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Andrew Herdman, Director GeneralAssociation of Asia Pacific Airlines

4th Annual China Airfinance Conference 22 May 2006, Shanghai

Asia Pacific Aviation : Forging Ahead

• Future growth – Global economy – Asia Pacific aviation

• Competition and challenges• Regulatory perspectives• Some conclusions

Presentation outline

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The global economy

Source: PATA (Business Week) / AAPA estimates

Share of world GDP by region

2004

US 28%

EU 34%

Japan 12%

Asia 8%

China 4%

India 2%

Other 12%

Asia-Pacific

26%

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2015

World GDP boosted by growth in China & India

US 28%

EU 30%

Japan 10%

Asia 9%

China 8%

India 4%

Other 11%

Asia-Pacific

31%

Source: PATA (Business Week) / AAPA estimates

Asia Pacific

• Diverse geographic region• Home to 4 billion people

- 62% of the world’s population

• Generates 26% of global GDP• Wide range of income levels• Dynamic economies• Aviation recognised as a key

contributor to economic and social development

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Rising incomes boost travel demand

Source: ATAG

Asia Pacific Aviation

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AAPA Association of Asia Pacific Airlines

• Regional trade association representing 17 major international airlines based in Asia Pacific

• Committed to promoting sustainable growth of the aviation industry serving both passenger and freight needs

• Work with member airlines, governments, regulators and industry partners on issues of common concern

• Permanent secretariat headquartered in Kuala Lumpur, Malaysia

• Representation in Washington and Brussels

Revenue shares of Asia Pacific based airlines

Total revenues ~ US$ 92 billion

Asia Pacific Aviation

Data: 2005 estimates

AAPA

ChinaLCCs India

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AAPA global passenger and freight traffic share

Scheduled Systemwide Revenue Passenger Kilometres

Scheduled Systemwide Freight Tonne Kilometres

Note: AAPA, ICAO, IATA and ATWData: 2004

AAPA18%

ATA32%

AEA19% Others

26%

China5% AAPA

33%

ATA 28%

AEA 23%

Others10%

China 6%

Urumqi

Beijing

Fuzhou

ChengduShanghai

Harbin

Haikou

Hangzhou

Nanjing

Shenyang

Changchun

KunmingGuangzhou

Jinan

ChangshaChongqing

Wuhan

Xian

Ningbo

Yanji

Tianjin

Qingdao

Shenzhen

Guilin

Yantai

Dalian

Xiamen

Sanya

Mudanjiang

and others

138 million passengersDomestic 115 millionInternational 23 million

3 million tonnes of cargoSource: CAAC and OAGData: 2005

Mainland China carriers

AAPA members also offer 800 weekly flights

to 29 Chinese cities

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Challenges faced by Chinese carriers

• Strong demand growth• High capital investment requirements• Dependent on supporting infrastructure: airports, airspace • Scarcity of pilots and other skilled personnel

• Airline profitability remains weak• Domestic

• Price controls undermine effective revenue management • High fuel and other cost pressures• Lack of competition amongst key aviation service providers

• International• Liberalisation• Product positioning• Yield management and distribution• Lower costs no guarantee of profitability

Data: 2005 estimates for combined AAPA + non-AAPA airlines GMT+5 to GMT+12

Asia Pacific Aviation

• 440 million passengers- Domestic: 270 million- International: 170 million

• 13 million tonnes of cargo• 300,000 employees• 2,700 aircraft• US$ 92 billion revenue• US$ 2 billion profit• Global market share

- 24% global pax traffic- 39% global cargo traffic

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Asia Pacific aviation growth: passengers

AAPA estimates

Data: Passenger numbers: AAPA, China, India and LCCs

0

100

200

300

400

500

600

700

800

1990 2000 2005 2010F

Mill

ion

Pass

enge

rs

AAPA China India LCCs

Asia Pacific aviation growth : cargo

AAPA estimates

Data: Cargo tonnage: AAPA, China and India

0

10

20

30

1990 2000 2005 2010F

Mill

ion

tonn

es

AAPA China India

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Asia Pacific’s share of world traffic will continue to grow

Source: Airbus Market Outlook

Asia Pacific 25% Asia Pacific

31%

Record aircraft orders in 2005

Source: Airbus and Boeing

• Worldwide, over 2,000 new aircraft ordersdriven by …

– Renewed confidence in future growth

– Economics of high fuel prices

– Low interest rates

• More than 900 from Asia Pacific– Two-thirds narrow body jets

– 600 from China and India

• In reality, global market demand growth remains ~ 850 aircraft p.a.

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Competition and challenges

• Airline profitability • Cost challenges • Competition • New entrants • Regulatory concerns

Airline profitability: mixed picture

Airline Profitability by Region

Source: IATA

Industry losses top US$42 billion since 2001

-14.0-12.0-10.0-8.0-6.0-4.0-2.00.02.04.06.08.0

1999 2000 2001 2002 2003 2004 2005US Europe Asia

$bn

+ 8.5 + 3.7

- 13.0 - 11.3 - 7.2 - 5.3 - 6.0

Global industry profits

Global industry losses

-14.0-12.0-10.0-8.0-6.0-4.0-2.00.02.04.06.08.0

US Europe Asia

$bn

- - - - -

Global industry profits

Global industry losses

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Airfares do not keep pace with inflation

50

60

70

80

90

100

110

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004Rea

l Pas

seng

er y

ield

s, in

dexe

d to

199

3=10

0

US domestic markets

Intra-Europe markets

AAPA Systemwide

Real passenger yields have fallen by a third in the past decade

The good news: air travel is affordable for the masses

Impact of high fuel prices

AAPA fuel bills and % of total costs

2003

2004

2005

US$ 9 bn

US$ 12 bn

US$ 18 bn

~ 17%

~ 20%

~ 26%

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Source: AAPA FY2005, FY2006E

2004 2005

Fuel Costs Fuel Costs

Non-FuelCosts

Non-FuelCosts

Profit ~6%Profit ~3%

Average fares rose 7% … but this was not enough to offset higher fuel costs … and margins fell sharply

Profitability under pressure

Impact of new entrants

Source: IATA

Regional seat capacity

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New entrants: some Asian leaders

40+ routes to 20+ destinations47 B737s

23 A320s and 6 B717s5 A320s on order

60+ routes to 40+ destinations 35 B737s and 4 A320s56 A320s on order

18 MD80/90s and 5 B737s30 B737-900ERs on order

11 DC-9s, 2 B767s and 6 A319s/A320s8 A319s/A320s on order

13+ routes to 12+ destinations4 A320 8 A320s on order

20+ routes to 18+ destinations 19 B737s, will lease 9 A320s

Even after achieving meaningful scale …profitability remains patchy

Source: Company websites and Orient Aviation fleet census April 2006

Challenges faced by new entrants

• Progressive liberalisation, but not yet a common market• Mainly focused on domestic market opportunities

• Some regional international routes but national ownership and control rules complicate business structures

• High fuel prices and other cost pressures, including scarcity of pilots and other skilled personnel

• Established airlines and new entrants are competing directly in overlapping market segments

• Failure to liberalise other aviation services impedes both established airlines and new entrants

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Price-competitive fares

Average yields: US cents/RPK

easyJet 8.6Virgin Blue 8.2

Southwest 7.3Ryanair 7.0

AirAsia 3.6* AAPA Y = systemwide economy class yields

JetBlue 5.2

Data: 2005. Not adjusted for different average stage lengths

AAPA FJY 7.5

China CA,MU,CZ 6.8AAPA Y* 5.3

Regulatory perspectives

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Working together

Industry Partners

Regulators Airlines

Associations

Global regulatory influences

Asia Pacific

Wider impact of US and EU regulations: need for better global harmonization

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U.S. and EU: regulatory perspectives

• US mainly driven by US domestic political concerns– Safety, led by FAA– Security, led by DHS/TSA – Open (your) Skies

• EU mainly driven by EU domestic political concerns– Safety: EASA, Eurocontrol – Consumer rights– Environment– EC assuming lead role in aero-political process

• Insensitivity about extra-territorial impacts: unilateral actions

• Where international issues are taken into account, the focus tends to be on US-EU differences

• Insufficient recognition of Asia-Pacific role and views

• Highly diverse region: multiple governments and regulators

• Need for co-operation on multilateral basis engaging various stakeholders

• Strengthen collaboration to enhance airline safety and security, reliability, economy and efficiency

• Harmonisation is more about sharing best practices before legislating, not about resolving differences after unilaterally imposed regulations

• Positive bias towards consensus, but sometimes slows the process

Asia Pacific : regulatory perspectives

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Aviation : Aeropolitical regulation

• Still governed by an outdated bilateral framework

• Progressive liberalisation, but protectionist sentiments often still evident

• National ownership and control restrictions– Hold back airline industry consolidation

– Isolate domestic markets from foreign participation

– Empower national labour unions

– Indirectly benefit key service providers at major hub airports

• Affects airlines, both established carriers and new entrants, and others in the aviation supply chain

Some conclusions

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Conclusions

• Traffic growth remains positive

• Optimism about the future reflected in orders for new aircraft and investments in airport infrastructure

• Competitive pressures remain intense– Challenges in passing on the impact of high fuel prices to

consumers

– Labour cost inflation, especially skilled pilots and mechanics

– Need to drive efficiency gains throughout the value chain

• Goal of improving industry performance and returns on capital

• Further steps needed to truly liberalise this most global of industries

• At the heart of Asia Pacific’s economic development

• Quality service reputation allied to good cost management

• Able to compete against the world’s best

• Investing for future growth

• Well placed to take advantage of new global opportunities

Asia Pacific Aviation: Forging Ahead

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Andrew Herdman, Director GeneralASSOCIATION OF ASIA PACIFIC AIRLINES

herdman@aapa.org.my

www.aapairlines.org