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The Future for Australian Aviation: Policy, Market & Infrastructure Challenges Ian Thomas Senior Consultant Industry Affairs BTRE Transport Colloquium ‘05 Market Overview BTRE Transport Colloquium ‘05 Domestic market: - Return to stable duopoly - Further restructuring likely International market: - Local/regional pressure for liberalisation (eg Pacific) - Foreign ownership, control rules under review - Competition intensifying The scorecard: 15 years into domestic deregulation Upside: Strong traffic growth Greater competitiveness Product innovation Cheaper fares Encourages market entry, allows exit Downside: X High volatility X Depleted yields X 4 failures X Single dominant operator BTRE Transport Colloquium ‘05 The highs and lows 35 Domestic Deregulation 30 Average annual traffic growth 2.3 times GDP AAGR 25 Entry, exit Compass 2 20 15 Market re-growth Entry Impulse, Virgin Blue % 10 5 0 Compass 1 collapse -5 Exit Impulse, Ansett fails Asian crisis -10 GDP PAX ASK 04 20 03 20 02 20 01 20 00 20 99 19 98 19 97 19 96 19 95 19 94 19 93 19 92 19 91 19 19 90 -15 Frequency Source: BTRE, CAPA BTRE Transport Colloquium ‘05 Percentage change in CY Traffic, Capacity & Frequency v GDP Long-term growth trend despite crises Capacity, Traffic & Load Factor Trends 60 82 80 50 78 40 76 bln 30 74 % 20 Trend lines 10 RPKs: +15.7% ASKs:+17.6% CY2004 72 70 68 ASKs RPKs Load factor (% ) Linear (RPKs) 04 20 03 20 02 20 01 20 00 20 99 19 98 19 97 19 96 19 95 19 94 19 93 19 92 19 19 19 91 66 90 0 Linear (ASKs) Source: BTRE, IMF BTRE Transport Colloquium ‘05 High passenger loads, traffic levels Record profits 1400 New peak Major Airline Profits & Profit Per Passenger, Capacity Unit Previous peak 2000 1200 1000 800 600 $m 400 200 0 -200 Total Op. Profit ($m) Source: CAPA, Airlines BTRE Transport Colloquium ‘05 $ Profit/PAX Total PAX (m) 04 20 03 20 02 20 01 20 00 20 99 19 98 19 97 19 96 19 95 19 94 19 93 19 92 19 19 19 90 91 -400 70 65 60 55 50 45 40 35 30 25 $ 20 15 10 5 0 -5 -10 -15 -20 $ Profit/1,000 ASKs Aggregate earnings eclipse previous peak by 42% in 2004 More competition = less profit Qantas Ansett Virgin Impulse 1400 1200 Qantas/Virgin Qantas/Ansett 1000 Qantas/ Australian Ansett Compass 1&2 800 600 $Am 400 200 0 -200 -400 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Ansett Qantas Virgin Australian Source: CAPA, Airlines BTRE Transport Colloquium ‘05 Combined Profits of Major Airlines Year-on-year, 1990-2004 Commercial impact Basic LCC Building Complexity/cost? Simple product Value –plus Product International/domestic Partners, Connectivity? One class On-board food, drink sales No hot food Focus on leisure, small business market Minimal costs Pricing drives growth VIRGIN LIGHT BTRE Transport Colloquium ‘05 BluePlus fares, BlueZone seating Hot food FF programme Airport lounges Satellite TV VIRGIN HEAVIER From traditional LCC……to Ansett II? Traditional network Disaggregated Vertically-Integrated International domestic regional One brand One product One fare system QANTAS 2000 BTRE Transport Colloquium ‘05 Differential products, fares Joint Ventures QANTAS 2005 Qantas fragments….different brands for different markets International Policy: The greatest challenge Where to next with “open skies” Australian airlines losing market share to foreign operators Ownership/control limits need addressing - capital mobility issues - consolidation constraints Government response to regional liberalisation (ASEAN+3, other) Greater engagement with Asia BTRE Transport Colloquium ‘05 Asia growing rapidly, but Australia/NZ only small players Asia accounts for 83% of available airline capacity to/from region Australasia, 3.0 Other, 0.3 North America, 4.2 Middle East, 3.9 Europe, 6.1 Asia, 82.5 Source: Innovata APGdat BTRE Transport Colloquium ‘05 Australia/NZ fifth to Asia, Europe, America and Middle East Capital access, rising debt threaten growth Fleet rebuilding, high growth 6 5 Capex 2002-2007 = $13.6b 4 Qantas Capex, Net Debt Trends, 1994-2007 $1.4b in equity raisings $b 3 2 Debt curve 1 Source: Qantas annual reports, Lehman Bros BTRE Transport Colloquium ‘05 Capex Net debt 20 04 20 05 E 20 06 E 20 07 E 20 02 20 03 20 00 20 01 19 97 19 98 19 99 19 95 19 96 19 94 0 Regional fleet growth places pressure on labour pool 300 High demand impacts on training wage costs expansion plans Current Aircraft Orders by Region 250 200 150 100 50 BTRE Transport Colloquium ‘05 Narrow-body /N Z Ea A us le id d M rS tr al ia st a A si a ou th A si SE O th e A si a n N or th O th er Ja pa na C hi Orders for 1,056 aircraft in next 3-5 years, 80 in Australia/NZ In di a 0 Medium twin-aisle Source: Centre for Asia Pacific Aviation, Airlines Large Skills shortfall looms large 9000 7780 8000 7000 Est. Annual Airline Employee Requirements by Type by Region, 2005-2009 6023 6000 4718 4472 5000 4000 2515 3000 2100 1422 2000 390 1000 Pilots Maintenance BTRE Transport Colloquium ‘05 us tr al ia /N Z id dl e M A Ea st si a ou th A As ia th er S SE si a A or th O O th er N Ja pa n hi na C In d 146,000 jobs required over 5 years; 29,000+ per year ia 0 Flight attendants Ticket sales Ground handlers Managerial Source: Centre for Asia Pacific Aviation Australia & New Zealand 7,109 jobs over 5 years Managerial 987 Ticket sales 938 Maintenance 14.5% increase in employees to 2009 1234 Ground handlers 1777 Flight attendants 1685 Pilots 489 0 200 400 600 800 Source: Centre for Asia Pacific Aviation BTRE Transport Colloquium ‘05 1000 1200 1400 1600 1800 2000 Surplus pilot supply may disappear quickly 18,000 16,000 14,000 12,000 10,000 8,000 4,303 commercial pilots (non-airline) 6,000 4,000 6,025 licensed airline pilots 2,000 0 1996 1997 1998 1999 2000 ATPL Source: CASA Annual Reports BTRE Transport Colloquium ‘05 2001 2002 2003 2004 CPL Also available: 300 ex-Ansett pilots, 200 foreign pilots Offshore competition for pilots increasing Overseas exodus to high demand centres Retirement China India SE Asia Middle East BTRE Transport Colloquium ‘05 Qantas, Virgin, Air NZ Aust/NZ Pilot Pool Conclusions: The Challenges Ahead Build on industry globalisation, regional liberalisation Accelerate air service deregulation programme, focus on Asia First stop is Singapore “open skies” agreement; 5th freedom access to Pacific Remove road-blocks to consolidation (starting with New Zealand) BTRE Transport Colloquium ‘05 Conclusions Failure to facilitate capital, alliance development will impede growth and may threaten viability BTRE Transport Colloquium ‘05 Only the brave..... BTRE Transport Colloquium ‘05 Thank You! BTRE Transport Colloquium ‘05