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1
The case for liberalisation
¸ Why air transport is similar to banking
¸ Bank credit facilitates trade and market transactions
¸ Air connectivity facilitates trade and globalisation
2
The case for liberalisation
¸ Best practice regulation is focused
on market failure
¸ Bank prudence
¸ Air transport safety and security
3
Other network industries
already have commercial freedoms
¸ Banking
¸ Electricity and gas
¸ Telecoms
¸ Media
16.0
20
14.0
Euro cents/RPK
US cents/RSM
-30% 15
12.0
10.0
-50% 10
8.0
5
6.0
Source: ICAO, AEA
4.0 0
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006
4
Employees have also benefited
from post-liberalisation expansion
7.0%
US since deregulation EU since deregulation
6.0%
Source: US GAO study
5.0%
4.0%
Annual % change
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
Passengers Number of pilots Pilot compensation Real yields
5
Studies have shown consistent
wider economic benefits
Liberalisation of Australia-
New Zealand market
Estimated impact of Single Aviation Market
1996, Open Skies 2002
6
Studies suggest additional economic
benefits would be significant
US-EU Open Skies liberalisation
Model-based forecast of impact
2.4
6
11.6 21% average
ROIC
1.1 21% average ROIC
4
2 4.1
Source: McKinsey, IATA
0
Network Labour Aircraft and Infra- Product, Seat Density Ryanair
Airlines Fuel structure Distribution, Adjustment
Overhead
7
Deeper liberalisation may address
financial unsustainability of airlines
10.0 Cost of capital/ target ROIC
9.0
8.0
WACC
7.0
% invested capital
6.0
5.0
Airline industry ROIC
4.0
3.0
2.0
1.0
Source: IATA
0.0
7
% invested capital
0
Network LCCs Network LCCs Network LCCs
Airlines Airlines Airlines
Total US Europe
Source: McKinsey, IATA
8
The problem is not geography
7
% invested capital
0
Total US Europe Asia
25.0 4.0
ROIC, left scale
Volatility, right scale 3.5
20.0
3.0
% invested capital
2.5
15.0
2.0
10.0
1.5
1.0
5.0
0.5
0.0 0.0
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9
But returns are unsustainably low
for air transport as a whole
Annual investor returns (US$bn) in the air transport value chain (1996-2004)
2
+0.3 +0.2
0
Investor Return (US$billion)
-2
-1,1 -0.2
-4
-6
-8
-10 +0.4
+0.7 -0.01
-12 ~11
-14 -11,7
es
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Le
ac
rw
Ai
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uf
Fo
-A
av
an
on
t
Tr
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M
N
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Source: McKinsey, IATA
Fr
170
1200
150
1000
130
800
US equity prices 110
(left scale)
600
90
400 70
Source: Haver
200 50
1992 1994 1996 1998 2000 2002 2004 2006 2008
10
Fuel prices have subsided - so have
foundations for air travel and freight
140
Source: Haver
150 Oil price
(right scale) 120
130 100
Confidence index
US$/barrel
80
110
60
90
40
US consumer
70
confidence 20
(left scale)
50 0
2003 2004 2005 2006 2007 2008
8%
% change over year
6%
4%
2%
0%
-2%
-4% Air freight FTKs
-6%
-8%
-10%
M 6
M 7
M 8
6
8
Se 5
N 5
Se 6
N 6
Se 7
N 7
Se 8
08
Ja 5
M 6
Ja 6
M 7
Ja 7
M 8
0
0
0
-0
-0
-0
l-0
l-0
l-0
l-0
-0
-0
-0
-0
-0
-0
n-
n-
n-
p-
p-
p-
p-
ay
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ay
ar
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ar
ov
ov
ov
Ju
Ju
Ju
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11
Causing the industry to shrink
and put economic benefits at risk
Scheduled ASK planned growth - all regions
Source: IATA SRS Analyser
10.0%
8.0%
% change over year
6.0%
4.0%
2.0%
0.0%
-2.0%
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09
5.6
5.0 5
3.7
Operating margin
% (LHS)
0.0 0
US$ billion
% sales
-0.5
-11.3
Source: ICAO, IATA
-13.0
-15.0 -15
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008F 2009F
12
More airline bankruptcies likely
in months ahead
Airline bankruptcies and service cessations since 1978
Source: Air Transport Association, Morgan Stanley Research
13
Commercial freedom required
¸ Liberalisation brings great benefit
to consumers and the wider economy
14
Commercial freedom required
¸ Removing the barriers to restructuring airline
capital is key to long-term sustainability
¸ May avert widespread airline failures
¸ Will generate cost efficiencies improving returns
and reducing fares
¸ Can be achieved maintaining safety, security
and labour standards
15