Liberalisation Driving Force For Growth? Andrew Herdman, Director General Association of Asia Pacific Airlines 16 th ACI Pacific Regional Assembly 10 May 2006, Hong Kong Presentation outline Aviation industry growth Global economy Asia Pacific aviation Future development Industry collaboration Regulatory policy issues 1
The growth of aviation: what a great industry! 1915 ~ 0.1 million passengers 1965 ~ 15 million passengers 2005 ~ 2,200 million passengers Outstanding safety record Air travel delivers global mobility Carries 35% of global trade by value Wider social and economic benefits Source: ATAG What factors have shaped the growth? Dramatic technological progress Efficiency gains drive down costs Rising global incomes Investment in supporting infrastructure Strict regulatory framework Technical Commercial Government taxes and charges 2
Regulatory reform: force or friction? Progressive liberalisation but the industry remains very highly regulated Can be credited for the industry s outstanding safety record but it increases costs and stifles innovation Aviation still highly subject to political influences Persistence of national ownership and control Outdated international bilateral system Rising incomes boost travel demand 3
Real Passenger yields, indexed to 1993=100 Airfares do not keep pace with inflation 110 100 90 80 70 60 50 Real passenger yields have fallen by a third in the past decade AAPA Systemwide US domestic markets Intra-Europe markets 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 The good news: air travel is affordable for the masses The global economy 4
Asia Pacific Diverse geographic region Home to 4 billion people - 62% of the world s population Generates 26% of global GDP Wide range of income levels Dynamic economies Aviation recognised as a key contributor to economic and social development AAPA Association of Asia Pacific Airlines Regional trade association representing 17 major international airlines based in Asia Pacific Committed to promoting sustainable growth of the aviation industry serving both passenger and freight needs Work with member airlines, governments, regulators and industry partners on issues of common concern Permanent secretariat headquartered in Kuala Lumpur, Malaysia Representation in Washington and Brussels 5
Asia Pacific Aviation Revenue shares of Asia Pacific based airlines AAPA LCCs India China Total revenues ~ US$ 92 billion Data: 2005 estimates Global passenger and freight traffic share by region Scheduled Systemwide Revenue Passenger Kilometres Scheduled Systemwide Freight Tonne Kilometres ATA 32% AEA 19% Others 26% AAPA 18% ATA 28% AEA 23% China 5% AAPA 33% Others 10% China 6% Data: 2004 Note: AAPA, ICAO, IATA and ATW 6
Mainland China carriers Urumqi Harbin Changchun Mudanjiang Yanji Shenyang and others 138 million passengers Domestic 115 million International 23 million 3 million tonnes of cargo Data: 2005 Beijing Dalian Tianjin Jinan Yantai Xian Qingdao Nanjing Shanghai Chengdu Wuhan Hangzhou Chongqing Ningbo Changsha Fuzhou Kunming Guilin Xiamen Guangzhou Shenzhen Haikou Sanya AAPA members also offer 800 weekly flights to 29 Chinese cities Source: CAAC and OAG Indian carriers Amritsar 24 million passengers Domestic 19 million International 5 million Delhi Ahmadabad Kolkata Mumbai Hyderabad Bangalore Chennai Kochi Thiruvananthapuram AAPA members also operate over 130 weekly flights to 10 Indian cities Data: 2005 Source: DGCA and OAG 7
New entrants: some Asian leaders 40+ routes to 20+ destinations 47 B737s 11 DC-9s, 2 B767s and 6 A319s/A320s 8 A319s/A320s on order 23 A320s and 6 B717s 5 A320s on order 60+ routes to 40+ destinations 35 B737s and 4 A320s 56 A320s on order 18 MD80/90s and 5 B737s 30 B737-900ERs on order 13+ routes to 12+ destinations 4 A320 8 A320s on order 20+ routes to 18+ destinations 19 B737s, will lease 9 A320s Even after achieving meaningful scale profitability remains patchy Source: Company websites and Orient Aviation fleet census April 2006 Impact of new entrants Regional seat capacity Source: IATA 8
Challenges faced by new entrants Progressive liberalisation, but not yet a common market Mainly focused on domestic market opportunities Some regional international routes but national ownership and control rules complicate business structures High fuel prices and other cost pressures, including scarcity of pilots and other skilled personnel Established airlines and new entrants are competing directly in overlapping market segments Regardless of business model, all airlines are focused on maintaining cost competitiveness and serving diverse market segments Price-competitive fares Average yields: US cents/rpk easyjet 8.6 Virgin Blue 8.2 Southwest 7.3 Ryanair 7.0 AAPA Y* 5.3 JetBlue 5.2 AirAsia 3.6 * AAPA Y = systemwide economy class yields Data: 2005. Not adjusted for different average stage lengths 9
Asia Pacific Aviation 440 million passengers - Domestic: 270 million - International: 170 million 13 million tonnes of cargo 300,000 employees 2,700 aircraft US$ 92 billion revenue US$ 2 billion profit Global market share - 24% global pax traffic - 39% global cargo traffic Data: 2005 estimates for combined AAPA + non-aapa airlines GMT+5 to GMT+12 Airline profitability: mixed picture Airline Profitability by Region $bn 8.0 6.0 4.0 2.0 0.0-2.0-4.0-6.0-8.0-10.0-12.0-14.0 + 8.5 + 3.7 Global industry profits Global industry losses - 13.0-11.3-7.2-5.3-6.0 1999 2000 2001 2002 2003 2004 2005 US Europe Asia Industry losses top US$42 billion since 2001 Source: IATA 10
Impact of high fuel prices AAPA fuel bills and % of total costs 2003 US$ 9 bn ~ 17% 2004 US$ 12 bn ~ 20% 2005 US$ 18 bn ~ 26% Profitability under pressure Average fares rose 7% but this was not enough to offset higher fuel costs and margins fell sharply Profit ~6% Fuel Costs Profit ~3% Fuel Costs Non-Fuel Costs Non-Fuel Costs 2004 2005 Source: AAPA FY2005, FY2006E 11
Asia Pacific Aviation: Pressing Ahead At the heart of Asia Pacific s economic development Quality service reputation allied to good cost management Able to compete against the world s best Well placed to take advantage of new global opportunities Investing for future growth Share of world GDP by region 2004 Other 12% Asia-Pacific 26% India 2% China 4% Asia 8% US 28% Japan 12% EU 34% Source: PATA (Business Week) / AAPA estimates 12
World GDP boosted by growth in China & India 2015 Other 11% India 4% US 28% Asia-Pacific 31% China 8% Asia 9% Japan 10% EU 30% Source: PATA (Business Week) / AAPA estimates Asia Pacific aviation growth: passengers 800 700 Million Passengers 600 500 400 300 200 100 0 1990 2000 2005 2010F AAPA China India LCCs Data: Passenger numbers: AAPA, China, India and LCCs AAPA estimates 13
Asia Pacific aviation growth : cargo 30 Million tonnes 20 10 0 1990 2000 2005 2010F AAPA China India Data: Cargo tonnage: AAPA, China and India AAPA estimates Asia Pacific s share of world traffic will continue to grow Asia Pacific 25% Asia Pacific 31% Source: Airbus Market Outlook 14
Working together Airlines Regulators Airports Industry Partners Global regulatory influences Asia Pacific Wider impact of US and EU regulations: need for better global harmonization 15
U.S. and EU: regulatory perspectives US mainly driven by US domestic political concerns Safety, led by FAA Security, led by DHS/TSA Open (your) Skies EU mainly driven by EU domestic political concerns Safety: EASA, Eurocontrol Consumer rights Environment EC assuming lead role in aero-political process Insensitivity about extra-territorial impacts: unilateral actions Where international issues are taken into account, the focus tends to be on US-EU differences Insufficient recognition of Asia-Pacific role and views Asia Pacific : regulatory perspectives Highly diverse region: multiple governments and regulators Need for co-operation on multilateral basis engaging various stakeholders Strengthen collaboration to enhance airline safety and security, reliability, economy and efficiency Harmonisation is more about sharing best practices before legislating, not about resolving differences after unilaterally imposed regulations Positive bias towards consensus, but sometimes slows the process 16
Aviation : Aeropolitical regulation Still governed by an outdated bilateral framework Progressive liberalisation, but protectionist sentiments often still evident National ownership and control restrictions Hold back airline industry consolidation Isolate domestic markets from foreign participation Empower national labour unions Indirectly benefit key service providers at major hub airports Affects airlines, both established carriers and new entrants, and others in the aviation supply chain Future growth: aviation infrastructure Contribution of aviation to economic and social development is widely recognised, especially in Asia-Pacific Readiness to invest in development of infrastructure to match growth in demand Nevertheless, need to ensure that capital is wisely invested Greater focus on operating efficiency and cost-effectiveness Airports Air traffic control Corresponding challenges in manpower development and training 17
Conclusions Traffic growth remains positive Optimism about the future reflected in orders for new aircraft and investments in airport infrastructure Competitive pressures remain intense Challenges in passing on the impact of high fuel prices to consumers Labour cost inflation, especially skilled pilots and mechanics Need to drive efficiency gains throughout the value chain Goal of improving industry performance and returns on capital Further steps needed to truly liberalise this most global of industries Andrew Herdman, Director General ASSOCIATION OF ASIA PACIFIC AIRLINES herdman@aapa.org.my www.aapairlines.org 18