Melbourne-Sydney passenger growth hits 6½-year low; Reserve Bank ready to act “if needed”

Domestic air travel; Weekly consumer sentiment; Reserve Bank Board minutes

• People flying: There were 5.12 million passengers carried on Australian domestic commercial aviation (including charter operations) in May 2019, an increase of 0.7 per cent on May 2018. Rolling annual passenger growth on the Sydney-Melbourne route is at 6½-year lows.
• Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating fell by 1.5 per cent to 115.8 points. But consumer sentiment is still above the average of 114.4 points held since 2014 and the longer term average of 113.1 points since 1990.
• Reserve Bank: Minutes of the July 2 Reserve Bank Board meeting were released. The Board reduced the cash rate by 25 basis points to a record low of 1.00 per cent and said, “The Board would continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”

The consumer confidence figures have implications for retailers, and other consumer-focussed businesses. Domestic aviation data is a key indicator for airline and airport performance as well as the broader economy. The Reserve Bank Board minutes and speeches provide guidance on interest rate settings.

What does it all mean?

• The Reserve Bank is fixated on developments in the job market. Policymakers would prefer to see a much lower unemployment rate (closer to 4.5 per cent) than the current level of 5.2 per cent to spur wages and prices growth.
• But in the minutes of its July 2 Board meeting released today, the Board admitted that it’ll take “some time” to erode spare capacity in the labour market due to record participation and an expanding working age population.
• Aussie domestic travel demand weakened in the lead up to the Federal Election in mid-May. The more challenging market conditions were particularly evident for the key Melbourne-Sydney route. Passenger numbers are growing at the slowest annual growth rate in almost seven years.
• In May, Qantas reported a 2.3 per cent lift in revenues for the third quarter of fiscal year 2018/19, supported by resilient domestic leisure demand.
• But Qantas CEO Alan Joyce said that while activity in the resources states of Queensland and Western Australia had picked up, demand from the broader corporate sector for premium business class seats lagged. In particular, small businesses and firms operating in financial services, telecommunications and construction were called out for their “dampening impact on travel demand.”
• Consumer confidence continues to ebb and flow. After a 4 per cent lift over the week ended June 30 – the biggest increase in 12 months – sentiment has fallen by 2.6 per cent in aggregate in successive weeks.
• While the initial positivity of consumers focused on interest rate and personal tax cuts has waned recently, it is still expected that spending will lift in the coming months once tax refunds hit Aussie bank accounts.
• But Aussies could get a head start on their ‘retail therapy’ with Amazon’s Prime Day sales kicking off this week, triggering aggressive discounting from Aussie bricks and mortar retailers.

What do the figures show?

Domestic aviation

• There were 5.12 million passengers carried on Australian domestic commercial aviation (including charter operations) in May 2019, an increase of 0.7 per cent on May 2018.
• There were 4.88 million passengers carried on regular passenger transport (RPT) flights in May 2019, an increase of 0.4 per cent on May 2018.
• For the year ending May 2019 there were 60.97 million RPT passengers, an increase of 0.4 per cent on the year ending May 2018.
• Capacity, measured by available seat kilometres (ASKs), increased by 1.2 per cent compared with May 2018 to a total of 7.25 billion. With RPT passenger traffic increasing at a faster rate than capacity the industry wide load factor (RPKs/ASKs) decreased from 78.2 per cent in May 2018 to 77.4 per cent in May 2019.
• On the key Melbourne-Sydney route, passenger numbers were up by 0.9 per cent on a year ago. On a rolling annual total (smoothed) basis, annual passenger growth fell by 0.3 per cent – the biggest decline since August 2012.

Consumer Sentiment

• The weekly ANZ-Roy Morgan consumer confidence rating fell by 1.5 per cent to 115.8 points. Consumer sentiment is still above the average of 114.4 points held since 2014 and the longer term average of 113.1 points since 1990.
• Four out of the five major components of the index fell last week:
  • The estimate of family finances compared with a year ago was down from +13.0 points to +10.0 points;
  • The estimate of family finances over the next year was down from +27.1 points to +25.2 points;
  • Economic conditions over the next 12 months was down from +3.3 points to +2.3 points;
  • Economic conditions over the next 5 years was down from +10.9 points to +8.0 points;
  • The measure of whether it was a good time to buy a major household item was unchanged at +33.8 points.
• The measure of inflation expectations rose from 3.9 per cent to 4.1 per cent.

Reserve Bank July Board minutes

• The case for lower interest rates: “As assessed at the previous meeting, members agreed that the Australian economy could sustain a lower rate of unemployment, while achieving inflation consistent with the target. In light of this, the recent run of data and the lower level of interest rates resulting from the decision taken at the previous meeting, the case for a further reduction in the cash rate was considered.”
• Economic and inflation outlook: “Members judged that a further reduction in the level of interest rates would support the necessary growth in employment and incomes, and promote stronger overall economic conditions, which would in turn support a gradual increase in underlying inflation.”
• Job market outlook: “Employment growth had remained strong, at 2.9 per cent over the year to May. Despite this, there was still spare capacity in the labour market. Some of the additional labour demand had been met by an increase in the participation rate, which had reached its highest level on record. Even so, forward-looking indicators, such as job advertisements and employment intentions, suggested that growth in employment would moderate over coming months.”
• Labour market spare capacity and wages growth: “Although there had been a modest pick-up in wages growth in the private sector, wages growth had remained low overall. In combination, these factors suggested that spare capacity was likely to remain in the labour market for some time.”
• Household incomes and spending: “Despite strong growth in employment, growth in household disposable income had remained low and this had contributed to low growth in consumption. Members noted the near-term prospects for a lift in income growth and the contribution of the low and middle income tax offset. Higher growth in disposable income was expected to support consumption, although the outlook for consumption remained uncertain.”
• Housing outlook and household debt: “Conditions in the established housing markets of Sydney and Melbourne had improved a little since the previous meeting. Housing prices had stabilised in June in these cities and auction clearance rates had picked up further, albeit still on low volumes. More generally, turnover in the housing market had remained low. Housing prices had continued to fall in Perth and Darwin.”
• Home lending: “…an easing in the loan serviceability interest-rate floor was likely to see a boost in borrowing capacity for many new borrowers, which would be in addition to the positive effect on the cash flow of the household sector overall following the reduction in the cash rate at the previous meeting.”
• Global interest rates: “Members commenced their discussion of financial markets by noting the significant change in the expected path of monetary policy around the world, particularly in the United States.”
• Rate cut decision: “The Board would continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”

What is the importance of the economic data?

• The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.
• The Bureau of Infrastructure, Transport and Regional Economics (BITRE) releases data on domestic and international aviation each month. The data is useful in tracking consumer spending and airline performance as well as broader economic activity.
• The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.

What are the implications for interest rates and investors?

• An important leading indicator of Aussie economic activity is the growth of airline passenger numbers – especially the key business route between Sydney and Melbourne – one of the busiest aviation corridors globally. Business class airfares have been cut by the fastest annual rate in six years, down 10.6 per cent from July 2018, in an attempt to entice corporate travellers back into business class cabins.
• It is hoped that recent interest rate cuts will coax businesses to lift spending, investment and hiring. In fact, combined with greater policy certainty, personal income tax cuts, a lower Aussie dollar and a tentative stabilisation in the property market, the business outlook appears brighter. That said, non-mining business earnings look to be under pressure with the August reporting season likely to be instructive.
• In recent commentary, Reserve Bank Governor Philip Lowe emphasised that low mortgage rates, falling borrowing costs, higher iron ore prices, the weaker Aussie dollar and gradually increasing wages were reasons to be optimistic.
• Policymakers, however, have a delicate balancing act. On one hand, they are trying to engineer a ‘soft landing’ in the property market without an “unwelcome” increase in household mortgage debt. On the other hand, they are trying to arrest a slowdown in jobs growth, which is critical to consumer confidence, retail spending and income growth. But population growth remains solid and participation in the work force from females and older Australians are near record highs. And Aussies want to work more hours.
• The Reserve Bank is expected to ‘sit pat’ for now, assessing incoming economic data over the coming months before deciding the next move for the cash rate. But the Board stands ready to act, “if needed” to support the economy and job market.