Travel flies in the face of retail gloom

WE ARE all familiar with the depressed level of retail spending in Australia. From fridges to fashion, and televisions to toys, the picture of the typical consumer is one of short arms and long pockets.

But even this sobering data has been distorted. Because these broad spending trends ignore the fact that Australians have been spending on travel - in particular overseas air travel.

The bad news is that once that is accounted for, it makes the other areas that make up retail sales look even worse.

When it comes to discretionary spending we are more inclined to take a holiday overseas than buy a flat screen TV - and here is another misconception - it is not all about the strength of the Australian dollar.

That's part of it, but not the whole story. If it was all about the currency, the outbound travel market would be strong and the inbound markets weak. Both these segments are experiencing solid growth.

So why is this demand for travel not strongly reflected in the earnings from our major airlines, Qantas and Virgin?

In the first instance we are not only using these carriers. The liberalisation of bilateral agreements between governments has allowed more international carriers into Australia.

And secondly, while our local airlines are carrying more people, they are offering discounted fares, and thus are not getting the boost in their bottom line profits. Their market share of overseas travel (and this particularly applies to Qantas) is being eroded and so are the margins.

And it's even a bit more complicated than this. There is the domestic travel side, which includes business and leisure (or holiday) markets, and then there is the international side.

There has been massive increase in capacity in domestic travel, which is the main reason both Qantas and Virgin reported weaker earnings over the past week.

Then there is international travel, which is particularly interesting. Over the long-term the cost of overseas travel has been coming down and becoming more affordable. This is part of a structural shift in the market. Overseas travel long ago moved to the middle-class market and away from the domain of the wealthy.

If you ignore the business market (which travels because it needs to and is less sensitive to price) the factors that influence overseas travel are just the same as any other purchase decision - price and therefore value.

In the immediate aftermath of the global financial crisis the Australian dollar rapidly appreciated, making offshore travel a far better value proposition.

We are now pretty accustomed to this and despite a number of fundamental reasons, economists said it would fall, but our currency has remained stubbornly high. This might explain some of our reasons for offshore travel. But it doesn't account for why incoming travel to Australia is also pretty strong.

A Deloitte Access Economics report shows international visitor arrivals during the second half of 2012 accelerated strongly. International arrivals were up 5.8 per cent in December and 4.6 per up on the year. And it is expecting growth to continue at this annual rate over the next three years.

What is particularly interesting about these numbers is that the geographic source of visitors is also changing. It's no longer about Europe and the UK - growth in international passengers is coming out of Asia. The trend is backed up by financial statements from Sydney Airport, which showed strong growth in passenger numbers.

Again it's about supply and demand combined with geopolitical change and technology.

Put simply, there are more flights coming into Australia particularly from the emerging middle class areas of Asia. So on the supply side there has been some substantial expansion, which in the past year alone has included two budget airlines entering the Australian market, Scoot out of Singapore and AsiaAir X out of Malaysia.

The existing airlines are also adding capacity (rather than flights) by using larger planes, which are also more fuel and environmentally efficient.

On top of that the Chinese and the Indians are boosting the numbers of inbound passengers. There has also been some revival in traditional markets - including the US and Japan. Outbound travel that experienced a boost when the Australian dollar started its post-GFC rise is only now showing some signs of tapering off in terms of growth rates.

We are still growing outbound travel but the double-digit growth rates have eased, according to Deloitte. Air fares are still coming down but the adrenalin hit from the exchange rate is not as potent, as we have become more accustomed to a high dollar.

Deloitte suggests that this will continue to lose momentum as they expect the currency will depreciate over time. That remains to be seen.

In the meantime, the domestic leisure market remains subdued despite the fact that increased capacity has pushed down airfares. The area of increased activity on this front is derived from visits to family and friends rather than holiday travel.