition and includes carriage by Australian international airlines operating between Australian airports as part of an international flight. Intrastate Route data may vary to Transport for NSW Intrastate Regional Aviation Statistics. (a) Armidale-Sydney route included from May 2014, prior data not shown. (b) Tamworth-Sydney route included from June 2015, prior data not shown. Totals may not sum to 100% due to rounding. (c) Share includes Armidale. Source: TFI based on data from BITRE. Aviation Outlook The International Monetary Fund has been progressively lowering its global growth forecasts. As a result of uncertainties surrounding the impact of the Brexit decision and weaker than expected growth in the United States, the 2016 growth forecast for the advanced economies has been marked down to 1.6% in the most recent forecast. Global growth is now projected to slow to 3.1% in 2016 before recovering to 3.4% in 2017. The outlook for the emerging Asian economies is reported to have improved with expectations of lower interest rates in advanced economies, reduced concern about China s near-term prospects following policy support to growth, and some firming of commodity prices. Growth in all emerging markets and developing economies combined is expected to strengthen slightly in 2016 to 4.2%, led by 7.6% growth in India, 6.6% in China and 4.8% in the ASEAN-5 countries. Oil prices fell to a 12-year low in January 2016 with the Brent price of US$31 per barrel the lowest seen since December 2003. While prices have since increased, they remain at a level which is still around half the average monthly price of the past 5 years. The low oil prices have encouraged the growth in international route development. Allied with the greater penetration of the new aircraft types such as the B787 and A350, airlines are able to consider routes that would not have offered potential profit just a few years ago. Assuming oil prices remain below US$60 for some time and given the growth in airline routes using the new aircraft types and the growth of LCCs across Asia, the prospects for international visitor growth over the next few years look positive. The Australian dollar has fallen in value against most currencies, lowering the relative cost of a visit to Australia while making it more expensive for Australians to travel overseas. The monthly Trade Weighted Index and the USD to AUD exchange rate are back down to around longer term averages. While the AUD is expected to rise as commodity prices rise, it should remain at or marginally above its long-term average range. 8

The end of the mining investment boom in Australia has seen a change in State performances with economies in the former strong mining states (Western Australia and Queensland) slowing and with NSW and Victoria improving. Tourism Research Australia (TRA) is forecasting an average 5.5% annual growth for inbound to Australia over the next 5 years. Overall China and Asia represent the major growth markets for tourism to Australia. TRA forecasts that China and the rest of Asia will contribute just over 70% of the total visitor growth to Australia over the next decade. China alone will contribute around 43%. China remains the critical story for international tourism to Australia and elsewhere. By the end of 2016, six Chinese airlines plan to be operating to Sydney from 13 Chinese cities, amongst the largest 30 urban agglomerations in China. Under current plans, the number of China-Australia city pair routes will increase to 26 by December 2016, up from 16 six months earlier. From January 2017, Qantas will be operating daily flights between Sydney and Beijing. This service will mark Qantas return to the route for the first time since 2009 adding to existing daily return services to Shanghai and 28 return services a week to Hong Kong. Virgin Australia is also planning new services to Greater China in 2017, with approval to commence daily A330 services to Beijing and to Hong Kong by June 2017. The growth in domestic air travel remains sluggish due to a number of factors including low income growth and low consumer confidence. However the lower value of the Australian dollar should contribute to an increase in domestic travel and TRA are forecasting annual increases in domestic overnight travel of 5% in 2016/17. The next wave of domestic airline capacity is expected in 2017/18 with the commencement of delivery of Jetstar s A320neo aircraft and Virgin Australia s B737MAX aircraft. 9