ICAO Air Connectivity and Competition. Sijia Chen Economic Development Air Transport Bureau, ICAO

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ICAO Air Connectivity and Competition Sijia Chen Economic Development Air Transport Bureau, ICAO

Connectivity Concept Connectivity Concept Capacity of the transport value chain to move passengers, mail or cargo from one point to another, with minimum transit points Which makes trip as shortest as possible With optimal user satisfaction At the minimum price possible

Improved connectivity leads to economic growth Connectivity directly impacts UN Sustainable Development Goals (SDGs) Passenger: 54% of international tourists arrive by air Cargo-Freight: 35% of the value of world trade shipped by air

Airline Competition Airline competition has evolved from an era of economic regulation and intervention to an increasing trend towards liberalization. This in turn has resulted in the global air transport network transiting from simple networks structures with limited competition and connectivity options of the past to complex structures of today responding dynamically to the changes in regulations and the business opportunities offered by liberalization.

Air Transport Network Characteristics The global air transport network is characterized by more connectivity options to customers with a variety of competitive network strategies pursued by the major aviation stakeholders. Some of these strategies include decisions related to point to point versus hub and spoke systems yield management to respond effectively to demand through pricing and product differentiation and alliances and mergers. These strategies are invariably a trade-off between the most economically efficient path to transport passengers through the various nodes available in the network constrained by real time factors that prevent the network from being the most optimized or efficient

Factors Impacting Route Network Size of the market (existing demand) and pricing strategies of existing competitors Policy factors air carrier ownership and control, liberalization and regulation of traffic rights to fly (market access), cross ownerships of aviation verticals, taxation and charging policies. Slot availability and other restrictions like lack of infrastructure, night and noise curfews Presence of alternative models on a route i.e. low cost carriers versus legacy carriers

Source: ICAO Air route network 2015

Web of bilateral air services agreements 2015 data Source: ICAO WASA Map Tool

Bilateral open skies States which signed open skies agreements with both the US and third countries States which signed open skies agreements with the US only States which signed open skies agreements with the third countries only Over 400 Open Skies Agreements involving 146 States 9

Utilization of air connectivity Comparing the number of markets made available by air transport liberalization ( available or reserved connectivity) with the number of those markets having actual air services ( real connectivity) About 60% of available connectivity opportunities do not have direct flights Source: ICAO

Air Transport Diagnostics Project

ICAO ICM Joint Project on Air Connectivity and Competition Introduction ICAO and the Interdisciplinary Centre for Mathematical and Computational Modelling (ICM) of the University of Warsaw have initiated a joint air transport diagnostics project. The project aims to better understand the complex dynamics and interlinkages between the various policy factors and market realities that influence the competitive strategies of the aviation stakeholders and the optimization of the global air transport network. Outcome of this study could assist policymakers in optimizing connectivity and maintaining sustainable growth of air transport.

ICAO ICM Joint Project on Air Connectivity and Competition Concept of the Project Decision Support Systems for Informed Policy Making A visual interactive decision support system (DSS) to ICAO Member States and other stakeholders. Indicates areas where the market forces provide potential opportunities to States to further increase connectivity and optimization of the air transport network though appropriate policy initiatives and addresses of constraining factors.

ICAO ICM Joint Project on Air Connectivity and Competition Preliminary Analysis Results ICAO and ICM have initially analyzed as a prerequisite for this project, the two major existing factors namely demand and price that influence competitive strategies of the aviation stakeholders and the optimization of the global air transport network. A segment of the preliminary analysis based on most recently available data for the year 2015 is presented.

Direct vs indirect flights (Global passenger flow in 2015) Worldwide Figures Number of Total Passengers 1.3 billion Number of Direct Passengers 880.2million Number of Indirect Passengers 391.8 million 69% direct 31% indirect 69% of passenger took direct flights while 31% chose indirect flights to reach final destinations Source: ICAO, ICM University of Warsaw 15

Passenger Flow by Region of Departure Passengers Flow by Region of Departure 2015 Europe Asia/Pacific Middle East Africa Latin America/Caribbean North America 0 50 100 150 200 250 300 350 400 450 Passengers (millions) Direct Flights Passengers Connecting Flights Passengers 16

ECONOMIC DEVELOPMENT Regional Passenger Flow Region Pair Passenger Flow (Africa) Africa > Europe Middle East > Africa Africa > Africa Africa > Asia/Pacific North America > Africa Africa > Middle East Asia/Pacific > Africa Africa > North America Africa > Latin America/Caribbean Latin America/Caribbean > Africa 0 2 4 6 8 10 12 14 16 18 20 Passengers (millions) Region Pair Passenger Flow (Asia/Pacific) Asia/Pacific > Asia/Pacific Middle East > Asia/Pacific Europe > Asia/Pacific North America > Asia/Pacific Asia/Pacific > Europe Asia/Pacific > North America Asia/Pacific > Middle East Africa > Asia/Pacific Asia/Pacific > Africa Asia/Pacific > Latin America/Caribbean Latin America/Caribbean > Asia/Pacific 0 5 10 15 20 25 30 35 40 45 50 Passengers (millions) 239 Direct Flights Indirect Flights Direct Flights Indirect Flights

ECONOMIC DEVELOPMENT Regional Passenger Flow (continued) Region Pair Passenger Flow (Europe) Region Pair Passenger Flow (Middle East) Europe > Europe North America > Europe Europe > Asia/Pacific Asia/Pacific > Europe Europe > Africa Africa > Europe Europe > Latin America/Caribbean Europe > Middle East Middle East > Europe 394 Middle East > Asia/Pacific Middle East > Middle East Europe > Middle East Middle East > Africa Middle East > Europe North America > Middle East Asia/Pacific > Middle East Africa > Middle East Middle East > North America Europe > North America Latin America/Caribbean > Europe Middle East > Latin America/Caribbean Latin America/Caribbean > Middle East 0 5 10 15 20 25 30 35 40 45 50 Passengers (millions) 0 5 10 15 20 25 30 35 40 Passengers (millions) Direct Flights Indirect Flights Direct Flights Indirect Flights

ECONOMIC DEVELOPMENT Regional Passenger Flow (continued) Region Pair Passenger Flow (Latin America/Caribbean) Region Pair Passenger Flow (North America) North America > Latin America/Caribbean Latin America/Caribbean > Latin America/Caribbean Europe > Latin America/Caribbean Latin America/Caribbean > North America Latin America/Caribbean > Europe Asia/Pacific > Latin America/Caribbean Latin America/Caribbean > Asia/Pacific Africa > Latin America/Caribbean Middle East > Latin America/Caribbean Latin America/Caribbean > Africa Latin America/Caribbean > Middle East 0 10 20 30 40 50 60 70 80 Passengers (millions) North America > Latin America/Caribbean North America > Europe North America > Asia/Pacific North America > North America Latin America/Caribbean > North America Europe > North America Asia/Pacific > North America North America > Middle East North America > Africa Middle East > North America Africa > North America 0 10 20 30 40 50 60 70 80 Passengers (millions) Direct Flights Indirect Flights Direct Flights Indirect Flights

Intra Europe Central America/Caribbean - North America Central South West Asia - Pacific South East Asia Europe - North America Intra Pacific South East Asia Central South West Asia - North Asia Intra Central South West Asia Middle East - South West Asia Europe - Middle East North Asia - Pacific South East Asia Europe - North Africa Intra Middle East Intra North America Europe - Pacific South East Asia Europe - South West Asia Africa - Middle East North America - South America Europe - Sub Saharan Africa Central South West Asia - Europe Intra Africa ECONOMIC DEVELOPMENT Route Group Passenger Flow 0 10 20 30 40 50 60 70 80 Passengers (millions) Route Group Passenger Flow Route Group Passenger Flow 364 Intra South America Central South West Asia - North America Central America/Caribbean - Europe Europe - South America North America - Pacific South East Asia Middle East - North Asia & Pacific South East Asia North America - North Asia Europe - North Asia Intra North Asia Central America/Caribbean - South America Intra Central America/Caribbean North America - South West Asia Africa - Asia/Pacific Middle East - North America Africa - North America Central South West Asia - Middle East Latin America/Caribbean - North Asia & Pacific Africa & Middle East - South America Latin America/Caribbean - Central South West Africa & Middle East - Central America/Caribbean Latin America/Southwest Asia 0 2 4 6 8 10 12 Passengers (millions) Direct Flights Indirect Flights Direct Flights Indirect Flights

ECONOMIC DEVELOPMENT Route Group Average Fares Route Group Connectivity (Inclusive of Domestic Connections in International Trips) Average Fares (Inclusive of Domestic Connections in International Trips) Intra North Asia Intra Middle East Central South West Asia - North Asia Intra Central South West Asia Intra Europe Europe - North Africa Intra Pacific South East Asia Africa - Middle East North Asia - Pacific South East Asia Central South West Asia - Pacific South East Asia Intra Central America/Caribbean Intra Africa Middle East - South West Asia Europe - Middle East Intra South America North America - North Asia Central America/Caribbean - North America Intra North America Middle East - North Asia & Pacific South East Asia Central South West Asia - Middle East Central South West Asia - North America Central America/Caribbean - Europe 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0 100 200 300 400 500 600 700 % of Total Passengers Average Fare (USD) % Direct Passengers % Indirect Passengers Average All Flights Fare Average Direct Fare Average Indirect Fare

ECONOMIC DEVELOPMENT Route Group Average Fares (continued) Route Group Connectivity (Inclusive of Domestic Connections in International Trips) Route Group Average Fare (Inclusive of Domestic Connections in International Trips) Europe - South West Asia Central America/Caribbean - South America Central South West Asia - Europe Europe - North Asia Europe - North America North America - South America Europe - Sub Saharan Africa Middle East - North America Europe - South America Africa & Middle East - South America Europe - Pacific South East Asia North America - Pacific South East Asia Africa - Asia/Pacific Africa - North America North America - South West Asia Latin America/Caribbean - North Asia & Pacific South East Asia Latin America/Caribbean - Central South West Asia Africa & Middle East - Central America/Caribbean Latin America/Southwest Asia 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0 100 200 300 400 500 600 700 800 900 1000 % of Total Passenger Average Fare (USD) % Direct Passengers % Indirect Passengers Average All Flights Fare Average Direct Fare Average Indirect Fare

ECONOMIC DEVELOPMENT Route Group Average Fares (continued) Route Group Connectivity (Exclusive of Domestic Connections in International Trips) Route Group Average Fare (Exclusive of Domestic Connections in International Trips) Intra North America Intra North Asia Central America/Caribbean - North America Central South West Asia - North Asia Intra Middle East Intra Pacific South East Asia Intra Central South West Asia North America - North Asia Intra Europe Europe - North Africa Intra South America North Asia - Pacific South East Asia Central South West Asia - Pacific South East Asia Intra Africa Africa - Middle East Intra Central America/Caribbean Central South West Asia - North America North America - South America Middle East - South West Asia Europe - Middle East Europe - North America 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % of Total Passengers 0 100 200 300 400 500 600 700 Average Fare (USD) % Direct Passengers % Indirect Passengers Average All Flights Fare Average Direct Fare Average Indirect Fare

ECONOMIC DEVELOPMENT Route Group Average Fares (continued) Route Group Connectivity (Exclusive of Domestic Connections in International Trips) Route Group Average Fare (Exclusive of Domestic Connections in International Trips) Middle East - North Asia & Pacific South East Asia Central South West Asia - Middle East Central America/Caribbean - Europe Central America/Caribbean - South America China - Europe Europe - South West Asia Europe - North Asia Europe - South America Europe - Sub Saharan Africa North America - Pacific South East Asia Middle East - North America Africa & Middle East - South America Africa - North America Europe - Pacific South East Asia Africa - Asia/Pacific North America - South West Asia Latin America/Caribbean - North Asia & Pacific South Latin America/Caribbean - Central South West Asia Africa & Middle East - Central America/Caribbean Latin America/Southwest Asia 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % of Total Passengers 0 200 400 600 800 1000 1200 1400 1600 Average Fare (USD) % Direct Passengers % Indirect Passengers Average All Flights Fare Average Direct Fare Average Indirect Fare

ECONOMIC DEVELOPMENT ICAO ICM Joint Project on Air Connectivity and Competition Observations of Preliminary Analysis The results of the preliminary analysis encompassing the entire big data set leads to the following overarching observations With the inclusion of domestic legs on international trips 69% of the passengers in 2015 flew direct to their destination and 31% flew though connecting nodes in the air transport network. Around half of indirect passengers include domestic connections on the international trip. There exists differences in the direct and indirect connectivity at the country pair level which when summarized is reflected at the region pair or route group pair level. Inclusion of domestic legs on the international trip results in higher average indirect fares compared to average direct fares.

Direct vs indirect flights (The Bahamas) 103 direct nonstop routes from The Bahamas 2,907 O&D city pairs with 773 different connections Source: ICAO, ICM University of Warsaw

Future: Traffic Forecasts

Revenue Passenger Kilomtres* (billions) Long-term air traffic forecasts Scheduled international passenger traffic 12,000 10,000 Historical 6.0% CAGR** Forecasts 4.2% CAGR** Rank 2040 Rank 2015 1 4 Projected Top 10 Routes 2040 Long Term Forecast Route Group Central Southwest Asia - Pacific South East Asia Share 2040 Share 2015 11.9% 5.4% 8,000 6,000 2 1 Intra Europe 11.5% 15.8% 3 8 Central Southwest Asia - Middle East 11.3% 3.9% 4 2 Europe - North America 9.0% 11.8% 5 3 Central Southwest Asia - Europe 7.3% 5.8% 4,000 60% of total traffic 6 5 Intra Pacific South East Asia 6.1% 4.5% 7 7 Central Southwest Asia - North America 5.9% 4.1% 2,000 63% of total traffic 8 18 Central Southwest Asia- North Asia 4.6% 1.9% 9 6 Europe - Middle East 3.6% 4.5% 0 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 10 9 Europe - Pacific South East Asia 3.5% 3.6% *Scheduled Services **Compound Average Annual Growth Rate

Revenue Passenger Kilometres* (bilions) Long-term air traffic forecasts Scheduled international freight traffic 600 500 Historical 4.5% CAGR** Forecasts 4.2% CAGR** Projected International Freight Traffic Breakdown by AOC 2040 400 300 Middle East, 23% North America, 13% Africa, 1% Asia and Pacific, 42% 200 100 0 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 Africa Asia and Pacific Europe Latin America/Caribbean Middle East North America Latin America/C aribbean, 2% Europe, 17% *Scheduled Services **Compound Average Annual Growth Rate

Top route groups in 2032 out of Latin America/Caribbean Revenue Passenger-Kilometres (RPK) (billion) 0 100 200 300 400 South America Domestic Central America/Caribbean - North America Europe - South America North America - South America Central America/Caribbean - Europe Central America/Caribbean Domestic Intra South America Central America/Caribbean - South America Intra Central America/Caribbean Africa & Middle East - South America Latin America/Caribbean - North Asia & Pacific Latin America/Caribbean - Central South West Asia Africa & Middle East - Central America/Caribbean 2042 2032 2012 Source: ICAO CAGR* 3.5% 3.2% 9.3% 3.7% 4.0% 6.1% 2.9% 3.0% 6.8% 3.5% 3.7% 4.4% 2.9% 3.2% 7.2% 4.2% 4.2% 5.1% 3.5% 3.2% 6.8% 4.0% 3.8% 10.6% 4.2% 4.2% 3.4% 4.2% 3.8% 12.2% 2.7% 2.9% 11.2% 6.7% 7.7% 0.0% 4.3% 4.4% 19.2% 2012-2042 2012-2032 1995-2012