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Andrew Herdman, Director GeneralAssociation of Asia Pacific Airlines
4th Annual China Airfinance Conference 22 May 2006, Shanghai
Asia Pacific Aviation : Forging Ahead
• Future growth – Global economy – Asia Pacific aviation
• Competition and challenges• Regulatory perspectives• Some conclusions
Presentation outline
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The global economy
Source: PATA (Business Week) / AAPA estimates
Share of world GDP by region
2004
US 28%
EU 34%
Japan 12%
Asia 8%
China 4%
India 2%
Other 12%
Asia-Pacific
26%
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2015
World GDP boosted by growth in China & India
US 28%
EU 30%
Japan 10%
Asia 9%
China 8%
India 4%
Other 11%
Asia-Pacific
31%
Source: PATA (Business Week) / AAPA estimates
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
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Rising incomes boost travel demand
Source: ATAG
Asia Pacific Aviation
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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
Revenue shares of Asia Pacific based airlines
Total revenues ~ US$ 92 billion
Asia Pacific Aviation
Data: 2005 estimates
AAPA
ChinaLCCs India
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AAPA global passenger and freight traffic share
Scheduled Systemwide Revenue Passenger Kilometres
Scheduled Systemwide Freight Tonne Kilometres
Note: AAPA, ICAO, IATA and ATWData: 2004
AAPA18%
ATA32%
AEA19% Others
26%
China5% AAPA
33%
ATA 28%
AEA 23%
Others10%
China 6%
Urumqi
Beijing
Fuzhou
ChengduShanghai
Harbin
Haikou
Hangzhou
Nanjing
Shenyang
Changchun
KunmingGuangzhou
Jinan
ChangshaChongqing
Wuhan
Xian
Ningbo
Yanji
Tianjin
Qingdao
Shenzhen
Guilin
Yantai
Dalian
Xiamen
Sanya
Mudanjiang
and others
138 million passengersDomestic 115 millionInternational 23 million
3 million tonnes of cargoSource: CAAC and OAGData: 2005
Mainland China carriers
AAPA members also offer 800 weekly flights
to 29 Chinese cities
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Challenges faced by Chinese carriers
• Strong demand growth• High capital investment requirements• Dependent on supporting infrastructure: airports, airspace • Scarcity of pilots and other skilled personnel
• Airline profitability remains weak• Domestic
• Price controls undermine effective revenue management • High fuel and other cost pressures• Lack of competition amongst key aviation service providers
• International• Liberalisation• Product positioning• Yield management and distribution• Lower costs no guarantee of profitability
Data: 2005 estimates for combined AAPA + non-AAPA airlines GMT+5 to GMT+12
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
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Asia Pacific aviation growth: passengers
AAPA estimates
Data: Passenger numbers: AAPA, China, India and LCCs
0
100
200
300
400
500
600
700
800
1990 2000 2005 2010F
Mill
ion
Pass
enge
rs
AAPA China India LCCs
Asia Pacific aviation growth : cargo
AAPA estimates
Data: Cargo tonnage: AAPA, China and India
0
10
20
30
1990 2000 2005 2010F
Mill
ion
tonn
es
AAPA China India
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Asia Pacific’s share of world traffic will continue to grow
Source: Airbus Market Outlook
Asia Pacific 25% Asia Pacific
31%
Record aircraft orders in 2005
Source: Airbus and Boeing
• Worldwide, over 2,000 new aircraft ordersdriven by …
– Renewed confidence in future growth
– Economics of high fuel prices
– Low interest rates
• More than 900 from Asia Pacific– Two-thirds narrow body jets
– 600 from China and India
• In reality, global market demand growth remains ~ 850 aircraft p.a.
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Competition and challenges
• Airline profitability • Cost challenges • Competition • New entrants • Regulatory concerns
Airline profitability: mixed picture
Airline Profitability by Region
Source: IATA
Industry losses top US$42 billion since 2001
-14.0-12.0-10.0-8.0-6.0-4.0-2.00.02.04.06.08.0
1999 2000 2001 2002 2003 2004 2005US Europe Asia
$bn
+ 8.5 + 3.7
- 13.0 - 11.3 - 7.2 - 5.3 - 6.0
Global industry profits
Global industry losses
-14.0-12.0-10.0-8.0-6.0-4.0-2.00.02.04.06.08.0
US Europe Asia
$bn
- - - - -
Global industry profits
Global industry losses
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Airfares do not keep pace with inflation
50
60
70
80
90
100
110
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004Rea
l Pas
seng
er y
ield
s, in
dexe
d to
199
3=10
0
US domestic markets
Intra-Europe markets
AAPA Systemwide
Real passenger yields have fallen by a third in the past decade
The good news: air travel is affordable for the masses
Impact of high fuel prices
AAPA fuel bills and % of total costs
2003
2004
2005
US$ 9 bn
US$ 12 bn
US$ 18 bn
~ 17%
~ 20%
~ 26%
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Source: AAPA FY2005, FY2006E
2004 2005
Fuel Costs Fuel Costs
Non-FuelCosts
Non-FuelCosts
Profit ~6%Profit ~3%
Average fares rose 7% … but this was not enough to offset higher fuel costs … and margins fell sharply
Profitability under pressure
Impact of new entrants
Source: IATA
Regional seat capacity
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New entrants: some Asian leaders
40+ routes to 20+ destinations47 B737s
23 A320s and 6 B717s5 A320s on order
60+ routes to 40+ destinations 35 B737s and 4 A320s56 A320s on order
18 MD80/90s and 5 B737s30 B737-900ERs on order
11 DC-9s, 2 B767s and 6 A319s/A320s8 A319s/A320s on order
13+ routes to 12+ destinations4 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
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
• Failure to liberalise other aviation services impedes both established airlines and new entrants
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Price-competitive fares
Average yields: US cents/RPK
easyJet 8.6Virgin Blue 8.2
Southwest 7.3Ryanair 7.0
AirAsia 3.6* AAPA Y = systemwide economy class yields
JetBlue 5.2
Data: 2005. Not adjusted for different average stage lengths
AAPA FJY 7.5
China CA,MU,CZ 6.8AAPA Y* 5.3
Regulatory perspectives
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Working together
Industry Partners
Regulators Airlines
Associations
Global regulatory influences
Asia Pacific
Wider impact of US and EU regulations: need for better global harmonization
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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
• 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
Asia Pacific : regulatory perspectives
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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
Some conclusions
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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
• 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
• Investing for future growth
• Well placed to take advantage of new global opportunities
Asia Pacific Aviation: Forging Ahead
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Andrew Herdman, Director GeneralASSOCIATION OF ASIA PACIFIC AIRLINES
www.aapairlines.org