Asia Pacific Aviation Refocusing on the Future Andrew Herdman Andrew Herdman Director General Association of Asia Pacific Airlines
Overview Asia Pacific aviation Leading the recovery Global regulatory issues Future growth
Asia Pacific Aviation US$ 116 billion revenue 600 million passengers 393 million domestic 207 million international 10 million tonnes of cargo 3,800 aircraft Asia Pacific carriers overall market share: 28% of global passenger traffic 40% of global cargo traffic Data: 2009 Source: Combined AAPA + non-aapa airlines GMT+7 to GMT+12
Airlines managed through the downturn Trimmed route networks and capacity in response to lower demand Reduced utilisation, grounded surplus aircraft, deferred some new deliveries Implemented wide range of measures to reduce staff costs, retrenchment as a last resort Conserved cash, shored up balance sheets Worked with industry partners to reduce unnecessary costs Airlines focused on survival whilst preserving Airlines focused on survival whilst preserving their ability to respond to an upturn
Refocusing on growth Ongoing capital investment in fleets, airports and other services infrastructure Recruitment and training of skilled workforce Airfares do not keep pace with general price inflation Constant focus on productivity improvements and reducing unit costs Manage risks including currency and oil price volatility Airlines may have returned to profitability but are still not earning their cost of capital
Global economic recovery World growth 2009-0.6% 2010E +4.6% 2011F +4.3% Led by dynamic Asia Pacific economies Source: IMF
Variable growth outlook Global l rebalancing will take time Source: IMF
Recovery in passenger and cargo volumes Global international passenger and cargo traffic Volumes returned to pre-recession levels Source: IATA
Oil price volatility Jet Fuel and Crude Oil Price ($/barrel) 2005 2010 Source: Platts, RBS Oil prices stabilised around $80 per barrel
Global airline industry profitability W l t t fit bilit i 2010 b t Welcome return to profitability in 2010, but some caution over prospects for 2011
Airline profitability by region Asian airlines leading the way European carriers held back
Will capacity growth pressure profits? Source: Ascend
Regulatory Issues Regional perspectives Safety Security & Facilitation ti Passenger Rights Environment Structural reform
Global regulatory influences Asia Pacific Wider impact of US and EU regulations: Asia Pacific needs a unified voice
Asia Pacific Diverse geographic region Home to 4 billion people - 62% of the world s population Generates 27% of global l GDP Wide range of income levels Dynamic economies leading the global recovery Aviation widely recognised as a key contributor to economic and social development economic and social development Political diversity remains challenging: need for multilateral cooperation
Global shifts Over the past decade, the share of global GDP accounted for by the G7 developed economies has fallen from 72% in 2000 to a projected 53% next year The G20 grouping reflects the increasingly important role played by rapidly developing economies Other global political institutions must adapt to new realities
Safety
Safety performance by operator region Western-built Jet Aircraft Major Accident Rates 2001-2010* 3-year moving averages 1.80 * as of 1 November 2010 1.60 (per million sec ctors) Major Accident Rates 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* World IATA N. America Europe ASPAC AAPA
Safety Asia Pacific aviation maintains a very good safety record Governments need to strengthen regional safety oversight through effective regulation Support ICAO recommendations including establishment of Regional Aviation Safety Groups Strong reservations about unilateral imposition of operational bans on airlines, and effects of category downgrading of national authorities Need to harmonise ICAO/US/EU standards
Security
Security & Facilitation Air travel is both highly safe and secure Security procedures must balance risks against costs and inconvenience to the public Excessive layering of requirements We need greater consistency and less duplication: mutual recognition of security measures Cargo security must involve the entire supply chain Terrorists measure their success by how much we (over)react Counter-terrorism efforts are better focused on surveillance and sharing of intelligence
Passenger Rights
Passenger Rights Customers benefit from having a choice of products and service levels Individual attitudes to the risk of service failures may vary Cost of mandatory insurance schemes may exceed the benefits Overlapping national rules create inconsistencies and confusion for international passengers What is the right balance between market-driven solutions and government-imposed service standards?
Aviation and climate change
ICAO A37 Resolution on Climate Change Improve fuel efficiency by 2% annually to 2050 Global CO 2 standard for aircraft engines by 2013 Develop global framework on market-based measures by 2013 based on common principles Aspirational goal of capping aviation s carbon emissions from 2020 (CNG2020) de minimis clause: States with less than 1% of international RTKs exempt from submitting action plans and participating in market based measures A milestone agreement although A milestone agreement, although significant differences still to be resolved
Climate: where do we go from here? No agreement on translating global goals into national obligations and individual airline responsibilities Unresolved differences: Developed versus Developing States de minimis exceptions remain controversial Copenhagen Accord sees aviation as source of financing Challenge of commercialising sustainable biofuels EU ETS still moving forward despite legal challenge Patchwork of national schemes still the likely outcome Proliferation of national taxes on aviation This is an inherently political process
Aviation is seen as a soft target Myth that aviation is under taxed Taxes hurt the economy of the state imposing tax Damage extends to wider travel and tourism sector Taxes are a blunt instrument, ineffective in addressing climate change Governments must look at the bigger picture Taxing foreign citizens i may trigger retaliatory measures Some governments view airlines as convenient Some governments view airlines as convenient tax collection agencies
Structural reform
Structural reform Progressive liberalisation of traffic rights has supported growth but led to highly fragmented industry structure Restrictive national ownership and control rules stand in the way of necessary restructuring and international consolidation Domestic markets remain closed to foreign investment and competition Airlines unable to fully access international capital markets Also need to reform quasi-monopoly aviation service providers, including airports and air navigation Airlines need more freedom to compete Airlines need more freedom to compete globally, just like other industries
Global aviation taking steps towards consolidation Full cross-border mergers still restricted by national ownership and control rules US and EU aim to leverage their domestic markets and dominant regulatory influence to shape the industry
Airline capital structure by region EV E t i l L t d bt + k t it li ti EV = Enterprise value = Long-term debt + market capitalisation Revenues FY09/10; Market Cap as of 28 October 2010 Source : AAPA estimates
Bright Skies Ahead
Asia Pacific growth prospects still bright Source: Airbus Rapid expansion of China domestic market Asia Pacific s share of world traffic will grow
Growth: complementary business models FSC LCC FSC LCC Global network carriers expected to thrive despite competition
Conclusions Aviation is at the heart of global economic development Society relies on aviation every day, and especially in a crisis Growing economic influence of Asia Pacific needs to be matched by stronger engagement on key international policy issues A global industry needs harmonised regulations Further steps needed to truly liberalise this most global of industries Prospects for long term growth remain good
www.aapairlines.org Association of Asia Pacific Airlines 9/F Kompleks Antarabangsa Jalan Sultan Ismail Kuala Lumpur 50250 MALAYSIA Tel: +60 3 2145 5600 Fax: +60 3 2145 2500