Statistics Aviation CAPA Sept2011

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ci1Final Draft Report

MappingAustraliasTourismAviationPriorities(Stage2)Final Report

For:Resources,EnergyandTourismContractNo:001430

Date:asat30Se tember2011

Authors:IanThomas,NickiBlackwellManagingConsultants,[email protected],TourismFuturesInternational
mailto:[email protected]:[email protected]


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CONFIDENTIALITY & DISCLAIMER STATEMENT

This document is proprietary to Miller Aviation Partners trading as CAPA Consulting and theinformationcontainedhereinisconfidentialandisprovidedsolelyforthepurposeofrespondingtotheScopeofWork,asdefinedbyResources,EnergyandTourism(RET).ThisprojectissubjecttothetermsoftheConsultingAgreementbetweenCAPAConsultingandRET.

InformationcontainedinthisdocumentissubjecttocontractualarrangementsandwrittenandverbalconfidentialityagreementsbetweenCAPAConsultingandRET.

Whilecareandattentionhasbeenexercisedinthepreparationofthisdocument,anycommentson,oropinionsstated in thisdocumentwhetherornotexpressedasbeing thoseofCAPAConsulting,arebased on the information provided to CAPA Consulting by RET or available from credible publicallyavailable sources of information. While CAPA Consulting does not have reason to believe that thisinformationisinanywayinaccurateorincomplete,responsibilityforitsaccuracyandcompletenessdoesnotrestwithCAPAConsulting.

Miller Aviation Partners Pty Ltd t rades as CAPA Consulting ACN: 122 984 892



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Document Control

ProjectRefProjectTitle MappingAustraliasTourismAviationPriorities(Stage2) RET01

Code:Document

FinalReportTitle

Revisionno. Date RevisionDetails Author ApprovedBy1 IncorporationofCommentsinresponseto

DraftReport IT/BC/NB AMEditingchanges,updates IT/BC/NB AMAdditional

graphics

IT/BC/NB

AM

FINALREPORTASCIRCULATEDTOTAWG30.09.11DB.



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TableofContentsEXECUTIVE SUMMARY .....................................................................................................................61. INTRODUCTION......................................................................................................................12

1.1 STUDY STRUCTURE.......................................................................................................................121.2 METHODOLOGY ............................................................................................................................14

PART I: KEY ISSUES IMPACTING ON AIR SERVICES DEVELOPMENT

2. REVIEW OF GOVERNMENT STRATEGY DOCUMENTS...................................................162.1 THENATIONAL AVIATION STRATEGY ..........................................................................................162.2 NATIONAL TOURISM STRATEGY & THE JACKSON REPORT ...........................................................182.3 MAPPING AUSTRALIAS TOURISM AVIATION PRIORITIES STAGE 1 REPORT...............................19

3. ANALYSIS OF KEY MARKET, REGULATORY & AVIATION ISSUES ............................223.1 RECENT AVIATION CAPACITY TRENDS.........................................................................................23

3.1.1 IMPEDIMENTS TO AVIATION DEVELOPMENT ........................................................................233.2 AVIATION REGULATORY DEVELOPMENTS....................................................................................24

3.2.1 ASEAN EMERGING AS KEY COMPONENT OF REGIONAL INITIATIVES .................................273.2.2 CHINA THE DOMINANT INFLUENCE......................................................................................283.2.3 FURTHERLIBERALISATION OF THENEW ZEALAND MARKET...............................................313.2.4 OWNERSHIP REFORMS .........................................................................................................31

3.3 AIRLINE-FOCUSED ISSUES ............................................................................................................333.3.1 FURTHEREVOLUTION OF THE BUSINESS MODEL .................................................................333.3.2 EXPANSION OF LONG-HAUL LCCS ......................................................................................343.3.3 DEVELOPMENT OF HYBRID LCCS ........................................................................................353.3.4 IMPACT OF FLEET GROWTH ANDNEW AIRCRAFT TYPES .....................................................36

3.4 FUEL PRICE VOLATILITY ..............................................................................................................423.5 MIGRATION TO ALLIANCE STRUCTURES; NEED FORSERVICE CONNECTIVITY .............................453.6 INFRASTRUCTURE: THE ROLE OF AIRPORTS .................................................................................49

3.6.1 FUNCTION OF INTERNATIONAL HUBS...................................................................................493.6.2 KEY COMPONENTS OF A SUCCESSFUL HUB..........................................................................503.6.3 CURRENT GLOBAL HUBS .....................................................................................................523.6.4 FUTURE GLOBAL HUBS........................................................................................................533.6.5 AUSTRALIAN GATEWAYS.....................................................................................................543.6.6 CAPACITY CONSTRAINTS ON GROWTH ................................................................................57

4. TRAVEL MARKET FACTORS IMPACTING ON SERVICE DEVELOPMENT ................584.1 INBOUND/OUTBOUND TRAVEL MIX.............................................................................................584.2 TRAVEL PURPOSE .........................................................................................................................594.3 GROUP/NON-GROUP TRAVEL .......................................................................................................604.4 AVERAGE STAY FORTOURISTS ....................................................................................................614.5 ISSUES OF SEASONALITY..............................................................................................................62

PART II: MARKET DEVELOPMENT SCENARIOS & RECOMMENDATIONS

5. REVIEW OF CAPACITY AND TRAFFIC FORECASTS ...................................................665.1 INTERNATIONAL MARKETS DRIVING TFC 2020 FORECASTS .......................................................685.2 MARKETS CENTRAL TO DISTRIBUTION ACROSS AUSTRALIA ........................................................70



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6. MARKET DEVELOPMENT SCENARIOS................................................................................72

6.1 THE TASMAN MARKET .................................................................................................................736.1.1 OVERVIEW OF CURRENT AIRLINE SERVICES........................................................................736.1.2 MEDIUM AND LONG TERM SCENARIOS................................................................................756.1.3 ASSESSMENT........................................................................................................................79

6.2 MEDIUM-HAUL MARKETS ............................................................................................................806.2.1 NORTHEAST ASIA ................................................................................................................80

6.2.1.1 OVERVIEW OF CURRENT AIRLINE SERVICES .....................................................................806.2.1.2 MEDIUM AND LONG TERM SCENARIOS .............................................................................836.2.1.3 ASSESSMENT.....................................................................................................................88

6.2.2 SOUTH AND SOUTHEAST ASIA .............................................................................................886.2.2.1 OVERVIEW OF CURRENT AIRLINE SERVICES .....................................................................886.2.2.2 MEDIUM AND LONG TERM SCENARIOS .............................................................................92

6.2.2.3 ASSESSMENT.....................................................................................................................99

6.2.3 THE MIDDLE EAST .............................................................................................................1006.2.3.1 OVERVIEW OF CURRENT AIRLINE SERVICES ...................................................................1006.2.3.2 MEDIUM AND LONG TERM SCENARIOS ...........................................................................1026.2.3.3 ASSESSMENT...................................................................................................................105

6.3 LONG-HAUL MARKETS...............................................................................................................1066.3.1 AUSTRALIA-UK/EUROPE ...................................................................................................106

6.3.1.1 OVERVIEW OF CURRENT AIRLINE SERVICES ...................................................................1066.3.1.2 MEDIUM AND LONG TERM SCENARIOS ...........................................................................1086.3.1.3 ASSESSMENT...................................................................................................................116

6.3.2 THE AMERICAS ..................................................................................................................1166.3.2.1 OVERVIEW OF CURRENT AIRLINE SERVICES ...................................................................1166.3.2.2 MEDIUM AND LONG TERM SCENARIOS ...........................................................................1196.3.2.3 ASSESSMENT...................................................................................................................123

7. ASSESSMENT OF AIR SERVICE REQUIREMENTS TO ACHIEVE MARKET GROWTH TARGETS..................................................................................................................................................124

8. AVIATION-RELATED THREATS TO GROWTH FORECASTS........................................1449. STRATEGIC RECOMMENDATIONS ................................................................................147

9.1 GENERAL MARKET DEVELOPMENT ............................................................................................1479.2 REGULATORY POLICY.................................................................................................................1479.3 PRIORITY MARKETS....................................................................................................................1499.4 AIRPORT INFRASTRUCTURE ........................................................................................................151

10. CONCLUSIONS ......................................................................................................................152APPENDIX 1: CONSULTATION PROGRAM...........................................................................................154APPENDIX 2: SYNOPSIS OF CONSULTATION.......................................................................................157APPENDIX 3: AUSTRALIAS SHARE OF CAPACITY BY MARKET .........................................................163APPENDIX 4: CURRENT AIRLINE FLEETS BY MARKET.......................................................................166APPENDIX 5: UNFILLED JET AIRCRAFT ORDERS BY MARKET ...........................................................168APPENDIX 6: GLOBAL ALLIANCE AND CODESHARE ARRANGEMENTS FORKEY CARRIERS...............170APPENDIX 7: FREEDOMS OF THE SKIES .............................................................................................176



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Executive Summary

Resources,EnergyandTourism(RET)commissionedtheStage2MappingAustraliasAviationTourismPriorities report to furtherassist theFederalGovernmentsTourismAccessWorkingGroups(TAWG)indevelopingastrategytopositionAustraliastourismindustrytorealiseitsfuturegrowthpotentialandidentifyanyimpediments.

Extensive consultation was undertaken with tourism organisations, airports andairlinesaspartofthisstudywhichmapsthepotentialdevelopmentofkeymarkets inthemediumtolongterm(i.e.05yearsand510years).

Forecasts produced by the Bureau of Infrastructure, Transport and RegionalEconomics(BITRE),AircraftMovementsthroughCapitalCityAirportsto2029/30Report117,December2009,andTourismForecastingCommittee(TFC),Forecast2011Issue1,TourismResearchAustralia,Canberra,May2011,both indicateambitious targets fortourismgrowth.

However, theanalysis in this report suggests that such targetsmaybeachievablegiven the scope and rapidity of developments taking place in the aviation industry,including:

Progressive and potentially dynamic market liberalisation in Southeast andNortheast Asia which is opening up new route development and expansionopportunities(e.g.theformationofanASEANSingleAviationMarketby2015);

Substantialaircraftorders,tobedeliveredoverthenext10years,whichwillseeairlinecapacityinAsiaandtheMiddleEast,inparticular,growconsiderably;

Introductionofnew,longerrangeaircrafttypeswhichprovideanopportunitytoestablishnonstopservicestodestinationspreviouslyonlyservedasoneortwostops(e.g.theB787andA350);

Furtherdevelopmentofalliancestructureswith increasedconnectivityoptions;and

ExpansiononshortandlonghaulsectorsbyLowCostCarriers(LCCs)withafocusonpricedrivenstimulationofexistingandemergingmarkets

Thesedevelopments are notmerely incremental changes in thewaymarkets areserved by airlines. They will present major market development opportunities (forexamplenonstopaccesstocentralhubmarkets intheUS, increaseddirectaccesstoAsiansourcemarketsandlowercostoptionsfortravelfromEuropetoAustralia).

WhiletheseopportunitiesoffertheprospectofextendingAustraliastourismreachintonewmarketsandbuildingexistingones,theyalsopresentchallengeswhichneedtobeaddressed:



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Developmentofacoordinated,strategicapproachtomarketstosecurethelong

termcommitmentofcarriersatrequiredservice levels,recognisingthatairlineshavemanydestinationoptions;

Provisionofadequate capacityunderbilateralandmultilateralagreements toenableairlinestoplanaheadandachievegreaterrouteviability;

Australia needs to offer airlines the prospect of yields at least comparable toalternative destinations in order to attract increasing capacity. This may beachievedthroughareductionofadditionaloperationalcostsand/ortheremovalof impediments to operating to Australia such as economic and technicalregulationorinfrastructurelimitations.Thecostfactormaybecritical,especiallywithjetfuelpricesathighlevels;and

Offeringacompetitivetourismproductoftheappropriatequantityandqualitytoattractvisitors.

Thetopprioritiesfortourismtoconsiderinmeetingthesechallengesinclude: Establishing open skies agreements with China and the EU, two of the most

important markets in growth terms and potential. China is critical to growthtargets,withpotentialnotonlytodriveinbounddevelopmentbutalsotoserveasahubforintercontinentaltraffic.Inourrecommendations,wesuggestastagedapproachtoachievingopenskieswithChinawithaninitialfocusonunlimited3rdand4thfreedomrights;

ExpeditingairservicesnegotiationswithIndonesiaandMalaysia,firstlytoobtainadditional capacity to assist in service growth to Australia. Indonesia, whilepreviouslyseenasanoutboundmarket,willoffersignificantinboundpotentialasitseconomymatures;whileavailablecapacity forMalaysiascarriers (AirAsiaXandMalaysiaAirlines)istightening;

Developinga strategy tobuildcloser tieswithASEANaspartofamove toanopenskiesagreementwith the region.ASEANalreadymaintainsanopen skiesagreementwithChinaandhasplanstosecuresimilararrangementswithJapan,Korea

and

India.

An

agreement

with

ASEAN

would

allow

Australia

to

engage

with

theproposedASEANSingleAviationMarketandtheopportunitiesitpresents;

Encouraging theharmonisationofpassengerprocessingbetweenAustraliaandNewZealandwiththeobjectiveofachievingacommonborderapproach.Thishasthepotentialtoopenupnewrouteoptionsoutsidethemajorcities;and

Supporting a phased approach by airlines to service development, initiallythroughoperationsviaintermediatepoints,thenthroughathickeningofroutestothestagewherenonstopservicescanbejustified.



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Overview of Pr

Developments inMarke

BasedonScenariosintheStage2Report

Final Draft Report


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Tourism Industry Potential, Current Negotiated Capacity & Utilisation, Forecast Capacity and Aircr

Markets

IncrementalGrowth

ContributiontoAustralia's

TourismIndustry

Potential2020

Currentnegotiated

capacityunderASAs(foreach

country'scarriers)

BilateralCapacity

utilised byForeignCarriers

Bilateralcapacityutilised

byAustralianCarriers

ForecastSeatCapactoAustralia(basedon

CAPAConsultingEstimat

Now Now 2015 2020(%oftotal) (wk) (%) (%) ('000) ('000

Canada 3% 3,000seats 63% 0 6,700to7,100 7,9008,800

China 14% 18,500seats 78% 11% 30,000to32,000 35,00039,000France 2% 3frequencies 66% 0% n/a n/a

Germany 4% 25frequencies 0% 28% 6,000to6,500 6,9007,800Hong

Kong 2% 70frequencies 96% 36% 10,300to10,800 11,70012,700

India

4%

6,500seats

0%

14%

9,400to9,900

12,40013,800

Indonesia 3% 14,800seats 84% 90% 31,900to32,300 36,40037,500

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Ireland 1% 7frequencies 0% 0% n/a n/a

Japan 5% 79B767200units(19,276seats) 13% 37%

13,500to14,400 14,70016,500

Korea 5% 8,500seats 67% 4% 7,300to7,900 8,1009,400

Malaysia 4% 29,100seats(Australia);23,500seats(Malaysia) 80% 0%

15,300to16,000 18,30020,000

NewZealand

7%

Open

capacity

n/a

n/a

63,000to

66,300

68,90075,900

Singapore 4% Opencapacity n/a n/a 15,900to16,700 17,50019,400South

Africa 1% 21frequencies 33% 33% 4,700to4,900 5,4006,000

Taiwan 1% 6,000seats 44% 0% 4,000to4,300 4,7005,400

Thailand 1% 45B747equivalents(15,750seats)

81% 35% 18,400to18,700

21,400

22,100

UnitedKingdom 11% Opencapacity n/a n/a 29,000to30,700 32,20035,900

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USA 9% Opencapacity n/a n/a 33,400to 34,700 38,50041,400

UAE 3% 126frequencies 87% 2% n/a n/aBrazil 1% 14frequencies 0% 0% n/a n/aTotal 100%

Note. Theabovecapacityentitlementsdonot include capacity to regionalpointsunder theRegionalPackageor caRegionalPackagetoGatewaypointsprovidedtheflightsareroutedthrougharegionalpoint. ThistablewasaccurateasatJ

*Ordersrelatetoaircraftcapableofoperatingto/fromAustralia.N/Anot applicable.Source:TourismAustralia,CAPAConsulting

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1. Introduction

Resources,EnergyandTourism(RET)commissionedtheStage2MappingAustraliasAviation Tourism Priorities study in conjunction with Tourism Australia to assist inunderstandingandpreparingforthekeyaviationrelateddriversandtrends impactingorlikelytoimpactonAustraliasvisitormarketsoverthenext10years.

This study provides a detailed analysis of the issues and potential outcomesinfluencing the development of international air services which are critical to theachievementofgrowthtargetsforAustraliasinboundvisitormarket.

The Stage 2 Study Team developed a framework consistent with the terms ofreference to examine the major areas of influence affecting international inboundmarkets and build future scenarios. These scenarios range from qualified possibledevelopmentswhichmaybesubjecttoanumberofvariablesandassumptionstomorelikelyoutcomesdependingonthecontext.

Wehave sought through this analysis to generatediscussionabout the effectsofchanges takingplaceonAustralias ability to achieve and service visitor forecasts asprescribedbyTourismAustraliaandtheTourismForecastingCommittee(TFC).Clearly,the availability of sufficient and wellorganised air transport capacity, connectivitybetweenservicesandnetworkandalliancestructuresarecentraltotourismrealisingitsgrowthambitions.

The study, which highlights tourism stakeholders views on international aviationmarketdevelopment,willbeavailablefortheMinisterforInfrastructureandTransportandDepartmentofInfrastructureandTransporttoconsiderinplanning,prioritisingandundertakinginternationalairservicesnegotiation.1.1 Study Structure

Thetasksundertakenindevelopingthisreportaremappedoutinthediagrambelow:



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ReviewPolicyDocuments,Data

ConsultationwithKeyStakeholders

AnalysisofKeyAviation&Regulatory

IssuesAssessmentofTravel

MarketCharacteristics

DevelopMedium/LongTerm

ScenariosShort,MediumandLongHaul

Markets

AssessmentofAirServiceGrowthRequirements

MarketThreatAssessment

StrategicRecommendations

Conclusions

1

3

2

6

4

5 8

7

Consistentwith theapproachandrequirementsof the study, the report isdividedintotwopartsincorporatingthefollowingsections:

Part I: The Key issues Impacting on Air Service Development

Thisincludes: Section 2 provides a summation of government strategy/policy documents

relatingtoaviation/tourismdevelopment; Section 3 analyses the key aviation (airlines, airports) and regulatory issues

influencingthemediumandlonghauldevelopmentofairservicesintoAustraliaanditsmarkets;and

Section 4 outlines the influence played by travelmarket factors in air servicedevelopment.

Part II: Market Development Scenarios & Recommendations Section5reviewsmarketforecastsbytheBureauofInfrastructureandRegional

Economics(BITRE)andTourismForecastingCommittee(TFC). Section 6 examinesmarkets by segment, discussing variousmedium and long

termscenariosforeach,andthepotentialimplicationsforaviationcapacityandtourismdevelopmenttoAustralia;

Section 7 considers the air service growth (capacity and flights) required toachieve tourism growth targets bymarket and the relationshipwith availablecapacityunderAirServicesAgreements;



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Section 8 assesses the major aviationrelated threats, based on the above

analysis,toachievementofmarketgrowthforecasts;and Section9examinesandprovidesrecommendationsonstrategicinitiativeswhich

could be introduced to prepare tourism organisations for the anticipateddevelopmentsinaviationandstrengthenAustraliasposition.

Muchofthedatautilisedforthisreportisincorporatedintheappendices,includinghistoricaviationcapacitytrendsbymarket;currentaircraftfleetsandaircraftordersbytypebycountry;andglobalalliancesstructuresandpartnershipsbetweenairlines.1.2 Methodology

Extensiveconsultationhasbeenundertakentoinformthisreportthroughphoneandfacetoface interviews with representatives of Tourism Australia, state tourismorganisations,industrygroupsandinternationalairportsandairlines.Discussionswereconductedinconfidence.

A listofconsultees isprovided inAppendix1andasynopsisofthe issuesraised isgiveninAppendix2.

In order to conduct the scenarios analysis, the aviation markets are subdividedundergroupingswhichreflectthetypeofairservicesupplied (i.e.short,mediumandlonghaul;nonstop, intermediate stop).Thisenables the structureof inbound trafficflows tobeconsideredand likely/possible scenariosaddressed for thenext5and10years.

Thesegroupingsinclude:(1)Shorthaul;TransTasman(nonstopservicesfromNewZealandandthePacific).(2)MediumHaul,comprising:

a. NortheastAsia(mixofnonstopandintermediatestoppingservicesfromChina,Japan,KoreaandotherNortheastAsianmarkets);

b. South and Southeast Asia (includes ASEAN countries and Indian SubContinent; mostly nonstop services; some intermediate services fromIndiaviaSoutheastAsia);

c. The Middle East (also mostly nonstop services; some intermediateservicesviaSoutheastAsia).

(3)Longhaul:a. Intercontinental from Europe (serviceswith intermediate stops viaAsia

andtheMiddleEast);andb. TransPacific(directandindirectservicesfromNorthandLatinAmerica).



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There is clearly some overlap between the groupings, for example mediumhaul

markets in Asia and the Middle East often also serve as connecting points to/fromEuropeandtheUKandthereforeprovideadualfunctionbothassourcemarketsandintermediaries.

Withineachofthegroupings,therearespecificdriversofchangewhichwillinfluencethe development of services. Many of these drivers, however, are common to allmarkets.ThesearediscussedintheissuesoverviewprovidedinSection3.Theyincludemarket liberalisation,thedevelopmentofairlinebusinessmodels, fleetsandalliancesandtheroleplayedbygatewayairportsandhubs.



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Part I: Key Issues Impacting on Air Services Development

2. Review of Government Strategy DocumentsThefollowingprovidesabriefoverviewofrelevantgovernmentstrategydocuments

whichhavebeenreviewedbytheconsultantteam.2.1 The National Aviation Strategy

Australias international and domestic aviation policy is based on the frameworkestablishedintheAviationWhitePaper,FlightPathtotheFuture,whichwasreleasedinDecember 2009.While the terms of reference for the MappingAustralias TourismAviationPrioritiesreportproscribesinitiativeswhichextendbeyondthoseintheWhite



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Paper, it is important to understand the scope and rationale for existing policyparameters.

ThestatedgoaloftheFederalGovernmentsWhitePaperistheestablishmentofanopenandcompetitiveinternationalaviationmarketwhichservesthenationalinterestthrough tourism, trade and consumers; enables Australian and overseas airlines toexpand;andmaintainsavibrantAustralianbasedindustry.

Australiaspositionisunderwrittenbythecompetitivedisadvantageofgeographyasan endmarket destination and a need to maintain and develop a diverse andsustainablesystemofairservices linking intotheworldsmajormarkets. Internationalpassengercarriageandhighvaluefreightrelyontheavailabilityofadequatecapacitytoaccommodatedemandandprovideforgrowth.

The Government maintains a policy of ensuring capacity ahead of demand toprovide for optimum commercial flexibility and regulatory certainty for carriersoperating intheAustralianmarket.Inpractice,openskieshasbeenhardertoachieve

5th

largely due to constraints often imposed on freedom rights to operate via adestinationtothirdcountries.AustraliahasestablishedanopenskiesagreementwithNewZealandandtheUS,whilethereareopencapacityarrangementswithSingaporeand theUK.Developmentof suchanagreementwith theEUasawhole iscurrentlyimpededbyongoingforeignownershipissues.AccordingtotheWhitePaper,Australiasnegotiatingprioritiesfocusbothonmatureandemergingmarketsandaredeterminedbybroadereconomicconcerns, includingairlineopportunities,tourismandtrade.TheGovernment has also expressed a willingness to discuss with likeminded countriesopportunitiestobuildagreementswhichgobeyondtraditionalbilateralarrangements,potentially incorporating enhanced cooperation in areas such as aviation safety andsecurity, competition law and environment protection and expanded prospects forcrossborderairlineinvestmentandconsolidation.

TheGovernmentiscommittedto: Incorporateregionalpackageprovisionsintobilateralagreementswhichoffer:

-

Foreignairlines

unlimited

access

to

secondary

gateway

markets

(i.e.

those

otherthanSydney,Brisbane,MelbourneandPerth);

- Additionalbeyondrightsandimprovedaccesstomajorgatewaymarketsfor international flights linked to secondary gateways. This involvesservices tomajorgatewaysnotbeingcountedagainstavailablecapacity(up to a limit), provided the airline operates via or beyond a regionalairport.

Seekfullyopenarrangementsfordedicatedcargoservices;



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Facilitate opportunities for crossborder airline investments by incorporating

principalplaceofbusinesscriteriainbilateralagreements; Consider more flexible foreign ownership arrangements for Australian airlines

otherthanQantasaspartofopenskiesagreements.However, Australia does not intend to provide cabotage rights (i.e. the rights to

operate within the domestic market) unless there are exceptional circumstances ortheserightscanbetradedstrategicallyonabilateralbasis. Itremainsoneofthefewcountriestoprovidefor100%foreignownershipofdomesticairlines.

Seventh freedom rights,allowinganairlineofonecountry tooperate standaloneservicesbetweentwoforeigncountries,willonlybeconsideredonacasebycasebasiswhereitisinthenationalinterest.

Multiple airports serving a single major gateway (e.g. Melbourne and AvalonAirports)are treatedasone for thepurposesofbilateralagreements.This,however,doesnotapplytoGoldCoastandBrisbanewhichareseenasservingdiscretemarkets.

TheGovernmentalsohasestablishedasetofprinciplesandprocesseswhichapplytothe provision of government services at new international airports. Proposals toestablish new international gateways will be assessed against the national interest,including regional development, border security, aviation and tourism policyconsiderations.

2.2 National Tourism Strategy & the Jackson Report

The Governments National LongTerm Tourism Strategy, also released in 2009,provides a policy framework for the development of domestic and internationaltourism.

The Strategy notes that Australia requires a marketingled approach to developinternationalprioritymarketsthroughTourismAustraliaandstateandterritorytourismorganisations.Marketingwill be conducted through targeted campaigns focusing onsignificantinboundgrowthmarkets,including,China,NewZealand,theUK,theUSandIndia.

TheStrategyincludesthefollowinginitiatives,amongothers: Strengthen Tourism Australias capacity and functions to incorporate industry

developmentandonlinedistribution; ReinvigoratetheTourismMinistersCounciltoencouragestrongerparticipation

bystateandterritorygovernmentsandindustry;



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Maintainwholeofgovernment links through the InterdepartmentalCommittee

meeting to identify and progress Strategyrelated impediments and monitorimplementation;

Broaden and elevate the role of the National Tourism and Aviation AdvisoryCommitteewhichwillbecochairedbytheMinistersforResources,EnergyandTourismandInfrastructureandTransport;

Establishanewgovernancestructureforresearchanddevelopmenttodrivethetourismresearchagenda;

EncouragethecontinuedadvancementoftheNationalLandscapesprogramanddevelopmentofIndigenoustourismproducts;and

Review and monitor progress against the Strategy and key industrymeasurements,settingstrategicprioritiestodriveimplementationofthenationaltourismagenda.

TheseinitiativeswerederivedfromrecommendationsprovidedthroughtheJacksonReport, InformingtheNationalLongTermTourismStrategy,onbehalfoftheSteeringCommitteeestablishedtodeliveralongtermvisionfortheindustry.

According to the report, Australia was failing to recognise significant changesoccurring in international markets and capitalise on the opportunities. As aconsequence,thenationsshareofglobaltourismhaddeclinedby14%between1995and2008.

The reports recommendations included development of a national researchcapabilityfocusedontourism industrydevelopment;acceleratingtheonlinecapabilityof Australias tourism product; ensuring tourisms access to national and state skillsprograms;establishinganationaltourismscorecardwithtargetsandkeyperformanceindicators; improving the case for tourism investment through integrateddestinationdevelopment plans and creationof a national visitation priorities list; recognition oftourism ingovernmentplanningandapprovalsprocesses, taxationand infrastructureinvestment planning; developing and maintaining longterm product strategies; andestablishingafederalministerialtaskforcetoreviewtourismissuesandopportunities.2.3 Mapping Australias Tourism Aviation Priorities Stage 1 Report

Table 2.1 summarises the key findings of the Stage One report of the MappingTourismAviationPrioritiesproject,providedinOctober2010.



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Table 2.1: Summary of Findings of Stage 1 Mapping Australias Aviation Tourism Priorities

Report

Country TotalCapacityEntitlements(PerYear) Capacity&OtherIssues Conclusion

PriorityRating

Canada 312,000seatsRestrictedintermediaterights.Currentagreementpreventsairlinesmovingtodoubledailyservices

AdequatecapacityinASA;highrequirementtoreviewintermediaterights. Medium

China 1.92mseatsChinesecarriersusingsignificantamountofavailablecapacity.Restrictionsonintermediate,beyondrights

Chinaisatopprioritymarket.Bothcountriesmovingtowardsanopenskiesarrangement

High

France 312servicesRestrictedto3servicesperweekineachdirection;restrictionsonintermediate,beyondrightsandcodesharing

Benefitindiscussingintermediate,beyondrights;bilateralmaybesupersededbyEUarrangements

Low

Medium

Germany 2,600services NoconstraintsAmplecapacityforairlinesfrombothcountries;maybesupersededbyEUarrangement

Low

HongKong 7,280servicesHongKongcarriersusingsignificantcapacity.Cathaytotakeservicesto70perweekcap.Restrictionsonbeyondrights.

KeymarketforAustralia;desiretoseecapacityincreasesandbeyondrightsrelaxed

High

India 676,000seats Noconstraints Amplecapacityavailable Low

Indonesia 1.54mseatsAirlinesofbothcountriesexpectedtofullyutilisecapacityundercurrentarrangements;restrictionsonintermediate,beyondrightsforAustralianairlines

FurtherdiscussionswithIndonesiarequired High

Ireland 728servicesCurrentcapacitynotutilisedbyeitherparty Amplecapacity Low

Japan 8,216services Restrictedintermediate,beyondrights;adequatecapacity

Currentarrangementsforintermediate,beyondrightsneedtobeaddressed Medium

Korea 884,000seats Restrictedintermediate,beyondrights Adequatecapacityexists Low

Malaysia 2.73mseatsMalaysiancarriersusingsignificantamountofavailablecapacity;regionalpackageincludesAvalon

KeygrowthmarketforAustralia;significanthubforAsia,Europeancarriers.Increaseincapacityrequiredtoallowforfurthergrowth

High



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NewZealand Opencapacity Noconstraints NorestrictionsunderSingleAviationMarketpackage n/a

Singapore Opencapacity Restrictedbeyondrights;SingaporeairlineshavenoaccesstoPacificroute

SignificanthubforAsian,Europeancarriers;nolimitationsoncapacity n/a

SouthAfrica 1,456services Noconstraints Existingarrangementadequate Low

Taiwan 624,000seats Noconstraints Adequatecapacity Low

Thailand 4,680services NoconstraintsSignificanthubforAsian,EuropeanconnectionstoAustralia;nocapacityrequirements

Low

UnitedKingdom Opencapacity TrafficrightsviaChinaandtheUSArestricted

Accessingintermediate,beyondrightswouldbewelcomedbytourismindustry;currentASAmaybesupersededbyEUarrangement

Medium

USA Opencapacity NoconstraintsOpenskiesagreementprovidesforunlimitedcapacity,routeandtrafficrights

n/a

* Capacity entitlementsdonot include capacity to regional pointsunder the Regional Package orcapacityagreedundertheEnhancedRegionalPackagetoGatewaypointsprovidedtheflightsareroutedthrougharegionalpoint.

Source:Stage1Report,MappingAustraliansAviationTourismPrioritiesItshouldbenotedthatcapacityentitlementsasshowninthetablewerecurrentat

thetimeofthereport,butsubsequentlymayhavechanged.TheentitlementsreflectatotalforbothAustralianandforeignoperators.

The Stage 1 report builds on work undertaken by the Tourism Access WorkingGroupspredecessor,theNationalTourismandAviationAdvisoryCommittee.

ThedocumentmapstheAustraliantourismindustrysaviationaccesspriorities,andwill aid tourism's engagement in bilateral air services negotiations conducted byInfrastructure and Transport. It also identifies marketspecific travel patterns andexpenditure,dominantairlinesontheroute(basedonmarketshare),thecurrentseatutilisationontheroute,andprovidesforecastsofmarketgrowth.

Eighteenmarkets are examinedusing information from various sources includingTourismAustraliasStrategicPlan20102011,TourismForecastingCommitteeForecasts,



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June2010,datafromtheBureauof Infrastructure,TransportandRegionalEconomicsandInternationalVisitorSurveys.

3. Analysis of Key Market, Regulatory & Aviation Issues

This section discusses the various aviationrelated issueswhichwill influence thedevelopmentofAustraliasinboundtourismmarketsinthemediumandlongterms(5yearsand10years).

Theseinclude:(1)Marketliberalisation;(2)Airlinebusinessremodelling;(3)Fleet,capacityandaircraftusage;(4) Jetfuelprices;(5)Alliancestructuresandserviceconnectivity;and



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(6)Theroleofairports(includingAustraliangatewaysandoffshorehubs).Constraintstoprospectivegrowtharealsoaddressedinabroadcontext.Theimpact

and implications of these issues for service and capacityprovision are considered inmarketspecificdetailthroughthemarketscenariosreviewinPartII:Section5.3.1 Recent Aviation Capacity Trends

AnanalysisofgrowthratesinseatcapacityandflightfrequenciesbetweenAustraliaandkeyinboundmarketsbetween2006and2011indicatesaverymixedperformancecompared with that for total international services in those markets. The dataunderpinning

this

analysis

is

provided

in

Appendix

3.

On this basis, Australia has underperformed compared with total international

growthinJapan,SouthKorea,theUKandSingapore.AverageannualAustraliangrowthratesexceeded those forall international services in theUS,NewZealandandHongKong.TheCompoundAnnualGrowthRate(CAGR)forAustraliaMalaysiacapacitywashigherat9.8%but thegrowth in flightnumberswasslightlydownon the10.4%perannumachievedforallinternationalservicesfromMalaysia.

The best performing market for Australia has been China, where growth infrequenciesandseatcapacitytoAustraliahasoutpacedgrowthtothetotalofallothermarketsbymorethanfivepercentagepoints.

Interestingly, capacity growth rates were particularly strong from the US as theGlobal Financial Crisis eased in 2009 and 2010 but were quite soft on AustraliaSingaporeandAustraliaUKroutesforthesameyears.

Continuing weakness in the Japan market and the financial problems envelopingJapanAirlineshaveseenasharperosionofcapacityintheAustralianmarket.Capacitylevelsin2011wereabout41%downon2006.

Malaysia has proved a robustmarket for Australia,with high growth levels evenduringtheGFC.TheentryofAirAsiaXwasonefactorinfluencingthisgrowth.

AustraliasshareoftotalinternationalcapacityfortheUShasincreasedfrom1.1%incalendar2006to1.4%in2011;andNewZealandfrom60.4%to61.5%.

3.1.1 Impediments to Aviation Development

VariousissueswereraisedduringtheconsultationswhichareseenasinhibitingthedevelopmentofaviationservicestoAustralia.Theseinclude,amongothers:

Australiasgeographicalpositionasanendofhemispheremarket:SomeairlinesdonotregardAustraliaasapriorityforservicedevelopment;



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Increasing competition fromotherdestinations,particularly inAsia: IntraAsian

routesofferanopportunity forairlines to improveaircraftutilisation,whereasAustraliahaslimitationsinthisregard;

Capacity constraintson some routes, includingChina (despite recent increasesagreedbythetwogovernments);excesscapacityonothers(e.g.AustraliaNewZealand)whichunderminesyields;

Few options exist where the Enhanced Regional Package can be effectivelyemployed;

ThehighA$asreflectedintourismproductand infrastructurecosts; Restrictedoperationalaccesstoanumberofkeyairports(includingSydney)and

highairportcharges.Thisisdiscussedingreaterdetaillaterinthissection.3.2 Aviation Regulatory Developments

WhiletheEUandtheUShaveembracedmarketliberalisation(atleastontheirownterms), Australias other major markets have been much slower to adopt moreexpansiveregulatorystructures.

Inthemediumtolongterm,thissituationisexpectedtochangeconsiderablyasthepaceandscopeof liberalisationaccelerates,particularly inAsia inresponsetovariouseconomic, trade and market initiatives. Some countries in the Middle East are alsoofferingrelativelyrelaxedaviationaccessregimestosupportthedevelopmentoftheircarriers,tourismandthehubbingambitionsofairportswithintheregion.



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Figure 3.1: The Changing Regulatory Landscape

ASEANSAMby2015;ASAswith

DialoguePartners

EUSAM

USOpenSkiespartnershipsPacificIslandsAirServicesAgreement

AUSTNewZealandSAM,openskies

ExtendsCommonAviationAreas

ChinaJapanKoreaTrilateralAgreement?

ChinaASEANopenskiesinked

USEUOpenAviationArea

UnionofSouthAmericanNations

CommonAviationAreainCaribbean

Note:SAM=SingleAviationMarket;ASAs=AirServicesAgreements;ASEAN=AssociationofSouthEastAsianNations;EU=EuropeanUnion

Source:CAPAConsultingFigure 3.1 depicts the major developments in international regulatory reform

(bilateralandplurilateral)andtheinterrelationshipwithglobalmarkets.TheseincludedevelopmentswithinASEAN,ASEANandexternalmarkets,theEUUS,thePacificIslandsAirservicesAgreement(PIASA)andAustraliaNewZealand.

Anoverviewof theFreedomsof the Skies isprovided in Appendix 7.Bilateralairservices agreements typically incorporate liberalised arrangements for the flow ofpassengers,capacityandaircrafttypesbetweenmarkets(i.e.3rdand4th freedomrights)butothermoreliberalformsofaccessmaybelesslikely.Fifthfreedomorbeyondrightsaremostlyofferedonanegotiablebasis,while7th freedom and cabotage rights arerarelyprovided.

Some LowCost Carriers (LCCs)have effectively gainedaccess to 7th freedom andcabotagerightsthroughminorityownedjointventuresinAsia.

AustraliasJetstar,forexample,operatesoutofaSingaporebasetoothercountriesinAsiausingSingaporeanrightsandalsomaintainsanoperationinVietnam;andAirAsiahas established international/domestic vehicles based in Thailand, Vietnam andIndonesiawhichaccessrightsfromthosecountries(asimilarventureisproposedinthe



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Philippines). TigerAirways is following a similar strategy, proposing an internationalJointVenture(JV)withThaiAirwaysinThailand.

This typeof franchisedcrossborderownershiphasbrought investmentandotherbenefitstonationalmarkets(includingservicegrowthandtourism).SimilarrightsarealsoavailabletodesignatedcarriersintheEU.

Codesharingarrangementsalsohavepushedtheregulatoryboundariesbyprovidingindirectmarketaccessthroughpartnercarriers.Assuch,thisiscommonlyincludedinairservicesagreements.

However, international airlines are still mostly subject to conditions requiringsubstantialownershipandeffectivecontrolbynationalsoftheirhomecountry,exceptwheregovernmentshavebeenabletoagreeonalternativearrangements,forexampleprincipalplaceofbusinessand/oreffectiveregulatorycontrol.

Cabotageordomesticaccess isalsohighlyunusualthough it isallowedforcarrierswithintheEUandfordesignatedoperators inAustraliaandNewZealandundertheirSingleAviationMarket(SAM)andopenskiesagreements.

Overthenext5oreven10years,itwouldbeunrealistictoexpectwholesalechangestooccurinaglobalcontext.Morelikelyistheemergenceofregionalapproachestotheremovalofnationalbarrierstoaviationgrowth.

TheAsiaPacificwillbea focus forthis liberalisationduetothedirectand indirecteffectsof:

(1)ASEANsmovestoestablishaSingleAviationMarketby2015,and itsproposedentry into open skies agreements with China, Japan and other DialoguePartners(anagreementwithChinahasalreadybeeninked);

(2)LiberalisationofforeigncarrieraccesstomainlandChinawhichhasseengreaterengagementwithairlinesfromotherAsiancountries;

(3)Development of subregional open skies agreements within ASEAN (e.g. theCLMVagreementbetweenCambodia,Laos,MyanmarandVietnam;SingaporeBrunei

ThailandsMultilateralAgreement fortheLiberalisationofPassengerAirServices(MALPAS);andplurilateralagreementsbetweentheIndonesia,Malaysia

andThailandgrowthtriangle;theBrunei,Indonesia,MalaysiaandPhilippinesEastASEANGrowthArea;and

(4)Theproposed(butnotyetnegotiated)trilateralagreementbetweenJapan,KoreaandChina;

(5)ExpansionofbilateralFreeTradeAgreementsandmembershipofglobaland/orregional organisations with a strong competitive charter, including the WorldTradeOrganisationandAPEC;and



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agreement will support the ASEANChina Free Trade Area and also increasetouristtrafficbetweenASEANandChina.

TheaboveagreementonfurtherliberalisationwasreacheddespiteresistancefromIndonesia,which insiststhatonly5of its26 internationalairportscurrentlymeetthestandardsfortheOpenSkyPolicy.

EconomicestimatessuggestthatthemovetoaSingleAviationMarketwilldrive26%annualgrowthinmarketswithinASEAN.Thebenefitswillextendfurtherthroughotheropen skiesagreementswithChina, Japan,Koreaand India.As suchASEAN+3 (China,Korea,Japan)or4(withIndia)willbecomeaneffectivenegotiatingbloctoredressthecompetitivedisadvantageenjoyedbyEUdesignatedairlineswhichareabletoserveAsiathroughmultipleairportsinEurope.

ASEANsdevelopmentoffersanopportunityforAustraliatoengagemorecloselywithSouthEastAsia,andshareinthegrowthbypromotinganexpansionofpassengerandfreightlinkages.

There is also an inherent threat to Australias tourism prospects from theestablishmentofadditionalcompetingdestinationsinAsia.

3.2.2 China the Dominant Influence

ChinaisthesinglemostsubstantialairmarketintheAsianregionandamajordriverofgrowthfortheshorttomediumterm.IATAexpectsChinatobecomethe8th largestinternationalmarketintheworldby2014,growingby10.8%perannumto82.1millionpassengers2.JapanandHongKongaretheonlyotherAsiaPacificmarketsinthetop10busiest markets (9th and 10th respectively). Chinas domestic market is forecast toexpandatanevenfasterrateof13.9%to2014.

According to the Civil Aviation Administration of China (CAAC)3, total passengervolumesgrewby14%perannumto270million in2010(internationalanddomestic).Thatnumber isexpected to reach450millionby2016,700millionby2020and1.5billionby2030,drivenbyeconomicgrowth,tourism,and increasingurbanizationandincomelevels. TheCAACpredictsthatthepopulationwillaverageoneairtripperyearby20305timesthecurrentpropensity.

Chinesecarriershavecurrentordersfor593newaircraftwhichwillbedeliveredby2020.Of these,58%arenarrowbody typeswhichwilloperate internally andwithinAsianmarkets. Theother240ordersareamixofwidebodyandvery largeaircraftcapableofservingAustralianandintercontinentalmarkets.AirChinahas150aircraftonorder;ChinaSouthern130;ChinaEastern86andHainanAirlines52.

2 IATAAirlineIndustryForecast20102014.3 ForecastannouncedbyCAACDirectorGeneralLiJiaxiang,December2010.



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Forecastgrowth ishighestonroutesbetweenChinaandSoutheastAsia, reflecting

benefits flowing from the development of an open skies air services agreementbetweenASEANandChina(ASEANsfirstwithaDialoguePartner).

Table 3.2: No. Weekly Return Flights between China and its Bilateral Partners and % Shareof Total China Market

To China fromNo. Weekly

Flights% China

TotalAir services relat ionship

Hong Kong 819 17.7 SAR agreement

South Korea 678 14.6

Agreement allows shuttles to selectedairports, open skies for Shandong

region; may join trilateral alliance withChina, Japan

Japan 654 14.1Chinese domestic airports open toshuttle traffic; may be part of trilateralalliance with Korea, China

Taiwan 370 8.0 Limited direct services

Singapore 275 5.9Liberal bilateral; multilateral ASEANagreement

US 204 4.4Liberal bilateral agreement but notopen skies

Thailand 194 4.2 Very liberal bilateral; multilateralASEAN agreementMalaysia 152 3.3

Macau 114 2.5 SAR agreement

Vietnam 106 2.3Liberal 3rd,4th and 5th freedomaccess

Russia 101 2.2 Strong bilateral agreement

Germany 94 2.0Bilateral agreement; also EU openskies negotiations

UAE 67 1.4 Relatively open agreement

Australia 63 1.4Recent increase in capacity;discussing open skies agreement

Philippines 62 1.3Bilateral; ASEAN multilateralagreements

France 53 1.1Bilateral agreementsCanada 46 1.0

Netherlands 43 0.9

India 42 0.9 Limited agreement

Cambodia 37 0.8 Broad bilateral agreements; ASEANmultilateral agreementIndonesia 32 0.7

UK 30 0.6Bilateral agreement; also EU openskies negotiations

Myanmar 28 0.6 Broad bilateral agreements; ASEANmultilateral agreementLaos 22 0.5



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Qatar 18 0.4 Limited agreement

Bangladesh 11 0.2 Limited agreement

Pakistan 11 0.2 Limited agreement

Iran 10 0.2 Limited agreement

New Zealand 8 0.2Liberal bilateral ASA; open skies oncargo

Brunei 4 0.1 Limited access

Sri Lanka 3 0.1 Limited agreement

Other 287 6.2

Total 4640 100.0

Source:SRSAnalyserTable 3.2 provides a breakdown of nonstop and onestopweekly flights in each

directionbetweenChinaanditsbilateralpartners,asofMay2011,andrelativemarketsharesintermsofmovements.

MorethanhalfthemovementsrelatetoChinasfourNortheastAsianneighbours HongKong,Korea,JapanandTaiwan.Some20%offlightsoriginateinASEANcountries.

TheUS isthemost importantmarketoutsideofAsiawith4.4%offlights.Australiaaccounts

for

arelatively

modest

1.4%

of

Chinas

4,640

weekly

flights.

One futuredevelopment to consider is themuch talkedabout trilateralaviation

marketbetweenChina, JapanandKorea.TheKoreanGovernmentand carriershavebeenitsmostavidproponents.TrafficbetweenKoreaandChinahasgrownat11.1%perannumbetween2001and2009. However,ChinaandJapanremaincautiousaboutthetrilateralopenskiesproposal.

Looking forward, there could be significant implications for ASEAN carriers if theproposedtrilateralbecomesareality.China,JapanandKoreacouldpossiblybecome(orcomeclosetobeing)asingleaviationbloc intheirownright.Thiswouldenabletheircarriers to operate multiple hubs within the region, similar to what the EuropeancarrierscannowdowithintheEU. Individualcarriers inChina,JapanandKoreacouldthus end up having increased network coverage, compared to their counterparts inASEANthatremainrestrictedtotheirindividualmarkets.

InternationalaccesstoChinawillcontinueto liberaliseoverthenext10years,withAustralian and Chinese carriers responding to growing demand for VFR and leisuretravel between the countries by lifting capacity and serving a greater range ofdestinations. The recently renegotiated AustraliaChina Air Services Agreement willdeliveranadditional4,000weeklyseats in2011and2012(albeit lessthaneitherthetourismindustryorairportsdesired).



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Australia ideally would like to secure an open skies arrangement with China,

complementingasimilararrangementforairfreightstruckin2004.However,therearecurrentlysomestickingpointsoverprovisionofunlimitedaccessto5th freedomrightsthroughChina.

3.2.3 Further Liberalisation of the New Zealand Market

Australia and New Zealand are expected to move over time towards theestablishmentof commonborderarrangements.While thiswill initiallybe limited tostreamlinedprocessingofarrivalsanddeparturesfornationalsfrombothcountries,thepotentialforafullyintegratedEUstylesystemmaybeplausibleinthemediumterm.

New Zealand represents a high volume (but low yield) inbound market which islargely served as an extension of the Australian domestic market. Common borderarrangementshavethepotentialto:

ExpandaccesspointstoAustraliafromNewZealand,buildingtrafficvolumesatnonmetropolitanairports;and

Assist regional tourismbyencouragingdevelopmentof secondarymarkets (i.e.NewZealandtoNewcastleorCanberra).

Onedownside is thepotential lossof airport dutyfree income from visitingNewZealanders(ashasoccurredwithintheEU).

3.2.4 Ownership Reforms

Most Air Services Agreements (ASAs) are subject to the traditional substantialownership and effective control provisions. This means, in effect, that nationallydesignated international carriers have to be at least 51% owned and controlled bynationalinterests.

However, governments are increasingly recognising reform moves to establish amore flexible regime underpinned by place of incorporation and principal place ofbusiness criteriawhich seek to shift the focus fromequity to the countrywhere thecarrierisbasedandmaintainsregulatoryoversight.Principalplaceofbusinesscriteriaoramodifiedversionthereofhasbeennegotiatedin32ofAustralias70bilateralASAs.

Suchanapproachisconsistentwithinternationalinitiativesbythe InternationalAirTransportAssociation(IATA)andtheInternationalCivilAviationOrganisation.GiventhebilateralnatureofASAs,adoptionoftheseprovisionsrequiresreciprocityandapprovalfrombothsides.IATAsAgendaforFreedominitiativecallsforcountriestounilaterallywaiveownershipandcontrolandtrafficrightsclauseswithinAirServicesAgreements(ASAs)onaconditional,reciprocalbasiswithothercountries.Theobjectiveistoremoverestrictionswhichprecludecommercialfreedoms,suchasmarketaccessandtheability



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toconsolidatebusinesses.TheEUand10othercountries, including theUS,Malaysia,SingaporeandtheUAEhavesignedorendorsedthepolicyprinciplesoftheinitiative.

InAustralia,theFederalGovernmenthasadheredtoa49%limitofforeignownershipforQantas,however, theWhitePaperpolicy indicates itmay in some circumstancesallowhigherlevelsofforeignownershipinotherairlinesonacasebycasebasis.

AccordingtotheGovernment,thelatter(i.e.foreignownershipabove50%)maybeconsideredif:(1)itispartofacomprehensivebilateralopenskiesagreement;(2)thereare demonstrableeconomicbenefits forAustralia;and (3)equivalentopportunitiesareavailableforAustralianairlinesinthemarketsofthetradingpartner.

Intheory,thismaycreateopportunitiesfor: Foreigninvestors(oranairline)tomajorityownaninternationalairlinebasedin

Australia(otherthanQantas)whichcanaccessAustralianairrights;and/or Existing Australiandesignated airlines to enter into crossborder equity

partnershipswithothercarriers.Realistically,theformerisnotlikelytooccurasthelevelofpoliticalandcommercial

oppositionfromhomegrowncarrierswouldbeconsiderable.The substantial ownership/effective control provisions do not apply to the

Tasman. The open skies ASA with New Zealand requires airlines to be effectivelycontrolled by Australian nationals, and to be incorporated and have their place ofbusinessinAustralia.

The issue is furthercomplicatedby theSingleAviationMarket (SAM)designationcriteria,alsoinplacefortheTasman,whichneedstobesatisfiedifairlinesfromeithercountrywanttooperateintheothersdomesticmarket.Thiscriteriarequires,amongother things, that carriers to be at least 50% owned and effectively controlled bynationalsfromAustraliaand/orNewZealand4.

TheprospectofAustraliancarriersacquiringormergingwithotherairlines in theregionisdistinctlypossible.QantashasinthepastconsideredallianceswithSingaporeAirlinesandMalaysiaAirlines,butwith littlesuccessasthe issueofcontrol inevitablyintervened.

We note that attitudes towards foreign crossborder ownership are softeninggenerally, as indicated by EU regulations, the USEU Open Skies relationship andproposalswithinASEANtoprovidefortheestablishmentofanASEANcarrierownedbyinterestsfromoneormoreofthememberstates.

4SAMdesignatedcarriersalsoneedtohaveAustralianand/orNZnationalscomprisingatleasttwothirds

oftheirboardmembersandthechairperson;andaheadofficeandoperationalbaseinAustraliaorNZ.ci32

Final Draft Report


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The more relaxed approach reflects an overall need for airline consolidation to

improveverypoorreturnsandthefragilefinancialstateofanumberofoperators.In tourism terms,an increasedpotential forairline consolidation is likely tohave

both positive and negative implications. While it may provide for more economicoperationsandimprovedcapitalstructuresforlongertermviabilityofservices,thereisalsothelikelihoodofserviceandcapacityrationalisationonoverlappingroutes.

3.3 Airline-Focused Issues

3.3.1 Further Evolution of the Business Model

Thestructureandeffectivenessof thebusinessmodeloperatedbyairlinesdefinestheirstrategyforinternationalmarketsandeconomicperformance,includingoperatingmarginsandreturns.

Given the capital intensive nature of commercial aviation,much of the focus fortraditional operators in recent years has been on restructuring to reduce costs andachieveprofitableoutcomes.LCCsemergedlargelyinresponsetotheserequirements.

LCCsintheirvariousformshavemade,andwillcontinuetomake,substantialinroadsintotheAustralianandAsiaPacificmarkets.FleetsoperatedbyLCCscurrentlyaccountfor35%oftheactivefleetinIndia,41%inSoutheastAsiaand44%inAustraliaandNewZealand.However,thepenetrationofLCCsinEastAsiaissubstantiallysmallerat4.8%,reflectingconstraintsonLCCestablishmentandoperationinChinaandhighstructuralcostsinJapan.

The48LCCsservingtheAsiaPacificasawholehave706aircraftinoperation(mostlynarrowbodiedA320sorB737s),or19.5%ofthetotalregionalfleet.Thispercentagewillincrease sharplyas theASEAN singleaviationmarketdevelops from2015andChinaadoptsamorerelaxedapproachtoLCCs.

Inthemediumandlongterms,theremaynotbeanotherseachangeinoperatingstructures(aswiththeintroductionofLCCs)butotheriterationswilloccur:

Further development of longhaul LCCs which will drive growth levels onintercontinentalroutes(e.g.AirAsiaXandJetstar);

EstablishmentofmorehybridoperationswhichblendamixofeconomyandpremiumtypeproductswithanLCCcoststructure(e.g.VirginBluesNewWorldCarriermodel,LionAirandCebuPacific);

More dual brand airline structures targeting different market segments,particularlyintheAsiaPacific(e.g.QantasandJetstar);and

Anexpansionof crossborder JointVentures (similar to theAirAsiaand Jetstargroups).



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Full scale mergers between airlines have proved untenable under national and

competition laws, particularlyon routeswhere carrier servicesoverlap or there is adiminutionofservice(e.g.Qantas/AirNewZealand).Therearealsoconcernsaboutlossof sovereignty and foreign control of national carriers. In the medium term, thissituationisunlikelytochange.

However, over 10 years there is potential for carriers within aviation blocs, forexample ASEAN, to merge by capitalising on more relaxed ownership regulations.Australian carrier investment in foreignairlines (i.e. inAsia)mayoccuraspartofanexpandedcommercialrelationship,but it isdifficulttoseecontrolbeingcededunderany equity arrangement. Themost likely proposition is in anAustraliaNew Zealandcontext such as Virgin Australia/Air New Zealand (Air NZ). We note that the NewZealandGovernmentiscurrentlyconsideringsellingdownitsshareholdinginAirNZ.

Any merger carries with it the prospect of service rationalisation, subject toconditions applied by competition regulators. There alsomay be benefits streamingfromenhancedmarketreachandcoordinationofscheduleswithimprovedconnectivity.

Theimpactofthesedevelopmentsoninboundcapacitywillvary,buttheyhavethepotential to strengthen airline viability and support routes which are currentlyunsustainable or marginal. The latter could see the development of gateways toadditionalsecondarytourismmarketsinAustralia.

There may also be negative repercussions for full service carriers from theintroductionofmore intensive andeffective competition and farepricingon certainroutes.Thismayormaynot lead toa rationalisationof servicesor, inaworsecase,wholesalewithdrawalfromamarket.

3.3.2 Expansion of Long-Haul LCCs

The spread of the low cost longhaul model appears inevitable as the bilateralfoundations to allow operators to both enter the market and operate services asdesignatednationalcarriersarelargelyinplace,forexample:

AirAsiaX(adesignatedMalaysiancarrierunderMalaysiasbilateralASAswiththeUK,Australia,theMiddleEastandChina);

AirArabia(adesignatedUnitedArabEmiratescarrierunderUAE/BrazilbilateralASAs);and

Jetstar International (a designated Australian carrier under a number ofAustralianbilateralagreeements).

JetstarclearlyhasplanstoemulateAirAsiaXbyoperatingthroughitsSingaporehubto the European market. Singapore Airlines has also flagged a longhaul LCC



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development.AirAsiaX,meanwhile,currentlyoperatestoGoldCoast,MelbourneandPerthandisstillhopingtogainMalaysianGovernmentapprovaltoflytoSydney.

Thefurtherdevelopmentof longhaulLCCswithanattractive lowfareproducthasthe potential to diminish the returns, and in some cases overall route viability, ofestablishedpremiumoperatorswhichpreviouslydominatedintercontinentalmarkets.

Qantassstrategicapproach inoperatingdualbrandswithJetstar isseenbothasareflectionof the challengesaheadandalsoavehicle todrivedown costswithin thegroup. Jetstar is expected to further establish its brand in Asian markets directlythrough services out of Australia (China, Japan) and those channelled throughSingapore, and indirectly through itsjoint ventures in Singapore (Jetstar Asia) andVietnam(JetstarPacific).

TwolonghaulA330200s initiallyhavebeenbased inSingapore. TheattractionforJetstaristwofold:(1)itcantakeadvantageofSingaporeslower labourcosts;and(2)70%ofrevenueonflightsoutofSingaporerelatetoSingaporepointoforiginsales.

3.3.3 Development of Hybrid LCCs

VirginAustraliaistransitioningunderitsGameChangeProgramintoamixedLCCandfull serviceoperator.Theairlinesbusinessmodelhas changed considerably since itslaunch in 2000 as abasic LCC,with the introductionofpremiumproduct, longhaulservicesanddifferentaircrafttypes.

The strategy ismultifacedwitha focuson repositioning theairline in themarketplaceby:

Increasing Virgins share of corporate and government traffic from 1015% to20%,reducingitsdependenceontheloweryieldleisuremarket;

Improvingaccesstogrowthmarketsthrough:- Consolidation of international operations Pacific Blue and V Australia

throughthecreationofasingleVirginAustraliabrandacrossthenetworkandtwokeyinternationalhubsinAbuDhabiandLosAngeles;and

- Establishment of strong strategic alliances which extend market reachwithout requiring capital commitment (e.g. AirNew Zealand, Delta AirLinesandEtihadAirways);

Aspartofthisstrategy,VirginslonghaularmVAustralia(nowVirginAustralia)hasdropped nonperforming services to South Africa, Fiji and Phuket in Thailand, andincreased frequencies to theUS. Thewithdrawal of PacificBlue fromNZsdomesticmarketwasalsotriggeredbysignificantlossesthere.



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Virgin is introducing A330s with a business class from the second half of 2011,

upgradingandexpanding itsairport loungesandrevamping itsVelocityfrequentflyerprogramaspartofthetacticalapproachtochallengeQantasslonghelddominanceofthecorporatemarket.

OtherexamplesofhybridLCCswithamixedproduct includeLionAirlines,nowthelargestoperatorinIndonesia,andCebuPacificofthePhilippines.

3.3.4 Impact of Fleet Growth and New Aircraft Types

The expansion and restructuring of airline fleets globally and regionally,with theintroduction

of

new

aircraft

types,

will

influence

network

structures

and

the

development of markets and inbound tourism in the medium and long term.Appendices4and5profilecurrentfleetsandfutureaircraftordersbycountryforthemajormarkets.

MostcarriersdirectlyorindirectlyservingtheAustralianmarketareundertakingrefleetingprogramstocapitaliseonstrengtheningmarketconditionsandthe impendingavailability of new aircraft types with extended range and payload capabilities andimprovedoperatingeconomics.

Some of these programs have been brought forward as a counter to pressuresimposedbyescalating fuelpriceswhichappearunlikely toabate for the foreseeablefuture.

TheintroductionofnewaircrafttypeswithgreaterfuelefficiencysuchastheB787andA350from2012/13hasthepotentialtoprovideairlineswithentrytonewmarkets;increasedirectserviceoptions;andestablishaccesstoamorediversemixofgatewayswithinexistingmarkets.Aswell,airlinesare continuing tobuild capacity in longhaulintercontinentalmarketsthroughtheuseofhighcapacityA380sandstretchedversionsoftheB747.

Thescaleofoutstandingaircraftordersunderlinesthegrowthfocusinthemarket.AtApril 2011, Boeing and Airbus had outstanding orders for 7,273 aircraft globally,equivalentto7yearsofproductionatcurrentrates.

As Figures 3.2 and 3.3 show, demand is the greatest in the Asia Pacific whichaccountsforalmostonethirdofthetotalorders.



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Figure 3.2: Current Unfilled Jet Orders by Type and Region (April 2011)

1068 1284 1120367 321

99

356

784

445

94565

740

5001000150020002500

Europe AsiaPacific NorthAmerica LatinAmerica MiddleEast Africa

No.

Aircraft

NarrowBody WideBodySource:Boeing,Airbus

Figure 3.3: Unfilled Orders as a Percentage of Total by Region

Europe,21.7

AsiaPacific,31.4NorthAmerica,

23.8

LatinAmerica,7.0

MiddleEast,13.5Africa,2.6

Source:Boeing,AirbusTheAsiaPacificpresentlyhasunfilledorderswithBoeingandAirbusfor2,085new

aircraft.Theseordersreflectcurrentknownfleetdevelopmentprogramsandshouldbedeliveredbetween2010and2020.

LCCsaccountfor31%oftheorders.Overthenext510years,theregionsLCCswilltake delivery of 752 new aircraft. As a consequence, there is a heavy emphasis onnarrowbodiedjetswhichcomprise60.1%ofthetotal.



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Theemphasisonnarrowbodyaircraftforfuturegrowthisconsistentwithexpansion

of LCCs across South and SoutheastAsia, including India, the Philippines, Singapore,ThailandandIndonesia.

Some22%oftheregionalrequirementfornewaircraftwillrepresentreplacementsforolderaircraft.Thisisonlyhalfoftheglobalreplacementrate,indicatingtheneedforsubstantial additional capacity to accommodatemarket growth. The other 39.9% ofordersareamixofwidebodyaircraft foroperationon regionaland intercontinentalroutes.Some4%ofthesewidebodiesareVeryLargeJets(i.e.theA380orB7478).

As Figure 3.4 shows, Chinawill acquire 28.4% of the aircraft currently on order;SoutheastAsia27.9%;andIndia20.2%.

Figure 3.4: Percentage Breakdown of Current Aircraft Orders in the Asia Pacific by Market

SEAsia,27.9

China/SARs,28.4

OtherEastAsia,11.8

India,20.2

Australia,9.1NewZealand,

0.9 Other,1.7

Source:Boeing,Airbus,CAPAConsultingAnalysisOtherEastAsia (Japan,KoreaandTaiwan)will take11.8%of the total.Australias

ordersaccountfora9.1%share.The major Australian carriers (Qantas, Jetstar, Virgin Australia and Tiger Airways

Australia)haveexistingordersfor190newaircraft(includingjetsandturboprops)fordelivery

to

2018

and

afurther

112

options

and

purchase

rights

which

can

be

exercised

toaccelerateexpansionrates.Abouthalfoftheseorderswillreplaceageingaircraftinthefleet.



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Figure 3.5: Expected Development of the Australian Major Airline Fleet by Type, 2010-2018

279

279 322 337

362 390 410 424 442

57 6061 66

67 7473 76 76

34 3636 35

33 3436 37

39

0100200300400500600

2010 2011 2012 2013 2014 2015 2016 2017 2018

VerylargeWidebodyNarrowbody

Source:CAPAConsultingAnalysisFigure3.5showstheimpactoftheplannedchangesinthefleetsofthemajorairlines

netofreplacementsbyaircrafttypefortheperiodto2018.Thenational fleetsof the fourcarrierswill increaseatanAverageAnnualRateof

5.6%perannum,risingfrom370in2010to557in2018.Themaindriversof thatdemandwillbe theLCCs (includingVirginAustralia),with

AverageAnnualGrowthintheirfleetsof9%duringthisperiod,asopposedto2.7%forthemainlineoperationsofQantas.

3.3.4.1 Introduction of New Aircraft Types

TheAsiaPacificholdsthemostordersofanyregionfortheB787(295ordersor35%oftheworldstotal)and26%ofcurrentordersfortheA350.Thespreadofordersfortheseandothernewaircraft types, including theA350andA320neo,aredetailedbymarketintablesinAppendix5.

Airlines taking deliveryof these aircraftover the next 5 years are based in India,Singapore,Vietnam,ThailandandMalaysia;Japan,HongKong,Korea,Taiwan;AustraliaandNewZealand.ThefirstB787 isduefordeliverytoAllNipponAirways inthethirdquarterof2011afterrepeateddelays,whiletheA350 isscheduledtoenterservice in2013.

In an Australian context, the impact of the B787 is likely to be greatest oninternationalroutes.Jetstars initialdeliverieswillbeamixof8B7878sand7 longerrangeB7879s (the latterby2015/15).Allare likely tobedeployedon internationalrouteswithasmallnumberbasedoffshore.Jetstarultimately intendsto focusonthe



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B7879,withB7878sprogressivelyswitchedtoQantasmainlineforboth internationalandsomedomesticservices,particularlyonrouteswithhighervolumes.

JetstarhasindicatedthatanumberoftheseaircraftwillbebasedinSingapore,withonwardlinkagestonorthAsianandsouthernEuropeanmarkets.ThiswouldprovidetheairlinewithacompetitivelonghauloptionsimilartoAirAsiaX.

While theB7878doesnothave the range to service LondonornorthernEuropewithoutasecondstop,theaircraftcouldbeusedoutofSingaporetoAthensorRomewithout attracting a significant payload penalty. The B7878 has a range of 14,20015,200kmswitha fullpayload in two classes, significantlymore than theA330200s13,430kms. Its range is only slightly shorter than the B7879,which can fly 14,80015,750kmswithalargerloadingcapacity(280passengers).

Figure3.6showsthemarketswhichcanbereachedfromSydneywiththeB787sandtheA330200swhicharecurrentlyoperatingbyJetstarmostlyonAsianroutes.

Figure 3.6: B787 Range from Sydney Compared with A330

Source:BoeingTheA350isdesignedtocompetewiththeB787andB777,andwillbeamidsizedjet

(270350 seats)with an equally long range capability. Twothirdsof the 148 aircraftpresentlyonorderwillbedeliveredtocarriersinNortheastAsia(55ofthemtoChineseoperators).

Development of aircraft with longer range capabilities will influence the airportsserved, forexample,airlinescurrentlyoperating through intermediatepoints suchasSingaporeorHongKongmayelecttobypassthesehubsenroutetoEurope.Theyalsocreatenewmarketopportunities.Qantas,forexample,couldfeasiblyserveotherparts



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ofSouthAmericanonstopwiththelongerrangeB787s(e.g.Brazil);theairlinespresentB747400ERswouldtakeapayloadpenaltyonasimilarrouting.

Inthehighercapacitycategory,theAsiaPacificwillreceiveafurther57A380sinthemedium term, including11toQantas.Therearealsoorders for36B747800s,whichhaveanextendedrangetotheB747400s.

Currently, only three airlines operate A380s in the Australian market Qantas,EmiratesandSingaporeAirlinesonroutesthroughthemajorhubsofSingapore,DubaiandLosAngelestotheUK/EuropeandNorthAmericanmarkets(Figure3.7).

Figure 3.7: Existing A380 Operators and Routes Served in the Australian Market

Emirates14fts/weekDubaiSydneyAuckland

Qantas22fts/weekLosAngelesSydney

LosAngelesMelbourne

Qantas26fts/week

LondonSingapore

Sydney/Melb

SIA42fts/week

SingaporeSydneySingapore

Melbourne

SIA28fts/weekLondon

Singapore

Sydney/Melb

Source:SRSAnalyserVariousdevelopmentsarealsotakingplace inthenarrowbodysegmentwhichwill

provideagreatercapabilityforLCCs,forexample,tooperatefromSoutheastAsiaintotheAustralianmarket.

Airbus is offering a modified version of the A320, the A320 New Engine Option(known as A320neo), from 2015 and plans to sell 4,000 units over 15 years. TheA320neostargeted16%lowerfuelcostsandimprovedmaintenanceoverheadswillbehighlyattractivetooperators,especiallyiffuelpricesescalatefurther.TheA320neowillbeabletofly950kmsmorethantheexistingmodel(an18%betterrange)orcarryanextra2tonnesofpayload.

BoeingisalsoconsideringareplacementfortheB737NG,orareenginedversion,forintroduction in2016 following theB787.Thiswillbe slightly larger than the currentB737NG, enabling its costs to be spreadovermore seats, and offer fuel economies



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similartotheA320neo.Assuch,ithasthepotentialtoimprovetheeconomicviabilityofrouteswhicharecurrentlymarginalandextendtherangeoftheaircraft.3.4 Fuel Price Volatility

Fuel represents a substantialproportionof airline operating costs. Therefore, thesharp increasesexperiencedrecentlyheavily influencethestrategicapproachtoroutedevelopment,particularlyonlonghaulroutesby:

Deterring or limiting expansion, especially onmarginal intercontinental routeswith alreadysignificantyieldpressuresthroughcompetition;

Encouraginggreateruseofallianceswithconnectingservices,asopposedtoownoperatedservices,toreducethefuelrelatedriskexposureandcost;and

Acceleratingtheintroductionofmoreeconomicaircrafttypesandretirementofolderaircraft.

Whilerevenue trendsandprofitabilityhavebecomemorepositive fortheairlines,fuelcostshavereemergedasathreatwiththereturnofbettereconomicconditions(coupledwithrecentupheavalsintheMiddleEast).

Historically, fuelexpenseshaverangedbetween10%and 15%of airline operatingcosts,weremanageableand relatively constant.Since2003 this ratiohasmore thandoubledastheaveragepriceofjetfuelperbarrelrosetoUS$180in2008.Whenbasedonasampleof45majorglobalpassengerairlines,fuelrepresentedabout32.3%ofthetotaloperatingcost5.

AsofMay2011,thejetfuelpricehadrisentoUS$127perbarrel39%morethanayearearlierwithpremiums(therefiningmarginorspreadbetweencrudeoilandjetfuel) reaching the highest level since 2008. This was slightly down on the previousmonth,butmostairlineshaverespondedtothe increaseoverthepast12monthsbyreintroducingticketsurchargesandrevisinghedgingprograms.

Figure3.8showstheupwardtrendinfuelpriceswhichhasgatheredpaceinrecentmonthsduetonorthernwinterdemandandMiddleEastinstability.

5InternationalAirTransportAssociation,EconomicAnalysis.



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Figure 3.8: Jet Fuel and Crude Oil Price Trends

Source:PlattsTheriseinthejetfuelpricesandawideningintherefinerymarginbetweencrudeoil

andjet fueldue largely to capacity constraints at refineriesadded anextraUS$34.5billiontotheindustrysfuelcostsin2008.

This margin narrowed in 2009 due to an easing of these constraints. While theincreaseincostandflowoneffectshasbeenamajorproblemforairlines,itisthepricevolatilitythatmakesjetfuelsuchacriticalissueintheairlinebusinessmix.

Figure 3.9: Percentage Share of Airline Operating Costs by Region and Global, 2001-2011F

15 14 1619

24 2532

37

0510152025303540

2001 2002 2003 2004 2005 2006 2007 2008 2009F 2010F 2011F

%

AsiaPacific NorthAmerica Europe All

Forecast

Source:IATAThesteadyclimbinfuelpricesasapercentageofairlineoperatingcoststothe2008

peakisshowninFigure3.9,aswellasregionalvariations.



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AsiaPacificcarriersweretheworstaffected inarelativesense,risingto37%from

15% in 2001, due to the fact that their overall costs were much lower than NorthAmericaandEuropeanoperators. Thisunderlinesthedisproportionateimpactthatfuelpriceshaveon the regionsairlines,despiteactivehedgingprograms.The LCCswereevenmoreseverelyaffectedbyincreasingfuelprices,withfuelcostsrisingto50%60%oftheirtotaloperatingcosts.

FuelpriceseasedoffduringtheGFCasdemanddeclined.However,furtherincreasesareexpectedin2011andbeyondaseconomicconditionsimproveandairlinesscaleupfleetexpansion.

Figure3.10depictstheexpectedoilpricetrendto2030,aspublishedbyAirbusinitsGlobalMarketForecast20102029.Onthisbasis,oilpriceswereexpectedtoreturntothe2008peaklevelsby2016,andcontinuetoriseaboveUS$100perbarrel.However,recenttrendssuggestthatthepricespikehasbeenreachedmuchearlierthanexpectedandmaybewellinexcessoftheAirbus/HISprediction.

Figure 3.10: Historic and Forecast Oil Prices (US$ per barrel)

Source:EIA,HISGlobalInsight(November2010),AirbusThedevelopmentofcheaperbiofuelsisexpectedtohavealimitedeffectonaviation

overthenext10years.TheCSIROsrecentreport,SustainableAviationFuelRoadMap,indicatesamore likelyscenarioisthatAustralianandNewZealandairlineswillsource5%oftheirjetfuelrequirementsfrombiostockby2020,risingto40%by2050.

However, rising carbonbasedjet fuel prices and demands for a reduced carbonfootprint by regulators could well accelerate usage by airlines of biofuels as theybecomemorewidelyavailable.



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3.5 Migration to Alliance Structures; Need for Service Connectivity

Australias international tourism markets are served directly and/or indirectlythroughabroadrangeofalliancestructuresandcommercialpartnerships,comprising:

Globalsystems(StarAlliance,oneworldandSkyTeam),offeringcoveragethroughmembercarriersofmajormarkets;

Jointservice,codesharingandblockedspacerelationships;and Interline arrangements (mostly commercial partnerships which involve agreed

fareratesandtermsforoncarriageofpassengersandfreight).Thesestructuresenhancemarketpenetrationanddiversityandoftenenableairlines

to maintain profitable offline linkages, thereby avoiding requirements to commitaircraftandcapacitytoparticularroutes.Assuch,alliancesofferaneconomicsolutiontonetworkdevelopmentwhichgeneratesrevenueatmarginalcost.

Whilecooperativearrangementsaresubjecttooversightbycompetitionregulators,codesharing and interline connections are generally compatible with air servicesagreementsastheydelivermutualbenefitsforbothmarketingandoperatingcarriers.

In the medium and longer terms, the scope and value of commercial linkagesbetweenairlineswill continue todevelopandmayevenaccelerateasjet fuelpricesescalateandcompetitionintensifies.

These traditionally have been the domain of full service operators, howeverincreasingnumbersofLowCostCarriersareexpectedtomigratetoalliancesastheiroperating,productanddistributionmodelsbecomemorecomplex.

VirginAustraliaisoneexampleofanevolvinghybridLCCwhichhasenteredintoachain of international partnership arrangements through its full service subsidiary VAustralia.

This has extended its accessible markets to Europe through Etihad Airways andthroughDeltaAirLines,aswellasstrengtheningthegroupstransTasmanlinksthroughAirNewZealand.Therelationshipsalsoprovide itspartnerswithbroadaccesstotheAustraliandomesticmarket.

AsVirginsstrategyseesittransitionintoapremiumhybrid,thecarrierisexpectedtojoinoneorotheroftheglobalalliances,possiblySkyTeam,tocounterthecompetitivestrengthofQantasandoffermoreinternationalserviceoptionsforitscustomerbase.



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Figure 3.11: Map of Current and Future Global Alliance Members

CurrentMembers

FutureMembers

Source:StarAlliance,SkyTeam,oneworldFigure 3.12: Direct Routes Operated by the Global Alliance Airlines into Australia

Note:oneworldservicesareshowningreen;SkyTeaminred;andStarAllianceinblue.Thechartonlycoversnonstoporonestopservicesoperatingthesameflightcode.

Source:SRSAnalyser



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AsFigures3.11and3.12show,memberairlinesofthethreeglobalalliancesprovide

coverage ofmost of themajor tourismmarkets forAustralia in Europe,Asia,NorthAmericaandLatinAmerica.

StarAllianceisparticularlystronginEuropeandtheAmericas(halfofits27membersareintheEU).Afurther4carriersaresettojointhealliance.SkyTeamisthenextlargestwith13members(6moreduetojoinin2011and2012);whileoneworldisthesmallestoftheglobalallianceswith12membersbutiswellrepresentedinmostmarkets(twomorewilljoinin2011/12).

ThesharesoftotalAustralianinternationalseatsheldbyoneworld,StarAllianceandSkyTeam are depicted in Figure 3.13. oneworld, underpinned byQantas, is still thedominantalliancethough itssharehasdeclinedfrom36.8%in2006to28.3%in2011(consistentwithQantassownweakeningposition).

Figure 3.13: Percentage Shares held by Global Alliances of Annual Seats into/out of Australia

2006 2007 2008 2009 2010 2011oneworld 36.8 37.1 36.0 31.4 29.1 28.3StarAlliance 24.5 24.3 25.4 23.4 22.1 21.4SkyTeam 1.0 1.3 1.7 2.0 3.5 4.9

0.010.020.030.040.050.060.070.080.090.0100.0

%

Note:2011dataisbasedonforwardairlineschedules.Source:SRSAnalyser

Star Alliance carriers have also lost ground, with SkyTeam the only one of thealliancestoincreaseitssharefromtherelativelysmallbase.ThisreflectsthegrowthinmembershipofSkyTeamwiththeentryofChinaSouthern.

Theoverall seat shareof thealliances in theAustralianmarkethasdiminished inrecentyearsfrom62%in2006to55%in2011.Thistrendislikelytobereversedinthenext fewyearsasothercarriers represented in themarketjoin, forexampleGaruda(2012), China Eastern/Shanghai Airlines (2011), China Airlines (2011) and Aerolineas(2012).Air India istheStarAlliancesonlyproposedadditionwithpotentialAustralian



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links, while oneworlds memberelect Kingfisher Airlines is still to activate plans tooperatehere.

Globalandbilateralpartnershipsplayasignificantrole,inparticular,inaccessingtheUK/European market. Only three EU airlines serve Australia directly (Virgin Atlantic,British Airways (BA) and Air Austral6). However, other offline carriers includingLufthansa, Air FranceKLM, Swiss, Finnair and SAS maintain indirect links with theAustralianmarketthroughAsiancodesharepartners.

TheoneworlddeclineshowninFigure3.13reflectsinpartthelossofmarketshareby JointServicesAgreement (JSA)partnersQantasandBA.The JSA coversall routesbetween Australia and Europe and has approval to continue at least until 2015.HowevertheQantas/BApositionhasbeenerodedbychangestothedynamicsoftheAustraliaEuropemarketwith:

FurtherdevelopmentofservicesthroughMiddleEasthubs(Dubai,AbuDhabiandDoha)whichareextendingtoNorthandSouthAmerica;and

TheexpansionoflowcostlonghauloperationstoEuropebyAirAsiaXandJetstar(throughKualaLumpurandSingapore).

This trend is likely to continuewith the establishmentofnewhubsby themajorChinesecarriersbetweenChinaandEurope,includingGuangzhouandShanghai.

Thegrowthofthehubmarketswillfurtherstrengthenhubbasedairlinesoperating6thfreedomservicesbetweenAustraliaandEurope(Emirates,EtihadandQatarAirways

intheMiddleEast;SingaporeAirlines,MalaysiaAirlines(MAS),ThaiAirways,KoreanAirandCathayPacificinAsia).

Otherserviceoptionsarebeingfacilitatedthroughthe introduction inthenextfiveyears of improved technology throughmore efficient, longer range aircraft (e.g. theB787900andA350).

CodesharepartnershipsalsoenableairlinesservingtheAustralianmarkettoextendtheir reach and access inbound traffic from markets outside their networks. Theseairlinetoairlinerelationships,forthemostpart,alignwithglobalalliancecommitments.However,inmarketswhereparticularalliancesarenotrepresented,carriersoftenenterintocodesharingarrangementswithotheroperators.

Qantas, forexample,codeshareswithSkyTeammembersAirFrance/KLMonAsiaParis services and Vietnam Airlines on AustraliaVietnam; and Star Alliance carrierAsianaonAustraliaKorearoutes.

6EuropeanairlineswhichhavewithdrawnfromdirectservicestotheAustralianmarketinclude

Lufthansa,KLMRoyalDutchAirlines,AustrianAirlines,Alitalia,OlympicAirways,UTAFrenchAirlines(nowAirFrance),AOMFrenchAirlinesandJATYugoslav.



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TheinterrelationshipsbetweenairlinesinAsia,Australasia,Europe,theMiddleEast

andtheAmericasaremappedinAppendix5.Alliances therefore have an increasing role to play in the mediumlong term in

interlinking international marketswith Australia, both through the expanding globalmemberships (especially in Asia) and onetoone partnerships between carriers. Thetwinpressuresofrisingoperatingcostsandheightenedcompetitionwillseelongerhauloperators,inparticular,seekalliancesolutionswithenhancedconnectivitytosecureamarketpresence.3.6 Infrastructure: The Role of Airports

In this section, we examined the role of International and domestic hubs insupporting the development of air services to Australia, and in distributing trafficthroughtheAustraliansystem.

3.6.1 Function of International Hubs

Thedevelopmentofahubairportcanbringsubstantialeconomicandsocialbenefits.Successfulairportsattractairserviceswhichinturngeneraterevenueandemployment,for example through spending on local businesses and tourist facilities and servicessupportingairlinesandairports.Aroughestimateof1,100directjobsperonemillionpassengersisoftencited,withagreaterlevelofindirectemploymentgenerated.

Anairportthatoffersconvenient,frequentandcosteffectiveairserviceswillattractbusinesstravellersandcanbeakeydeterminingfactorinthedecisionastowheretolocatecorporateandregionalheadquarters,distributioncentres,manufacturingplantsand service companies. This in turn attracts foreign direct investment, as well asconventionsandtradefairs.

Thetypesofairlinesservicinganairport,forexampletheproportionoffullserviceversuslowcostcarriers,willinfluencethemixofbusinessandleisurevisitors.

Fortheconsumer,ahubairportprovidesabroaderrangeoftraveloptionsintermsof choiceof flightsanddestinations, frequencyof services, flexibility in reschedulinganda loweringoftheancillarycostsrelatedtotravelsuchasthetimeandcostofanovernightstay.Ahubairportalsoprovidestheabilitytoconnectsmallcommunitiestotheglobalmarketplace.

Hubairportrolemodelsinclude: AmsterdamSchipholAirport oneofthebestconnectinghubsinEurope; SingaporeChangiAirport theleadinghubinSoutheastAsia;and DubaiInternationalAirporttherapidlyexpandinghubfortheMiddleEastwh