Transport Colloquium 2006Transport Colloquium 2006Department of Transport and Regional Department of Transport and Regional

ServiceService

The Level Playing Field: Does The Level Playing Field: Does

Government Need the Heavy Roller?Government Need the Heavy Roller?

Andrew MillerAndrew Miller

CEO, Centre for Asia Pacific AviationCEO, Centre for Asia Pacific Aviation

The operating environment of airlines is becoming increasingly complex.

Intensified CompetitionIntensified Competition•LCCs Invading MarketsLCCs Invading Markets

•Growth of New World CarriersGrowth of New World Carriers•Declining YieldsDeclining Yields

Regulatory Regulatory EnvironmentEnvironment•Open SkiesOpen Skies•BilateralsBilaterals•Capacity ConstraintsCapacity Constraints

Rising CostsRising Costs•Rising Fuel PricesRising Fuel Prices•Rising Airport Rising Airport ChargesCharges•High Operating CostsHigh Operating Costs

Network and Aircraft ChoiceNetwork and Aircraft Choice•Point/Hub to PointPoint/Hub to Point

•Hub BypassHub Bypass

Uncontrollable Uncontrollable ThreatsThreats •Epidemics (SAARS Epidemics (SAARS and Bird Flu)and Bird Flu)•Political InstabilityPolitical Instability

CustomersCustomers•High Customer High Customer ExpectationsExpectations•More Price-sensitive More Price-sensitive Customers Customers •Increased Price Increased Price Elasticity/SeasonalityElasticity/Seasonality

Full Full Service Service CarriersCarriers

US airlines fail to produce profits, while US airlines fail to produce profits, while Europe, Asia weather it better.Europe, Asia weather it better.

Loss of US$6.7

Jet fuel prices at record

highs

Jet fuel prices at record

highs

Competition escalates;

LCC growth

Competition escalates;

LCC growth

Capacity pressures in key markets

Capacity pressures in key markets

US

Europe

AsiaPacific

Profit ofUS$1.6b

Profit of US$2.1b

Total Loss of US$3.2b

2005 2006FLoss of

US$5.2b

Profit ofUS$1.3b

Profit ofUS$1.7b

Total Loss of US$3.0b

Source: IATA Estimates

The DNA of geography, technology The DNA of geography, technology and history.and history.

Dubai

Sao PauloJohannesburg

Aircraft choice: point to point versus hub to hub

Source: Boeing

Globally, the confidence up… but is it Globally, the confidence up… but is it misplaced?misplaced?

0

500

1000

1500

2000

2500

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

No

. a

irc

raft

-7

-2

3

8

13

%

Total orders Pax traffic growth (RPKs)

Recession

Asian Crisis

9/11

Source: CAPA Analysis

Despite uncertainty, aircraft order books fill to overflow - driven by costs, new types.

0

50

100

150

200

250

300

350

400

China/HongKong

India SE Asia Other NorthAsia

Japan Aust/NZ Middle East

Narrow-bodied Medium LargeSource: CAPA Analysis

40-50% of total orders in 2005;40-50% of total orders in 2005;mostly narrow bodies.mostly narrow bodies.

1,217 aircraft due for delivery1,217 aircraft due for delivery

Australian inbound traffic by carrier

Source: BTRE

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

20,000,000

2 005 2 004 2 003

QF SQ NZ EK TG OS BA MH CX JL Others

32.5%

12.4%

10.0%

22.07%

35.6%

3.2%

2.7%

3.6%

3.4%

3.2%

7.0%

35.8%

20.64%17.4%

10.1%

12.6%12.6%

5.1%

Key differences between legacy carrier costs and LCC’s costs. With a lower cost base, Singapore Airlines and Emirates have an advantage.

0

2

4

6

8

10

LegacyCarrier

SeatDensity

AircraftUtilisation

Flight,CabinCrew

InflightService

OtherFlight Ops

S&D Overhead Marketing LCC

Source: CAPA Analysis

5 US c/ASK5 US c/ASK

10 US c/ASK10 US c/ASK

Note: Legacy carrier and LCC c/ASK are industry averages

Qantas’ main focus in cost Qantas’ main focus in cost saving initiativessaving initiatives

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M2002 2003 20052004

2005

Launching its own LCC, Jetstar, is the only way for QF to fight competitor Virgin Blue head-on for the price-conscious customer.

Example: JetStar’s Role in Containing Growth of Virgin BlueExample: JetStar’s Role in Containing Growth of Virgin Blue

Source: CAPA Analysis

Billion of RPKs (Australia Domestic)

QantasQantas

Virgin BlueVirgin Blue

JetStarJetStar

Air New Zealand maintains market share, despite small gains by Emirates, Pacific Blue

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

N D J F M A M J J A S O N

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

500000

N D J F M A M J J A S O N

Qantas Air NZ Freedom Pacific Blue Emirates

Qantas 36%

Air New Zealand/Freedom Air

48%

Pacific Blue 7%Emirates 9%

2004 2005

Source: BTRE

The relationship between liberalisation and economic growth

LiberalisationLiberalisation

Newer and Newer and Better Air Better Air ServicesServices

Traffic Traffic GrowthGrowth

Economic Economic GrowthGrowth

Job Job GrowthGrowth

Source: CAPA Analysis

The growing conflict between liberalisation and ownership controls

LiberalisationLiberalisationNew airlinesNew airlines

LCC growth as major LCC growth as major driverdriver

New routes and New routes and additional capacityadditional capacity

Pressure on legacy Pressure on legacy carriers to carriers to restructurerestructure

Tourism growthTourism growth

Ownership Ownership ControlsControlsPrevention of Prevention of consolidation/mergerconsolidation/merger

Support of Support of protectionismprotectionism

Limitation of prospects Limitation of prospects for multilateralismfor multilateralism

Limitation of local Limitation of local capital marketscapital markets

Examples of liberalisation events and results

Source: CAPA Database

Event Results

U.S. Deregulation 1978 Emergence of hub and spoke systems, low cost carriers with nationwide route networks, new entrants and integrated cargo carriers.

U.K. Liberalization of Secondary Airports

Growth of international services to Manchester, Birmingham, Glasgow, etc.

Open Skies Agreements for United Arab Emirates

Growth of Dubai as major international hub.

Domestic Deregulation in India Development of low cost carriers and aggressive, expansion- oriented airlines.

U.K.-India Bilateral and Creation of New Frequencies

Growth of capacity, new gateways and additional carriers operating U.K.-India service.

Domestic Deregulation in Brazil Growth of low cost carrier Gol and others. Single European Market Growth of low cost carriers. Ryanair,

Easyjet, etc. New services, traffic growth, new gateways throughout European Union.

Summary

1.1. The DNA of geography, technology and history determines The DNA of geography, technology and history determines liberalisation requirements with a strong regard to tourism as a liberalisation requirements with a strong regard to tourism as a powerhouse of GDP.powerhouse of GDP.

2.2. Despite tough operating conditions, confidence is up and aircraft Despite tough operating conditions, confidence is up and aircraft orders increased significantly.orders increased significantly.

3.3. Traffic growth subsequent to liberalisation of air services agreements Traffic growth subsequent to liberalisation of air services agreements between countries typically averaged between 12% and 35%.between countries typically averaged between 12% and 35%.

4.4. Global liberalisation of 320 non-deregulated country routes would Global liberalisation of 320 non-deregulated country routes would result in a 63% traffic growth, create 24.1 million jobs and generate an result in a 63% traffic growth, create 24.1 million jobs and generate an additional USD490 billion in GDP.additional USD490 billion in GDP.

5.5. Liberalisation facilitates market access for foreign carriers and Liberalisation facilitates market access for foreign carriers and normally results in lower market share for flag carriers.normally results in lower market share for flag carriers.

Thank YouThank You