Airline Markets in Asia to/from Australia
An overview of the airline markets in S.E and N.E Asia to/from Australia and the impacts of the economic downturns.
Introduction
The international market between Australia and Eastern Asia’s airlines has been a major part of the global airline market for decades, which has created economic benefits for both Australia and NE, SE Asian countries. This paper will look deeply into the market in various aspects such as, the structure of the market, the elasticity of demand of the market of this air route (Southeast and Northeast Asia to/from Australia), and the factors that affect the changes of demand and supply of this particular aviation market. Apart from the market description, this essay will also provide a clear review of the key airlines involved in the carriage of this traffic, followed by an investigation of impacts that caused by the economic downturn and recent events such as swine flu on travel patterns.
Australia’s arrivals
According to the recent report on international movements of Australia issued by Australian Bureau of Statistics, from year 2008 to June 2009, there was a record of 23.8 million travelers crossing the Australia’s international borders. In which over half of the total movements in 2008-2009 were arrivals to Australia. This consists of 5.8 million Australian residents who were returning after a short-term absence from Australia, and 6.5 million visitors from overseas arriving for either a short-term or long-term stays. (2009, Internet)
Moreover, the figures from the Australian Bureau of Statistics has also shown that, Southeast and Northeast Asian countries were the largest contributors to short-term visitor arrivals to Australia, apart from New Zealand, UK and USA, i.e. Japan(7.3%), China(6.5%), Singapore(5%), Malaysia(3.5%), Korea(3.5%) and Hong Kong(2.7%). In addition, the short-term arrivals from China have been recorded as the strongest growth over the period with contributions of 1.9% in 1998-1999 and 6.5% in 2008-2009, which is a 4.6% (276,000visitors) increase.
Australia’s departures
According to the previous report, there were 5.8 million Australian residents who travelled overseas for short-term visits from 2008 to June 2009, which has increased by 0.1 million comparing to 5.7 million in year 2007 to 2008, and a 2.6 million increase comparing to ten years ago- 1998 to 1999, which has 3.2 million residents departing Australia short-term.
The following table shows the top ten destination countries for short-term resident departures. Amongst all Asian countries that listed below, Indonesia is the largest contributor to short-term resident departures from Australia with a proportion of 7.5%, followed by Thailand (6.5%), China (4.6%), Singapore (3.7%), Malaysia (3.5%) and Hong Kong (3.4%).
Southeast Asian countries such as Indonesia, Thailand, Singapore and Malaysia; and Eastern Asia countries such as China and Hong Kong, have tremendous contribution proportions, regarding the data of both short-term visitor arrivals and short-term resident departures of Australia. Since the number of visitors to/from Eastern Asian countries in Australia has been increasing, this also represents a strong growth in demand of air tickets between these countries, thus a sturdy stimulation on airlines’ profits.
Market description
The term ‘market’ is a place where buyers and sellers meet to exchange goods and services where there is a potential for a transaction to take place. (……….) The term ‘market structure’ is the interconnection of market characteristics, the number and relative strength of buyers and sellers, and degree of collusion among them, level and forms of competition, and ease of entry into and exit from the market.(….) In theory, there are four kinds of market structures, they are, Perfect Competition, Imperfect Competition, Oligopoly and Monopolistic Competition.
An ‘Oligopoly’ market is a market situation between Perfect Competition and Monopolistic Competition. An Oligopoly Market has 6 main characteristics.
- There are only a small number of sellers but many buyers, e.g. dominated by several major sellers.
- There is an independence among sellers, which means actions of one seller will lead to rapid response of others.
- Products sold by sellers are considered as homogeneous, that means there is only little or no difference of the products in buyers’ viewpoint.
- There is a presence of entry barriers. As entering the market is rather difficult since existing sellers are usually well-established.
- Price rigidity. Cutting price will soon be followed by other sellers, so price tends to be rigid.
- Non-price competition, i.e. differentiated services and marketing campaigns are used to boost sales
The above characteristics of an Oligopoly market can be fully applied to today’s global airline market, the same would also be true to the airline market that in Eastern Asia to/from Australia.
Firstly, the number of air ticket buyers is definitely greater than airlines that are selling air tickets, this totally satisfy the first rule.
Secondly, there is interdependence between airlines; this phenomenon can be explained by the occurrence of intensive price wars between each airline on the air route between Eastern Asia and Australia, which is really common in the airline industry nowadays, and this also satisfies the second and fifth feature of an oligopoly market.
Thirdly, it is obvious that the main purpose of buying an air ticket of a passenger is to commute from point A to B, and in buyers’ point of view, each airline provides the same service, therefore the ‘product’ here is regarded as homogeneous.
Fourthly, in order to compete in an airline market, airlines have to differentiate their product in different ways other than cutting prices. For example, by advertising it’s catering services, in-flight entertainment systems, and cabin classes.
Lastly, let’s discuss the existence of entry barriers in an airline market. Since the set-up cost of an airline is extremely high, interested investors cannot just enter the market even if there is profit to be made in the industry. Also, it would be extremely difficult to compete against the existing airlines which are well-established, e.g. Qantas, Singapore Airline, Cathay Pacific….
Moreover, airlines’ reputations are another important component in the airline industry which takes time to build up, and this can be a huge disadvantage to newly setup airlines.
Given the detail nature of the airline industry and the characteristics of an oligopoly market that mentioned above, we are able to conclude that the market structure of the airline market is an oligopoly.
The price elasticity of demand of the airline market
‘Demand’ refers to the amount of a good a consumer is able and willing to purchase at various prices for a specified period of time, ceteris paribus. ‘Supply’ refers to the amount of good a producer is willing and able to produce and sell at various prices for a specified period, ceteris paribus. ‘Elasticity’ refers to the measure of the responsiveness of demand and supply of a good or service to the change of market price (…….)
The elasticity of demand of an airline market depends on various factors. Key influences include
- the availability of close substitutes
- proportion of total expenditure
- degree of necessity
First of all, since the availability of close substitutes for air transport diminishes with distance travelled, it is expected that the demand for air transport will be less elastic for long-haul flights than for short-haul flights. Referring to the air route between Eastern Asian countries and Australia, it falls into the long-haul flight category, which means the demand of air tickets of this route is relatively inelastic. Secondly, international travel tends to be spread over more time than domestic travel, so that the airfare is a smaller proportion of overall trip costs, which makes international travel less sensitive to changes in ticket prices. In addition, according to the statistics of international movement that conducted by ABS, the main reasons for journey of Australia’s visitors are as holiday (47%), followed by visiting friends and relatives (23%) and business (11%). Leisure travelers are more likely to postpone trips to specific locations in response to higher fares, or to shop around for those locations offering more affordable fares. Consequently, it is expected that the demand for air transport for leisure reasons will be more elastic than business travel.
To sum up, there are three major factors that affect the elasticity of demand in the airline market. 2 out of 3 factors result in a relatively inelastic demand curve, therefore, the demand of air tickets of routes between Australia and Eastern Asia is fairly inelastic.
The Key Players
According to the data collected from the Sydney Airport webpage, the four major Australian and Asian airlines that have the highest frequency of flights between Sydney and Eastern Asia are Qantas (≈16 flights/day), Singapore Airline(≈10 flights/day), Cathay Pacific(≈8 flights/day), Air China (≈4 flights/day).(…….)
Qantas
Qantas Airways Limited (ASX: QAN) is the national airline of Australia. The name was originally "QANTAS", an acronym for "Queensland and Northern Territory Aerial Services". Nicknamed "The Flying Kangaroo", the airline is based in Sydney, with its main hub at Sydney Airport. It is Australia's largest airline and is the world's second oldest continuously operating airline (behind KLM). Qantas is headquartered in the Qantas Centre in the Mascot suburb of the City of Botany Bay, Sydney, New South Wales.
In 2009, Qantas was voted the sixth best airline in the world by research consultancy firm Skytrax, a successive drop from 2008 (third), 2007 (fifth), 2006 (second) and 2005 (second).
Singapore Airlines
Singapore Airlines Limited (SIA) is the state-owned national airline of Singapore. Singapore Airlines operates a hub at Singapore Changi Airport and has a strong presence in the Southeast Asia, East Asia, South Asia, and "Kangaroo Route" markets. The company also operates trans-Pacific flights, including the world's two longest non-stop commercial flights from Singapore to Newark, New Jersey and Los Angeles, California on the Airbus A340-500.
Cathay Pacific
Cathay Pacific Airways Limited is the flag carrier of Hong Kong, with its headquarters and main hub at Hong Kong International Airport. It also operates fifth freedom flights from Taipei and Bangkok, the airline's major focus cities. The airline, along with subsidiary Dragonair, operates passenger and cargo services throughout the world in 27 different countries operating under the CX or KA flight code. The carrier is a commercial airline with no financial support or subsidies from the Government of Hong Kong. The major shareholders are Swire Pacific and Air China.
Air China
Air China Ltd, literally "China International Aviation Company", is the People's Republic of China's state owned and second-largest commercial airline after China Southern Airlines. It is the flag carrier and the only airline in the world to fly the national flag on its entire fleet. Its logo consists of a phoenix in the form of the acronym VIP, and "Air China" in both English and Chinese, which was autographed by Deng Xiaoping. It operates 5,090 flights each week worldwide and is the 18th largest airline in the world by fleet size.
