The next revolution in theThe aviation next revolution cycle: in the 2007 - whatAviation now? Cycle

Peter Harbison Executive Chairman Centre for Asia Pacific Aviation TwoTwo QuietQuiet RevolutionsRevolutions andand aa MythMyth inin AsianAsian AviationAviation

Peter Harbison Executive Chairman Centre for Asia Pacific Aviation

Aviation Outlook Summit Singapore, 9/10 November, 2006 MajorMajor ThemesThemes

ƒ 2006 - Some major events - and two quiet revolutions ƒ LCCs - the potential and the possible ƒ China and India - growth and losses; the Middle East - growth and profits ƒ Airports and hub challenges ƒ ……and 2007? WhyWhy WeWe RememberRemember 20062006

ƒƒ TheThe dealdeal ofof thethe decadedecade –– AirAir ChinaChina andand CathayCathay PacificPacific ƒƒ TheThe worldworld’’ss dominantdominant airlineairline inin 1010 years?years? WhyWhy WeWe RememberRemember 20062006

560

480 ƒƒ ChinaChina’’ss continuingcontinuing emergenceemergence 400 asas aa dominantdominant aviationaviation powerpower

320

240 Airport pax: 1984-2006F 160

80

0 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06F07F08F09F 10F

International Domestic Regiona WhyWhy WeWe RememberRemember 20062006

ƒƒIndiaIndia’’ss traffictraffic explosionexplosion -- andand approachingapproaching maturitymaturity WhyWhy WeWe RememberRemember 20062006

million Bangkok 40.0 ƒƒAA newnew airportairport -- aa longlong timetime

36.0 coming,coming, butbut nownow poisedpoised toto changechange dynamicsdynamics

32.0

28.0

24.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 TheThe FuelFuel andand ShareShare PricePrice DuelDuel

160 Fuel Price Rising oil price Falling oil price Air China JAL 140 Air China

120 AirAsia

Cathay 100 Index Jet Jan-06 = 100 80 Qantas JAL SIA

60 Thai

Jet Airways Virgin Blue 40

3/7/06 5/6/06 8/5/06 2/1/06

9/10/06

25/9/06 11/9/06

28/8/06 14/8/06

31/7/06 17/7/06

19/6/06 22/5/06

24/4/06 10/4/06

27/3/06 13/3/06

27/2/06 13/2/06

30/1/06 16/1/06

3/10/06 2 A380A380 DelayDelay

ƒƒ DisruptsDisrupts fleetfleet planningplanning ƒƒ UncertaintyUncertainty ofof aircraftaircraft availabilityavailability ƒƒ FedexFedex cancels,cancels, VirginVirgin delays,delays, EmiratesEmirates inspectsinspects ƒƒ ExtendsExtends thethe lifelife ofof olderolder widebodieswidebodies ƒƒ SlowsSlows thethe expansionexpansion ofof EmiratesEmirates…….. QuietQuiet RevolutionRevolution #1#1

AA quietquiet changechange inin directiondirection forfor AsiaAsia PacificPacific airlinesairlines……....

LIBERALISATION FUEL PRICES

LCCsLCCs TheThe TwoTwo BestBest ThingsThings toto HappenHappen toto AsianAsian FlagFlag CarriersCarriers…….... 11-- LCCsLCCs……..

andand

22 -- HighHigh FuelFuel PricesPrices QuietQuiet RevolutionRevolution #1#1

The discipline imposed by these challenges has provoked : ƒ Reduced flying to points which lose money ƒ Increased seat load factors ƒ Increased yields (average fares) ƒ Lower ASK growth rates AsiaAsia PacificPacific AirlinesAirlines ReduceReduce seatsseats

No growth (or reduction) in (ASKs) - June 2006: ƒ ANA ƒ China Airlines (Taiwan) ƒ Japan Airlines (-13%) ƒ Korean Air ƒ Malaysia Airlines (-13%) ƒ Philippine Airlines ƒ Qantas ƒ Singapore Airlines ƒ Thai Airways TotalTotal seatseat growthgrowth -- belowbelow 4%4% BelowBelow longlong termterm averageaverage AAPAAAPA GrowthGrowth RateRate SlowsSlows

Asia Pacific Airlines ASK %age Growth 2005/06

AEA Airlines ……asas LoadLoad FactorsFactors ClimbClimb tootoo

10% LF differential AAPA Load Factors Climb 5% LF differential YieldsYields andand FuelFuel PricesPrices RiseRise inin UnisonUnison…….. 100.0

90.0

SIA overall yields (S cents/ltk) 1990-2006 80.0

70.0

60.0

89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 1H QuietQuiet RevolutionRevolution #2#2

ƒ Thanks to new entry, governments are recognising that they have… OPTIONS ƒ Alternatives to subsidy and protection now emerge, as new entrants offer alternatives to regulatory restrictions and protectionism ƒ The “national interest” is redefined QuietQuiet RevolutionRevolution #2#2

ƒƒ TheThe MalaysiaMalaysia CaseCase StudyStudy -- exercisingexercising thethe option:option: ƒ LCC operations ƒ Expand domestic market ƒ Remove the need for subsidy ƒ Offer an alternative short haul flag carrier ƒ Flag carrier restructuring delivers an effective network airline ƒ Everybody wins - almost there… TheThe LCC:LCC: AgentAgent ofof ChangeChange

ƒ “Ownership and control” – cross border joint ventures, are undermining the core of regulation ƒ Low fares – delivering policy options to governments ƒ A major (but unsung) development – standardisation of licensing: Malaysia/Thailand/Indonesia AA SimpleSimple PicturePicture seats in million 8.0 7.0 6.0 Asia Pacific LCC seat growth 5.0 - but still heavily regulated 4.0 3.0 2.0 1.0 0.0 2001 2002 2003 2004 2005 2006 LCCLCC ExpansionExpansion

Current orders only: 150% increase in LCC capacity to 2012 - over 600 aircraft

Virgin Blue AirAsia AirAsia Virgin Blue Jetstar Air Deccan Air Deccan Indigo Adam Air Jetstar Skymark Airlines Adam Air Cebu Pacific GoAir

Tiger Airways SpiceJet

SpiceJet Viva Macau

Air India Express Air India Express Nok Air Virgin Blue currently largest Air Arabia AirAsia jumps to 1st Air Arabia Spring Airlines

One-Two-Go One-Two-Go Freedom Air Air Deccan 4th East Star Air Deccan to 3rd Indigo Nok Air GoAir Indigo 15th Air Blue Indigo to 4th Cebu Pacific Jazeera Tiger Airways Air Blue Skymark Airlines Spring Airlines Jazeera Viva Macau Freedom Air East Star 0 2 4 6 8 10 12 14 16 18 0 2 4 6 8 10 12 14 16 18 Source: OAG MajorMajor PotentialPotential ShortShort HaulHaul GrowthGrowth MarketsMarkets

LCCsLCCs:: IndependentIndependent vsvs Government/Government/subsidariessubsidaries

Independents Fleet LCC Subsidiaries/Govt Owner Fleet 1 Adam Air 19 B737s 1 Air Arabia Sharjah 6 A320 2 Air Blue 3 A320 1 Air India Express Air India 6 B737-800 3 Air Deccan 15 A320 2 Freedom Air Air New Zealand 5 A320 15 ATR-42 3 Jetstar Qantas 27 A320 6 ATR-72 4 One-Two-Go Orient Thai 5 MD-82 AirAsia4 35 B737-300 5 Nok Air Thai Airways 7 B737-400 7 A320 6 Tiger Airways Singapore Airlines 7 A320 5 Cebu Pacific 10 A319 Total 63 6 East Star 3 A320 7 GoAir 4 A320 8 Indigo 4 A320 9 Jazeera 4 A320 LCC Fleet Breakdown 10 SpiceJet 6 B737-800 11 Spring Airlines 3 A320 12 Skymark Airlines 6 B767-300 Subsidiaries 2 B737-800 24% 13 Virgin Blue 31 B737-800 22 B737-700 14 Viva Macau 2 B767 Total 197 Independents 76% Source: Centre for Asia Pacific Aviation China,China, IndiaIndia andand thethe MiddleMiddle EastEast

ƒ While AsiaPac airlines slowed: – China increased 12%+ – India increased 25-30% – LCCs grew 10-20% ƒ Indian and Chinese airlines almost all lost heavily. Air China a standout; ƒ Most Asia Pacific airlines remained profitable; ƒ Gulf airlines mostly profitable, notably Emirates WhereWhere thethe OrdersOrders areare GoingGoing

600

500 Asia Pacific- current orders

400

300

200

100

0 Korea Japan India China Others

Airbus Boeing Bombardier ChangingChanging PassengerPassenger ProfileProfile inin IndiaIndia

60.0 55.0 50.0 45.0 40.0 Growing the leisure market - 35.0 projections to 2010 30.0 25.0 Leisure/VF 20.0 15.0 10.0 Busines 5.0 96 97 98 99 00 01 02 03 04 05 06 07F 08F 09F 10F

Source: Centre for Asia Pacific Aviation Business Lesiure * Years ending 31-March NewNew RouteRoute PotentialPotential inin ChinaChina Liberalised access opens up many new city pairs

Source: Airbus,Centre for Asia Pacific Aviation Source: Centre for Asia Pacific Aviation ChinaChina -- thethe LCCsLCCs’’ longlong marchmarch

100 + cities > 0.5million 140 + airports Growth exceeds 15%

Asia Tiger

Smaller airports keen to attract new entrants, revenues AirportAirport CompetitionCompetition -- Asia/MiddleAsia/Middle EastEast

HND

PEK

HKG

BKK

SIN

NRT

SYD

CGK

ICN

DXB

PVG

CAN

KUL

TPE MEL The Top 24: pax 2005 ITM

FUK

CTS

SHA

BOM

KIX

SZX

MNL

BNE

- 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 60,000,000 70,000,000

Source: Centre for Asia Pacific Aviation International Domestic Transit AirportAirport CompetitionCompetition -- Asia/MiddleAsia/Middle EastEast -Twin drivers: Liberalisation & economic expansion - Dubai & Chinese airports rise rapidly in rankings

1995 2000 2005 1 Tokyo Haneda 45,822,503 1 Tokyo Haneda 56,402,20 1 Tokyo Haneda 63,303,843 2 Seoul/Incheon 30,919,462 2 Osaka 36,821,52 2 Shanghai 41,517,550 3 Osaka 29,575,993 3 Seoul/Incheon 36,727,12 3 Beijing 41,004,008 4 Hong Kong 28,043,338 4 Hong Kong 32,752,35 4 Hong Kong 40,269,847 5 Tokyo Narita 24,210,286 5 Bangkok 29,616,43 5 Seoul/Incheon 39,671,948 6 Singapore 23,196,242 6 Singapore 28,618,20 6 Bangkok 38,985,043 7 Bangkok 23,124,116 7 Tokyo Narita 27,389,91 7 Osaka 35,250,608 8 Sydney 18,123,336 8 Sydney 25,755,18 8 Singapore 32,430,856 9 Fukuoka 16,534,050 9 Beijing 21,691,07 9 Tokyo Narita 31,451,274 10Beijing 15,044,700 10Fukuoka 19,615,10 10Sydney 29,234,504 11Taipei 14,478,196 11Taipei 18,681,41 11Jakarta 27,947,482 12Jakarta 13,142,909 12Melbourne 16,536,76 12Dubai 24,782,288 13Kuala Lumpur 12,776,877 13Kuala Lumpur 14,732,87 13Guangzhou 23,558,274 14Melbourne 12,245,182 14Guangzhou 13,135,64 14Kuala Lumpur 23,213,926 15Shanghai 11,076,000 15Manila 12,764,91 15Taipei 21,700,702 16Mumbai 10,957,287 16Shanghai 12,364,67 16Melbourne 21,191,403 17Manila 10,574,839 17Dubai 12,320,66 17Fukuoka 18,684,471 18Guangzhou 8,959,654 18Mumbai 12,067,40 18Mumbai 17,408,886 19Brisbane 8,845,803 19Brisbane 11,854,13 19Manila 16,216,031 20Dubai 7,102,984 20Jakarta 10,679,20 20Brisbane 16,170,548 Source: Centre for Asia Pacific Aviation AirportAirport CompetitionCompetition -- Asia/MiddleAsia/Middle EastEast

Tokyo Haneda Bangkok (new) Hong Kong Beijing Singapore Seoul Kimpo Bangkok (old) Tokyo Narita Incheon Asia Pacific/Middle East Sydney Asia Pacific/Middle East Taipei Airport Capacity: Current Guangzhou Million passengers p/a Kuala Lumpur Dubai Shanghai Pudong Shanghai Hongqiao Jakarta Mumbai Manila Auckland Cairo Bahrain Jeddah Abu Dhabi Source: Centre for Asia Pacific Aviation Doha

0.0 20.0 40.0 60.0 80.0 100.0 120.0 Source: Centre for Asia Pacific Aviation AirportAirport CompetitionCompetition -- Asia/MiddleAsia/Middle EastEast

Dubai World Central (Jebel Ali) Tokyo Haneda Beijing Dubai Singapore Shanghai Pudong Bangkok (new) Hong Kong Doha Kuala Lumpur Tokyo Narita Incheon Abu Dhabi Jeddah Seoul Kimpo Guangzhou Asia Pacific/Middle East Sydney Bangkok (old) Airport Capacity: 2012 Taipei Million passengers p/a Mumbai Manila Jakarta ƒ Dubai moves from 14th to 1st (Jebel Ali) Hangzhou Cairo ƒ Doha surges from 25th to 9th Kuwait Shanghai Hongqiao

0.0 20.0 40.0 60.0 80.0 100.0 120.0

Source: Centre for Asia Pacific Aviation Current Capacity Planned Capacity InIn conclusionconclusion -- forfor 2007:2007:

ƒƒ OfOf MythsMyths andand RisksRisks TimeTime toto MoveMove fromfrom MythMyth toto LegendLegend inin AsiaAsia PacificPacific

ƒƒ TheThe AsianAsian aviationaviation growthgrowth miraclemiracle isis becomingbecoming aa MYTHMYTH ƒ Only China and India domestic markets are booming - but most of their airlines are unprofitable ƒ Intra-Asian international services are seriously constrained by regulation ƒ Time to re-assess: the justification for intra-Asian international regulation and protectionism no longer exists TimeTime toto MoveMove fromfrom MythMyth toto LegendLegend inin AsiaAsia PacificPacific

One more Revolution is needed, to unlock growth: liberalisation -

ƒ Move quickly to revive the ASEAN Agreement for 2008 ƒ Add China to the ASEAN market ƒ China, Japan, South Korea accelerate regional access ƒ Pursue bilateral liberalisation AA WordWord aboutabout RiskRisk inin 20072007

ƒ 2006 dramatically illustrated the need for risk management, as fuel prices escalated ƒ There is more to risk management than fuel price hedging ƒ Any airline, airport or tourism CEO who is not prepared for a major setback in 2007 will have nowhere to hide AA WordWord aboutabout RiskRisk inin 20072007

ƒ Risks: ƒ Terrorist attacks - local or international ƒ New security controls ƒ Avian flu ƒ SARS ƒ Economic downturn ƒƒ TheseThese risksrisks areare notnot unpredictableunpredictable -- onlyonly theirtheir timingtiming isis ThankyouThankyou!!