BTRE Transport Colloquium ‘05 The Future for Australian Aviation : Policy, Market & Infrastructure Challenges Ian Thomas Senior Consultant Industry Affairs

BTRE Transport Colloquium ‘05

The Future for The Future for Australian AviationAustralian Aviation: :

Policy, Market & Infrastructure Policy, Market & Infrastructure ChallengesChallenges

Ian ThomasIan ThomasSenior Consultant Senior Consultant

Industry AffairsIndustry Affairs


Market OverviewMarket Overview

Domestic marketDomestic market::

-- Return to stable duopolyReturn to stable duopoly

- - Further restructuring likelyFurther restructuring likely International marketInternational market::

-- Local/regional pressure for Local/regional pressure for liberalisation (eg Pacific)liberalisation (eg Pacific)

-- Foreign ownership, control Foreign ownership, control rules under reviewrules under review

-- Competition intensifying Competition intensifying



The scorecard: 15 years into The scorecard: 15 years into domestic deregulationdomestic deregulation

Upside:Upside: Strong traffic growthStrong traffic growth Greater competitivenessGreater competitiveness Product innovationProduct innovation Cheaper faresCheaper fares Encourages market entry, allows exitEncourages market entry, allows exitDownside:Downside:XX High volatilityHigh volatilityXX Depleted yieldsDepleted yieldsXX 4 failures4 failuresXX Single dominant operatorSingle dominant operator


-15

-10

-5

0

5

10

15

20

25

30

35

%

GDP PAX ASK Frequency

Compass 1 collapse

Domestic Deregulation

Asian crisisExit Impulse,Ansett fails

Entry Impulse, Virgin Blue

Entry, exit Compass 2

Market re-growth

Source: BTRE, CAPA

Percentage change in CY Traffic, Capacity & Frequency v GDP

Average annual traffic growth

2.3 times GDP AAGR

The highs and lows


Long-term growth trend Long-term growth trend despite crisesdespite crises

0

10

20

30

40

50

60

bln

66

68

70

72

74

76

78

80

82

%

ASKs RPKs Load factor (%) Linear (RPKs) Linear (ASKs)

Source: BTRE, IMF

Capacity, Traffic & Load Factor Trends

Trend lines

High passenger loads, traffic levels

RPKs: +15.7%ASKs:+17.6%

CY2004


Record profitsRecord profits

-400

-200

0

200

400

600

800

1000

1200

1400

$m

-20-15-10-50510152025303540455055606570

$

Total Op. Profit ($m) $ Profit/PAX Total PAX (m) $ Profit/1,000 ASKs

Aggregate earnings eclipse previous peak by 42% in 2004

Source: CAPA, Airlines

Previous peak 2000

New peakMajor Airline Profits & Profit Per Passenger,Capacity Unit


-400

-200

0

200

400

600

800

1000

1200

1400

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

$Am

Ansett Qantas Virgin AustralianSource: CAPA, Airlines

Qantas/Ansett

Qantas/Virgin

Qantas/Australian

AnsettCompass 1&2

Qantas Ansett Virgin

Impulse

More competition = less profit

Combined Profits of Major Airlines Year-on-year, 1990-2004


Basic LCC

Simple productOne class

On-board food, drink salesNo hot food

Focus on leisure, small business market

Minimal costsPricing drives growth

Building Complexity/cost?

Value –plusProduct

International/domesticPartners, Connectivity?

BluePlus fares, BlueZone seatingHot food

FF programmeAirport lounges

Satellite TV

VIRGIN LIGHT VIRGIN HEAVIER

From traditional LCC……to Ansett II?

Commercial impact


Traditional network

Vertically-Integrated International

domesticregional

One brandOne product

One fare system

Disaggregated

Differential products, faresJoint Ventures

QANTAS 2000 QANTAS 2005

Qantas fragments….different brands for different markets


International Policy: International Policy: The greatest challengeThe greatest challenge

Where to next with “open skies”Where to next with “open skies” Australian airlines losing market Australian airlines losing market

share to foreign operatorsshare to foreign operators Ownership/control limits need Ownership/control limits need

addressing addressing - capital mobility issues- capital mobility issues- consolidation constraints- consolidation constraints

Government response to regional Government response to regional liberalisation (ASEAN+3, other)liberalisation (ASEAN+3, other)

Greater engagement with AsiaGreater engagement with Asia


Asia growing rapidly, but Asia growing rapidly, but Australia/NZ only small playersAustralia/NZ only small players

Asia, 82.5

Middle East, 3.9

Europe, 6.1

North America, 4.2

Australasia, 3.0

Other, 0.3

Australia/NZ fifth to Asia, Europe, America and Middle East

Source: Innovata APGdat

Asia accounts for 83% of available

airline capacity to/from region


Capital access, rising debt Capital access, rising debt threaten growththreaten growth

0

1

2

3

4

5

6

$b

Capex Net debt

Fleet rebuilding, high growth

Capex 2002-2007 = $13.6b

$1.4b in equity raisings

Debt curve

Source: Qantas annual reports, Lehman Bros

Qantas Capex, Net Debt Trends,

1994-2007


Regional fleet growth places Regional fleet growth places pressure on labour poolpressure on labour pool

0

50

100

150

200

250

300

Narrow-body Medium twin-aisle Large

Orders for 1,056aircraft in next

3-5 years,80 in Australia/NZ

Source: Centre for Asia Pacific Aviation, Airlines

High demand impacts on training wage costs expansion plans

Current Aircraft Orders by Region


Skills shortfall looms large Skills shortfall looms large

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

Pilots Flight attendants Ground handlers

Maintenance Ticket sales Managerial

4718

7780

25152100

4472

390

6023

1422

146,000 jobsrequired over

5 years; 29,000+ per year

Source: Centre for Asia Pacific Aviation

Est. Annual Airline Employee Requirements by Type by Region,

2005-2009


Australia & New ZealandAustralia & New Zealand7,109 jobs over 5 years7,109 jobs over 5 years

489

1685

1777

1234

938

987

0 200 400 600 800 1000 1200 1400 1600 1800 2000

Pilots

Flight attendants

Ground handlers

Maintenance

Ticket sales

Managerial

Source: Centre for Asia Pacific Aviation

14.5% increase in

employees to 2009


Surplus pilot supply may Surplus pilot supply may disappear quicklydisappear quickly

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1996 1997 1998 1999 2000 2001 2002 2003 2004

ATPL CPL

Source: CASA Annual Reports

4,303 commercial pilots (non-airline)

6,025 licensed airline pilots

Also available:300 ex-Ansett pilots,

200 foreign pilots


Offshore competition for Offshore competition for pilots increasingpilots increasing

SE Asia

China

Middle East

India

Aust/NZ Pilot Pool

Overseas exodus to high demand centres

Retirement

Qantas, Virgin, Air NZ


Conclusions: Conclusions: The Challenges AheadThe Challenges Ahead

Build on industry globalisation, Build on industry globalisation, regional liberalisationregional liberalisation

Accelerate air service deregulation Accelerate air service deregulation programme, focus on Asiaprogramme, focus on Asia

First stop is Singapore “open skies” First stop is Singapore “open skies” agreement; 5agreement; 5thth freedom access to freedom access to PacificPacific

Remove road-blocks to Remove road-blocks to consolidation (starting with New consolidation (starting with New Zealand)Zealand)


ConclusionsConclusions

Failure to facilitate capital, alliance Failure to facilitate capital, alliance development will impede growth development will impede growth and may threaten viabilityand may threaten viability


Only the brave.....Only the brave.....


Thank You!Thank You!

Documents

BTRE Transport Colloquium ‘05 The Future for Australian Aviation : Policy, Market & Infrastructure Challenges Ian Thomas Senior Consultant Industry Affairs