bureau of transport & regional economics, transport colloquium 2007

BTRE Transport Colloquium ‘07BTRE Transport Colloquium ‘07 1

Bureau of Transport & Regional Economics, Transport Colloquium 2007

Liberalise or Bust: The Aviation Policy Conundrum

13 June 2007


Introduction

International aviation liberalisation back on track EU-US Agreement heads dramatic changes over the next five years Pace of change challenges government policy options Two strategic options:

1) “Big bang” - Full deregulation

2) “Softly, softly” - Incremental liberalisation Airline industry increasingly setting the agenda; developing new

alliance structures/JVs Progress has been uneven globally. Some roadblocks remain –

especially ownership & control


39% 26%

The transatlantic agreement bridges two biggest aviation markets in an “open skies” structure

Phase 1, March 2008: Unlimited EU-US services• Greater access to Heathrow• Cargo freed up• Recognition of multinational airline ownership within EU• No change to US ownership rules

65% Global Air Traffic

Source: IATA, CAPA Consulting

Phase 2 2010• Subject to negotiation•Achieve Open Aviation Area• Reforms to US ownership

AgreementAgenda


Implications of the Agreement1) Recognition of EU rights

2) Encourages further EU airline consolidation, US still limited

3) Lead to debatable levels of growth on the Atlantic, driven by greater efficiencies, lower fares

4) Provides impetus to EU horizontal mandate negotiations, also US bilateral “open skies” programme

5) Some resistance to EU agreements as they provide natural advantage for European airlines over national operators in other markets (e.g. Asia Pacific):

Opportunity to operate from multiple bases in Europe; Greater flexibility; and Better economies of scale

6) IATA generally disappointed with lack of progress in EU-US pact on ownership/control, turns focus to Asia for reforms to traditional criteria

BTRE Transport Colloquium ‘07BTRE Transport Colloquium ‘07

Asia, Middle East poised to take leading roles in aviation liberalisation

Middle East: “Open skies” by

UAE, 7 otherArab states

Middle East: Arab Maghreb Union “open skies” 2008

SE Asia: ASEAN “open skies” 201010 member states + China,

Japan, India?

China: Domestic

deregulation2010

Japan:Asia Gateway Plan

Open access to regional, secondary

airports

Source: IATA, CAPA Consutling


But progress to date has been uneven across region, fragmented

ASEAN agenda most significant (though no fait accomplit) Other initiatives being pursued in Asia:

(1) APEC: Mixed results to date(2) MALIAT: Broke new ground, but little support(3) Low-Cost Carrier JVs: More successful, commercially-

driven(4) Equity alliances: New opportunities, focus on China(5) Sub-regional groupingsTrilateral (Japan, China, Korea): Potentially very powerful, still

some resistanceSE Asia, Mekong: Heavy tourism emphasis

Reforms are largely a response to market opportunities (e.g. greater foreign access to China), capital requirements

Impasses still unresolved (e.g. Singapore-KL)


Where does Australia stand….

Generally supports liberalisation moves, reflects end-of-the-line position Risk that developments in Asia, US & EU could further isolate Australia.

Already signs that Asian tourists opting for closer (and cheaper) regional destinations

Government policy needs to:– Address changes taking place, engage more with Asia– Further capitalise on Australia’s strong liberalisation credentials, history of

deregulation Recent development of Middle East market further indication of intent Signals changing competitive dynamics on the “kangaroo route”


Australia maintains substantial surplus of seats over available capacity in international market

m

Source: BTRE

Australia International Capacity & Passenger Traffic2000-2006

30% pax, seats growth Calendar Year 2007 vs 2000

0

5

10

15

20

25

30

35

2000 2001 2002 2003 2004 2005 2006

Total Seats

Total Pax


MiddleEast

QF/BA,Asian 6th

freedom

EmergingChinaOption

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

200000

2000 2001 2002 2003 2004 2005 2006 2007

Middle East

Other Europe

Asian 6th freedom

BA/Qantas

3.7% Average Annual Growth in Aust-Europe Weekly Seats, 2000-2007

Source: IATA/CAPA Consulting

Middle East may dominate “kangaroo route”; also emerging routes via China

Airline share of Average Weekly Seats Australia-Europe by Region of Origin


What does this mean for Government policy – and Qantas?

Australia’s perspective very different, end-of-line destination with limited prospects

Maintaining international services a priority...and Qantas is central to the equation

Government has adopted broader economic benefits argument with its air services policy

Factors in the interests of:– Tourism, – Airports and – The national carrier


The exodus of European airlines from the Australia-Europe market

0.0

5000.0

10000.0

15000.0

20000.0

25000.0

30000.0

2000 2001 2002 2003 2004 2005 2006 2007

Exit of Alitalia,

KLM Laudadeparts; entry ofAustrian

Olympic Airlines

exits market

Austrian returns Lauda

exits

Virgin Atlantic arrives

Austrianexits

Lauda returns,

Austrian exits


Total SeatsPer week

From 5 airlines in 2000 to two in 2007


Qantas responds to the challenge through development of Jetstar



Qantas Group

Jetstar Qantas Mainline

45%

100%100%

Air Pacific

46%

30%

100%

Cooperation

Jetstar International

Orangestar

JetstarAsia

Valuair

100%

The Asian LCC

Network

The Future: Franchises in Indonesia, The Philippines, Thailand

The LCC Growth Strategy

Source: CAPA Consulting, Qantas


Conclusion: The Outlook for Liberalisation

An Asian aviation bloc + Japan, China & India will emerge in the next 3-5 years

Further deregulation will take place in the high growth markets of the Middle East, China and India

The EU/US will ratify Phase 2 of their agreement Operational restrictions to, from and within the major markets will

continue to recede Nationality clauses in air services agreements progressively replaced by

commercial solutions based on place of business and incorporation Australia will respond over time with changes to its own policy; the

ownership strategy for Qantas will be redefined; and closer engagement will be sought with Asia


Thank You!Thank You!

bureau of transport & regional economics, transport colloquium 2007

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