Agenda for Freedom Presentation
Transcript of Agenda for Freedom Presentation
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The case for wider and deeper
liberalisation of air transportBrian Pearce
Chief EconomistThis presentation is available online at:This presentation is available online at: www.iata.orgwww.iata.org/economics/economics
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The case for liberalisation
Why air transport is similar to banking
Bank credit facilitates trade and market transactions
Air connectivity facilitates trade and globalisation
The case for liberalisation
Why air transport is different to banking
Risk of failing financial system largely from lack ofregulatory oversight
Risk of failing air connectivity largely from restrictivemarket access and ownership regulations
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The case for liberalisation
Best practice regulation is focusedon market failure
Bank prudence
Air transport safety and security
The case for liberalisation
No clear market failures justify regulatingmarket access or airline capital andownership structures
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Other network industriesalready have commercial freedoms
Banking
Electricity and gas
Telecoms
Media
Liberalisation has brought largebenefits to air travel consumersAirline passenger yields deflated by consumer prices
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006
UScents/RSM
0
5
10
15
20
25
Eurocents/RPK
US domestic (left scale) Intra-Europe (right scale)
-50%
-30%
Source: ICAO, AEA
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Employees have also benefitedfrom post-liberalisation expansion
Source: US GAO study
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Passengers Number of pilots Pilot compensation Real yields
Annual%c
hange
US since deregulation EU since deregulation
There have been large benefitsfor the wider economy as well
Liberalisation of Thailand-Malaysia marketEstimated impact of MOUs to Bermuda 1 provisions 1996-2006
37% rise in traffic
4,300 jobs created
US$114m boost to GDP
Source: InterVISTAS study
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Studies have shown consistentwider economic benefits
Liberalisation of Australia-New Zealand market
Estimated impact of Single Aviation Market1996, Open Skies 2002
56% rise in traffic20,600 jobs created
US$726m boost to GDP
Source: InterVISTAS study
Deeper liberalisation would bringadditional economic benefits
Liberalising the US-UK Bermuda II bilateralModel-based forecast of impact
Open Skies only: +1-25% UK benefits
Open Skies + OAA: +9-34% UK benefits
Source: UK CAA study
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Studies suggest additional economicbenefits would be significant
US-EU Open Skies liberalisationModel-based forecast of impact
Passengers:Economic benefits:Jobs:
Source: Booz Allen Hamilton study
Open Skies
only+26m6-12bn+70,000
O&C liberalisation(incremental benefits)
+15-40m4bn+1,800-10,000
Further cost efficiencies possiblefrom deeper liberalisation
Potential synergies/scale economies
4% average ROIC
21% averageROIC
Network airlines vs lowest cost for within-Europe operations
11.6
4.1
0.5 1.2
2.2
2.4
1.1
0
2
4
6
8
10
NetworkAirlines
Labour Aircraft andFuel
Infra-structure
Product,Distribution,
Overhead
Seat DensityAdjustment
Ryanair
centsperASK
Potential synergies/scale economies
21% average ROIC
Source: McKinsey, IATA
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Deeper liberalisation may addressfinancial unsustainability of airlines
Cost of capital/ target ROIC
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
1993 1995 1997 1999 2001 2003 2005 2007
%investedcapital
Airline industry ROIC
WACC
Source: IATA
The problem is not withbusiness modelsAirline returns on invested capital (ROIC)
0
1
2
3
4
5
6
7
8
NetworkAirlines
LCCs NetworkAirlines
LCCs NetworkAirlines
LCCs
Total US Europe
%investedcapital
Average cost of capital/ target ROIC
Source: McKinsey, IATA
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The problem is not geography
0
1
2
3
4
5
6
7
8
Total US Europe Asia
1996-2000 2001-2004 Cost of Capital
%investedcapital
Airline returns on invested capital (ROIC)
Average cost of capital/ target ROIC
Source: McKinsey, IATA
There are serious problemsin the air transport value chainReturns to capital invested (ROIC) in the air transport value chain (1996-2004)
0.0
5.0
10.0
15.0
20.0
25.0
CRS
Lessors
Freig
htForwa
rders
Grou
ndhan
dlin
g
Manu
facturers
Fuellin
g
Trav
elAge
nts
Cate
ring
Main
tena
nce
Airports
Airline
s
%investedcapital
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Ratioofu
pturntodownturnROIC(volatility)
ROIC, left scale
Volatility, right scale
Source: McKinsey, IATA
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But returns are unsustainably lowfor air transport as a whole
Annual investor returns (US$bn) in the air transport value chain (1996-2004)
-14
-12
-10
-8
-6
-4
-2
0
2
Manu
facturers
Less
ors
Airports
Service
s
Airline
sCR
S
Travel
Age
nts
FreightF
orwa
rders
Non-Ac
counte
d
Total
InvestorReturn(US$billion)
+0.3 +0.2
-1,1 -0.2
-11,7
+0.7 -0.01+0.4
~11
Source: McKinsey, IATA
Now fallout from financial crisisthreatens to damage air transportAsset prices
200
400
600
800
1000
1200
1400
1600
1800
1992 1994 1996 1998 2000 2002 2004 2006 2008
MSCIequityindices
50
70
90
110
130
150
170
190
210
230
Case-Sch
illerUShousepriceindex
US house prices(right scale)
US equity prices(left scale)
World equity prices(left scale)
Source: Haver
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Fuel prices have subsided - so havefoundations for air travel and freight
50
70
90
110
130
150
2003 2004 2005 2006 2007 2008
Confidenceindex
0
20
40
60
80
100
120
140
US$/barrel
Oil price(right scale)
US consumerconfidence(left scale)
Source: Haver
International passenger and freight tonne-kilometersSource: IATA
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
Jul-0
5
Sep-05
Nov-05
Jan-06
Mar-06
May-06
Jul-0
6
Sep-06
Nov-06
Jan-07
Mar-07
May
-07
Jul-0
7
Sep-07
Nov-07
Jan-08
Mar-08
May
-08
Jul-0
8
Sep-08
%
changeoveryear
Air freight FTKs
Passenger RPKs
Traffic volumes have alreadyweakened very sharply
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Causing the industry to shrinkand put economic benefits at risk
Scheduled ASK planned growth - all regions
Source: IATA SRS Analyser
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09
%c
hangeoveryear
Losses expected to continue in 20098.2 8.5
3.7
-13.0
-11.3
-7.5-5.6
-4.1
-0.5
5.6
-5.2-4.1
-15.0
-10.0
-5.0
0.0
5.0
10.0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008F 2009F
%sales
-15
-10
-5
0
5
10
US$billion
Net lossesUS$bn (RHS)
Operating margin% (LHS)
Source: ICAO, IATA
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More airline bankruptcies likelyin months ahead
Source: Air Transport Association, Morgan Stanley Research
Airline bankruptcies and service cessations since 1978
Commercial freedom required
Banking crisis accentuates fundamentalproblems
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Commercial freedom required
Liberalisation brings great benefitto consumers and the wider economy
Commercial freedom required
Low airline returns mean scarce capitalis not being used efficiently
Consumer and wider economic benefits at riskif airline performance unsustainable
But this is not due to business models
It is not due to geographical market
It is only marginally due to the value chain
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Commercial freedom required
Removing the barriers to restructuring airlinecapital is key to long-term sustainability
May avert widespread airline failures
Will generate cost efficiencies improving returnsand reducing fares
Can be achieved maintaining safety, security
and labour standards