This research aims to quantify the effect of air transport capacity on tourism demand by examining their long-term (cointegrating) relationship, accounting for cross-sectional dependence and endogeneity. Panel time series data from 2008Q1 to 2019Q4 for international tourist arrivals from 16 main origins to six Australian states are investigated. The study finds 1% increase in Available-Seat-Kilometers, seat capacity, or flight frequency can result in 0.4%–0.7% increase in tourist arrivals to Australia, adding to the body of evidence that shows a non-negligible aviation-led generative effect on tourism demand. The study finds ignoring cross-sectional dependence can result in significantly different, and potentially incorrect, coefficient estimates. Although using pre-COVID data, the results are useful in highlighting the likely aviation supply—tourism demand relations under reasonably well-performing market conditions. For greater tourism demand, findings call for more liberal international air services agreements, and direct/indirect air route development subsidies with minimum commitment of several years.