The Future for Australian Aviation:

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• The Future for Australian Aviation
• Policy, Market Infrastructure Challenges
• Ian ThomasSenior Consultant
• Industry Affairs

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Market Overview

• Domestic market
• - Return to stable duopoly
• - Further restructuring likely
• International market
• - Local/regional pressure for liberalisation
  (eg Pacific)
• - Foreign ownership, control rules under review
• - Competition intensifying

BTRE Transport Colloquium 05
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The scorecard 15 years into domestic deregulation

• Upside
• Strong traffic growth
• Greater competitiveness
• Product innovation
• Cheaper fares
• Encourages market entry, allows exit
• Downside
• X High volatility
• X Depleted yields
• X 4 failures
• X Single dominant operator

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The highs and lows
Domestic Deregulation
Average annual traffic growth 2.3 times GDP AAGR
Market re-growth
Entry, exit Compass 2
Entry Impulse, Virgin Blue
Compass 1 collapse
Exit Impulse, Ansett fails
Asian crisis
Source BTRE, CAPA
Percentage change in CY Traffic, Capacity
Frequency v GDP
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Long-term growth trend despite crises
Capacity, Traffic Load Factor Trends
RPKs 15.7 ASKs17.6 CY2004
Trend lines
Source BTRE, IMF
High passenger loads, traffic levels
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Record profits
Major Airline Profits Profit Per
Passenger, Capacity Unit
New peak
Previous peak 2000
Aggregate earnings eclipse previous peak by 42
in 2004
Source CAPA, Airlines
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More competition less profit
Qantas Ansett Virgin Impulse
Qantas/Virgin
Qantas/Ansett
Qantas/ Australian Ansett Compass 12
Source CAPA, Airlines
Combined Profits of Major Airlines Year-on-year,
1990-2004
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Commercial impact
VIRGIN LIGHT
VIRGIN HEAVIER
From traditional LCCto Ansett II?
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QANTAS 2000
QANTAS 2005
Qantas fragments.different brands for different
markets
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International Policy The greatest challenge

• Where to next with open skies
• Australian airlines losing market share to
  foreign operators
• Ownership/control limits need addressing
• - capital mobility issues
• - consolidation constraints
• Government response to regional liberalisation
  (ASEAN3, other)
• Greater engagement with Asia

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Asia growing rapidly, but Australia/NZ only small
players
Asia accounts for 83 of available airline
capacity to/from region
Source Innovata APGdat
Australia/NZ fifth to Asia, Europe, America and
Middle East
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Capital access, rising debt threaten growth
Fleet rebuilding, high growth
Qantas Capex, Net Debt Trends, 1994-2007
Capex 2002-2007 13.6b
1.4b in equity raisings
Debt curve
Source Qantas annual reports, Lehman Bros
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Regional fleet growth places pressure on labour
pool
Current Aircraft Orders by Region

• High demand
• impacts on
• training
• wage costs
• expansion
• plans

Orders for 1,056 aircraft in next 3-5 years, 80
in Australia/NZ
Source Centre for Asia Pacific Aviation, Airlines
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Skills shortfall looms large
Est. Annual Airline Employee Requirements by
Type by Region, 2005-2009
7780
6023
4718
4472
2515
2100
1422
390
146,000 jobs required over 5 years 29,000 per
year
Source Centre for Asia Pacific Aviation
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Australia New Zealand7,109 jobs over 5 years
14.5 increase in employees to 2009
Source Centre for Asia Pacific Aviation
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Surplus pilot supply may disappear quickly
4,303 commercial pilots (non-airline)
6,025 licensed airline pilots
Also available 300 ex-Ansett pilots, 200
foreign pilots
Source CASA Annual Reports
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Offshore competition for pilots increasing
Retirement
Overseas exodus to high demand centres
China
India
SE Asia
Middle East
Qantas, Virgin, Air NZ
Aust/NZ Pilot Pool
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Conclusions The Challenges Ahead

• Build on industry globalisation, regional
  liberalisation
• Accelerate air service deregulation programme,
  focus on Asia
• First stop is Singapore open skies agreement
  5th freedom access to Pacific
• Remove road-blocks to consolidation (starting
  with New Zealand)

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Conclusions

• Failure to facilitate capital, alliance
  development will impede growth and may threaten
  viability

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Only the brave.....
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• Thank You!