1. BTRE Transport Colloquium ‘05 The Future for Australian Aviation : Policy, Market & Infrastructure Challenges Ian Thomas Senior Consultant Industry Affairs

2. BTRE Transport Colloquium ‘05 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

3. BTRE Transport Colloquium ‘05 The scorecard: 15 years into domestic deregulation Upside: Strong traffic growth Strong traffic growth Greater competitiveness Greater competitiveness Product innovation Product innovation Cheaper fares Cheaper fares Encourages market entry, allows exit Encourages market entry, allows exitDownside: XHigh volatility XDepleted yields X4 failures XSingle dominant operator

4. BTRE Transport Colloquium ‘05 Compass 1 collapse Domestic Deregulation Asian crisis Exit Impulse, Ansett fails Entry Impulse, Virgin Blue Entry, exit Compass 2 Market re-growth Source: BTRE, CAPA Percentage change in CY Traffic, Capacity & Frequency v GDP Average annual traffic growth 2.3 times GDP AAGR The highs and lows

5. BTRE Transport Colloquium ‘05 Long-term growth trend despite crises Source: BTRE, IMF Capacity, Traffic & Load Factor Trends Trend lines High passenger loads, traffic levels RPKs: +15.7% ASKs:+17.6% CY2004

6. BTRE Transport Colloquium ‘05 Record profits Aggregate earnings eclipse previous peak by 42% in 2004 Source: CAPA, Airlines Previous peak 2000 New peak Major Airline Profits & Profit Per Passenger, Capacity Unit

7. BTRE Transport Colloquium ‘05 Source: CAPA, Airlines Qantas/Ansett Qantas/Virgin Qantas/ Australian Ansett Compass 1&2 Qantas Ansett Virgin Impulse More competition = less profit Combined Profits of Major Airlines Year-on-year, 1990-2004

8. BTRE Transport Colloquium ‘05 Basic LCC Simple product One class On-board food, drink sales No hot food Focus on leisure, small business market Minimal costs Pricing drives growth Building Complexity/cost? Value –plus Product International/domestic Partners, Connectivity? BluePlus fares, BlueZone seating Hot food FF programme Airport lounges Satellite TV VIRGIN LIGHTVIRGIN HEAVIER From traditional LCC……to Ansett II? Commercial impact

9. BTRE Transport Colloquium ‘05 Traditional network Vertically-Integrated International domestic regional One brand One product One fare system Disaggregated Differential products, fares Joint Ventures QANTAS 2000QANTAS 2005 Qantas fragments….different brands for different markets

10. BTRE Transport Colloquium ‘05 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 (ASEAN+3, other)  Greater engagement with Asia

11. BTRE Transport Colloquium ‘05 Asia growing rapidly, but Australia/NZ only small players Australia/NZ fifth to Asia, Europe, America and Middle East Source : Innovata APGdat Asia accounts for 83% of available airline capacity to/from region

12. BTRE Transport Colloquium ‘05 Capital access, rising debt threaten growth Fleet rebuilding, high growth Capex 2002-2007 = $13.6b $1.4b in equity raisings Debt curve Source: Qantas annual reports, Lehman Bros Qantas Capex, Net Debt Trends, 1994-2007

13. BTRE Transport Colloquium ‘05 Regional fleet growth places pressure on labour pool Orders for 1,056 aircraft in next 3-5 years, 80 in Australia/NZ Source: Centre for Asia Pacific Aviation, Airlines High demand impacts on  training  wage costs  expansion plans Current Aircraft Orders by Region

14. BTRE Transport Colloquium ‘05 Skills shortfall looms large 4718 7780 2515 2100 4472 390 6023 1422 146,000 jobs required over 5 years; 29,000+ per year Source: Centre for Asia Pacific Aviation Est. Annual Airline Employee Requirements by Type by Region, 2005-2009

15. BTRE Transport Colloquium ‘05 Australia & New Zealand 7,109 jobs over 5 years Source: Centre for Asia Pacific Aviation 14.5% increase in employees to 2009

16. BTRE Transport Colloquium ‘05 Surplus pilot supply may disappear quickly Source: CASA Annual Reports 4,303 commercial pilots (non-airline) 6,025 licensed airline pilots Also available: 300 ex-Ansett pilots, 200 foreign pilots

17. BTRE Transport Colloquium ‘05 Offshore competition for pilots increasing SE Asia China Middle East India Aust/NZ Pilot Pool Overseas exodus to high demand centres Retirement Qantas, Virgin, Air NZ

18. BTRE Transport Colloquium ‘05 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; 5 th freedom access to Pacific  Remove road-blocks to consolidation (starting with New Zealand)

19. BTRE Transport Colloquium ‘05 Conclusions  Failure to facilitate capital, alliance development will impede growth and may threaten viability

20. BTRE Transport Colloquium ‘05 Only the brave.....

21. BTRE Transport Colloquium ‘05 Thank You!