1. BTRE Transport Colloquium 15 June 2006 Ian Thomas Senior Consultant, Centre for Asia Pacific Aviation Regional Aviation: Subsidise or Perish? A Dilemma for Government Policy

2. BTRE Transport Colloquium 15 June 2006 Three shades of regional routes Economic Marginal Deregulated Self sustainable Economic regulation Qualified Sustainability UneconomicSubsidised Requires support Route 1: Commercial Route 2: Limited Route 3: Non-commercial

3. BTRE Transport Colloquium 15 June 2006 The Current Subsidy Models The States & Territories Queensland: Competitive tender WA: Tendering for non-jet routes Northern Territory: Licensing Federal Government RASS: Enroute Charges Rebate Scheme: Terms 5-year contract, $7m p.a. subsidy 5-year period. Monopoly access/growth targets. Subsidy on non-viable routes Route specific, negotiated subsidy Provided to 7operators; services 270 communities 30 non-Qantas operators

4. BTRE Transport Colloquium 15 June 2006 Key Findings of Study ECRS means difference between viability, non viability of some regional operators Enroute costs:1-2% total costs; range from 20% to 54% Profit Before Tax All Airservices Australia charges: 2%-7% operator costs; 32%-101% PBT Services passing through major cities have higher level of Airservices charges due to tower costs

5. BTRE Transport Colloquium 15 June 2006 The Qantaslink Network: a national regional Operates jets, turboprops on mix of routes; complements QF, Jetstar Source: CAPA Analysis

6. BTRE Transport Colloquium 15 June 2006 Qantaslink: by far strongest performer, but earnings still volatile Collapse of Ansett Jetstar entry; Assumes some QF routes 2006* *Results for the 6 months to December 31 2006 Source: Qantas, CAPA Q1 2006

7. BTRE Transport Colloquium 15 June 2006 The major non-Qantas Regional Operators; Marginalised but rebuilding Macair, Airnorth aligned with Qantas; Rex with Virgin Blue; Skywest non-aligned Source: CAPA Analysis

8. BTRE Transport Colloquium 15 June 2006 Avgas prices escalate globally Source: US Department of Transportation Up by 50% in 2005; Some relief this year Peak

9. BTRE Transport Colloquium 15 June 2006 +40% YOY Taxes & Charges =13% Total Costs The cost crunch for the regionals: Profile of typical operator Fuel rises from 15%-25%+ airline costs; charges bite hard Source: CAPA Analysis

10. BTRE Transport Colloquium 15 June 2006 Low-Cost Carriers spread to 23 regional routes; growth continues Focus on dense, tourism-related sectors connecting with the major cities Source: CAPA Analysis

11. BTRE Transport Colloquium 15 June 2006 Jetstar and/or Virgin Blue compete with other airlines on 20 regional sectors Non-Qantas regional carriers challenge on: PER-Broome, SYD-Ballina Source: CAPA Analysis

12. BTRE Transport Colloquium 15 June 2006 LCCs dominate regional ports Average 70%+ capacity share of all regional destinations Source: CAPA Analysis

13. BTRE Transport Colloquium 15 June 2006 Options for Service Development Option 1: Status Quo –Continuing subsidy arrangements; probably inevitable on uneconomic routes Option 2: Competitive Tenders –Hybrid model, contracting services with strings attached; satisfies competition legislation Option 3: Risk Sharing - “Win win” outcome –Highly focused, localised solution –Opportunity for innovation, reduced dependence on state/federal support –Local authority and/or airport participation –Potential for public/private partnerships (takes many forms)

14. BTRE Transport Colloquium 15 June 2006 Summary 1)Air services critical to regional economic development, tourism; bring disproportionate benefits 2)Differentiation in approach to commercial, non- commercial (eg Community Service Obligation) routes 3)Where necessary, subsidies maintained on a transparent basis; tenders with commercial overlay 4)Public/private cooperation should be sought where possible (eg Rex model, WA) 5)Policy challenge: to balance social service needs with private sector opportunity

15. BTRE Transport Colloquium 15 June 2006 Thank you