Future Growth of the Airline Industry

How will global competition drive change?

Andrew HerdmanDirector General

Association of Asia Pacific Airlines

Geneva, Switzerland22 February 2011

Overview

• Current business conditions

•• Future growth drivers

• Evolving airline strategies

Aviation: moving the world

• Air travel delivers global mobility

• 2,500 million passengers

• Outstanding safety record• Outstanding safety record

• Carries 35% by value of global trade

• Wider social and economic benefits

Source: ATAG

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 • 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 their ability to respond to an upturn

Global economic recovery

World growth

2009A - 0.6%

2010E +4.8%

2011E +4.2%

2012F +4.5%

Source: IMF

Led by dynamic Asia Pacific economies

Recovery in passenger and cargo volumes

Global international passenger and cargo traffic

Overall volumes returned to pre-recession levels

Source: IATA

Slower recovery for premium traffic

Global international passenger traffic by class

Source: IATA

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

Governments still view our industry as a soft target for arbitrary taxes

Oil price volatility

Real oil prices Oil as % of World GDP

• Macro-economic impact

• Future carbon emissions pricing

Source: FT

Global airline industry profitability

Welcome return to profitability in 2010, but some caution over prospects for 2011

Poor returns to airline shareholders

Paradoxically, the industry has never suffered from capital scarcity

Airline EBITDA margins by region

Source: IATA

Airline profitability by region

Asia Pacific and US airlines outpacing European carriers

Will capacity growth pressure profits?

Source: Ascend

Future GrowthFuture Growth

Long term growth prospects remain bright

Projected annual growth rates

Source: Airbus GMF2010

Traffic by airline domicile

Asia Pacific traffic will grow significantly

Source: Airbus

Airline StrategiesAirline Strategies

Competitive dimensions for airlines

• Revenue enhancement• Tailoring products to markets

• Investing in premium products and services

• Active yield management

• Multiple brand strategies

•• Improving cost competitiveness• Asset utilisation

• Fuel efficiency

• Labour productivity

• Value chain improvement• Partnering with service providers

Evolving Business Models

• Full Service Network Carriers

• Streamlining short haul operations• Establishing LCC subs and associates

• Point-to-Point LCCs• Initially focused on domestic short-haul

•• Venturing into longer-haul markets

• Experimenting with codeshares, connections, adding

customer service

• Further signs of convergence and hybridisation

• Long haul invariably uses wide body aircraft, involves

cargo operations, two-class passenger configurations

Asia: customer service leadership

• Asian carriers are global leaders in service quality with world-class premium product offerings

• Premium cabins generate 27% of total international passenger revenueinternational passenger revenue

• Continuous innovation in seat comfort, cabin ambience, inflight entertainment, food and beverage, cabin crew, customer service

• Investing in products, people and partnerships

Growth: complementary business models

FSC

FSCLCC

LCC

Global network carriers expected to thrive despite competition

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 • 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 globally, just like other industries

Global regulatory influences

Wider impact of US and EU regulations

Asia Pacific

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 enterprise values by region

North America

Europe

Source: AAPA Estimates

Asia Pacific

Closing Thoughts

• Aviation is at the heart of global economic development

• Prospects for long term growth remain bright

• Global economic growth will shape future aviation

• Intensely competitive industry continues to drive innovationinnovation

• Highly regulated industry, covering both technical, economic and customer service dimensions

• Intractable global policy issues, especially climate change

• Further steps needed to truly liberalise this most global of industries

www.aapairlines.org

Association of Asia Pacific AirlinesAssociation of Asia Pacific Airlines9/F Kompleks AntarabangsaJalan Sultan IsmailKuala Lumpur 50250MALAYSIA

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