Air Transport: An Engine to Prosperity

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1 Air Transport: An Engine to Prosperity Mark Smyth Senior Economist, IATA To represent, lead and serve the airline industry

2 Africa in a Global Economic Context Relatively low shares of GDP, trade and air travel Africa's Global Share Population 13.0 GDP - market exch rates 1.9 GDP - PPP 3.4 Exports 2.9 Air Passengers 3.3 International Air Freight % share of global total Source: IMF, IATA

3 Equatorial Guinea Seychelles Botswana Mauritius South Africa Tunisia Namibia Algeria Gabon Cape Verde Swaziland Morocco Angola Ghana Sudan Mauritania Djibouti Guinea Zimbabwe Cameroon Lesotho Gambia Comoros Senegal Chad Côte d'ivoire São Tomé and Príncipe Uganda Togo Mozambique Congo Benin Rwanda Burkina Faso Kenya Mali Nigeria CAR Zambia Ethiopia Liberia Eritrea Madagascar Niger Sierra Leone DR Congo Tanzania Source: IMF Guinea-Bissau Malawi Burundi 0 GDP per Capita, 2006 (PPP values) 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 African Economies A long tail of countries with low per capita incomes

4 African Economic Prospects have improved Africa is set to enjoy above-average economic growth to Average Annual GDP Growth to 2010 AAGR 2006 to Global Average 0 USA EU25 Japan India China Middle East Africa Latin America Source: EIU

5 Which should help to boost air travel demand Historically air demand has grown at 1.5 to 2 times GDP growth Source: IMF, ICAO P World Real GDP growth (%) Passenger Kilometre Growth (%) World GDP Growth Airline Passenger Km Growth (RHS)

6 While globalisation will boost cargo demand Increased economic links are leading to strong trade growth W orld trade and economic growth W orld trade growth Ratio of world trade to GDP (r scale) % change Indexed to Econom ic growth Source: EIU

7 Steady growth is forecast to 2010 Freight traffic to Asia is set to see the highest growth 9% 8% 8.4% Passenger Volumes Freight Volumes Average annual % growth, 2006 to % 6% 5% 4% 3% 2% 3.5% 3.1% 5.4% 5.1% 4.7% 2.7% 6.5% 5.0% 6.8% 5.4% 5.1% 5.0% 1% 0% n/a Within Africa Africa - Asia Africa - Europe Africa - Latin America Africa - Middle East Africa - North America Africa Total Source: IATA

8 The economy / air travel virtuous cycle Economic growth boosts air travel but also benefits from it Air transport is a key network asset for economic development, like banking or telecommunications. Network connections provide benefits over and above the sum of the benefits from point-to-point routes. Value is created not just by a new air service and the importance of the destination but also by connections provided within the network. A well-designed air transport network widens markets, improves the efficiency of production and encourages greater investment.

9 Aviation as an engine for economic growth Access to the global network creates significant wider economic benefits Greater Access to the Global Air Transport Network Widens the available market Facilitates efficiency improvements Fosters greater competitiveness Higher Revenues Higher potential returns from investment Access to a wider base of suppliers Access to new production techniques Increases inward and outward investment Ability to exploit economies of scale Source: IATA

10 Link between productivity and connectivity Improving connectivity has a greater marginal impact for developing countries Labour Productivity vs Connectivity/GDP Labour Productivity - GDP/Hour Developed Asia North America and W estern Europe Developing Asia and Africa Emerging Europe Transitioning Asia and South America Connectivity per $Billion of GDP Source: IATA

11 Creating large economic returns on investment Economic returns alone can recoup investment costs within six years Economic Rates of Return from Aviation Investment Kenya Cambodia Jordan El Salvador Jamaica Investment (US$ million) Increase in national connectivity / GDP Impact on GDP (%) Annual Economic Rate of Return (%) % 46% 55% 35% 28% % % % % % 59% 19% 28% 16% 16% Source: IATA

12 Connectivity can also boost competitiveness Link between access to network and travel and tourism competitiveness Overall T & T competitiveness score vs connectivity, T & T index score Connectivity per $Billion of GDP Source: WEF

13 Investment needs to be attracted to the industry Though this will require an improvement in the return on invested capital Cost of capital 6.0 % invested capital R eturn on invested capital F 2008F Source: ICAO, IATA

14 How to improve returns on capital? High Capacity Utilisation match new supply to demand Further Cost Efficiency Improvements Reduce inefficiency / monopoly power among suppliers Liberalise airline market operations and exit Liberalise airline ownership

15 Liberalisation is not an easy process and is likely to involve higher competition, at least in the short run Scheduled departures from Morocco to Europe April 2005 April 2006 April 2007 Number of Airlines Number of Routes Departures per Week Royal Air Maroc share 60% 54% 45% Source: SRS Analyser

16 But it can be beneficial creating benefits for consumers and flexible and efficient firms Improve capacity utilisation towards optimal levels (e.g. UK energy markets) Increase productivity for both incumbents and new entrants (e.g. Japanese telecoms) Facilitate a transfer of managerial and technological best practice (e.g. New Zealand media sector) Increase investment by providing firms with more efficient access to finance (e.g. Telecoms) Improve profitability through lower costs, improved efficiency and economies of scale (e.g. EU banking) Increase a firm s market value (e.g. Nestlé)

17 There is room for different business models Size is not the only influence, knowing competitive advantages is key Revenues Operating Profit Margin US$ million % margin SAA Egyptair Royal Air Maroc Kenya Airways Tunis Air Ethiopian Airlines Air Mauritius Comair Safair Air Seychelles Air Botswana -5 Source: Company reports

18 Aviation in a global environmental context Sustainable and responsible growth, not artificial constraints World man-made CO 2 Aviation in context Aviation 2% Road transport 18% Other transport 4% Other sectors 10% Industry 18% Energy 5% Residential 8% Public electricity and heat production 35% Source: IEA

19 Decoupling emissions from future growth Industry-wide operational improvements can have a significant impact Traffic growth (5% pa) 200 Emissions growth (3% pa) ATM Operations Technology 100 Market Based Measures? Time Source: IATA

politicians and decision-makers with a licence to support aviation

20 ATAG campaign Cross industry communications campaign Speak with one voice Provide balance in the environmental debate Provide politicians and decision-makers with a licence to support aviation Provide the general public with a licence to fly guilt-free

21 Summary Economic growth will help to boost air travel demand in Africa. But investing in and improving the aviation industry can also act as an engine to improve long-term economic growth Large economic returns, over an above those received directly by investors and users can be obtained Attracting investment will require structural changes, including greater airline liberalisation Important to place the environmental debate in context. Artificial constraints put at risk significant wider economic benefits

22 Thank you

Table A.LPG1 : TOTAL LPG CONSUMPTION (Best available Estimates)

Table A.LPG1 : TOTAL LPG CONSUMPTION (Best available Estimates) 1000 MT 1 Burkina Faso 0.509 0.587 0.615 0.606 0.435 0.429 0.691 1.057 1.385 1.698 2.156 2.432 2.888 2 Cape Verde 4.058 4.268 4.988 5.259