Bureau of Transport & Regional Economics, Transport Colloquium 2007

1. Bureau of Transport & Regional Economics, Transport Colloquium 2007 Liberalise or Bust: The Aviation Policy Conundrum13 June 2007

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: “Big bang” - Full deregulation “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 2

3. The transatlantic agreement bridges two biggest aviation markets in an “open skies” structure 65% Global Air Traffic 39% 26% • 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 • Phase 2 2010 • Subject to negotiation • AchieveOpen Aviation Area • Reforms to US ownership Agreement Agenda Source: IATA, CAPA Consulting 3

4. Implications of the Agreement Recognition of EU rights Encourages further EU airline consolidation, US still limited Lead to debatable levels of growth on the Atlantic, driven by greater efficiencies, lower fares Provides impetus to EU horizontal mandate negotiations, also US bilateral “open skies” programme 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 IATA generally disappointed with lack of progress in EU-US pact on ownership/control, turns focus to Asia for reforms to traditional criteria 4

5. Asia, Middle East poised to take leading roles in aviation liberalisation China: Domestic deregulation 2010 Middle East: “Open skies” by UAE, 7 other Arab states Japan: Asia Gateway Plan Open access to regional, secondary airports SE Asia: ASEAN “open skies” 2010 10 member states + China, Japan, India? Middle East: Arab Maghreb Union “open skies” 2008 Source: IATA, CAPA Consutling

6. 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)

7. 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”

8. Australia maintains substantial surplus of seats over available capacity in international market 30% pax, seats growth Calendar Year 2007 vs 2000 m Source: BTRE Australia International Capacity & Passenger Traffic 2000-2006

9. Middle East may dominate “kangaroo route”; also emerging routes via China Emerging China Option Middle East QF/BA, Asian 6th freedom Airline share of Average Weekly Seats Australia-Europe by Region of Origin 3.7% Average Annual Growth in Aust-Europe Weekly Seats, 2000-2007 Source: IATA/CAPA Consulting

10. 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

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

12. Qantas responds to the challenge through development of Jetstar Source: IATA, CAPA Consulting 13

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

14. 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

15. Thank You!