REGIONAL AIRPORTS PROJECT STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

1 EXECUTIVE SUMMARY 3 2 INTRODUCTION 7 3 METHODOLOGY 11 4 MARKET CHARACTERISTICS 13 5 AIRPORT CASE STUDIES 22 Contents 6 SWOT ANALYSIS 36 7 THE KEY CRITERIA FOR INTERNATIONAL AIR SERVICES 39 8 ADDITIONAL CONSIDERATIONS 43 9 AIRLINE DRIVERS 47 10 CONCLUSIONS AND ACTIONS 52

REGIONAL AIRPORTS PROJECT STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

FIGURE 2-1 PROJECT VISION ...... 7 FIGURE 2-2 KEY AVIATION DRIVERS FOR IN 2012...... 8 FIGURE 3-1 STAKEHOLDERS ...... 12 FIGURE 4-1 MARKET VISITATION ...... 14 FIGURE 4-2 STOPOVERS BY MARKET ...... 15 FIGURE 4-3 CHINESE VISITATION GROWTH...... 15 FIGURE 4-4 CHINESE VISITATION BY DESTINATION ...... 16 FIGURE 4-5 TIER A AIRPORTS: DOMESTIC PASSENGER TRAFFIC ...... 17 FIGURE 4-6 TIER A AIRPORTS: INTERNATIONAL PASSENGER TRAFFIC ...... 18 FIGURE 4-7 TIER B AIRPORTS: DOMESTIC PASSENGER TRAFFIC ...... 18 FIGURE 4-8 TIER B AIRPORTS: INTERNATIONAL PASSENGER TRAFFIC ...... 19 FIGURE 4-9 LOAD FACTORS ...... 20 FIGURE 5-1 MARKET POSITIONING OF TIER B AIRPORTS ...... 22 FIGURE 5-2 INTERNATIONAL ROUTE NETWORK 2012 ...... 23 FIGURE 5-3 ADELAIDE INTERNATIONAL PASSENGER GROWTH ...... 24 FIGURE 5-4 ADELAIDE INTERNATIONAL FLEET MIX AND AIRLINE MARKET SHARES ...... 24 FIGURE 5-5 INTERNATIONAL PASSENGER GROWTH...... 25 FIGURE 5-6 CAIRNS INTERNATIONAL FLEET MIX AND AIRLINE MARKET SHARES ...... 26 FIGURE 5-7 DARWIN INTERNATIONAL ROUTE NETWORK 2012 ...... 27 FIGURE 5-9 DARWIN INTERNATIONAL AIRLINE MARKET SHARES ...... 28 FIGURE 5-10 DARWIN INTERNATIONAL CARRIER TYPE AND FLEET MIX ...... 28 FIGURE 5-11 GOLD COAST INTERNATIONAL ROUTE NETWORK 2012 ...... 29 FIGURE 5-12 GOLD COAST INTERNATIONAL PASSENGER GROWTH ...... 30 FIGURE 5-13 GOLD COAST INTERNATIONAL AIRLINE MARKET SHARES AND FLEET MIX ...... 31 FIGURE 5-14 INTERNATIONAL PASSENGERS ...... 31 FIGURE 5-12 NORTH AUSTRALIAN TIER C AIRPORTS INTERNATIONAL ROUTE NETWORK SPANNING 2000-2012 ...... 33 FIGURE 5-13 SOUTH AUSTRALIAN TIER C AIRPORTS INTERNATIONAL ROUTE NETWORK SPANNING 2002-2004 ...... 34 FIGURE 7-1 LENGTHS BY TIER AIRPORTS ...... 42 FIGURE 7-2 FLEET MIX OF CURRENT INERNATIONAL OPERATIONS TO AUSTRALIA ...... 42 FIGURE 8-1 REGIONAL AIRPORT HURDLES ...... 43 FIGURE 8-2 AIRPORT RELATED CHARGES ...... 45 FIGURE 8-3 HURDLES FOR CIQ PROVISION AT REGIONAL AIRPORTS ...... 46 FIGURE 9-1 AIRLINE CLUSTERS ...... 47 FIGURE 9-2 AIRLINE DECISION-MAKING ...... 48 FIGURE 9-3 SOURCES OF PASSENGERS TO ENHANCE SUSTAINABILITY ...... 50

REGIONAL AIRPORTS PROJECT STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

FIGURE 9-4 AIRLINE CHECKLIST FOR NEW ROUTE POTENTIAL ...... 51 FIGURE 10-1 ROLES OF KEY STAKEHOLDERS IN ACCESS DEVELOPMENT ...... 53

TABLE 2-1 CATEGORIES OF AIRPORTS ...... 9 TABLE 4-1 TIER A AIRPORTS: PASSENGER GROWTH RATES ...... 18 TABLE 4-2 TIER B AIRPORTS: PASSENGER GROWTH RATES ...... 19 TABLE 6-1 TIER A AIRPORTS: SWOT ...... 37 TABLE 6-2 TIER B AIRPORTS: SWOT ...... 38 TABLE 6-3 TIER C AIRPORTS: SWOT ...... 38 TABLE 7-1 CRITERIA FOR ATTRACTING INTERNATIONAL SERVICES ...... 40

REGIONAL AIRPORTS PROJECT STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

The Department of Resources, Energy and Tourism, on behalf of the Tourism Access Working Group, has undertaken substantial investment into understanding how regional airports in Australia can overcome the 1 Executive challenges and impediments to attracting international air passenger services. Particularly, this investment has included a three stage project titled ‘The Regional Airports Project’, which was developed to investigate the reasons behind the limited uptake from foreign airlines of the regional Summary 1 bilateral air services packages (or ‘The Packages’ ) developed by the Australian Government. Subheadingt Stage One of this project identified potential issues affecting the use of the Regional Packages. This Stage One research was completed by Aspirion Consulting and concluded that awareness of the Packages themselves is low amongst foreign airlines and a limited understanding exists of the benefits the Packages provide to airlines and regional Australian airports. The solutions identified from Stage One focused on improving the marketing and communication of the benefits of these Packages and a more hands-on role from the Government with airline network planning departments. Stage Two then developed the communication strategy and collateral for promotion of the Regional and Enhanced Regional Packages to target foreign governments and carriers. Stage Three, this project, focuses on factors that drive airlines to make decisions on new international air services and recommendations to regional airports and governments to overcome the challenges and impediments to attracting international services. In the course of this work, Airbiz has consulted extensively with airlines, airports, State Tourism Authorities, aviation industry suppliers as well as other Australian Government Departments, involving 22 one-to-one interviews. Quantitative research into historical performance at airports in Australia and overseas as well as case studies into successful regional international airports (and those without international services) has also been completed. This analysis has resulted in a clear picture of

1 The Packages are defined as follows:

1. The Regional Package – unlimited capacity and access from overseas countries to international airports other than the four major gateways of Sydney, Melbourne, and . 2. The Enhanced Regional Package – additional capacity into the four major gateway airports where services pass through, in one or both directions, a regional airport.

REGIONAL AIRPORTS PROJECT 3 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

destination and regional airport requirements needed to attract new Secondary Findings international air services. It has also highlighted the role and performance The study further highlighted other important considerations in removing of the Packages and Government’s role in facilitating the ongoing growth barriers to growth. of regional air services dispersion in Australia. First, that a destination can increase and develop its international Core Finding visitor numbers without initially having to attract a direct international The most important finding of this Stage Three study is that the Packages air service. The ongoing importance of domestic flights to enable are in themselves not a sufficient reason for an airline to begin a new route connectivity for regional airports beyond the established gateway airports but that airlines will only decide to fly to a region if the business case will continue to be an enabler for growth of international visitors to regional to do so is commercially viable. Australia. Overwhelmingly, the airlines interviewed reinforced that unless a new route Improving these connections can then build traffic towards a ‘critical mass’ will be profitable and the destination meets certain key criteria, then it is of international visitors required to eventually achieve a direct and irrelevant if the Packages exist or not. Those key criteria, determined sustainable international service. through the interview process and essential in determining route Second, regional airports generally have a higher cost per passenger profitability, are outlined below; than gateway airports. This is due to a reduced opportunity to achieve 1. Does the destination have an iconic tourism appeal? economies of scale in core services such as airport management, fuel, air navigation costs, Customs, Immigration and Quarantine (CIQ) and the 2. Is the destinations market catchment (population) 100,000+ people? relativity of costs of other support services at regional airports versus 3. What is the potential for the outbound passenger market economies of scale at gateway airports (such as catering and ground 4. Is there year round demand and what are the 5 year growth handling costs). forecasts? Third, that there is limited awareness of the Packages by foreign 5. Is there a broad passenger mix (Business, Leisure, Visiting Friends airlines. and Relatives (VFR)) and potential for connecting domestic traffic? Actions 6. What is the destination’s geographic position in respect of a potential Stemming from these findings and the consultation process this study has route, what is the appropriate aircraft type and does airport identified a range of actions that airports and governments (Australian infrastructure match? state and local) can undertake to effectively address those issues identified 7. What are the airport’s costs to the airline to operate? above and assist in developing the core finding with potential customers 8. Is there a whole of community approach to supporting a new route (Airlines). (airport, local government, community, State government)? Airports Through the course of this study we have identified that the criteria listed Case studies and consultation has indicated that an Airport should; above should from part of any Airports business proposal to an Airline. In Leverage off strong established international flows with addition, it still considered that the Packages are effectively achieving their domestic connections to capital city gateway airports and to intended role in that they are creating an environment conducive to build domestic frequency and capacity. The long term goal, for growing international air services direct to regional airports, removing some airports, would include building a business case for bilateral impediments and facilitating air services, where they are international direct services by tracking international connections commercially viable. and passengers on domestic flights to demonstrate a sizeable

REGIONAL AIRPORTS PROJECT 4 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

market exists with good growth potential. It will be crucial to Government emphasise the benefits arising from domestic connectivity Case studies and consultation has indicated that governments at all levels and the increased choice in connecting destinations for can assist regional airport growth in the following areas; outbound travel as well as the increased visitor markets able to access the destination. Economic development agencies have a role to play, in aligning strategies and initiatives with the airport’s plans and Build a business case around the tracking identified above and considering the airport as a central pillar of the region’s economic invest in targeted marketing before attracting new opportunity for expansion. Further, economic development international air services and when the market has matured, agencies can co-ordinate the local economy’s role and local work towards the goal of long term sustainable direct flights. business’s participation in the airport’s growth. For example, Include in a business case for a route how it will be sustained collecting and tracking growth in key business segments that will through lower seasonal periods (identifying actions to reduce support new services as well as identifying freight opportunities. seasonality) and how it can draw feeder traffic and not just rely Tourism organisations, industry and partners can assist on point-to-point traffic. through destination and airline co-operative marketing, to Demonstrate in a business case what the forecast for the growth drive demand and have that demand flow through to increased of a route will be over five years, and how that growth is going to seat capacity. The provision of market research to assist smaller be delivered through expanding passenger markets and the airports who do not have the budget or people resources to track passenger mix, as the route matures. their potential growth in international visitors. Also, being present Provide appropriate infrastructure (runway length, passenger at airline meetings (where requested by the airport) and attracting processing ability (Customs, Immigration, Quarantine) and aircraft reciprocal government and tourism support from the corresponding parking positions in particular), understanding market opportunities foreign destination will show a united business case and help to and matching infrastructure to aircraft types are also core actions. build confidence within the airline. Specifically, what type of carriers is the airport likely to attract (i.e. Government and its agencies have a role to play in low cost or full service or a mix) and how can the airport best tailor infrastructure provision too, as not all infrastructure and facilities their product offering to match? and services are under the control of the airport. Air navigation Opportunities at regional airports are around long term strategies, starting aids and services and CIQ facilities and staff resourcing are with building international visitor markets on domestic flights first to necessary to the airport’s international opportunity. The key is to establish a business case for demand. have a policy framework that enables tailored local solutions dependent on the airports needs, particularly in respect of the size It is key to note that airports need to first understand what drives the of CIQ infrastructure required (for example, stakeholder feedback targeted airline and how their destination, market profile and infrastructure suggested that more Quarantine desks are required to be built will fit in that airlines framework and strategy. than are actually used and these desks are built at the expense of Market forces dictate that regional airports must achieve critical mass in the airport). Consultation with local operators on tailored local order to be sustainable and that every party has a role to play in marketing needs would go a long way to improving costs in this area. the destination and the opportunity in order to assist regional airports to Consider Principle 2 in the National Passenger Facilitation achieve appropriate levels of market demand and drive down the (lack of) Committee (NPFC) Provision of Government Services New economies of scale. (the Guide) which suggests a five year commitment is required from an airline to operate a route, which is

REGIONAL AIRPORTS PROJECT 5 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

an unrealistic period for an airline to be able to commit to in a The recommendations of this report focus on commercial criteria commercial environment. considered by airlines in network and route planning and how this is Consider Principle 3 in the National Passenger Facilitation relevant to regional airports in Australia. Committee (NPFC) Provision of Government Services New Airlines will only fly to an airport if it services a region and/or destination International Airport (the Guide) which states no airport should that possess key commercial criteria that enable and support long term experience “unreasonable” barriers to entry into the market. sustainable flights. Continuation of the Packages is essential to ensure the Stakeholder feedback indicates the current practice could in itself environment supports market-driven decisions and to remove any hurdles be deemed a barrier, in that CIQ services are not in place and or barriers to airlines commencing new international air services to regional many challenges need to be overcome to achieve designation. airports. Future investment should be focused less on building awareness Successful regional destinations have enjoyed the full support of all levels of the Packages and more on governments partnering with regional of local tourism, government, product and local businesses to build an airports which can demonstrate that a profitable business case exists for attractive airline business case. It is not just about tourism but instead a new international flights, by providing research and marketing support to whole economic development plan to support access growth. demonstrate market demand exists and can be sustained and by removing hurdles around physical operation and facilitation of flights. Usually driven by the airport, the collective group of stakeholders target various levels of the airline, travel trade and business to develop a series of key messages to the airline and commence building the story of market demand. In most cases, the conversion of a new international air service can take 3-5 years from idea conception and first approach to operation of a viable new airline service. Thus, a long-term strategy and supporting investment is needed. State Tourism Organisations and Regional Tourism Organisations also need to embrace the need for outbound travel to ensure sustainable air services for the long term. The Australian Government’s key role is to ensure a framework exists that will reduce the hurdles for regional airports to attract and operate new international air services. There is a need for Government to work closely and consult with individual operators under an objective of ‘cost reduction’. The most relevant for Government assistance can be tailored solutions for CIQ to match individual airport needs, partnering with airports and regional communities to incentivise new flights by discounting the Passenger Movement Charge (PMC) for the initial start-up phase (normally seen as 12 months) for a new route.

REGIONAL AIRPORTS PROJECT 6 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

The Department of Resources, Energy and Tourism, on behalf of the Tourism Access Working Group, has undertaken substantial investment 2 Introduction into understanding how regional airports in Australia can overcome the challenges and impediments to attracting international airline services. Particularly, this investment has included a three stage project titled ‘The Regional Airports Project’, which was developed to investigate the reasons behind the limited uptake from foreign airlines of the regional bilateral air services packages developed by the Australian Government. This report is for Stage Three of this project and discusses factors that drive airlines to make decisions relating to new international air services. Core Finding The core finding from this Study is that airlines will only decide to fly to a region if the business case to do so is commercially viable. Recommendations for growth Therefore an Airport should provide a clear business case, addressing key criteria, in support of its proposal for international operations. Describe key Key feedback from airlines illustrating the importance of the commercial elements for business case includes: attracting international “Market demand is the number one driver for a new route decision. airlines to regions Where is the demand coming from currently and can it be stimulated into Identify key the future?” [Airline] challenges “The [Packages] are not part of our consideration set, if we know we can profitably operate a route, we will seek permission at that point” [Airline] Therefore this report discusses information critical to developing a coherent business case and addressing key airport and airline decision making criteria. The report is structured in a way which; FIGURE 2-1 PROJECT VISION First illustrates the current aviation environment within which airlines Source: Airbiz and airports operate, key in developing the business case, Secondly identifies, issues and challenges that airports face in attracting international airline services, Subheadingt Third it presents airport case studies where relevant airports have secured international air services, and Finally determines through analysis and consultation the ways airports and governments can work to improve the potential for development of international airline services.

REGIONAL AIRPORTS PROJECT 7 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

2.1. Project Vision networks can effectively feed and connect Australian and foreign travellers to an expansive network at a more effective cost. Alliances and Figure 2-1 on the previous page outlines the project vision for Stage 3. At partnerships will play an increasingly important role in the selection of both the conclusion of this report the reader should be aware of how airlines domestic and international air services to regional airports in Australia, decide on a new route, the challenges and commercial realities for regional Figure 2-2 illustrates this current aviation environment. airports wanting international air services, where regional airports can position themselves and how they can work with key stakeholders to grow international visitors to their region.

2.2. Australia’s Current Aviation Environment Capacity growth Polarising – corporate domestic is mainly Australia’s aviation environment is dynamic and reflective of the macro & leisure trends in the Australian economy. Typically, aviation growth travels in with seven to ten year cycles, led by economic conditions, airline restructuring and natural events. The most recent cycle has been driven primarily by leisure demand stimulated by lower prices delivered by low cost carriers (LCCs) for discretionary travel and tourism. In contrast, Australia’s current aviation environment can be characterized by the polarizing of air service growth to mining destinations (e.g. Western International growth driven by Middle East Australia) versus high volume leisure destinations (e.g. Gold Coast, Alliance - Reliance ). & Chinese Carriers in Regional Australia has recorded steep growth spikes in remote past 2 years destinations responding to mining company logistical needs to fly-in and fly-out (FIFO) employees. Of the ten fastest growing domestic routes in 2011, nine featured resource rich regions or hubs, such as Perth, Karratha, Brisbane and Mackay. Both and are focused on the corporate market and high yielding traffic as well as capturing this “explosion” of FIFO travelers. Regional domestic Leisure capacity At the other end of the spectrum are Jetstar and Tiger Airways who are traffic explosion due to declining, better bang focused on leisure and high volume tourism destinations. In addition, mining for buck elsewhere Jetstar is targeting Australian outbound travelers to and Asia. Jetstar is currently the high growth capacity airline for Australia, being the only major airline adding significant new aircraft (and thus additional seat capacity) into the Australian domestic market in the 2013-2015 period. FIGURE 2-2 KEY AVIATION DRIVERS FOR AUSTRALIA IN 2012 Alliances and airline partnerships are evidently the way of the future. Both Source: Airbiz Qantas and Virgin Australia joined with major Middle Eastern and Asian carriers in the past 12 months to facilitate network expansion without having to purchase new aircraft. By strategic partnering with airlines servicing Europe, Asia, America and the Middle East, Australian domestic

REGIONAL AIRPORTS PROJECT 8 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

2.3. Categories of Airports in Australia 2.4. Regional Growth in Domestic Services The terminology used to categorize airports in Australia for consideration of Regional airports in Australia have experienced significant growth at key potential international access varies between government, airports and resource rich and iconic tourism destinations. This has put pressure on tourism representatives. Table 2-1 outlines the categories used in this existing airport and supporting infrastructure (in particular accommodation report to describe gateway or capital city airports, regional airports rooms available in mining towns) and also raised the aspirations of some currently with international air services and regional airports with small regional airports and municipal councils to investigate options for direct volumes or no international air services. international air services.

Key feedback from airlines illustrating the importance of an airport having Tier A Tier B Tier C existing critical infrastructure and services include:

Gateway Airports Regional International Regional Airports “Regional airports with sizeable domestic flights and capacity are designated with without existing generally less cost (to operate to) as they have direct and other support existing international international services services already in place (i.e. ground handling and catering)” [Airline] services and and/or permanent permanent Customs, international designation Immigration and and/or CIQ 2.5. International Services to Capital City vs. Regional Airports Quarantine (CIQ) Most regional airports with existing international services have recorded solid growth in international passengers over the past five years. This has Sydney Gold Coast Sunshine Coast been mainly due to new long haul low cost carriers and the increase in Melbourne Adelaide Port Headland Chinese visitor demand for Australia. These carriers work to lower cost Brisbane Cairns bases than full service carriers, look to new ways of stimulating demand and have presented opportunities to airports such as the Gold Coast, who Perth Darwin previously only had short-haul international services to New Zealand. The Gold Coast has recorded a compound average annual growth rate of 33% Broome in international passenger movements (inbound and outbound) from 2000 to 2011. Melbourne Avalon Whilst international services to the regional airports have increased Newcastle substantially in the past 10 years, it is essential to put this growth in All other airports perspective.

TABLE 2-1 CATEGORIES OF AIRPORTS Tier A or Gateway capital city airports account for 92% of all international seats to and from Australia. Source: Airbiz Tier B or regional airports represent only 8% of total international seats. Reasons why gateway airports have historically serviced the majority of international passenger movements are discussed later in this report. Looking to the future, regional airports will likely increase the total number of air services operating to their airports, however gateway airports will also continue to grow and will most likely always maintain the major market

REGIONAL AIRPORTS PROJECT 9 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

share of international airline capacity to Australia. This report will Bilateral Regional Airport Packages demonstrate that a key to growth for regional airports is to leverage off While limited awareness was evidenced during stakeholder consultations domestic connections to capital city gateway airports and to build domestic for Stage Three of both the Regional Entitlements Package and the frequency and capacity with, for some airports, the long-term goal of Enhanced Regional Package, it is clear that this limited awareness is not a building a business case for non-stop international services by tracking true hurdle for attracting international air services to regional ports. international connections on domestic flights and demonstrating a sizeable Feedback around the Enhanced Regional Package was particularly market exists with good growth potential. negative from all airlines. This is based on the historical evidence within Furthermore this report will show that success is dependent on meeting the airline industry that triangulation reduces the overall profitability of a key airline commercial imperatives as well as developing a clear niche for route. Thus the triangulation concept will never be appealing because it is the destination and matching market demand to the right airline partner not commercially viable. Triangulation without cabotage rights results in a and route development opportunities. ‘dead-leg’ for the short sector of any route with a stop over, making the overall route unviable. Triangulation also means a reduction in the quality of the service offered to passengers, whereby the airline does not 2.6. Key Stakeholder Feedback adequately service either of the two ports on the route and offers a less The following identifies key feedback from stakeholders through the attract product than a competing airline who is operating a non-stop consultation process. service. Cost Comparison - Regional Airport vs. Capital City Airport Many stakeholders perceive that operating an international air service to a regional airport provides a cost advantage over a capital city airport. Airbiz has conducted numerous studies into this perception and the evidence consistently demonstrates that regional airports are more expensive for international airline operations when considering unit costs of operation. Unfavourable cost of operation for an airline is the number one issue confronting regional airports. Many of these costs are beyond the control of airport management, including fuel, air navigation costs and the relativity of costs of other support services at regional airports versus economies of scale at gateway airports (such as catering and ground handling costs). There is no simple cost advantage for international airlines to fly to a regional airport in Australia. An airline indicated the importance of year round sustainability by saying: “Regional airports do not really have any cost advantage compared to Capital City airports and it is more difficult to attract multiple passenger segments. I always ask, how is my aircraft going to be filled 365 days a year?” [Airline]

REGIONAL AIRPORTS PROJECT 10 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

3.1. Stage 3 Methodology The Airbiz approach to investigating this study has been to combine a 3 Methodology hands-on approach to regional international airport development with quantitative data analysis supported by findings from stakeholder interviews and qualitative assessment. The approach is based on extensive experience in attracting new international airline services to regional airports. Multiple case studies of airports with various degrees of success and experience in attracting international air services were examined. The methodology is: 1. To identify existing market characteristics and appropriate airport considerations and actions. 2. To analyze the characteristics of the three tiers of airport groups though a SWOT analysis,; — Tier A: Capital City (gateway airports), — Tier B: Successful international regional ports, — Tier C: Regional ports without current international flights. 3. Quantitative analysis of airport performance. 4. Case studies of relevant airports and destinations. 5. Identifying essential and desirable criteria for regional airports to attract sustainable international services. 6. Interrogation of the drivers of airline decision making by identifying the issues and positioning of regional airports through airline interviews. 7. Conclusions and actions.

Publicly available data was sourced from a range of organisations including the Tourism Research Australia, the Bureau of Infrastructure, Transport and Regional Economics (BITRE) and others. Sabre Airport Data Intelligence Analysis was also used in the quantitative analysis. In addition, ( Airports Ltd) granted permission for the reference to the results of a study completed by Airbiz in May 2012 looking at the total cost for an airline operating to a regional airport versus capital city airports. A half-day workshop was held with representatives of the Department of Resources, Energy and Tourism on Thursday 14 September 2012 to

REGIONAL AIRPORTS PROJECT 11 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

discuss findings and recommendations from the first draft Stage 3 report. Feedback supplied by the Regional Sub-committee of the Tourism Access Working Group has been included in this report. Informal Airports Airlines Others 3.2. Stakeholders Interviews Twenty-two stakeholder interviews were conducted over the months August/September 2012. Airbiz held discussions with a further five individual stakeholders on air service development requirements in the past six months which are relevant to this project. Queensland Airports Department of Ltd AirAsia X Infrastructure & A range of views are represented in these qualitative interviews that have Transport been incorporated throughout this report. Stakeholders who were Cairns Airport Virgin Australia Customs interviewed are outlined in Figure 3-1. Darwin Airport Etihad Tourism Australia

Adelaide Airport Jetstar SATC AirServices Tourism WA Cebu Pacific* Tourism NT Eastern Airlines*

Tourism Qld Airlines* Tiger Airways

Queenstown Airport Qantas Airways* TTF

FIGURE 3-1 STAKEHOLDERS

*These stakeholders have been consulted on air service development by Airbiz within the past six months. Source: Airbiz

REGIONAL AIRPORTS PROJECT 12 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

In order to assess the potential for international air service opportunities it is important to understand the core market dynamics within which the Airports 4 Market operate, this section defines those core market characteristics. 4.1. Importance of Outbound Travel to Aviation Sustainability Characteristics The significance of the Australian resident outbound market cannot be underestimated in this study. Inbound visitation continues to grow at a steady, relatively mature rate. However seat capacity growth in recent years has been primarily led by the Australian outbound market, driven by an aspirational desire to travel overseas. This has in part been motivated by price levers applied to the market by LCCs such as Jetstar and AirAsia X, putting Asian and New Zealand airlines within reach of a wider consumer market, coupled with a higher Australian dollar giving consumers confidence in their spending power while overseas. Tourism is typically focused on visitors but for airline sustainability, the broader the appeal of a route to different markets, the lower the risk profile of the route. A mix of Australians and international visitors, travelling for a broad range of regions including business, leisure and education will give an airline confidence to grow a route. Therefore a route with a skew towards a strong leisure visitor market only highlights a risk exposure for an airline. Having a good sized population base (usually accepted as 100,000 people or more) and/or a local resident population with a high propensity to travel has three core benefits to an airline in that it: 1. Maintains airline load factors; 2. Reduces seasonality; and 3. Offsets risk of one source market dropping in demand.

4.2. International Visitor Market Trends The following key points illustrate the existing international market trends. New Zealand is the No 1 source market for Australia, however the market has been relatively static for the last 8 years at 19-20% market share.

REGIONAL AIRPORTS PROJECT 13 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

The Japanese market has more than halved over the past ten years, 4.3. International Visitor Travel Patterns from 612,000 in 2002 to 311,000 in 2012, and from 16% to 6% market As visitor markets evolve, wholesalers and consumers become more share. confident and experienced in visiting Australia. The potential for visitors to The Chinese market has grown from the smallest to the second largest, visit only one destination (mono-destination travel) increases over time, as with significant growth in the past three years. 156,000 Chinese visited repeat visitation generates travel beyond the major gateways/capital cities. ten years ago, to 530,000 in the most recent year (2011), increasing Decreasing the complexity of itineraries and increasing travel to one or two market share from 2% to 10%. centre’s only is a market of significant interest to regional airports, as direct The Malaysian and Singaporean visitor markets have exhibited steady services become viable, particularly as part of a hub operation. For example, growth over the past five years, as capacity has been added from those Jetstar successfully operates the largest volume of seat capacity in the markets. Australia- market, to Gold Coast and Cairns Airports only. Popular Japanese stopovers such as Sydney are served on domestic sectors, with How these markets behave as they mature can give an indication of the regional airports serving as the hubs, dispersing Japanese visitors to the what the expectation is for the Chinese market in the next five years. capital cities over a domestic network. Figure 4-1 depicts the volumes and trends for visitation by various markets On this basis, the evolution of markets such as Japan, which now since 2000. features a majority mono-destination profile, highlights future opportunities for regional international airports. As Chinese Volume of visitors from selected markets consumers become more familiar with the regional destinations, demand will increase and reach a point at which direct flights as part of 1,200,000 a one or two centre itinerary become viable, and regional airports can target a market with huge potential for growth. Cairns Airport has 1,000,000 recently achieved this with China Southern and China Eastern Airlines.

800,000 Multi-stop itineraries also have a significant impact on the way international airlines service Australia. Australia being an ‘end of line’ destination and a 600,000 long flying distance from key source markets (other than New Zealand)

Visitors means that most international travellers seek to experience multiple 400,000 destinations while on their visit to Australia. This results in high use of domestic flights by international travellers to access desired iconic 200,000 destinations. Furthermore, most visitors only have a short period of time to visit Australia and multiple regions and thus domestic air travel and 0 connectivity is essential. This is a major driver behind the key partnerships of Virgin Australia and Etihad/ and the Qantas-Emirates

relationship. Access to regional destinations via domestic flights enables

YE Mar02 YE Mar03 YE Mar04 YE Mar05 YE Mar09 YE Mar10 YE Mar11 YE Mar12 YE YE Mar01 YE Mar06 YE Mar07 YE Mar08 YE YE Mar00 YE Etihad for example to offer its Middle-Eastern core customer group New Zealand Japan codeshare options (and thus seamless travel arrangements) from Abu Dhabi (SAR of China) Singapore through to Cairns, Canberra or even Ballina. Malaysia China (excludes SARs and Taiwan Province) Figure 4-2 illustrates the mean number of stopovers by selected markets. FIGURE 4-1 MARKET VISITATION Source: TRA International Visitor Survey reporting data from April 1999 to March 2012

REGIONAL AIRPORTS PROJECT 14 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

Similarly, but not to the same volume, Queensland destinations have also Mean number of stopovers by selected markets increased Chinese airline capacity over the past 5 years, with direct capacity 2.8 to Brisbane from November 2010 and to Cairns commencing from October 2.6 2012. This growth has been founded on market demand and solid consistent increases in Chinese visitors to key tourism destinations in 2.4 Tropical North Queensland and . 2.2 Comparisons of level of visitation and growth rates to various Australian 2.0 centres by Chinese visitors are shown in Figure 4-3 and Figure 4-4 1.8 illustrating the significant growth achieved across the ports analysed. 1.6 Chinese visitor 10 year AAGR to selected major destinations 1.4 25% 1.2 21% 1.0 20% 17% 16%

15%

YE Mar01 YE Mar02 YE Mar03 YE Mar05 YE Mar06 YE Mar08 YE Mar09 YE Mar10 YE Mar12 YE YE Mar04 YE Mar07 YE Mar11 YE YE Mar00 YE 13%

New Zealand Japan Singapore China Malaysia 11% 11% 10% 10% FIGURE 4-2 STOPOVERS BY MARKET

Source: TRA International Visitor Survey reporting data from April 1999 to March 2012 5%

0% In determining which international source markets to target, regional airports 0% Sydney Melbourne NR/GC Brisbane Tropical Experience Adelaide ACT need to identify and understand these types of market dynamics in order to North Perth present a coherent and relevant business case to potential airlines. Queensland The following is a brief case study which illustrates how Cairns Airport was FIGURE 4-3 CHINESE VISITATION GROWTH able to identify and understand these types of market dynamics and Source: TRA International Visitor Survey reporting data from April 2001 to March 2012 subsequently attract a direct and sustainable international airline service.

4.4. Case Study: Chinese Visitor Dispersal and Australian Airports China is Australia’s fastest growing international source market. To date, airline capacity has been focused on Sydney and Melbourne. In particular, Melbourne’s recent growth reflects market demand for Chinese visitors to Victoria (including business links and visiting friends and relatives traffic (VFR)) plus the strong emphasis has placed on the Chinese market with publicly stated targeted business development initiatives.

REGIONAL AIRPORTS PROJECT 15 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

Chinese visitors to specified major stopover destinations Furthermore, travel within Asia, and to Russia, Africa and South America has 350,000 greater forecast growth potential than to Australia. However, Australia is a significant market to selected foreign carriers, albeit an end-of-the-line 300,000 market. 250,000 The ability for carriers such as Virgin Australia, Qantas and Air New Zealand 200,000 to grow in a global market is now most likely enabled through alliances and 150,000 consolidation with carriers with different geographic positioning and 100,000 significant fleet orders, as reflected with the alliance proposed between 50,000 Qantas and Emirates, and the shift in focus for Qantas from serving Europe 0 through Dubai.

With a similar arrangement in place for Virgin Australia with partners

YE Mar02YE Mar03YE Mar04YE Mar07YE Mar08YE Mar09YE Mar12YE YE Mar01YE Mar05YE Mar06YE Mar10YE Mar11YE YE Mar00YE Singapore Airlines and Etihad, the potential for Middle Eastern carriers to Sydney Melbourne NR/GC serve regional international airports directly has declined. Both Emirates and Brisbane Tropical North Queensland Experience Perth Adelaide ACT Etihad will now access regional international airports through the domestic networks on Qantas and Virgin Australia respectively (Adelaide excluded, FIGURE 4-4 CHINESE VISITATION BY DESTINATION which launches direct Emirates services in November 2012). Source: TRA International Visitor Surveyreporting data from April 1999 to March 2012 As a consequence of this industry consolidation, airlines will be more sustainable as risk is spread and the ability to serve markets by proxy Cairns Airport Case Study – China is extended. As a consequence, the potential for direct flights to Cairns Airport was able to build a business case for direct Chinese service some regional markets has declined, such as the seasonal traffic based on a 21% average annual growth rate of Chinese visitors Middle Eastern visitor market to the Gold Coast (July-September). This to the destination over the past 10 years (travelling on market still has the chance to fly direct to Brisbane and take a ground and domestic connecting flights via Sydney, Melbourne and Brisbane). transfer, or connect over Sydney or Melbourne on a domestic flight. Whilst This demonstrates the importance of building international visitors over this may appear negative for regional international airports, it clarifies the domestic flights first, tracking this to build a business case, investing in airlines’ focus on opportunities in Asian markets, closer to home. marketing before attracting new international air services and when the It is therefore important that as a regional airport begins to build a market market has matured, working towards the goal of long term sustainable and by proxy construct a business case, it considers the alliance situation of flights. airlines it is proposing to target. The airport should take care to identify the

available routes that the target market must utilise to arrive at the destination and also the airline alliances available to those passengers. This involves understanding the travel trade dynamics. 4.5. International Carrier Alliance Significance It is important to note that overseas carriers operate in regional (Asia-Pacific) 4.6. Historical Passenger and Capacity Growth and in the wider global markets, of which Australia is only a relatively small part. Travel in North America and Europe is of greater volume than Australia. The volume of international capacity at the gateway airports is highly This, airports in Australia are more in competition with other international significant with 92% of international seat capacity being concentrated at destinations than their counterparts at home. Sydney, Melbourne, Brisbane and Perth. International capacity has grown at an average annual rate of 4.6% p.a. over the previous 12 years. However

REGIONAL AIRPORTS PROJECT 16 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

growth at regional airports has been greater, at 5.6% p.a., albeit off a lower base. Two-Way Domestic Passenger Traffic - Tier A Historical trends can be characterised as follows: 30 Tier A (Gateway) airports have critical mass in international operations 25 and find growth relatively easy to absorb (although capacity constraints are present at some gateway ports in peak operating times of the day) 20 Tier B (Regional airports) are at a different point in a growth curve and

are still heavily impacted by the addition of one or two new services. 15

However with significant domestic operations and existing international Millions operations, they have the potential to grow internationally. 10 Tier C exhibits more challenges in developing/growing international

services, which will be examined in more detail elsewhere in this 5 document.

- Tier A Capital City Airports 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Figure 4-5 and Figure 4-6 depict historical trends for domestic and BRISBANE MELBOURNE PERTH SYDNEY international passenger traffic at Tier A airports over the period 2000 - 2011. FIGURE 4-5 TIER A AIRPORTS: DOMESTIC PASSENGER TRAFFIC The reduction in domestic traffic in 2011 is mostly related to Tiger Airways ceasing operations (as determined by CASA) in July 2011 and then Source: SABRE Airline Intelligence2000-2011 recommencing services with a reduced fleet and restrictions in place. Table 4-1 summarises compound annual growth rates (CAGR) at the four Tier A airports. Internationally, Melbourne and ’s success in growing their international markets is marked, at 7.1% growth each.

REGIONAL AIRPORTS PROJECT 17 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

Tier B Regional International Airports Two-Way International Passenger Traffic - Tier A Figure 4-7 and Figure 4-8 depict historical trends for domestic and 14 international passenger traffic at Tier B regional international airports over

12 the period 2000-2011. Table 4-2 summarises CAGR at the Tier B airports. Domestically, the impact of Tiger Airways cessation in 2011 can be noted, 10 particularly for Adelaide and Gold Coast Airports.

8 Two-Way Domestic Passenger Traffic - Tier B 8

Millions 6 7 4 6

2 5

- 4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Millions 3 BRISBANE MELBOURNE PERTH SYDNEY

2 FIGURE 4-6 TIER A AIRPORTS: INTERNATIONAL PASSENGER TRAFFIC 1 Source: SABRE Airline Intelligence2000-2011 - 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

ADELAIDE CAIRNS DARWIN GOLD COAST SUNSHINE COAST Airport Growth Rates (CAGR) CY2000-2011 Domestic International FIGURE 4-7 TIER B AIRPORTS: DOMESTIC PASSENGER TRAFFIC Brisbane 5.5% 5.5% Source: SABRE Airline Intelligence2000-2011 Melbourne 4.6% 7.1% Internationally, the individual airport’s trends illustrate the Qantas Group’s Perth 7.9% 7.1% decision to cease its hub at Cairns, and then invest with Sydney 3.6% 3.3% Jetstar in Cairns, Gold Coast and Darwin.

TABLE 4-1 TIER A AIRPORTS: PASSENGER GROWTH RATES

Source: SABRE Airline Intelligence2000-2011

REGIONAL AIRPORTS PROJECT 18 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

Two-Way International Passenger Traffic - Tier B

500,000 Comparison of the growth in Tier A and Tier B airports illustrates that the 450,000 decreased risk associated with broader passenger mixes at Tier A airports is 400,000 appealing to airlines focused on yield as their major metric. In respect of 350,000 international traffic, the graphics clearly illustrate the volatility of international services at Tier B airports It is this volatility that an airline might find 300,000 unattractive and it is this volatility that an Airport should attempt to reduce 250,000 through building international connections on domestic services in the first 200,000 instance.

150,000

100,000 4.7. Sustainability by Airport Tier and Load Factors 50,000 In considering a new international route airlines will consider what load factor - needs to be achieved in order to make a route profitable. Unless this route 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 can be shown to achieve an airline determined load factor, it may not be ADELAIDE CAIRNS DARWIN GOLD COAST considered a viable route (unless subsidized by government).

Full service carriers typically require a minimum average load factor of FIGURE 4-8 TIER B AIRPORTS: INTERNATIONAL PASSENGER TRAFFIC 75% for international flights, while Low Cost Carriers target an average Source: SABRE Airline Intelligence 2000-2011 load factor of 80% to see a flight as commercially viable. Average load factors reported by BITRE for Tier A, B and C airports are highlighted in Figure 4-9 . Tier A airports have consistently recorded strong load factors around 75% while Tier C are much lower. Airport Growth Rates (CAGR) CY2000-2011 For Tier C airports, there may have been operational impacts or restrictions Domestic International on the airline services causing the low load factors in the graph below. For example, some Custom, Immigration and Quarantine (CIQ) restrictions on Adelaide 4.5% 7.1% the number of passengers able to be processed or payload restrictions Cairns 4.2% -2.6% based on the length of runway at the airport may mean that the airline can Darwin 4.2% 5.6% only sell a restricted number of seats. This data highlights the significant challenge for Tier C in accessing “a fair Gold Coast 8.5% 33.7% go”. Airlines are highly risk averse in the current climate and any new route Sunshine Coast 11.1% n.a. opportunity should be considered by the Australian Government for start up subsidies, if deemed in the national interest. TABLE 4-2 TIER B AIRPORTS: PASSENGER GROWTH RATES

Source: SABRE Airline Intelligence2000-2011

REGIONAL AIRPORTS PROJECT 19 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

BITRE International Airline Activity Load Factor by first/last port 85% 80% 75%

70%

65%

60%

55%

50%

45%

40% SYD MEL BNE PER ADL OOL CNS DRW TSV PHE NRK Total Tier A Tier B Tier C Tier A Tier B Tier C Totals 2010 2011 FIGURE 4-9 LOAD FACTORS Source: BITREInternational Airline Activity Report 2011

In developing a business case Airports should consider and illustrate what load factors may be achievable, this will require consideration of airline, passenger volumes, aircraft types and available airport infrastructure (which will be addressed later in tis report). Therefore this chapter has illustrated four core components for consideration by regional airports; 1. Identifying international passenger source markets and volumes, 2. Initially connecting international passengers via domestic services and airline alliances and building these instead of a straight move towards direct international services unless the market can be shown to clearly exist, 3. The volatility of international passenger services at Tier B vs. Tier A airports, and 4. Consideration of achievable load factors on routes.

REGIONAL AIRPORTS PROJECT 20 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

REGIONAL AIRPORTS PROJECT 21 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

This section examines case studies of selected Tier B airports in Australia and their relative success in developing international services. The lessons 5 Airport Case from these studies will reinforce those core components identified at the end of Chapter 4. The airports analysed are; Studies Cairns Airport Darwin Airport Gold Coast Airport

5.1. Market Positioning of Tier B Airports The strength of all four Tier B airports is; They know their market, They have defined their market position (illustrated below), and They have a clear marketing proposition to airlines, backed up by existing international services and appropriate infrastructure.

Adelaide Gold Coast Darwin Cairns A-typical, the The Northern The hybrid hub outbound market The low cost hub Australian hub

FIGURE 5-1 MARKET POSITIONING OF TIER B AIRPORTS Each of the Tier B airports has managed to sustain a level of international capacity. However, some have also witnessed the cancellation of flights where the market dynamics and conditions have not been sustainable.

REGIONAL AIRPORTS PROJECT 22 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

Evidence for these case studies has been taken from both secondary data sources and qualitative stakeholder interviews.

5.2. Adelaide Airport (ADL) A-typical of regional internationals Adelaide differs from the other three Tier B airports as the majority of its international services are sustained by strong outbound travel (approximately 60% of passenger movements are locals) based on a larger population size. The direct catchment area of Adelaide Airport is estimated to be over 1.26 million people, including Adelaide city and surrounds. This accounts for 77% of the population of the State of South Australia. Having a solid population with a high propensity to travel builds confidence and reduces seasonal fluctuations for Adelaide. In addition some of the key characteristics of Adelaide’s international airline market are: All full service airlines Majority wide-body aircraft Limited geographical advantage – i.e. limited short-haul opportunities due to its geographical location Limited awareness of destination South Australia currently when compared to other high volume tourism destinations; and FIGURE 5-2 ADELAIDE INTERNATIONAL ROUTE NETWORK 2012 Strong VFR market (based on the population’s high propensity to

travel). The international flight network from Adelaide is shown in Figure 5-2 Historically, international passenger movements have grown at an average annual growth rate of 7.1% (2001 to 2011) this is illustrated in Figure 5-3. Only 8% of total passenger movements at Adelaide Airport are international passengers. Thus the ‘bread and butter’ market for ADL is domestic.

REGIONAL AIRPORTS PROJECT 23 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

Adelaide Airport Fleet Mix 2012 Adelaide Airport International Passenger Movements FY01-FY12 0% 16% 700,000

600,000 547,847

500,000

400,000

300,000

200,000 84%

100,000

0

Regional Narrow Wide

03 06 09 02 04 05 07 08 10 11

------

2002 2005 2008 2001 2003 2004 2006 2007 2009 2010 FY12 EST FY12 FIGURE 5-3 ADELAIDE INTERNATIONAL PASSENGER GROWTH Adelaide Airport International Carrier Market Share 2012 Note: FY12EST: Singapore Airlines and Malaysia Airlines expected to increase capacity Source: BITRE 4% 12% 2% Traditional full service airlines have operated to Adelaide over the past 10 years and Emirates has announced daily flights from November 2012. Due to Adelaide’s geographic location, the majority of aircraft types operated to 34% 12% the region are wide-body aircraft with large seat capacity to fill for each flight rotation, making it an ongoing challenge to sustain flights with reasonable load factors. 11% Carriers to Adelaide operate to key Asian hubs and now Dubai to service the outbound population of Adelaide and South Australia as well as facilitate inbound arrivals. Figure 5-4 illustrates the aircraft mix and airline market share at Adelaide. 25% The core learning from this case study is that growth in international services Qantas Cathay Pacific Virgin Australia Air New Zealand at Adelaide has been driven by significant support from a large local Malaysia Airlines Singapore Airlines Emirates outbound market allowing airlines access to a significant market on outbound flights. FIGURE 5-4 ADELAIDE INTERNATIONAL FLEET MIX AND AIRLINE MARKET SHARES Source: Sabre Airport Data Intelligence 2012

REGIONAL AIRPORTS PROJECT 24 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

5.3. Cairns Airport (CNS) Cairns Airport International Passenger Movements The iconic inbound tourism destination FY01-FY12 The success of Cairns as an international airport has been driven primarily 1,000,000 by tourism market trends. In particular, the Japanese market has had the 900,000

greatest influence on international passenger results based on the strong 800,000 market share of Japanese visitors to Tropical North Queensland. This one market has decided the highs and lows to date of international passenger 700,000 600,000 trends at Cairns Airport. 510,977 Cairns peaked with its highest recorded international passenger movements 500,000 in FY2005, supported by a boost to Japan capacity by Qantas’s then 400,000 subsidiary, Australian Airlines. Unfortunately, the Japanese market has 300,000 recorded a continuous decline in numbers to Australia and Cairns has been 200,000

negatively impacted by this factor, as shown in Figure 5-5. 100,000

However, with the destination now focused on developing the Chinese 0

02 03 07 08 09 04 05 06 10 11

------

market and spreading the risk of exposure to one major market, Cairns -

2001 2002 2006 2007 2008 2004 2005 2009 2010

Airport has recently announced both China Eastern Airlines and China 2003 FY12 EST FY12 Southern Airlines launching new services direct to China from October 2012. While China Southern flights are only seasonal at this stage, this initial FIGURE 5-5 CAIRNS INTERNATIONAL PASSENGER GROWTH commitment by the airline augers well for the future development of the Chinese market to Cairns. Note: Australian Airlines cease operations August 2007, Jetstar commence operations 2007 Source: BITRE Airport Traffic Data FY02-FY12 Cathay Pacific, while not operating directly to mainland China, has had a considerable role to play in the development of Chinese visitation to the region, and has enabled Cairns Airport management to track the historical Specifically, Cairns Airport can be described as: growth and forecast demand for Chinese visitors accessing the region for Located in a predominantly inbound leisure destination with strong leisure travel. destination brand awareness and iconic appeal, International traffic is significant to Cairns Airport and contributed up 13% of Smaller population and thus limited outbound passengers potential, total passenger traffic in FY2011. Highly seasonal market due to weather conditions,

A regional hub for , A Japanese traffic hub with Jetstar (linking to Gold Coast), Broadest mix of carrier types and aircraft types compared to any other regional international airport, One of Australia’s most mature international market destinations (in regards to product development) and inclusion in itineraries (Reef, Rock, Opera House).

REGIONAL AIRPORTS PROJECT 25 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

The mix of international carriers to Cairns is relevant to discuss. Although it Cairns Airport Fleet Mix 2012 is an inbound leisure destination, and thus attracting lower yields for airlines, full service carriers have operated now and historically based on visitor demand for Tropical North Queensland (specifically Reef) experiences.

However, other than Cathay Pacific Airlines which has a solid freight market 23% to support revenue and access to a growing Chinese market, the trend for Cairns is towards more low cost carrier services with Jetstar now dominating the mix at 48% market share. For Air New Zealand, the sustainability of Cairns has improved with the Virgin Australia partnership now ‘topping up’ load factors through a 12% combined airline service where previously the two carriers were individually 65% not profitable operating two brands and two aircraft types to Cairns. This is another example of how airline alliances are changing international services to regional ports. With regard to fleet mix, Cairns is just out of reach to most Asian hubs with narrow body aircraft types. Therefore 65% of aircraft flown to Cairns are wide body. The future of narrow body aircraft types with the A320 NEO and Regional Narrow Wide B737 MAX represents a great opportunity for the destination to now target Asian hubs with the right sized aircraft mix to sustain all year round flights Cairns Airport International Carrier Market Share (where many business cases for wide body aircraft with double the number 2012 of seats cannot be sustained to certain markets). Again, this will be a great marriage of geographic location, airline product mix and destination appeal

for Cairns Airport in the future. 23% 15% Figure 5-6 illustrates the aircraft mix and airline market share at Cairns. The core learning from this case study is that growth in international services 9% at Cairns has been a result of having an iconic destination able to

support a largely inbound and seasonal market, with significant domestic 3% connectivity to support seasonal fluctuations. 2%

48%

Cathay Pacific Air New Zealand Jetstar China Eastern United/Continental Regional FIGURE 5-6 CAIRNS INTERNATIONAL FLEET MIX AND AIRLINE MARKET SHARES

Source: Sabre Airport Data Intelligence 2012

REGIONAL AIRPORTS PROJECT 26 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

5.4. Darwin Airport (DRW) Darwin Airport International Passenger Movements The North Australian hub FY01-FY12 International passengers are now a key market for Darwin Airport, 400,000 accounting for 15% of all passenger traffic. Darwin is also a Qantas Group dominated port (79% market share). Virgin Australia and alliance partners, 350,000 Silk Air and SkyWest, account for 19% of seats, with the majority provided 300,000 252,214 by Virgin Australia. Other carriers are Vincent Aviation, Skytrans and 250,000 in the domestic market (regional airline passengers make up 9% of Darwin’s total traffic). Air Asia operated in the 200,000 international market to Bali until September 2012, when it ceased 150,000

operations. 100,000

50,000

0

02 03 05 08 10 11 04 06 07 09

------

2001 2002 2004 2007 2009 2010 2003 2005 2006 2008 FY12 EST FY12 FIGURE 5-8 DARWIN INTERNATIONAL PASSENGER GROWTH Source: BITRE Airport Traffic Data FY02-FY12

Darwin Airport can be characterised as follows: North Australian hub (targeted market positioning promoted by Darwin Airport and Northern Territory Tourism), Strong destination awareness in international markets, however it has a niche appeal (i.e. product is set up for short stays on a multi-stop itinerary for the majority of markets as well as a fly/drive market based on the fragmented location of tourism product throughout the Northern Territory. That is, Darwin itself is a base for tourism dispersal), Smaller population (estimated 127, 000 people in Darwin and 232,400 people total in the Northern Territory), Strong seasonality due to weather conditions (i.e. wet season over summer), South East Asian hub for short haul traffic from Australian capitals (that is airlines connect traffic to Darwin from capital city ports to connect to short-haul flights to Asia to counteract seasonality), FIGURE 5-7 DARWIN INTERNATIONAL ROUTE NETWORK 2012

REGIONAL AIRPORTS PROJECT 27 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

No wide body aircraft currently fly to Darwin due to the ‘thin’ nature of Darwin Airport Carrier Mix 2012 route demand, meaning it is more profitable to fill smaller aircraft types with the level of passenger demand and also the cost advantage for airlines to use short-haul aircraft. This is also an opportunity for Darwin. 7% 13% Strong LCC presence, highly competitive environment, Geographical advantage – Darwin’s ability to facilitate short-haul aircraft due to its proximity to key Asian hubs. This is particularly important compared to other Australian destinations to Asia.

Darwin Airport International Carrier Market Share 2012

80% 13% 6%

Regional LCC FS 7% Darwin Airport Fleet Mix 2012

0% FIGURE 5-10 DARWIN INTERNATIONAL CARRIER11% TYPE AND FLEET MIX Source: Sabre Airport Data Intelligence 2012

74% Figure 5-9 and Figure 5-10 illustrates the aircraft mix and airline market share at Darwin. The core learning from this case study is that growth in international services

Regional Silk Air Jetstar AirAsia at Darwin has been a result of its geographic location in reach of short haul narrow body aircraft from major Asian hubs and its destination FIGURE 5-9 DARWIN INTERNATIONAL AIRLINE MARKET SHARES awareness in international markets. 89% Source: Sabre Airport Data Intelligence 2012

Regional Narrow Wide

REGIONAL AIRPORTS PROJECT 28 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

5.5. Gold Coast Airport (OOL) The low cost hub Gold Coast Airport’s key strength is its very clear position in the market as a low cost carrier hub. Approximately 78% of all seat capacity is supplied by low cost carriers – with Air New Zealand and Virgin Australia delivering the only full service international product. Gold Coast is a good case study of an airport with a track record in short- haul international services to New Zealand which was built up based on strong market demand for the destination from New Zealand travellers. Building on these short-haul flights, Gold Coast Airport had a clear vision of tapping into long haul markets, facilitating direct flights from key international source markets with a high volume of international visitors to the iconic tourism destination. The development of long-haul at the Gold Coast was a product of a long term vision, targeted marketing, cooperative support from the local tourism authority, and investment in appropriate infrastructure (runway extension and terminal) based on a solid business case. Sustainable international flights were possible for the Gold Coast based on a foundation of volume tourism product infrastructure (approximately 13,000 accommodation rooms), substantial marketing in key international source markets from tourism products (i.e. theme parks) and a growing outbound population base. Furthermore, the ability for airlines to tap into the Brisbane population base due to supporting road infrastructure connecting Brisbane to the Gold Coast with an eight lane highway, built confidence in carriers’ FIGURE 5-11 GOLD COAST INTERNATIONAL ROUTE NETWORK 2012 abilities to siphon Brisbane residents to travel to the Gold Coast (along with reduced airport parking initiatives) to support year round wide body airline services.

REGIONAL AIRPORTS PROJECT 29 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

High penetration of low cost carriers due to the destination’s ability to Gold Coast Airport International Passenger Movements attract high volume leisure travellers (high volume of accommodation FY01-FY12 stock meant overall package prices to the Gold Coast were lower than 900,000 some competing destinations, it also meant the destination could handle large volumes of arriving passengers), 800,000 771,700 Gold Coast Airport built the terminal offering to meet the airport’s 700,000 targeted market position as a LCC airport (i.e. single level terminal with integrated domestic and international facilities enabled reduced 600,000 operating costs and flexibility of operations to aligned with LCC needs), and 500,000 Management willingness to work with airlines to aggressively market 400,000 flights and seek to reduce the total cost of operating to Gold Coast Airport vs. competition. 300,000 As a result of the above strengths, Gold Coast Airport attracted its first long 200,000 haul international airline in Air Asia X in October 2007 to/from . Air Asia X built its services initially around attracting both inbound Malaysian 100,000 visitors and Australians travelling outbound from other Australian ports (i.e.

0 passengers connecting via other airlines at Gold Coast from Sydney,

03 04 08 09 02 05 06 07 10 11

------Melbourne and Adelaide who wanted to take advantage of lower airfares to

Asia).

2002 2003 2007 2008 2001 2004 2005 2006 2009 2010 FY12 EST FY12 From this initial success, Gold Coast has been able to now establish itself as NZ operations only LCC Terminal opened a hub for Japan (with Cairns) and offer a point of difference to Brisbane December 2010 Runway extension March 2007 Airport (i.e. Singapore Airlines at Brisbane vs. Scoot at the Gold Coast). Scoot AirAsia X November 2007 In 2011, international passenger numbers represented 14% of total Gold commences Coast passenger movements. Jetstar Japan late 2008 June 2012 Given Gold Coast Airport’s geographic position to New Zealand (i.e. 3 hours FIGURE 5-12 GOLD COAST INTERNATIONAL PASSENGER GROWTH flying time to most airports), the mix of fleet is both wide-body and narrow- Source: BITRE Airport Traffic Data FY02-FY12 body aircraft. Having this mix facilitates frequency to New Zealand ports and sustainability in non-peak periods. On the other hand, wide-body aircraft are needed to operationally reach Asian hubs. While the runway extension to In summary, the key strengths that aided the Gold Coast’s rapid growth in 2,500m has enabled long haul flights, some aircraft are still payload international flights were (and still are): restricted. Clear market position as a low cost hub (internal mantra ‘unashamedly focused on leisure’), Strong destination with broad appeal to a mix of core markets (the Gold Coast was a key stop on major Asian market itineraries to Australia),

REGIONAL AIRPORTS PROJECT 30 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

Gold Coast Airport Fleet Mix 2012 5.6. Queenstown, New Zealand (ZQN)

0% Growing a seasonal destination to a year-round product Queenstown Airport recorded 1.09 million passengers in FY2012, putting it at a similar traffic level to Mackay, which is Australia’s 14th busiest airport. Investment and a partnership approach continue to be central to 39% Queenstown’s success, with destination marketing the core driver of demand.

Queenstown Airport International Passengers 61% FY05-12 250,000

200,000

150,000 Regional Narrow Wide

Passengers 100,000 Gold Coast Airport International Carrier Market Share 2012 50,000

0 8% 2005 2006 2007 2008 2009 2010 2011 2012 12% FIGURE 5-14 QUEENSTOWN AIRPORT INTERNATIONAL PASSENGERS 20% 10% Source: Queenstown Airport Annual Reports FY2005 – FY2012

While Queenstown has only a small population base for outbound travel at approximately 22,000 people (Census 2006), it has been able to grow sustainably year on year through its iconic tourism destination status. Queenstown is an example of an inbound visitor destination, in a highly 50% seasonal environment due to weather conditions, that has attracted multiple airline carriers through a very active local community working together to

Virgin Australia Air New Zealand Jetstar AirAsia X Scoot build a brand profile. Known as New Zealand’s active and adventure capital, Queenstown has worked to reduce seasonality by creating new reasons for FIGURE 5-13 GOLD COAST INTERNATIONAL AIRLINE MARKET SHARES AND FLEET international visitors to the destination. Adding to its well established MIX reputation as an ideal ski town, Queenstown tourism has added other Source: Sabre Airport Data Intelligence adventure sport activities to its resume in shoulder and non-ski seasons

REGIONAL AIRPORTS PROJECT 31 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

such as mountain biking and hiking. While airlines do fluctuate capacity Ability to facilitate flights with CIQ – the higher cost of using CIQ on a depending on the season, the airport has increased overall international trial basis or restrictions based on CIQ resources (for example in Port passengers by 29% on average per annum over the past 5 years to June Hedland where BITRE reported a 41% load factor in 2011, however this 2012. was due to payload restrictions). Similarly to the Gold Coast example, infrastructure facilitated by both the Key Lessons Learned airport and airlines were also required to drive the success of international Combining the learnings from the Case Studies of Tier B airports and those flights to Queenstown. Investment in Required Navigational Procedures discussed for Tier C airports the following are key lessons that regional (RNP) gave airlines confidence to commit to the destination and expand airports should consider in developing international markets. schedules with reduced risk of diversion during poor weather. Importance of a mix of passenger source markets 5.7. Tier C Airports: Lessons learned The broader the passenger mix, the more sustainable the route will be, and the level of risk exposure for airlines is reduced. For regional airports where Previous analyses of Tier C regional airports in Western Australia, traffic is more likely to be point to point only, the market for point to point , Queensland, and Australian Capital Territory services must be very strong as the ability to support the route with feeder where short and periodic spells of international services have occurred, allow hub traffic from before, beyond and bridge traffic is less likely to be available, some consistent experiences to be shared and subsequent lessons learned. particularly for LCCs who have a greater affinity with regional airports. That it Successful strategies compared against key reasons for international is not to say that an airline might not able to develop a hub operation to services being ceased, often after a short period of operation, are described support a route, (as Jetstar in particular has done), however such operations below. require time to mature and are not typical of the pure LCC model. Successful Strategies For regional airports, the key learning is to include in a business case for a Community investment and long term vision, for example in the case of route how it will be sustained through lower seasonal periods and how it can Sunshine Coast, draw feeder traffic and not just rely on point-to-point traffic. Further, regional airports need to be able to demonstrate in a business case what the forecast Building charter flights with a long term plan to attract scheduled flights. for the growth of a route will be over five years, and how that growth is going Defining a clear market position and brand. to be delivered through expanding passenger markets and the passenger mix, as the route matures. Key Reasons for Cessation of Services Having only one major source of passengers – limited options to source Underwriting services to seed international flights not always passengers from additional markets to maximise sustainability all year sustainable round Start-up airlines can be motivated by other agendas as opposed to a long- Runway infrastructure length and required capital investment without term presence at a regional destination. This can result in an initial existing international flights, enthusiasm by community stakeholders when a business case does not support an all year round source of passengers and thus flights enter a Geography – position and distance to source markets and whether market for a short period and then cease. these markets can be sustained with wide body flights versus short haul aircraft types, When a flight starts and suddenly stops in a regional community, a negative and cautious mentality is left towards any new airline services with the Population size, community feeling nervous about purchasing tickets in the future. (e.g. in Accommodation stock and tourism product investment,

REGIONAL AIRPORTS PROJECT 32 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

the case of Townsville Airport flights with Strategic Airlines from Townsville to Bali). Long term marketing focus Even in the case of Gold Coast Airport, Air Asia X increased flight frequency to daily, which was only shortly sustained, and flights were then pulled back to five per week. This was due to the large number of seats per flight required to be filled (380 each way which is 138,700 seats p.a. each way or 277,400 in total). Other factors such as Air Asia X increasing the number of flights to Australia with services to Melbourne, Perth and Sydney also generated competition for Gold Coast as a destination within their core source market from Malaysian and intra-Asia. Gold Coast was successful originally due to the business case proving profitable as well as a significant five year marketing package collectively funded by the airport, local tourism organisation, State Tourism and State Government. FIGURE 5-152 NORTH AUSTRALIAN TIER C AIRPORTS INTERNATIONAL ROUTE NETWORK SPANNING 2000-2012 Case studies of Tier C Airports The three airports share a geographic advantage of being within a In reviewing the history of sporadic international scheduled services at Tier C relatively short flying distance to Bali, enabling the services to be airports, there are two broad clustered markets: Northern and Southern operated by smaller-gauge aircraft, right sized to the relatively small outbound markets. populations of the three towns. Northern Outbound Markets Of the three ports, Port Hedland currently enjoys what has become Townsville, Port Hedland and Broome have all experienced an established, scheduled twice weekly service with SkyWest to scheduled international services, primarily to Bali. These markets Bali. The service is operated on a Fokker 100, seating less than 100 are characterised by small aircraft, sometimes regional turbo prop, a people. single outbound destination with a strong appeal to Australians and Demand for the flight is primarily driven by the resources community low volumes of travel, once or at best twice weekly. in Port Hedland, travelling outbound. It is expected that there is a high degree of repeat travel among the passenger base, with awareness of the destination high in what is a small community. In building to a twice-weekly scheduled service, Port Hedland experienced Bali services with three different carriers over a number of years. Previous services by Merpati Nusantara and Strategic Aviation were operated with larger aircraft, suggesting the market could not sustain the B737/A320 gauge, but is right-sized with SkyWest’s Fokker 100. This market is viable because of the relative proximity and short flying time between Port Hedland and Bali. Further, the scheduling of the service on a weekend represents efficient aircraft utilisation for SkyWest, enabling the airline to utilise its assets on days of the week when it experiences lower demand.

REGIONAL AIRPORTS PROJECT 33 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

Strategic Aviation operated a once-weekly Port Hedland-Bali service from August 2010 to March 2011. Broome also experienced scheduled flights to Bali with Ansett on a relatively small aircraft (Bae146 seating 73) from April 2000 to July 2001. Townsville has a long-term history of international flights, prior to the development of Cairns Airport’s international terminal in the 1980s. In more recent years, Strategic Aviation operated scheduled Bali services from December 2010 to October 2011, initially commencing with twice weekly services, then declining to once weekly prior to cessation. The aircraft utilised was an A320 aircraft which was connecting and refuelling at Townsville, while travelling from Brisbane to Bali. The service was primarily motivated by a need to refuel the aircraft and as such was not commercially sustainable FIGURE 5-163 SOUTH AUSTRALIAN TIER C AIRPORTS INTERNATIONAL ROUTE for long term operations. NETWORK SPANNING 2002-2004 Southern Outbound Markets Hobart experienced two brief periods of international operations by Canberra Airport and have experienced limited Singapore Airlines, of three flights in December 2002 and four flights international scheduled direct services in the last ten years. Greater in November/December 2003. The purpose of the flights is not geographical challenges exist for southern markets in accessing known, but the timing suggests they were focused on bringing international destinations, given the geographical disadvantage of inbound visitors to Tasmania, visiting during the summer months. typically requiring a larger gauge aircraft to service a direct The gauge of aircraft operating the services were both wide bodies, international route, and the challenges in filling that aircraft on a an A340 seating 250 in 2002 and a B777 seating 288 in 2003. year-round basis, for a service to be considered permanent. Canberra had a direct, twice weekly scheduled service to Fiji with Air As a result, the southern markets are characterised by seasonal Pacific from July 2004 to October 2004. The flight was able to flying, either in summer or winter depending on the market they are operate with a short-haul B737 aircraft, seating 127, which reduced primarily serving. one major challenge in filling a wide body aircraft. However the flight did not return to the Air Pacific seasonal schedule the following year. The impact of on the Canberra outbound market as a substitute for direct services from Canberra will be significant, given its greater choice of international destinations, flight timings and frequencies. Tier C specific case study learnings The case studies above primarily represent travel by an outbound Australian market only, to a leisure destination which is both popular and represents a clearly understood and well defined tourism offer to Australians. Of all five case studies, Port Hedland represents the only successful service, with continuous travel now in place for over two years, from August 2010

REGIONAL AIRPORTS PROJECT 34 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

until the present day. Port Hedland’s population should be considered too small to sustain an international service, but three key factors contribute to the success of the service: high repeat travel by a small number of individuals (based on the desire to travel between shifts for resource industry workers) the small gauge of the aircraft (less than 100 seats) and the relative proximity/short flying time between Port Hedland and Bali the benefits the airline experiences in aircraft utilisation outside of their peak demand period The circumstances of the Port Hedland-Bali service are unique to the resources industry and it is considered unlikely to be replicated as a model elsewhere.

REGIONAL AIRPORTS PROJECT 35 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

This section draws out and summarises the core characteristics of successful regional international airports as well as capital city airports and provides regional airports without international flights an understanding of 6 SWOT Analysis what traits are necessary to build direct international services. These analyses have been undertaken merging lessons identified in the previous chapters with stakeholder interviews. This analysis is presented overleaf.

REGIONAL AIRPORTS PROJECT 36 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

TABLE 6-1 TIER A AIRPORTS: SWOT 6.1. Tier A: Gateway Airports 6.2. Tier B: Regional Airports with International Services A Strength, Weaknesses, Opportunities and Threats (SWOT) analysis for The SWOT for Tier B airports is summarised in Table 6-2. Tier B airports Tier A airports is summarised in Table 6-1. The analysis has identified that tend to have a higher population base and/or an iconic inbound tourism gateway airports continue to dominate due to the pure marketing mix of high destination or strategic geographic location (i.e. hub potential). volume passengers and purpose of travel, sources of connecting traffic and economies of scale to reduce airline operating costs. Strengths Weaknesses

Strengths Weaknesses • Located in a high growth regions (i.e. • High portion of lower yield leisure passengers Population growth) • Cannot stimulate growth beyond a ceiling – due • Large population base (over 1 million • Highly competitive market • Proximity to a destination with high to the size of the population base people) • Slot restrictions at peak times of day awareness and appeal • Hard to sustain competition, accelerated growth • High volume tourism potential into similar markets can translate into • Business traffic to improve and sustain • Can have bilateral restrictions higher yields • Ground component infrastructure (i.e. cannibalization • Constant pressure on infrastructure • Economies of scale to reduce airline costs Accommodation room stock and other • Higher cost of other on-airport service providers • More difficult to offer deep discounts for tourism product) • Limited cargo potential • Connecting feeder traffic to enable daily new airlines and start up flights due to • Proven track record for international • Highly seasonal demand (domestic) existing agreements with airlines services now established • Higher costs for airlines based on low economies • Reduced seasonality due to the mix of • Less flexible with charges overall • Runway length capability of scale passenger segments • Do not work as closely with local • Already have CIQ facilities • Peak hour infrastructure pressure – inability to • Ability to sustain competition stakeholders and community compared to • A well established domestic market – grow (i.e. DRW and OOL) • Multi-daily frequencies possible regional airports meaning other on-airport services were • Consumer expectations of international • Proximity to infrastructure • Curfew (where exists) available (i.e. Fuel and ground handling) passenger experience (extensive retail/duty free • Multiple on-airport services to support airline • Very community and local stakeholder options) operations (i.e. Competitive ground handling, focused – ability to work together to support • More limited ground transport options/public catering, engineering facilities, MRO) new routes and build airline confidence transport • Destination awareness and desirability from • Aggressive and commercially savvy airport foreign carriers management • Critical mass of CIQ presence • Ground transport options/onward public transport • More extensive retail and duty free offer Threats Opportunities aligned with consumer expectations • Full service carriers to gateways are more • Economies of scale at capital city ports • Growth in short-haul (where geographically likely to have MOUs in place with Tourism • Competition from other international cities feasible) is better due to right sizing of aircraft Australia, and have a marketing plan in and destinations that are proven markets • Secondary market status to prove the market place for the route with significant funds • Regional ports seen as higher risk in times exists (i.e. Ability to track passenger flows over committed by multiple industry partners. of global economic pressure – particularly existing major gateways located nearby) for foreign carriers • Ability to incentivize new airlines and services Threats Opportunities • Pressure to innovate and continuously with flexible pricing agreements stimulate the market to ensure growth • Build on ‘hubbing’ to translate to feeder traffic (i.e. • Airlines play off regional incentives as • Ability for multiple daily frequencies and potential of passengers to avoid losing OOL and DRW) leverage to reduce capital city airport costs long term sustainable growth services to capital city ports • potential for tourism and industry partners to align • Other overseas international destinations • Local airline partner connectivity and traffic • Significant infrastructure investment to work co-operatively on a long-term marketing aggressively incentivizing new flights feed needed to allow further growth plan, with funding in place to support the route • Capitalize on confidence of larger and drive demand to support the growth of the destination with existing track record in the route in the future. The plan and the funding current economic environment when required should be tailored to the airline’s model, airlines are risk averse and should be matched to the profile and fit for the airline and the frequency of services

REGIONAL AIRPORTS PROJECT 37 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

TABLE 6-2 TIER B AIRPORTS: SWOT Strengths Weaknesses

6.3. Tier C: Regional Airports without International Services • Destination potential and local • Low population base with limited growth community vision The SWOT for Tier C airports is summarised in Table 6-3. • Low awareness internationally of destination • Existing domestic services and icons and product It is evident from the analysis that opportunities at Tier C airports exist in growth • No existing services to build confidence that long term strategies, starting with building international visitor markets on • flights can be sustainable domestic flights first to establish a business case for demand. The cost • • Runway length (too short) disadvantage due to limited existing services will always create a major • Ability to invest and sustain commercially hurdle for Tier C airports versus Tier A and Tier B airports. experienced management team • Reliance on State Tourism Partners to provide business development • Smaller product availability (ie. tourism accommodation room stock) • Limited awareness of regional tourism features in international source markets • Lower yield potential for airlines (with the exception of Canberra which has a high percentage of corporate travel)

Threats Opportunities

• Cost of attracting new flights and • Build community and local stakeholder the investment required by partnerships and develop a long term strategy to airports, councils and partners attract airlines • Lack of confidence from airlines • Support the development of existing markets over to sustain flights gateway airports to grow the business case for • Opportunity cost for airlines to direct services take a risk to an airport with no • Grow international passenger via domestic international services or proven services to prove a market exists and have future market vs competing/ higher potential profile destinations globally • Focus on building common-rated fares over • Higher costs of operating major gateways and code-sharing international flights (due to lack of • Positioning the destination with future airlines and economies of scale) results on a partners with a long term view higher airfare price and thus • Whole of destination economic development plan impacts competitiveness of the (i.e. looking at 5-10 years what industries can destination and demand drive access – looking beyond tourism to business, education and other industries)

TABLE 6-3 TIER C AIRPORTS: SWOT

REGIONAL AIRPORTS PROJECT 38 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

The preceding chapters have identified a range of criteria an airport needs to consider in development of a business case for international services. The material has discussed building a market through existing domestic 7 The Key Criteria connections until it is of sufficient size and stability to warrant consideration for direct international services. This chapter merges those key criteria into a checklist that should be for International addressed when an airport proposes a new airline service. It then discusses relevant core aspects of this checklist required to deliver a tailored and sustainable business case.

Air Services 7.1. Criteria (Checklist) for Attracting International Services To summarise the preceding analysis, stakeholder consultation and above t SWOT analyses into relevant items for regional airports, the following checklist of criteria has been assembled. This checklist will enable a clear comparison of gaps in an airports current commercial profile, essential criteria for an airline business case and additional desirable criteria which aid the profitability and therefore potential for a new international route. The checklist is designed to identify current selling points for airports as well as outline long term route development strategies.

Essential Criteria Desirable Criteria

• Market size – proven potential through • Mix of passenger segments to offset risk existing domestic connections and (i.e. Business, visiting friends and international visitor volume or ability to relatives and holiday traffic) demonstrate enough passengers exist to • Geographic location close to fill a daily flight within 3 years international markets which can be • Destination appeal & awareness (iconic accessed utilising a narrow body aircraft pull) • Aircraft sector lengths are shorter giving • Population of both city pairs (100,000 greater aircraft utilisation plus) • Operational capacity to operate narrow • High volume inbound (if mostly leisure body international aircraft market) • Local propensity to travel (outbound • Destination infrastructure & ongoing market size) investment • Freight • Growth (or potential growth) in economic • Ability to build a hub to offset seasonality development within the region long-term (i.e. Domestic growth/feeder • Existing airport infrastructure for narrow traffic) body services as a minimum (runway

REGIONAL AIRPORTS PROJECT 39 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

and terminal capacity) • Support services for airlines based at the Gold Coast: theme parks, casino, beach, a broad mix of product ideally airport (i.e. Catering, fuel, competition in • Growth in domestic flights to facilitate suited to a family leisure visit, connectivity and multi-center itineraries ground handling, freight forwarders) Cairns: the Great Barrier Reef, rainforest, unique natural attributes and for international visitors • Aggressive investment in marketing and casino availability, • Year round sustainability airport incentives for start-up operations • Established relationships with travel Darwin: gateway to Kakadu, unique natural attributes, gateway to the trade to build itineraries Northern Territory. • Access to capital for ongoing airport The destination requires sufficient infrastructure on the ground to be infrastructure investment wholesaler-ready for mass market visitation, e.g. sufficient room stock, • Government support (CIQ and Tourism) activities, entertainment and access to shopping and food and beverage TABLE 7-1 CRITERIA FOR ATTRACTING INTERNATIONAL SERVICES choices. The destination should be positioned and marketed well overseas, such that overseas wholesalers and consumers have awareness of the destination An airline identfied the following as being key decision making criteria when and its attributes. In addition, continued product development and considering a new route: investment, such that consumers continue to have compelling reasons to “Our commercial checklist is along the lines of: visit, and that the destination keeps pace with development of competing 1. Current market size. How much is flying indirectly? What is the OD destinations overseas. (Origin and Destination) market? Consider how much we could Key feedback from airlines illustrating the importance of the broad appeal of stimulate with a direct flight. the destination, first and foremost was: 2. Population size on both sides needs to be around 100,000 people plus. “If it’s a brand new route with no historical data, the decision for market growth potential is based on destination appeal. How does the destination 3. Domestic connectivity potential? appeal to our core customer segments? Is there a mix of segments (ie. 4. What links the two cities together? Businesses and trade? business, visiting friends and relatives and leisure, students?). If a route is 5. Mix of passenger segments. heavily weighted toward leisure traffic then more marketing investment from the destination is needed for the business case”. [Airline] 6. Cargo potential. 7. Operational aspects (ie. runway length). 7.3. Local market 8. Distance of the route. Narrow body versus wide body? Sector length and ability to fill and operationally handle the appropriate aircraft size. The local population would ideally be sufficiently large in volume that it can generate some form of outbound travel in terms of business, leisure or VFR 9. Seasonality. travel. [Airline]” The catchment of the region requires an economy which is healthy and has growth potential, in that its residents have disposable income for travel 7.2. Destination and/or potential new industries or growth opportunities to continue to drive growth, inclusive of population projections for growth. Based on the case studies, a regional airport’s destination should have an iconic status and key features that cannot be found elsewhere (in Australia), A catchment with universities or educational institutions will be attractive to for example: airlines, as international student travel generates multiple annual trips by

REGIONAL AIRPORTS PROJECT 40 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

students, their families, and establishes long term repeat visitation to establish its position and proposition with consumers from the outset of opportunities. services in November 2007. Local marketing included running radio The local outbound market should have both a propensity for travel and an promotions and visible outdoor marketing on bill boards and bus shelter interest in the city pairs/connections available or proposed as destinations advertising. Local consumers quickly adopted the carrier, embraced the from the regional airport. destinations and business model, and promoted the carrier through word of mouth marketing. The population should ideally have a profile of historical immigration, which can drive a degree of two-way VFR travel, with locals returning to their country of birth, or their relatives visiting them. 7.5. Infrastructure Requirements As previously noted, an outbound market is key to spreading risk for the A number of factors impact which markets can be reached from an airport, airline, and the greater the depth of that market, the greater the reduction in including the length of the runway, any obstacles impeding usage of the full risk. A market which relies on inbound tourism visitation is too high risk in the length of the runway, the aircraft proposed to operate the route and its current climate, compared to a market with a mix of local and visitor travel for maximum take-off weight. Taking all these factors into account, a regional business, leisure, education or VFR. airport will have a range circle of destinations within reach for each aircraft Key feedback from airlines illustrating the importance of the outbound market type. in underpinning a strong two-way travel market was: Most of the airports which have experienced international flights in Australia “Local propensity of travel as well as population is a key consideration for have a runway minimum length of 2,400m. Sunshine Coast’s development outbound growth” [Airline] plans envisage extending the current runway length, which is not sufficient to facilitate direct services to , without payload restrictions.

7.4. Niche Offsets A lower population and seasonal destination can be offset or compensated for, by favourable geography. An airport located within short haul reach of an international market (New Zealand or South East Asia) can act as a hub for outbound travel with short haul aircraft, operating more economically than a wide-body aircraft, and better suited to a smaller market in volume terms. Aircraft can be be routed from larger population markets typically found at state capitals, hubbing through a regional airport to the overseas market, e.g. Melbourne-Darwin-Bali. A hub operation can be specifically marketed to support forecast trough periods for the point to point market, to supplement the market and support year round operations to be sustainable, e.g. outbound Japan ski travel marketed for the northern hemisphere winter to Sydney and Melbourne residents, supporting travel over Cairns during the wet season. Finally, a carrier with a strong fit to the demographic of the local catchment may excel. Air Asia X has been strongly supported by Gold Coast Airport catchment residents, in part because it engaged in extensive local marketing

REGIONAL AIRPORTS PROJECT 41 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

Current Runway Lengths International Fleet Serving Australia 4000 (Current & In Design) 3500 600 5 3000 500 2500 4

2000 400 3 1500

Runway Runway Length(m) 300 1000 2 Engines

500 Seats MTOW & 200

0 1

100

Perth

Cairns

Avalon

Hobart

Darwin

Sydney

Broome

Brisbane

Adelaide

Canberra

Newcastle Townsville

Gold Coast 0 0

Melbourne

8 9

- -

SunshineCoast

737

E190

B767 B777 B747

A321 A330 A340 A320 A350 A380 B787 Tier A Tier B Tier C B787 FIGURE 7-1 RUNWAY LENGTHS BY TIER AIRPORTS Narrow body Wide body Source: Airbiz Engines Seats MTOW

7.6. Available Aircraft (Fleet) FIGURE 7-2 FLEET MIX OF CURRENT INERNATIONAL OPERATIONS TO AUSTRALIA Source: Airbiz Figure 7-2 outlines the current and planned aircraft fleet (seating capacity, Maximum Take-off Weight (MTOW) and number of engines) of airlines operating to and from Australia. The majority of capacity is provided by wide Due to infrastructure costs and market dynamics regional airports are body aircraft. This is important to acknowledge in the analysis of a viable generally better suited to narrow body or smaller wide body aircraft which business case as many regional airports do not have the runway capacity to are lighter and better suited to the shorter runway lengths that generally exist service these aircraft types. at Tier C airports. These are key in selecting potential international markets and airlines for business case development.

REGIONAL AIRPORTS PROJECT 42 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

Following an airports consideration of the key criteria identified previously 8 Additional there are a range of additional factors to business case development. 8.1. Regional Airport Hurdle Chain When developing a business case for an international service, a series of Considerations hurdles needs to be overcome from the time of presenting a business case through to conversion and ability to physically operate the services, these are summarised in Figure 8-1. The first two in the chain have already been discussed therefore here we focus on the third hurdle, charges and cost.

First & Critical Market sustainability & profitability Hurdle (95% of the decision)

Airport infrastructure

Cost of provision of international services (to the airline)

FIGURE 8-1 REGIONAL AIRPORT HURDLES

8.2. Cumulative Impact of Charges: Catastrophic for Regional Airports The impact of charges at regional airports as illustrated in Figure 8-2 cannot be underestimated. The base cause is the issue of economies of scale associated with lower volumes of passenger throughput compared to gateway airports.

REGIONAL AIRPORTS PROJECT 43 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

Some aspects of costs for regional airports are the same as gateway It is vital that all parties involved in this project are cognisant of the impact of airports, i.e. the absolute cost of passenger screening equipment. However the cost of operation at regional airports on their competitiveness against the when the cost is translated to a per-passenger basis, the impact on regional gateway ports. Market forces dictate that regional airports must achieve airports is disproportionate. critical mass in order to be sustainable and that every party has a role to play In addition, other major costs for regional airports are more expensive than in marketing the destination and the opportunity in order to assist regional gateway airports, such as AirServices Fire and Rescue Services and the airports to achieve critical mass and drive down some of the (lack of) cost of fuel. Both of these costs result from lack of economies of scale in economies of scale. operations at regional airports. The airport itself has a central co-ordinating role, making all partners aware The impacts of both scenarios are the same, regional airports are less of the benefits and airline criteria needed in growing the opportunity for competitive than the gateways on a per passenger cost basis. The result is economic and regional development from expanded air services. Further the more profound than merely a disproportionate cost. When market conditions airport has the majority responsibility for raising capital and investing in are factored in, and the lower volume of demand at a regional airport is infrastructure to facilitate international services and opportunities for growth. incorporated in the financial model, (resulting from a greater reliance on Economic development agencies have a role to play, in aligning strategies point to point traffic and reduced diversity in the passenger mix), then the and initiatives with the airport’s plans and considering the airport as a central overall impact is a significant barrier to entry. pillar of the region’s economic opportunity for expansion. Further economic It is not just regional airport feedback which reflects the cost impost for development agencies can co-ordinate the local economy’s role and local Regional Airports. Airline feedback also reflects the disproportionate cost for business’s participation in the airport’s growth. In particular, the operating to regional airports. Key stakeholder comments to support this are development of business links with future international connections and documented below from a mix of airline interviews: freight product investment. “Regional airports don’t really have a cost advantage”. Tourism organisations, tourism trade industry and partners can assist through destination and airline co-operative marketing, to drive demand and “There is no cost advantage to operate to a regional airport – they have that demand flow through to increased seat capacity. Importantly, are generally more expensive” providing insights and market intelligence from international offices regarding “Other aviation support services are more expensive generally at travel distribution packages and products. Tourism has a role in building regional airports (ie. catering, fuel, ground handling”). demand through ensuring the destination is included as a key stop-over point in relevant international market itineraries. “Airlines are more risk averse since the GFC. The price of fuel is making it tough for regional airports. Those that would have been “I don’t believe a state government’s role is to market regional airports. marginal before can now be unprofitable”. The state government’s role is to create an environment, a framework and remove barriers to entry” [State government tourism organisation] “The main barrier for regional airports is that if it’s not already a designated international airport the cost of CIQ reduces the Government and its agencies have a role to play in infrastructure provision profitability potential of the route” too, as not all infrastructure and facilities and services are under the control of the airport. Air navigation aids and services and CIQ facilities and staff “Capital city airports get economies of scale for on airport support resourcing are necessary to the airport’s international opportunity. Possible services such as catering” trade links with the corresponding international Government offices are “Regional airports with sizeable domestic flights and capacity are particularly important for new emerging markets (ie. China). Providing generally less cost as they have direct and other support services support through enabling senior representatives to participate in airline already in place” negotiations will also add confidence and priority to a business case.

REGIONAL AIRPORTS PROJECT 44 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

Finally it should be acknowledged that the relative cost of aeronautical Despite the commitment shown by the NPFC, there is a gap between Tier C charges at airports is determined not just by economies of scale, but where stakeholder experiences of challenges in resourcing CIQ and the provision the airport is in its pricing cycle. Airports typically negotiate pricing with their of services offered under the NPFC Provision of Government Services New carriers in five year phases, dependent on their infrastructure investment International Airports (the Guide). plans in that five year period. However, there is potential to consider a variation to the Guide, to reflect the opportunity for seasonal international services (as opposed to permanent). The Guide’s overarching focus is on clarifying the criteria for expanding Carbon tax international services where they are deemed to be possible and/or in the (Dom only) national interest. Clearly policy parameters have to be set for the NPFC,

En routes charges however some of the principles and guidelines are open to interpretation and do not make provision for seasonal services (beyond a short term charter Air Services location scenario), expecting all services to be permanent. specific charging Principle 2 suggests a five year commitment is required from an airline to Checked bag screening operate a route, which is an unrealistic period for an airline to be able to commit to in a commercial environment. LAGS screening Principle 3 states no airport should experience “unreasonable” barriers to Passenger screening entry into the market. Stakeholder feedback indicates the current practice could in itself be deemed a barrier, in that CIQ services are not in place and Passenger Movement Charge many challenges need to be overcome to achieve designation.

Fuel cost In summary, it is not the role of this report to suggest what the solution is, however the gap between what existing policy is able to offer and Airport’s Charges stakeholder expectation is clear. A recommendation is to enable a policy that includes close consultation with local communities to provide tailored FIGURE 8-2 AIRPORT RELATED CHARGES CIQ solutions. This is discussed in further detail in the Conclusions and Actions chapter of this report. 8.3. CIQ Provision for Tier C Airports Figure 8-3 is included below, to illustrate the hurdles in CIQ provision at regional airports under the current policy guidelines and their implications for From the outset, this report wishes to acknowledge there is no lack of a Tier C airport with an international business case for review. commitment from Customs, representing the National Passenger Facilitation Committee (NPFC) to resourcing opportunities for Tier C airports. Within existing policy, NPFC is doing all it can to guide and facilitate opportunities for Tier C airports, and stakeholders have noted local support from CIQ representatives.

REGIONAL AIRPORTS PROJECT 45 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

Perception Implication Idea

If no existing CIQ resources exist, must be imported, charged at cost, in addition to PMC charge Barrier to entry

“Unrealistic” requirements for accommodation and facilities dictated to airports, which are then not staffed/utilised Difficult to establish services Tailored CIQ solutions and and prove the market, services based on a case by Challenge to CIQ in resourcing trials and identifying chicken & egg case basis the tipping point for permanent services (recruitment, training, language skills etc.) Challenge is in risk-based infrastructure & staff Passenger Facilitation Committee exhibits great resourcing, particularly in commitment to support airports trial stage, and associated costs

FIGURE 8-3 HURDLES FOR CIQ PROVISION AT REGIONAL AIRPORTS

REGIONAL AIRPORTS PROJECT 46 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

Further developing the key criteria discussed and additional considerations, this chapter examines airline drivers in decision making and the selection of new routes. It is critical to put on the ‘airlines shoes’ and understand their 9 Airline Drivers product, strategy and where the potential new regional route will fit in their network planning. Subheadingt 9.1. Airline Clusters Airlines serving Australian airports can be broadly grouped into three clusters, as follows: 1. Pure low cost carriers, typically serving point-to-point and self- connecting traffic, 2. Full service carriers, but not in a formal alliance, and 3. Formal alliance carriers: Jetstar sits outside the clusters, as low cost but with informal alliances.

Full Service/Legacy Full Pure Low Cost Low Pure No alliance Informal alliances Formal alliance member FIGURE 9-1 AIRLINE CLUSTERS

REGIONAL AIRPORTS PROJECT 47 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

The proportion of these clusters serving Australia has also been changing are operated using larger wide-body aircraft (e.g. A380) and their success is over the last decade, moving from being all full service long haul carriers founded on hubbing and connecting traffic before and beyond their home (Qantas, Air New Zealand, Singapore Airlines, Cathay Pacific, Malaysia hub markets. Airlines, Thai Airways) to a substantial increase in both Middle Eastern carriers and low cost long haul airlines (i.e. Air Asia X, Jetstar and Scoot). 9.4. Airline Decision Making Full service and Middle East carriers do not normally operate to regional airports (with the exception of Adelaide Airport). Airlines think global. Australia is only one small part of most foreign carrier’s networks and all Australian airports are competing on a global scale with alternative international destinations. 9.2. Significance of Hub Carriers Australia does have a disadvantage to many Asian, American and European The current trend in aviation is for cautious, risk-averse approach into countries in that it is a long flight sector and thus has higher fuel costs than alliances, consolidation and risk-sharing on routes through virtual networks short-haul intra-Asian or intra-European flights. and feeder traffic. It is important for all airports to be cognisant of the fact that airlines will be In this environment, regional airports should focus their attention on two asking themselves ‘what is the opportunity cost of flying to Australia versus a markets: competing international port’? In particular, an airline will run through the 1. Their established domestic carriers and better aligning their domestic following decision-making tree or process in choosing where to place capacity to key hubs with international connections, and additional air capacity. 2. The carriers they have a clear fit with and strong business case for sustainable international services with growth potential. OPPORTUNITY COST OF There is not huge fleet growth beyond the major hub carriers, and as THE MARKET AIRCRAFT ELSEWHERE IN NETWORK/ALLIANCE FIT identified earlier, the potential for Middle Eastern carriers to enter regional NETWORK international ports has declined with industry consolidation and partnerships. Through codeshares with Emirates, Qantas will be able to serve 30 points in Europe over Emirates’ network, as opposed to the two destinations they have served directly in recent times. STRATEGIC/COMPETITIVE/PO THE YIELD POTENTIAL AIR SERVICE RIGHTS For regional airport stakeholders, it will be crucial to emphasise the benefits LITICAL CONSIDERATIONS arising from domestic connectivity and the increased choice in connecting destinations for outbound travel as well as the increased visitor markets able to access the destination.

9.3. Shift of Hubs from SE Asia to China and the Middle East THE COSTS FEEDER TRAFFIC POTENTIAL GROWTH POTENTIAL There is a growing trend for global hubs towards moving north and west away from the traditional ‘Kangaroo Route’ from Australia to Europe via hubs at Singapore, Hong Kong, Malaysia and Bangkok to new hubs in emerging FIGURE 9-2 AIRLINE DECISION-MAKING economies of China (Canton Route) and the Middle East (the Falcon Route). This shift in hubs will impact regional airports as the routes over new hubs

REGIONAL AIRPORTS PROJECT 48 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

Based on experience and airline interviews for this project the following — Key feedback from airlines illustrating the importance of the whole- describes how an airline approaches a decision to fly to a new destination: of-region support for a new route was: The Market: “The whole community works together in the regions better. This — What is the mix of passenger segments and who will potentially fill builds confidence and support and this enthusiasm can have a the plane? That is, is there a mix of business travellers (who pay a positive impact for those regions with a smaller marketing budget” higher airfare), visiting friends and relatives (VFR) traffic and [Airline] leisure traffic? The Yield Potential: — What other segments can assist in maintaining all year round — Where are the passengers coming from and what level of airfares demand with reduced seasonality? These segments may be are they likely to pay? connecting traffic from domestic flights and those travelling for — Is there evidence of existing yield or corporate ‘anchors’ in the education or events. destination (i.e. head offices or subsidiary offices where — Is there a directional balance between inbound and outbound passengers will have a high propensity to travel and will be willing travellers? to pay flexible and business class fares?). — Does the size of the local population at the destination support — Key feedback from airlines illustrating the importance of a route sustainability? having a long-term yield potential and growth profile was: — Overall, the market must be able to show a historical trend of “We take a long term (3 year at least) profit position. There are a growth, the destination show potential for growth (including host of drivers specific to long-haul, network and full service population growth and economic investment) and more carriers that may be different to low cost carriers. Overwhelmingly, importantly, be able to fill the aircraft type selected for a daily flight market demand is the most important consideration to start a new in the long term? service. We want to know how is the demand being served? — Do the market characteristics fit the airline model? This is key – Where is it coming from and can it be stimulated in the future? How airports need to think of themselves as a product like any other can yield be stimulated”? [Airline] (compare to the Technology Industry or Retail). The Costs: — Does the destination product match the airline product? For example, a predominantly leisure market should be targeting — What is the cost comparison to fly to this destination versus airlines which focus on leisure with a lower cost base. competing destinations? — Key feedback from airlines illustrating the importance of the market — Does the cost profile match the yield potential in order to derive a and passenger mix to the viability of a new route was: sustainable profit? “If it’s a brand new route with no historical data, the decision for — Analysis of all costs are included here – from direct costs (the market growth potential is based on destination appeal. How does actual cost of operating the service from point A to point B the destination appeal to our core customer segments? Is there a including airport, airport support services, navigation, fuel, staffing mix of segments (ie. business, visiting friends and relatives and cots) to indirect operating costs – aircraft leasing and head office leisure, students?). If a route is heavily weighted toward leisure costs proportioned to that route. traffic then more marketing investment from the destination is Opportunity cost of aircraft elsewhere in the network: needed for the business case”. [Airline] — What potential profit do competing destinations offer compared to this route?

REGIONAL AIRPORTS PROJECT 49 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

— Can the airline achieve high aircraft utilization for this route vs. Growth Potential: competitor? — Can the airport business case demonstrate long term growth — What other traffic can the airline capture by operating this route vs. potential for this route? What is the forecast passenger numbers a competitor? over a 5 year period? — What other competition exists to the destination vs. competition? — For some full service carriers (i.e. Middle East carriers in — Where does the core home market want to travel to? Risk analysis particular), if a route can demonstrate a profit is potentially viable of a new route for that aircraft type. within 2-3 years, the airline may be willing to take the risk and invest in a new route that may not be profitable in the first 12 Air Service Rights: months. — Does the airline have rights to fly to the destination and if not, are Again, the overriding driver for a new service will be market sustainability they obtainable? and profitability. Feeder Traffic Potential: — Is there an ability to capture ‘top-up’ traffic through alliances and partnerships as well as the carriers own domestic passengers in the home market. — How can the airline reduce seasonality and load factor risk by capturing multiple sources of passengers? Traffic sourced over a hub Network Alliance Fit: Bridge, — Is this a strategic route based on the airlines alliance partnership? Before & — Does this route contribute additional value to the overall airline Beyond traffic network by capturing new markets and feeder traffic? — Aircraft utilisation is key here and timing of the schedule suitability to how that aircraft is used for the rest of its working day or week. Network feed from short- Strategic/Competitive and Political Considerations: haul network — Most airlines would see this as only a small weight to the final decision. Network feed — Airlines which are partly government owned or controlled are more Point to point from alliance likely to have this factor as a consideration on the final route traffic chosen (after the commercial imperatives are met). partners — If there are two competing airports for an aircraft service and if both have similar profit potential, this factor of strategic importance and FIGURE 9-3 SOURCES OF PASSENGERS TO ENHANCE SUSTAINABILITY political relevance will influence the final decision.

REGIONAL AIRPORTS PROJECT 50 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

9.5. The Ultimate Airline Check List Sustain daily operations Building on the airline decision making process discussed above, airlines with demonstrated Population 100,000 + High propensity to travel furthermore seek the following criteria in a destination to aid in this decision. potential to increase frequency We earlier outlined a ‘check-list’ for regional airports to compare their destinations against in order to understand their potential route development opportunities and which areas need further development to achieve the ultimate goal of international air services. Figure 9-4 looks at what an airline might consider a checklist in route selection, this should be considered when an airport assesses a route business case. Network fit: High aircraft Preference for: lower Preference for: year round utilisation seasonality operations It is important to note that each airline has their own individual set of criteria and benchmarks for a new route opportunity. However, these criteria above represent an overlap in essential elements to a new route business case discussed with both full service and low cost carriers. Low cost carriers will have more emphasis on volume and a low cost base compared to a full Regional's need Brand new route with no service carrier. Thus it is key to note that airports need to first understand disproportionate incentives: historical data: the •lower cost of operations and destination appeal and what drives the targeted airline and how their destination market profile and Target 80% load factor charges to compensate for lower volume of tourism infrastructure will fit in that airlines framework and strategy. There is not one volume and limited passenger segments becomes most important size fits all. criteria

In recognising that tailored decision making criteria is existent in airlines, evidence shows that 95% of an airline’s decision to operate a new route will FIGURE 9-4 AIRLINE CHECKLIST FOR NEW ROUTE POTENTIAL be based on the route’s profitability potential and sustainable long term growth in the market.

REGIONAL AIRPORTS PROJECT 51 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

This report has identified a range of issues that airports, local stakeholders and all levels of government need to consider in order to develop 10 Conclusions and international services at Tier C Regional airports. We have illustrated that airports and governments need to develop a sound business case structured around a solid market understanding Actions coupled with addressing a range of key criteria. An airlines core consideration is the profitability of a new route and while regional airports will struggle to compete in areas such as per passenger Subheadingt costs, they can nonetheless work to develop international passenger markets through domestic connections, building these up towards a significant volume where the business case becomes enticing to an airline. Combining this with addressing the key criteria discussed, core airline drivers and developing a community wide approach to route development will assist in presenting a strong business case to any potential airline. This chapter summarises the key findings from this study and details actions that airports and governments can undertake to develop the growth of international passengers at regional airports that is in addition to the ongoing existence of ‘the Packages’ discussed at the outset of this report.

10.1. Addressing the Challenges A Regional Airport and its relevant local and state governments can address the challenges to growth in the following ways; Clearly define its market positioning – what unique competitive advantages can regional ports deliver to potential airlines?; Define and target a mix of passenger source markets; If these don’t currently exist, what is the long term strategy to build these markets via domestic flights and other sources?; Work intimately with a local stakeholder groups with clear targets; and Select relevant markets with potential for long term growth. Overall, the major disadvantage that regional airports possess is the ability to compete on cost and revenue sources of passengers compared to capital city airports. From a cost perspective, the challenge is lowering the average cost per person for an airline to service that destination compared to economies of scale achievable at gateway airports and also the choice of service providers for other airport services are limited (ie. ground

REGIONAL AIRPORTS PROJECT 52 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

handling operators). On the revenue side, gateway airports have access to a greater number of passenger sources and a greater mix of yield opportunity as they have larger population bases, increased domestic connecting services and generally more business travellers. Couple this with a higher level of tourism product volume (ie. More accommodation rooms available) and regional airports need to have a stand out offer for an airline and demonstrate their niche opportunity and ability for growth to attract a new airline service. This is achievable if the desire and cohesion exists as has been demonstrated in the Airport Case Study section of this report.

10.2. The Role of Individual Stakeholders in Addressing Challenges As previously highlighted, successful regional destinations have enjoyed the full support of all levels of local tourism, government, product and local businesses to build an attractive airline business case. Usually driven by the airport, the collective group of stakeholders target various levels of the airline, travel trade and business to develop a series of key messages to the airline and commence building the story of market demand. In most cases, the conversion of a new international air service can take 3-5 years from idea conception and first approach to operation of a viable new airline service. Thus, a long-term strategy and supporting investment is needed. State and regional tourism organisations also need to embrace the need for outbound travel to ensure sustainable air services for the long term. In practise, this could mean drawing on reciprocal relationships with other FIGURE 10-1 ROLES OF KEY STAKEHOLDERS IN ACCESS DEVELOPMENT international tourism organisations from source markets, creating introductions for airports to meet government officials and build relationships with relevant foreign parties. It is important to clearly identify 10.3. The Performance of the Regional Packages all the passenger source markets possible, who can influence those It is important to note that while the findings of stakeholder consultations potential passengers to travel and how can partnerships work to either reinforced the conclusion of Stage One of the Regional Airports Project, invest in marketing, awareness, reciprocal support and business ties (i.e., that there is limited awareness amongst airlines of the Packages), the between the two destinations connected by an air service. reality is that the packages themselves will not generate new international air services to regional airports. Overwhelmingly, the commercial viability and sustainability of the air route itself to the destination is what generates new international air services. Thus, it is not really relevant if airlines are not fully aware that the packages exist or of their specific details – as most airlines will make a decision to fly to a regional port if it represents a profitable business case

REGIONAL AIRPORTS PROJECT 53 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

and the airline network planning managers will investigate bilateral rights Some perceive foreign governments from emerging markets do not available as part of the business case. However, the packages are understand why the Regional Packages are encouraged in bilateral important to have in place and should be continued in order to facilitate an negotiations and are suspicious – why is access free? environment conducive to allowing international flights to regional airports.. What is happening with Stage One and the communication plan? The Packages effectively remove regulatory barriers to facilitate market Airports are keen to see taken following this project. dynamics and commercial realities (which will always rule). In conclusion, it is recommended the Australian Government Marketing and awareness of Australia being an ‘open skies to regional continue to encourage the uptake of the Regional Packages to ensure areas’ country is helpful for airports at a strategic level to ensure foreign no hurdles exist to growing international air services to regional carriers are aware that facilities and infrastructure exists beyond the four airports. However, while a communication strategy and collateral will major Australian gateways. However, it is not a decision driver – more an assist in improving the awareness and understanding of what benefits the enabler. Packages can bring and also that Australia has more to offer than only the Specific stakeholder feedback on the Packages can be summarised as four major gateways, it is unlikely that this alone will lead to new air follows: services. Airline Feedback Available capacity is a key consideration once a decision has been made 10.4. Airport Actions a route can be profitable. Leverage off strong established international flows with domestic The Packages are not an incentive where ample capacity already exists connections to capital city gateway airports and to build domestic between two markets. frequency and capacity. The long term goal, for some airports, would include building a business case for direct international services by Market sustainability is the number one driver. tracking international connections and passengers on domestic If capacity is not in place, the airlines know they can speak to flights to demonstrate a sizeable market exists with good growth government to have it put in place. potential. It will be crucial to emphasise the benefits arising from domestic connectivity and the increased choice in connecting Airports destinations for outbound travel as well as the increased visitor Understand that commercial considerations are far more significant to markets able to access the destination. airlines. Build a business case around the tracking identified above and invest in The packages are a nice to have. targeted marketing before attracting new international air Mention the Packages when bilateral capacity comes up with airlines services and when the market has matured, work towards the goal during capacity. of long term sustainable direct flights. Accept it is unrealistic to expect capacity to be restricted to gateways, in Include in a business case for a route how it will be sustained order to promote regionals. through lower seasonal periods (identifying actions to reduce seasonality) and how it can draw feeder traffic and not just rely Believe the Packages need government support, particularly in China, on point-to-point traffic. were the expectation is a package would be presented by government, not an airport. Demonstrate in a business case what the forecast for the growth of a route will be over five years, and how that growth is going to be

REGIONAL AIRPORTS PROJECT 54 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012

delivered through expanding passenger markets and the passenger landing fees and marketing dollars. Many stakeholders mix, as the route matures. interviewed would welcome the partnering of government to Provide appropriate infrastructure (runway length, passenger reduce the Passenger Movement Charge (PMC) for the initial processing ability (Customs, Immigration, Quarantine) and aircraft start-up phase (normally seen as 12 months) for a brand new parking positions in particular), understanding market opportunities route. Specifically, this could mean a 75% or 50% discount per and matching infrastructure to aircraft types and airline strategy are passenger for the start-up phase. In reality, this would be revenue also core actions. Specifically, what type of carriers is the airport neutral to the Australian Government as it would only be used for likely to attract (i.e. low cost or full service or a mix) and how can the flights that may have operated to other international countries and airport best tailor their product offering to match? not Australia, and as such, Australian would not have earned that revenue at all without any start up investment. 3. As previously mentioned, the Australian Government also has a 10.5. Government Actions key role in providing senior political delegations and participation in As outlined above, the Australian Government’s key role is to ensure a airline negotiations (where relevant) to demonstrate commitment framework exists that will reduce the hurdles for regional airports to attract and build confidence within senior airline ranks. and operate new international air services. The bilateral Packages are working to reduce any barriers to commencing operations to a regional To further explain point two above, many new routes experience their airport; however there are some additional hurdles to the effective greatest challenges during the start-up phase, and many airline models implementation and sustainability of a service in regards to the cost of expect a route to achieve a profit in a relatively short period. Typically an operation at regional airports. Whether these hurdles are real or perceived airline will expect all the commercial partners to incentivise it to operate a by stakeholders based on individual experiences, there is a need for new route by reducing their charges in the start-up phase, coupled with co- governments to work closely and consult with individual operators under operative marketing programmes requiring contribution from airlines, an objective of ‘cost reduction’. Some of the key costs have been airports, tourism organisations and tourism industry partners. discussed earlier in the report; however the most relevant for government Stakeholders proposed that for a brand new, uncontested route, assistance can be broken into two categories: government support the opportunity along with all other partners, by 1. Tailored solutions for CIQ to match individual airport needs. considering a reduced rate PMC charge for a honeymoon period. For those regional airports that have been successful in generating Stakeholders consider that as the route is new and the passengers would a viable business case and attracting a new airline/air service, potentially all be upside, government would be showing a commitment to provide matching support based infrastructure is key. In practise, share the risk with all other parties and be a committed participant and this could mean changing minimum ‘standards’ or desk required demonstrate shared commitment to the airline partner. for quarantine processing at Tier C airports. Establishing a group The above recommendations are made subject to a change of government made of Tier C airports and CIQ with a view of understanding the policy as some of the recommendations presented sit outside current operational needs and resulting cost implications and location policy, but could be explored, if revenue neutral. specific criteria would demonstrate a true partnership approach. 2. Partnering with airports and regional communities to incentivise new flights. Most regional airports (whether private or council owned) need to incentivise airlines to operate to their destination given the opportunity cost for airline to fly to gateway airports. These incentives can be in the form of reduced airline

REGIONAL AIRPORTS PROJECT 55 STAGE 3 REPORT REGIONAL-AIRPORTS-PROJECT-REPORT.DOC CW/IM 7/12/2012