Agenda for Freedom Presentation

7/31/2019 Agenda for Freedom Presentation

1/15

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


2/15

The case for liberalisation

Why air transport is similar to banking

Bank credit facilitates trade and market transactions

Air connectivity facilitates trade and globalisation


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


3/15


Best practice regulation is focusedon market failure

Bank prudence

Air transport safety and security


No clear market failures justify regulatingmarket access or airline capital andownership structures


4/15

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


5/15

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


6/15

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


7/15

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


8/15

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



9/15

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


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



10/15

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


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


11/15

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


12/15

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


13/15

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


14/15


Liberalisation brings great benefitto consumers and the wider economy


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


15/15


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

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