BTRE Transport Colloquium ‘07 1 Bureau of Transport & Regional Economics, Transport Colloquium 2007 Liberalise or Bust: The Aviation Policy Conundrum 13 June 2007

BTRE Transport Colloquium ‘07 2 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

BTRE Transport Colloquium ‘ % 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 Subject to negotiation Achieve Open Aviation Area Reforms to US ownership Agreement Agenda

BTRE Transport Colloquium ‘07 4 Implications of the Agreement 1)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 ‘07 Asia, Middle East poised to take leading roles in aviation liberalisation Middle East: “Open skies” by UAE, 7 other Arab states Middle East: Arab Maghreb Union “open skies” 2008 SE Asia : ASEAN “open skies” member states + China, Japan, India? China: Domestic deregulation 2010 Japan: Asia Gateway Plan Open access to regional, secondary airports Source: IATA, CAPA Consutling

BTRE Transport Colloquium ‘07 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 groupings Trilateral (Japan, China, Korea): Potentially very powerful, still some resistance SE 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)

BTRE Transport Colloquium ‘07 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”

BTRE Transport Colloquium ‘07 Australia maintains substantial surplus of seats over available capacity in international market m Source: BTRE Australia International Capacity & Passenger Traffic % pax, seats growth Calendar Year 2007 vs 2000

BTRE Transport Colloquium ‘07 Growth from Emirates, other ME carriers to climb sharply in next five years 113% growth in weekly seats by ME carriers Middle East airlines build 19.8% share of Australia- Europe market Set to grow substantially in next 5 years Source: IATA, CAPA Consulting

BTRE Transport Colloquium ‘07 Middle East QF/BA, Asian 6 th freedom Emerging China Option 3.7% Average Annual Growth in Aust-Europe Weekly Seats, 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

BTRE Transport Colloquium ‘07 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

BTRE Transport Colloquium ‘07 The exodus of European airlines from the Australia-Europe market Exit of Alitalia, KLM Lauda departs; entry of Austrian Olympic Airlines exits market Austrian returns Lauda exits Virgin Atlantic arrives Austrian exits Lauda returns, Austrian exits Source: IATA, CAPA Consulting Total Seats Per week From 5 airlines in 2000 to two in 2007

BTRE Transport Colloquium ‘07 13 Qantas responds to the challenge through development of Jetstar Source: IATA, CAPA Consulting

BTRE Transport Colloquium ‘07 Qantas Group JetstarQantas Mainline 45% 100% Air Pacific 46% 30% 100% Cooperation Jetstar International Orangestar Jetstar Asia Valuair 100% The Asian LCC Network The Future: Franchises in Indonesia, The Philippines, Thailand The LCC Growth Strategy Source: CAPA Consulting, Qantas

BTRE Transport Colloquium ‘07 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

BTRE Transport Colloquium ‘07 Thank You!