I6401 International Airlines in Australia Industry Report

8/2/2019 I6401 International Airlines in Australia Industry Report

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2 Aot this Indst2 Idustry Deitio

2 Mai Activities

2 Similar Idustries

2 Additioal Resources

3 Indst at a Glance

4 Indst Peomance

4 Eecutive Summary

4 Key Eteral Drivers

5 Curret Perormace

8 Idustry Outlook

11 Idustry Lie Cycle

13 Podcts & Makets

13 Supply Chai

13 Products & Services

14 Demad Determiats

15 Major Markets

16 Iteratioal Trade

17 Busiess Locatios

19 Competitive Landscape19 Market Share Cocetratio

19 Key Success Factors

19 Cost Structure Bechmarks

21 Basis o Competitio

22 Barriers to Etry

23 Idustry Globalisatio

24 Majo Companies

24 Qatas Airways Limited

26 Sigapore Airlies Ltd

27 Virgi Blue Holdigs Limited

31 Opeating Conditions

31 Capital Itesity

32 Techology & Systems

33 Reveue Volatility

33 Regulatio & Policy

34 Idustry Assistace

35 Ke Statistics

35 Idustry Data35 Aual Chage

35 Key Ratios

36 Jagon & Glossa

IBISWorld Industry Report I6401International Airlinesin AustraliaDeceme 2011 Aies Ngid

Flight to success: Solid passenger numbers arefuelling strong revenue growth

.iisold.com.a | (03) 9655 3881 | [email protected]


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www.IbISwOrLD.COM.Au Intenational Ailines in Astalia December 2011 2

The International Airlines industryprovides air transportation ofpassengers or freight over regularroutes and on regular schedules.These include any ights that either

end or originate internationally.Airlines that provide scheduleddomestic air transportation of mail ona contract basis are also included inthis industry.

The pima activities o this indst ae

Aircrat charter, lease or retal

Scheduled iteratioal air trasport

Air trasport termial operatio (ecept airports)

Iteratioal reight trasport

Iteratioal passeger trasport

Indst Defnition

Main Activities

Simila Indsties

Additional resoces

The majo podcts and sevices in this indst ae

Freight

Low-are passeger trasport

Passeger trasport

Aot this Indst

C2824 Aicat Manacting in Astalia

Busiesses i this idustry mauacture ad repair aircrat, aircrat egies ad rames.

I6403 Non-Schedled Ai and Space Tanspot in Astalia

Firms i this idustry operate aircrat o a o-scheduled basis or the trasportatio o passegers orreight betwee domestic ad oreig airports.

I6641 Tavel Agenc Sevices in Astalia

Compaies i this idustry operate ticket sales or bookig oces o o-residet airlies.

I6643 rail, Ai and Sea Feight Foading in Astalia

Eterprises i this idustry operate ticket sales or bookig oces o o-residet airlies.

Fo additional inomation on this indst

.ite.gov.aBureau o Irastructure, Trasport ad Regioal Ecoomics

.casa.gov.aCivil Aviatio Saety Authority

.toism.astalia.comTourism Australia


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Maket Shae

Qantas Airways

Limited 23.4%

Singapore AirlinesLtd 6.8%

Virgin BlueHoldings Limited6.8%

Ke Extenal DivesIntenational tavel Astalians

Intenational tavelto Astalia

Tade-eighted index

wold pice o cde oil

Polic and legislation oschedled intenationalai tanspot

Ke StatisticsSnapshot

Indst at a GlanceIntenational Ailines in 2011-12

revene

$14.9nPoft

$447.7mwages

$1.8nbsinesses

88

Annal Goth 12-17

2.8%Annal Goth 07-12

2.5%

Indst Stcte Lie Cycle Stage MatureReveue Volatility Medium

Capital Itesity High

Idustry Assistace Low

Cocetratio Level Medium

Regulatio Level Heavy

Techology Chage High

Barriers to Etry High

Idustry Globalisatio Medium

Competitio Level High

FOR ADDITIOnAL STATISTICS AnD TIME SERIES SEE THE APPEnDIx On PAGE 35

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International travel to Australia

SOURCE: WWW.IBISWORLD.COM.AU

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Revenue Employment

Revenue vs. employment growth

Business locations

68.2%NSW

12.7%QLD

12.7%VIC

3.4%SA

3%ACT


p. 24

p. 4



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Ke Extenal Dives International travel by AustraliansInternational travel by Australians is anindicator of the number of people exitingthe country. Most Australians travel toother countries by plane. This means that

an increase in the number of travellersincreases demand for air transportation.

International travel to AustraliaInternational tourism is a signicant

ExectiveSmma

The ight to success was turbulent overthe past ve years. The economicdownturn of 2008-09 wiped away muchof the growth achieved by theInternational Airlines industry in theprevious two years. Industry revenue fell2.6% in 2008-09. Since then, revenuehas grown. The main reason for theupward trend has been solid growth inpassenger numbers, partially due tofavourable economic conditions inAustralia and developing Asian

countries, and partially due to recordlow prices. Industry revenue is expectedto grow at an annualised rate of 2.5%per annum over the ve years through2011-12 to reach $14.9 billion.

Major airlines have participated inprice wars since the beginning of 2008-09 to attract higher passenger numbers.This competitive behaviour continuedinto 2009-10, although at a smallerscale. Furthermore, even though theworld experienced a downturn in thosetwo years, Australia avoided a recession,

as did China and other developing Asiannations. International airlines areexpected to record 3.0% growth inrevenue over 2011-12, as passenger

numbers continue to increase.A number of airlines from different

countries service the InternationalAirlines industry in Australia. However,few enterprises have their headquartersin Australia. The main enterprise withthat status is Qantas Airways Limited.Virgin Blue also offers internationalights. Virgin Blue expanded itspresence in the International Airlinesindustry through its subsidiary, VAustralia, now branded Virgin Australia.

Other major players include SingaporeAirlines, Emirates and Air New Zealand.The industry is headed for another

ve-year period of revenue growth.Industry revenue is forecast to increaseat an annualised rate of 2.7% over thenext ve years, to reach $17.1 billion in2016-17. Increasing favourableconditions, such as solid income growthin Australia and Asia, will result in anincrease in demand for travel.Continual downward pressure onairfares, a weaker Australian dollar

and strong competition on a global scalewill partially offset the favourableconditions, but not enough tostop growth.

Indst PeomanceExective Smma | Ke Extenal Dives | Cent Peomance

Indst Otlook | Lie Ccle Stage

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Indst Peomance

Passenge nmessoa

Total industry revenue is expected toincrease at an average rate of 2.5% perannum over the ve years through2011-12. The main driver of growth ininternational ights was strong consumerand business condence in Australia anddeveloping Asian countries. The strongcondence increased demand for travelto Australia and for travel by Australiansoverseas. Another determining factor was

aggressive price competition betweenmajor airlines. The aggressive price cutsspurred demand for air travel. The lowerfares tended to encourage travellers totravel more frequently, and peoplepreviously unable to afford airfares to useair travel.

Total passenger numbers boardinginternational ights to and fromAustralia is expected to increase by a

CentPeomance

Dips in consumer and business condenceand uctuations in household disposableincome slowed industry revenue growthover the past ve years. At the same time,the strong Australian dollar encouragedAustralians to travel overseas anddiscouraged foreigners from visitingAustralia. The global economic downturnresulted in a signicant slowdown indemand for international air travel during2008-09. The low demand created a pricewar among major players, which led to

falling revenue for many rms.The International Airlines industry

remained subdued during 2009-10.

While passenger numbers recoveredstrongly over 2009-10, competitionamong airlines was still very strong.International ight capacity was high andcarriers kept prices low as a result. Sincethen, rising fuel costs and growingdemand caused the average airfare toincrease. As such, industry revenuerecovered strongly in the years after.Industry revenue is expected to grow3.0% over 2011-12 to reach $14.9 billion.However, even though revenue will grow,

high fuel prices and strong competitionwill put downward pressure onindustry prots.

Ke Extenal Divescontined

source of passengers on internationalairlines. The number of inbound visitsto Australia is a good indication of thenumber of tourists entering thecountry, as most tourists arrive byair transport.

Trade-weighted indexThe trade-weighted index is a measureof the value of the Australian dollarrelative to the currencies of its largesttrading partners. The purchasing

power of Australians in some countriesincreases when the trade-weightedindex grows, which supports travel tothose destinations. Conversely, whenthe trade-weighted index is falling,foreigners may be encouraged to visitAustralia. Because Australiansrepresent the majority of internationaltravellers, the industry benets from astrong trade-weighted index.

World price o crude oilThe price of fuel is a signicantdeterminant of operating costs and caninuence protability in highlycompetitive segments of the market.When the price of crude oil increases,airline purchase costs also rise. Manyairlines are not able to pass on the fullcost increase to their customers andprots are often compromised.

Policy and legislation or scheduled

international air transportThe industry is under strict regulationfrom the Federal Government, particularlyregarding safety concerns. Regulation hasa negative effect on the industry as itrestricts operators from certain activities,increasing production costs. Compliancerequirements prevent some aircraft fromying if not in top condition, reducingrevenue prospects for operators.


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Indst Peomance

Passenge nmessoacontined

solid 5.3% per annum over the ve yearsthrough 2011-12. This includes aslowdown in numbers during 2008-09,when the number of passengersincreased only 1.0%. During theslowdown in passenger numbers,demand for air travel took a step back inlight of the global downturn.

Nonetheless, major airlines managedto grow their passenger numbers slightlythrough record-low airfares during2008-09. As such, the average price of

international scheduled air transportdecreased an estimated 6.8% in 2008-09.Prices fell again during 2009-10, with theoverall average producer price index forthe industry declining by an estimated5.3% per annum over the ve yearsthrough 2010-11. The downward pressureon prices stemmed from strong

competition in the industry and thesuccess of low-cost carriers.

Mail and freight account for a smallproportion of industry activity. Over thepast ve years, freight volumesincreased slower than passengernumbers. Airfreight demand fellsignicantly during 2008-09, when oilprices skyrocketed. Even whencommodity prices began to plummet,poor global economic conditionsreduced trade volumes of goods,

resulting in further losses for freightproviders. Overall, passenger servicesfared more favourably than freight overthe past ve years. Much of that is dueto the responsive price of air travel andthe increase in demand when airfaresfall. Demand for freight is lessdependent on prices.

Open Skies opens

oppotnities

Australia signed an Open Skiesagreement with the United States in

February 2008, allowing the signicantexpansion of air travel on the trans-Pacic route between the two countries.Previously, new airlines on the routewere only allowed to operate four servicesa week. The limited number of ightseffectively made the route uneconomicalfor new entrants and restrictedcompetition. The Open Skies agreementlifted these restrictions and increasedroute access for new airlines, allowingthem to y as often as they deem

economically viable. One airline to takeadvantage of the agreement is VirginBlues new international offshoot of

Virgin Australia (previously branded VAustralia), which commenced ights to

Los Angeles in December 2008.Airlines offering routes to and from

Los Angeles, including Virgin Australia,Qantas, Delta Air and United Airlines,entered a price war during 2009because of falling demand. During theyear, Delta Air and Virgin Blueproposed a joint venture to theAustralian and US authorities. TheAustralian Competition and ConsumerCommission (ACCC) and the USGovernment have approved the

proposal. Australia also has an OpenSkies agreement with New Zealand,effective since 1996.

Poft nde pesse International airlines, as large fuelconsumers, were unhappy to see theskyrocketing price of petrol in the lead upto 2008. With fuel and oil expensesaccounting for over 20% of total revenue,companies faced signicant challenges inproviding services at a price that wouldattract customers and keep prots abovezero. Most airlines introduced additionalcharges to salvage earnings, including

strict excess baggage charges,cancellation fees and additional chargesfor check-in luggage. However, the extracharges proved insufcient to cover the

Skyrocketing fuel pricesresulted in weak earningsfor airlines


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Indst Peomance

Poft nde pessecontined

rapid increase in fuel costs, resulting inpoor income for most industry operationsover the past ve years.

Many companies also took on hedgedcontracts for fuel, which locked in theprice at a much higher level than theaverage price since August 2008. As such,earnings remained weak during 2008-09,

with not much improvement during 2009-10 and 2010-11. The main reason behindthe inability to improve the bottom linewas aggressive price competition, whichlowered the unit value of sales. This yearwill see average prot of 3.0% as airlinesbetter match capacity with demand andimplement efciency measures.

Ailine nmes all The number of industry establishments is

expected to fall by an annualised 1.1%over the ve years through 2011-12. Thedecline in establishments reects thestrong cost pressures that airlines facedduring past ve years, particularly interms of fuel prices. In addition, price-based competition from low-cost airlinesand a larger array of routes offered bymajor airlines pushed some of thesmaller companies out of business. Whilethe industry saw some new entrantsbecause of strong demand prior to2008-09, these companies usually had

strong nancial backing and entered themarket in direct competition to the majorplayers. Therefore, they contributed tothe intense competitive pressures forsmaller airlines.

In line with the contraction inindustry participation, employment inthis industry is expected to decline

1.3% per annum over the ve yearsthrough 2011-12. Many key airlines cutstaff to maintain margins and usedtechnology to improve the productivityand efciency of their operations.During 2008-09, major airlines

announced labour cuts in response tocapacity rationalisation and decliningdemand. Industry wages are projectedto be down 2.9% per annum during thesame ve years. The average wagedeclined over the past ve years, asmajor airlines restructured and cutlabour costs.

Ailines oge

alliances

To operate an international airline based

in Australia, current regulations requirethat the companys foreign-ownership isno greater than 49%, leaving thecompany majority owned by Australianinterests. This requirement is Qantassingle greatest burden, as it restricts theairlines ability to source cheaper capitalin international markets and fund newprojects. Qantas indicated that theAustralian labour movement needed toaccept that the airline would have toemploy more people offshore, as over45% of revenue is sourced from overseasbut less than 7% of its employees areemployed overseas.

These restrictions are a constraint to

investment in Australian international

airlines, as they limit the sources ofadditional capital for an airline inAustralia. However, the FederalGovernment ruled against the lifting ofthe foreign-ownership cap, placing greatimportance on maintaining majorityAustralian ownership in companieslike Qantas.

Virgin Blue, as the second-largestinternational carrier in Australia, isworking hard to secure some competitiveadvantage via joint ventures overseas.During 2010, the company attempted toorganise alliances with Etihad, Air NewZealand and Delta Air Lines. TheAustralian Competition and Consumer

Declining industryestablishment numbersreect strong costpressures


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Indst Peomance

revene egainsaltitde

Industry revenue is expected to grow atan average rate of 2.7% per annum overthe next ve years, to reach $17.1 billionin 2016-17. Revenue is projected toimprove because of a recovery in globaleconomic conditions and growth inpassenger numbers. International travel

to Australia will be greater, whileAustralians will increasingly traveloverseas. International travel in and outof Australia virtually never falls. Even theglobal downturn only managed to slowinternational passenger growth. The onlyexception over the past 50 years is thetwo years in the aftermath of theSeptember 11 terrorist attacks. Barringexceptional events, internationalpassenger numbers will continue to grow.

International travellers willincreasingly come from Asia as incomesin the high-growth region rise.Furthermore, the Federal Governmentwill fund promotional activity overseas to

encourage growth in internationalvisitors. The promotional activity willgradually build up the number of short-term arrivals to Australia. The forecastdepreciation of the Australian dollar from2013-14, will further encourage growth inforeigners travelling to Australia.

IndstOtlook

The International Airlines industryfaces brighter skies, but some darkclouds remain on the horizon. Airlineswill experience stronger demand frompassengers over the next ve years.However, airfares will not keep pace.Competition from low-cost airlines willboost passenger numbers but weakenprice increases, slowing industryrevenue growth. Nonetheless, inbound

tourists will provide a signicantrevenue source, with sturdier conditions

in overseas economies.Offsetting this will be the strong

Australian dollar, which will deter sometravellers from coming to Australia. Onthe other hand, the strong Australiandollar means Australians will be morelikely to travel overseas. Oil prices areexpected to increase at a faster rate overthe next ve years. Rising oil prices willcreate some upward pressure on airfares.

The introduction of the carbon tax willalso squeeze industry margins.

Ailines ogealliancescontined

Commission allowed the Etihad alliancego through, as did their local authorities,and the two airlines began code-sharingin October 2010. Following regulatoryapproval, Air New Zealand purchased14.9% of Virgin Blue. The alliancesolidies plans to coordinate plans,schedules, capacity and routes. Alliancesare expected to increase competition onthe more popular routes to New Zealand,Los Angeles and the Middle East.

Another trend evident over the past

ve years was the rapid emergence oflow-cost carriers in the industry. Low-cost carriers such as Virgin Blue and VAustralia, Jetstar, AirAsia X and TigerAirways entered the market and reducedairfares by competing largely on price.The result was an increase ininternational air travel and an increasein industry revenue. The success oflow-cost carriers also reduced themarket share of premium operators suchas Qantas.

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Indst Peomance

revene egainsaltitdecontined

Australians will increasingly yoverseas, which will aid industry revenuegrowth over the next ve years.Supporting the trend are low-costairlines, which will continue to offerlow-fare ights to Asia. Furthermore, realhousehold disposable income levels areexpected to improve. More money tospend and cheap airfares will supportindustry revenue growth. Sporting eventssuch the 2012 Olympics in the United

Kingdom will also boost the number ofAustralians travelling overseas.

On the other hand, lower consumerand business sentiment are expected todampen revenue growth. In addition,Australians are forecast to possessreduced purchasing power with theforecast decreased value of the Australiandollar. With lower purchasing power,some Australians will return toholidaying in Australia.

Competition heats p The industry is opening itself up toforeign airlines, partly to promotetourism and business activity toAustralia. In the past few years, manyairlines expanded operations intoAustralia, offering more choices totravellers. Tiger Airways is the latestforeign airline to come into and competein the Australian market. In addition,Jetstar is following a strong expansioninto international destinations.

However, the later than anticipateddelivery dates for the new Boeing 787Dreamliner aircraft may delay the scaleof this expansion. The introduction ofnewer, more fuel-efcient aircraft overtime will lead to greater productivity,which should promote lower airfaresover the next ve years.

In addition to new airlines in Australia,the number of joint ventures and code-

sharing agreements with foreign airlinesis expected to increase over the next veyears. This is a common trend among

airlines globally as they strive to aligncapacity and costs, and increasecompetitiveness. Airlines are forced toforge alliances because governmentsaround the world, due to historicalreasons, are protective of airlines andairspace. Nonetheless, consumers willbenet from these alliances throughlower prices and greater seat availabilityon popular routes.

High el pices andcaon picing

Fuel prices are expected to increase at afaster rate over the next ve years thanthey did over the past ve, threateningairline prot margins. Internationalairlines are expected to raise airfares toprotect prot margins and pass on thecost increases to customers. The resultinghigher airfares will slow demand andrevenue growth.

The introduction of new governmentregulations designed to reducegreenhouse gas emissions may limitairline prot growth and hurt revenuegrowth. Currently, the AustralianGovernments carbon pricing policy does

not cover international aviation.However, if the Federal Governmentwere to extend carbon pricing tointernational aviation, the higher costswould put pressure on prot margins andlikely raise airfares. The higher airfareswould then translate to lower demand forair travel and lower industry revenue.

Airlines will invest in larger capacity,more fuel-efcient aircraft to combatrising fuel prices. Radically differentaircraft designs exist that can greatlyimprove fuel efciency. However, thesecutting-edge designs are unlikely to beadopted in the next ve years. This is

In the past few years, manyairlines have expandedtheir operations intoAustralia


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Indst Peomance

High el pices andcaon picingcontined

because new aircraft designs must becompatible with existing airportinfrastructure and satisfy safetyregulations. It will take time to overcomethese hurdles. In the meantime, tocounter higher operating costs, airlinesare likely to increase their reliance onlow-cost business models.

In August 2009, the European Unionannounced that commercial airlines,

business jet operators and air forces fromaround the world will have to join theirgreenhouse gas emissions trading plan by2012 or be penalised when ying to thecontinent. Under the program, operatorshad to submit plans for monitoring theiremissions. These additional regulatorycosts will put downward pressure onearnings and force some smallercompanies out of business.


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Indst Peomance

Industry value added is underperformingthe economy as a whole

Player numbers fell as cost pressures increasedand major players scrambled for market share

Technological developments have sloweddown after a boost in the early 2000s

Per capital consumption ofinternational travel is slowing

Lie Ccle Stage


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5 155 25 30

%

Gowthopoft/GDP

% Goth o estalishments

DeclineCrash or Grow? Potential Hidden Gems

Future Idustries

Qalit GothHigh growth i ecoomicimportace; weaker compaiesclose dow; developedtechology ad markets

Time wastesHobby Idustries

MatitCompaycosolidatio;level o ecoomicimportace stable

Shakeot

Shakeout

Qantit GothMay ew compaies;mior growth i ecoomicimportace; substatialtechology chage

Ke Feates o a Mate Indst

Reveue grows at same pace as ecoomy

Compay umbers stabilise; M&A stage

Established techology & processes

Total market acceptace o product & brad

Ratioalisatio o low margi products & brads

Aicat Manacting

Toism

Petolem wholesaling

Non-Schedled Ai and Space Tanspot

Tavel Agenc Sevices

Intenational Ailines


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Indst Peomance

Indst Lie Ccle According to the IBISWorld life cyclemodel, the International Airlinesindustry began to mature during the pastve years. The phase of maturity includesa slowdown in demand, high costpressures, falling protability, strongcompetition among players and operatorsleaving the industry. While there are stillcompanies entering the market, such asJetstar in 2005 and Tiger Airways in2007, these enterprises have to offer anextremely competitive service to remain

in business. Operating conditions havebecome tougher and companies arestruggling to gain market share.

Industry value added is expected todecline 0.8% per annum over the 10years through 2016-17. This is a weakperformance compared with the economyas a whole, which is expected to grow3.3% per annum over the same period.Downward pressures on value addedinclude falling prots due to high costpressures, cut labour cost and decliningwages, and a slowdown in capital

investment in the industry. Qantascancelled 15 Boeing 787s orders duringthe rst half of 2009, indicating thatcompanies are looking to remove some ofthe current overcapacity in the market.

Growth in per capita consumption ofinternational travel is slowing inAustralia. The number of passengersper population is expected to grow at3.5% per annum over the ve years

through 2011-12. This is a weaker rate ofgrowth compared with 6.0% per annumover the ve years ending 2007-08. Assuch, companies are struggling to win alarger market share and have enteredinto competitive campaigns and pricewars. This has been made harder by theglobal economic slowdown since 2008,resulting in fewer passengers on ightsto and from Australia. Competitionamong major players forced smallercompanies to leave the industry, as they

were unable to handle extreme pricecuts. The total number of enterprisesdeclined an estimated 0.9% per annumover the ve years through 2011-12.Some will likely return to the industryonce prot margins improve.

Technological developments amongairlines and aircraft manufacturershave been prominent over the pastve years. However, the changes havehad less effect and benet comparedwith those implemented in the early2000s, which included online booking

and in-ight entertainment. As such,returns on investment arediminishing, leading to slower capitalexpenditure by major players. Asignicant source of investment hasbeen in new aircraft, such as theAirbus A380. The introduction of theA380 on existing routes was a sourceof competition for many airlines overthe past ve years.

This idustryis Mate


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Podcts & Sevices Industry services can segment intopassenger and freight transport.Passenger transport services are by farthe largest product segment, with anestimated 90.1% of total revenue. Thetotal number of passengers carried oninternational ights increased at a 5.5%annualised rate over the past ve years.This is solid growth resulting in an

increase in the percentage of revenuegenerated by passengers, even with theslowdown during 2008-09. Theseservices include everything from ticketsto excess baggage charges andcancellation fees.

One of the reasons for passengernumber growth over the past ve years isindustry competition and moreaffordable travel. Low-cost airlines byAustralian and international carriers

were increasingly involved ininternational air transport. Low-costairlines, such as Jetstar, Virgin Australia,Tiger Airways and AirAsia X, are allplaying larger roles in the scheduledinternational air travel market inAustralia. The growth of low-costairlines was in response to the highercosts borne by the industry. Higher fuel

costs, security costs and otheroperational expenses createdopportunities for businesses with a lowercost structure to take advantage of themarket. Low-cost airlines capitalised ontheir business models in a particularlyprice-conscious environment.

The freight segment has grownsteadily since 2003, as international aircargo volumes increased. However, withthe steep increases in jet fuel prices in

KEy buyING INDuSTrIESX0003 Toism in Astalia

The Tourism idustry relies o the Iteratioal Airlie idustry to trasport visitors to thecoutry.

KEy SELLING INDuSTrIES

C2824 Aicat Manacting in AstaliaThe Aircrat Mauacturig idustry is oe o the major idustries that supply iteratioalairlies.

F4521 Petolem wholesaling in AstaliaPetroleum wholesalers supply iteratioal airlies with uel or aircrat.

I6403 Non-Schedled Ai and Space Tanspot in Astalia

This idustry is resposible or traiig aircrews ad pilots.

Podcts & MaketsSppl Chain | Podcts & Sevices | Demand Deteminants

Majo Makets | Intenational Tade | bsiness Locations

Sppl Chain

Products and services segmentation (2011-12)

Total $14.9bn

64.4%Passenger transport

25.7%Low-fare passenger

transport

5.4%Freight

4.5%Other



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Podcts & Makets

Demand

Deteminants

Factors affecting demand for air travel

include general economic activity,airfares, exchange rates, personaldisposable income, prosperity and theattraction of the destination.

Leisure and businessMovements in airfares determinenon-business travel to a greater extent,as holidays or overseas visits are eitherpostponed or excluded from the leisureitinerary during periods of high airfares.A similar logic applies to exchange rates when the domestic currency is strong,

Australians are more likely to traveloverseas as their trip becomes relativelycheaper. Foreigners are likely toincrease trips into Australia if theircurrency appreciates against theAustralian dollar. For the businesstraveller, airfares and exchange ratesare not such an important factor as theyare part of the cost of running abusiness. Demand determinants forbusiness travel are the level ofinternational trade activity, corporate

protability and available substitutessuch as video conferencing. Duringperiods of weak corporate protability,business travel may be restricted orclass of travel may be downgraded forshorter international trips.

Companies expanding overseas andbecoming more globalised inuencedemand for air transport. Business travelforms a signicant proportion of industryrevenue given the premium rates paid bybusiness travellers (e.g. business and rstclass). As more companies globalise,demand for international business travelincreases. The anticipated widespreaduse of video conferencing in the future

will likely offset this demand for

international air travel.The attraction of the destination cantake many different forms and includesprice parity advantages such as in theAsian nations, business conventioncentres and the growth of the visitingfriends and relatives market due to themulticultural composition of theAustralian population. Rapid economicgrowth in China and other Asiancountries has resulted in an increase indemand for holidaying in Australia.

The connectivity of airline network

routes constantly change, inuenced bysupply and demand factors. Carriers willonly operate a route when there issufcient market due to the high level ofxed costs. Demand is likely to increase ifcompanies stick to the scheduled routesoffered and provide point-to-pointprimary destinations that will enablepassengers to reach their destination inthe shortest possible timeframe.

Seasonality is another factor thatinuences demand in this industry. Due

to seasonality factors, the rst and fourthquarters of the year are generally weakerthan the second and third quarters.Favourable summer weather conditions,and extended school and work holidaysboost the second and third quarters.

FreightDemand determinants of airfreightinclude the level of high-value, time-sensitive imports and exports, airfreightrates that are inuenced by operatingcosts and capacity, and innovation inshipping and packaging technology.

Goods with high-value and time-sensitive products are more likely to be

Podcts & Sevicescontined

recent times, growth rates in air cargovolume have softened in the latter halfof the past ve-year period. During2008-09, freight and mail volumesdecreased 9.0% in total. High fuel pricesand the dip in 2008-09 translated intosubdued growth of 2.8% per annum forthis segment over the past ve years.

This segment provides airtransportation of cargo on bothfreighter and passenger aircraft overregular routes and regular schedules.Firms in this service segment alsooperate ights even if partially loadedand includes the transportation of mailfor the national postal system.


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Podcts & Makets

Majo Makets The International Airlines industry sellsits service to both Australian and foreigntravellers. Australians and foreignerstravel to and from Australia for variousreasons, including holidaying, visitingfriends and family, business, school andwork. Over the past ve years, thebusiness segment experienced the largestdrop in numbers, mainly due to theglobal economic downturn and cuts inmany business budgets. Recessionaryconditions in the United States, the

United Kingdom and other countries

caused fewer business travellers comingto Australia. Likewise, businesses inAustralia tightened spending onunnecessary expenditure such as travel.As such, the business market declinedover the past ve years.

The business segment includes travelwhere airlines may charge a premium fortickets (business class). This is becausepayment is usually under the travellerscompany account. In addition,

DemandDeteminantscontined

shipped using air transport rather thanother means such as shipping or roadtransport. It is more protable to shipproducts via air, especially if the goodshave a high value-to-weight ratio.Electronics and high-end products areusually transported by air to reach themarket in a fast and efcient mannerdue to the rapid change in technology.Time to market is important, whichcould inuence the demand for theseproducts. Many carriers are also

certied to handle dangerous goods suchas explosives, gases, ammable liquids,toxic and infectious substances, andradioactive materials.

Demand deterrentsOne major concern for passengers isterrorism. After the September 11 attacksin the United States, demand for air

travel in the same country droppeddramatically. It took a few years forpassengers to regain condence in safetyin the air; terrorist attacks on planes

therefore put signicant downwardpressure on demand for ying.An increase in jet fuel price will

also lead to lower demand for airtransport. Similarly, the spread ofdiseases such as avian inuenza orthe swine u will lower the amount oftrade and reduce the demand forairfreight services.

The popularity of travelsubstitutes, such as videoconferencing, affectsdemand for business travel

Major market segmentation (2011-12)

Total $14.9bn

42.2%Holidaying tourists

33.3%Consumers visiting friends

20.7%Business travellers

3.8%Freight forwarders



16/37


Podcts & Makets

Intenational Tade There is no data available on imports and

exports for this industry. However,IBISWorld expects that the industrygenerates both service exports andimports. Moreover, many companiesprovide contract or ad hoc services toforeign airlines when they are in theAustralia. In effect, they are providing aservice export. Service exports relate toAustralian carriers carrying non-residentpassengers to and from the country.Service imports relate to foreign carrierscarrying Australian residents to and fromAustralia. It is, however, extremely

difcult to obtain industry level importand export data. Trade analysis in theInternational Airlines industry is difcultdue to the paucity of data and thecomplexity of the industry.

IBISWorld estimates that importcompetition in the industry

intensied over the past ve years.With developments in the airlinesindustries in developing countriesand countries from the Middle East,international air transport serviceoperator numbers have grown. This

increased the number of ightsoffered by those carriers in Australia,which increased industry competition.In the absence of imports andexports, domestic demand equalsindustry revenue, which in 2011-12 isestimated to be $14.9 billion.

Majo Maketscontined

sometimes bookings are in short noticeand consequently attract a higher price.Therefore, the unit value of sales perperson is higher for business customers.

The emergence of discount carrierssuch as Jetstar, together with intenseprice-based competition, made air travelmore affordable. The increased

affordability promoted growth in thepassenger market segment over the pastve years.

Freight forwarders make the smallestmarket segment. Freight volumes havedeclined signicantly since 2008, leadingto a fall in the percentage of revenuereceived for freight services.

The use of foreign carriersby Australian residents hasbeen on the rise over thepast ve years


17/37


Podcts & Makets


TAS0.0

wA0.0

QLD12.7

VIC12.7

NSw68.2

NT0.0

SA3.4

ACT3.0

Entepises (%)

Cold Zone (


18/37


Podcts & Makets

bsiness Locations A signicant proportion of industryenterprises are located in New SouthWales, namely Sydney. Sydney accountsfor about 46% of seat availability and45% of all passengers on all internationalights, which makes it the main hub ofinternational travel. Sydneys KingsfordSmith airport is one of the busiestpassenger airports in the Asia-Pacicregion, with passenger numberscomparable to Singapores Changi andTokyos Narita airports. Over the past ve

years, competition from other airports,including Brisbane and Melbourne,has resulted in a loss of the shareof establishments.

Melbourne is the second busiestairport, with 13% of industry enterprises,19% of available seats and 20% ofpassenger trafc. This is partly attributedto Melbourne having one of the mostcompetitive landing fees structurearound Australia. Internationalpassenger volumes from MelbourneAirport have been increasing since

2004-05. It will likely continue toincrease in the next ve years as TigerAirways chose Melbourne as itsAustralian hub. The entry of AirAsia X inMarch 2008 also provided a boost toMelbournes passenger trafc.

Brisbane is estimated to be home to

13% of industry enterprises, which is upfrom 10% in 2005-06. Brisbane Airportaccounts for 17% of available seats and17% of passenger trafc. The airportcaters for the majority of incoming ightsfrom the Pacic Islands. OtherQueensland airports with international

scheduled air transport include the GoldCoast, Cairns and Townsville, whichplaces Queenslands share of passengerarrivals and departures ahead of Victoria,at 21%. Queensland offers some of themost visited holiday destinations, whichmakes it popular among foreign tourists.

Percentage

80

0

20

40

60

W

A

ACT

NS

W

N

T

QLD S

A

TAS

V

IC

Enterprises

Population

Distribution of enterprises vs. population



19/37


Cost Stctebenchmaks

The International Airlines industry issimilarly protable compared with theDomestic Airlines industry; prot is anestimated 3.0% of revenue. A number ofindustry trends adversely affectedearnings as a proportion of revenue.These detrimental trends includeincreasing oil prices, the introduction oflow-cost air carriers (who compete solelyand aggressively on price) and the

increase in capital costs across the globeas credit markets tightened. Because theindustry is in the mature stage of its lifecycle, industry prot will be stable andconsolidation of enterprises will becomeincreasingly common. More recently,however, prot was lower due to the higheffect of volatile oil prices on airlineoperations, with margins dropping to aslow as 1.0% in 2008-09.

Ke Sccess Factos Ability to manage risk eectivelyA successful fuel hedging strategy isimperative in the control of the biggestand most volatile cost to the industry andkey to the management of the nancialstability of operators.

Optimum capacity utilisationOperators need the ability to matchaircraft with routes for better utilisation.

Ability to accommodateenvironmental requirementsIt is essential for rms to accommodateenvironmental requirements, as thegeneral community increasingly demandsmore environmentally friendly aircraft.

Eective cost controlsGood cost control systems to manageyields better and increase earnings.

Ability to expand and curtail operationsrapidly in line with market demandHaving exible capacity to meet troughsand peaks in demand is important.

Ability to pass on cost increases

Operating costs in this industry arehigh. Transferring cost increases to theclient can help rms maintain theirprot margin.

Well-developed internal processesReservation systems that provide goodaccess to origins and destinationsare benecial.

Access to the latest available and mostefcient technology and techniques

The use of up-to-date technology such asthe internet and loading facilities willhelp improve efciency in this industry.

Maket ShaeConcentation

The International Airlines industry hasmedium level of concentration, with thetop four players accounting for anestimated 47.6% of industry revenue.Qantas is the largest company in theindustry and it holds 25.6% marketshare. Other major players are VirginBlue and foreign enterprises includingSingapore Airlines and Emirates. Thereare a number of smaller airlinesoperating in certain regions of Australiaonly, operating scheduled ights to

Pacic Islands or other surroundingcountries in smaller aircraft.The level of industry concentration

fell over the past ve years. This

indicates a growing level ofcompetition in the industry and amature market. The InternationalAirlines industry is experiencing risingcompetition from low-cost airlines,specically new entrants like TigerAirways. These companiesoutperformed the larger and moreexpensive airlines over the past veyears, particularly during the economicdownturn. During the downturn,Qantas and Singapore Airlines

experienced the largest drops inrevenue, while Jetstar and Virgin Blueexpanded their share of the market(despite weak demand conditions).

Competitive LandscapeMaket Shae Concentation | Ke Sccess Factos | Cost Stcte benchmaks

basis o Competition | baies to Ent | Indst Gloalisation

Level

Cocetratio i thisidustry is Medim

IBISWorld ideties250 Key SuccessFactors or abusiess. The mostimportat or thisidustry are:


20/37


Competitive Landscape

Cost Stctebenchmakscontined

Fluctuating uel costsA major expense in this industry ispurchases, which include the acquisitionof materials and commodities such asfuel. Because these costs are relativelylarge, this industry is vulnerable touctuations in the prices of materials andsupplies. Purchases account for 47.0% ofindustry revenue. This is higher than43.1% in 2005-06 and lower than 49.3%in 2008-09. The main reason for suchvolatile costs is the uctuating price of

fuel. Aviation fuel is one of the mostsignicant expenses for an airline (withinthe purchases segment), often accountingfor about 20% to 30% of all operatingexpenses for rms in this industry.

Fuel prices increased dramatically inlate 2007 and the rst half of 2008. Onaverage, the world price of crude oil grewat 26.2% over the ve years through2007-08. Oil prices then plummeted.However, many airlines had hedged fuelcontracts, with prices set much highercompared with the price of oil during

2008-09. Some hedge contracts last upto 18 months and were still effective in

2009-10. Since 2008-09, rising crude oilprices put increasing upward pressure onpurchase costs.

Wages or skilled labourWages are another major expense item,accounting for an estimated 12.2% ofrevenue. Wage levels differ from countryto country, and Australian wages are notexcessive, given cost of livingcomparisons with other countries. Wagesas a proportion of revenue fell gradually

over the past ve years, as higher costsand protability pressures (e.g. insurancepremiums and fuel expenses) causedmany operators to reduce labour costs inconjunction with increased productivity.

Generally, a crew consists of a pilot,co-pilot, ight engineer (depending uponthe type and age of the aircraft) and ightattendants. Crew and other employeetravel expenses reect the cost of airtransportation, hotels andreimbursements to cockpit and cabincrew members incurred when crews

operate away from home. The averagewage is estimated at $113,249 per

Secto vs. Indst Costs

Poft

wages

Pchases

Depeciation

utilities

rent

Othe

Average costs of

all industries in

sector (2011-12)

Indst costs

(2011-12)

0

20

40

60

Percentage

ofrevenue

80

100

9.7

31.0

4.13.4

7.1

27.8

17.0

3.0

47.9

6.12.1

7.7

21.0

12.2



21/37



basis o Competition The International Airlines industry ishighly competitive, and competition isgrowing. There are two distinctive factors

in competition: price and quality ofservice. These tend to be two separatefocal points of airlines. Companies willeither focus on price competitiveness orimprove quality to attract the higher-endconsumer. This does not mean they mustbe mutually exclusive, but they tend tobe. This trend has been highlighted bythe strong emergence of lower-costairlines over the past decade. Jetstar,Virgin Blue and Tiger Airways are threeof the most successful lower-cost airlinesin the Australian market, all threeoffering sub-par quality of service basedon lower prices.

Quality of service includes the types of

services included in the airfare, such asmeals, luggage and entertainment. Thesecompanies tend to charge extra for these

items, meaning that customers get lessoptions if they purchase lower fares.Cheap fares and less service has been apopular trend among the Australianpublic, with the success of thesecompanies evident in expandingmarket share.

Certain groups of customers stillprefer to pay more to enjoy a betterquality of service. These customers tendto be business travellers and otherpeople who travel based on need ratherthan want. Factors that also contributeto competitiveness of companiesfocusing on the non-price sensitivecustomers include frequency of service,

Cost Stctebenchmakscontined

annum, per person, which is reective ofthe high skills level required to work inthe industry.

Lease or ownLarge commercial airlines purchasepassenger aircraft. However, charteroperators lease rather than purchaseaircraft due to their small size and thehigh cost of aircraft. Most of these leaseagreements give the lessee the option topurchase at the end of the lease, enabling

the lessee to depreciate the aircraft.Therefore, lease agreements do notsignicantly affect industry depreciation.Aircraft leasing costs account for anestimated 6.0% of operating revenue.This has declined slightly over that pastve years, mainly due to more airlineschoosing to purchase aircraft as opposedto leasing.

With more companies owning theirown aircraft, maintenance increasedslightly as a percentage of revenue overthe past ve years. The depreciation of

aircraft, aircraft parts, loading andunloading equipment, communicationequipment, ofce equipment, technologyand software accounts for an estimated7.7% of operating revenue. Depreciationhas become a larger share of costs for the

industry, with an increasing number ofaircraft purchases and companiesinvesting more in newer planes, such asthe Airbus A380.

Other expensesOther costs include operating leases,utilities, interest, insurance, selling andadministrative, landing fees,advertising and similar items. The costof rent and utilities is relativelyconsistent as a percentage of revenue.

The growing use of electronic ticketdistribution systems provides theindustry with an opportunity to lowerits distribution and administrativecosts. However, the continuous increasein pricing transparency resulting frominternet use enabled cost-consciouscustomers to obtain more easily thelowest fare on any given route, thusdiminishing the impact of pricediscrimination strategies to increaserevenue. Advertising is a major tool forattracting customers among major

airlines. While these are multibillion-dollar companies and advertising doesnot account for a large share ofrevenue, advertising is an ongoing costthat is expected to increase over time ascompetition intensies.

Level & TendCompetitio ithis idustry isHigh ad the tredis Inceasing


22/37



baies to Ent IBISWorld rates the InternationalAirlines industry as having high barriersto entry. Costs to purchase aircraft,specialist machinery, hangar and otheraireld space, skilled labour and tosatisfy stringent safety requirements arevery high. This qualies the industry asone of the hardest to get into in Australia,although conditions have loosened in the

past few years. This is mainly due to areduction in industry regulation, namelythe argument against foreign ownershipin Australia.

The Federal Government has a 49%foreign ownership cap imposed onairlines to ensure they remain anAustralian-based carrier and enjoy fullbenets of bilateral agreements.However, this restriction has been liftedfrom only 30% a few years ago (forQantas, the largest carrier), which

indicates the Governments intention toliberalise the industry more.Furthermore, the Government hasallowed 100% foreign-owned companiesto begin operations to and from Australiain Australian hubs, which is anothermove towards free market conditions.

Airline agreements involving landingrights can determine the number ofaircraft designated to operate on eachroute and therefore act as a barrier to theentry of non-designated airlines. Theseagreements also set capacity limits foreach country and impose a volume quotaon international airline services on a

country-by-country basis. Airlines tend touse these quotas as an incentive tomaximise benets by aiming for thehigher end of the market, reducing thenumber of discount and economy airfaresoffered and therefore offering less varietyin fares and services than would occur ina more competitive environment.

A major constraint in Australia is

insufcient airport capacity,particularly in runways, terminals andapron parking for aircraft. This isparticularly the case with Kingsford-Smith Airport in Sydney, where nearlyhalf of all international visitors toAustralia arrive and depart. Inaddition, Sydney is the gateway for allfreight clearance, whether it bequarantine or customs-related.Increased domestic jet ights andsmaller aircraft using the two runways,and the nightly curfew operating atSydney airport add to the congestionfaced by international ights.

basis o Competitioncontined

airport lounges, route coverage andfrequent ier programs. For this reason,the largest airlines usually have thehighest competitive advantage forbusiness travellers, as they have thelargest route coverage and offer mostsupplementary services.

Industry competition is in partcontrolled by the number of carriers,despite the different types of servicesthey may offer. For instance, a smallernumber of carriers will mean more route

coverage by each, higher frequency of

ights, and more market power. Overthe past ve years, the number ofparticipants in the International Airlinesindustry has grown, with theintroduction of Tiger Airways andAirAsia X in 2007. These new companiesoffer cheap ights to and from Asia, andhave increased the level of competitionin the industry. Additionally, Virgin Blueintroduced V Australia in 2008, puttingmore pressure on existing companies tolower prices or increase the quality of

services offered.

baiesto ent checklist Level

Competitio High

Cocetratio Medium

Lie cycle stage Mature

Capital itesity High

Techology chage High

Regulatio ad policy Heavy

Idustry assistace Low


Level & Tend

Barriers to Etryi this idustryare High adDeceasing


23/37



IndstGloalisation

IBISWorld rates the industry as having ahigh level of globalisation and it isincreasing. Since the 1980s, air servicesagreements were increasingly liberaliseddue to higher demands for internationalair services. Many passenger airlineoperators in this industry have branchofces setup outside their domiciledcountry. Many airlines also act as travelconsultants, providing various traveloptions through their own or partnerairlines. Many airlines form

partnerships such as SkyTeam, StarAlliance and Oneworld global alliance totap into additional routes throughcode-sharing agreements. The numberof code-sharing agreements increasedconsiderably over the past 10 years, asglobal competition intensied.

Foreign ownership is a hot topic inAustralia, and an important indicatorof globalisation in the industry. As it

stands, the Federal Government allowsa maximum of 49% foreign investmentin local companies such as Qantas andVirgin Blue. Meanwhile, 100% foreign-owned enterprises can operate ightsto and from Australia. Qantas ispushing for a removal of the 49% cap,as it is looking for investmentopportunities from abroad. The capwas set to 35% until 2008, when theFederal Government reduced therestrictions. It is likely that further

liberalisation will follow in the nearfuture as less regulation frees new andexisting carriers to improve theirnetworks, create new business modelsand pursue different strategies. TheGovernment is likely to realise theefciency benets of increasingglobalisation locally, as code-sharingagreements demonstrated over thepast decade.

Level & Tend

Globalisatio ithis idustry isMedim ad thetred is Inceasing


24/37


Plae Peomance The Qantas Group provides airlineservices through an extensive domestic

and international network includingthose own by Qantaslink, its regionalnetwork operator. The group also offersservices across a network covered bycode-share partners in Australia, Asiaand the Pacic, the Americas, Europe andAfrica. Qantas, founded in theQueensland outback in 1920, wasoriginally registered as the Queenslandand Northern Territory Aerial ServicesLimited (QANTAS).

Qantas Groups ying businessesoperates under two major brands: Qantas

and Jetstar. Qantas also includes thegroup of smaller regional carriers underQantaslink. Qantas Group operates in theInternational Airlines industry throughthe international air transportation ofpassengers and freight by Qantas andJetstar. Jetstar is the Qantas Groupslow-cost airline, with its Australianoperations rst commencing in 2004.Qantas is the founding member ofOneworld Alliance, which provides thecompany access to hundreds of

destinations and airport lounges around

the world.The Qantas Group has increasingly

placed greater focus on its low-costairline Jetstar. The company is shiftingfocus to lower costs and respond tocustomer demand for cheap air travel.The move is also in response to strongcompetition from foreign internationalairlines that operate with lower costs.Supporting the strategy to lower costs isQantas launch of a new airline based inAsia. A new subsidiary in Asia is expectedto reduce Qantas costs due to cheaperlabour sourced in the region. However,the shift to Asia sparked erce industrial

action from Qantas employees, whichculminated in a grounding of the Qantaseet. Fair Work Australia intervened toterminate the industrial action and getAustralian passengers back in the air. Theintervention is expected to create a morestable future for Qantas with reducedthreat of industrial action.

In December 2009, the Governmentallowed an increase in foreign-ownershipof Qantas from 35% total foreign share,to 49% total foreign share. The increased

allowance for foreign ownership is

Majo CompaniesQantas Aias Limited | Singapoe Ailines Ltd

Vigin ble Holdings Limited | Othe

Majo plaes(Market share)

63.0%Othe

Qantas Aias Limited 23.4%

Singapoe Ailines Ltd 6.8%

Vigin ble HoldingsLimited 6.8%


Qantas AiasLimitedMarket share: 23.4%

Qantas Gop (intenational opeations) fnancial peomance*

yearevene

($ millio) (% chage)EbIT

($ millio) (% chage)

2005-06 3,515.5 n/C 80.1 n/C

2006-07 3,814.7 8.5 136.8 70.8

2007-08 3,740.8 -1.9 184.2 34.6

2008-09 3,458.7 -7.5 -224.4 n/C

2009-10 3,093.7 -10.6 -193.5 -13.8

2010-11 3,271.0 5.7 -200.0 3.4

*EstimateSOURCE: IBISWORLD


25/37


Majo Companies

Plae Peomancecontined

expected to improve Qantas capitalgeneration. The company also expandedcode-share agreements with Etihad andChina Eastern in an attempt to secure astronger international standing duringthe global economic downturn. In April2010, the company cancelled numerousights to Europe over a period of nearly aweek due to the volcano eruption inIceland. In May 2010, Qantas andTourism Australia signed a $44 millionpartnership to market Australia

internationally as a tourist destination.Numerous faults and maintenanceconcerns over the past ve years marredQantas reputation. A signicant incidentwas the engine re on the A380 ightfrom Singapore to Sydney, which saw thecompany ground all of its A380 planesfor 23 days. The problems stemmed fromthe Rolls-Royce engines tted to theA380s. The engine problems had adetrimental effect on Qantas reputationand consequently protability.

Financial perormanceThe Qantas Groups industry revenuedeclined an estimated 1.4% per annumover the ve years through 2010-11.Operations from international yingrepresent approximately one-fth ofcompany revenue and is steadilydeclining. The decline indicates thatstrong competition in the InternationalAirlines industry created a greater focuson domestic operations. At the sametime, Jetstar outperformed the

company as a whole, and Jetstar mainly

operates domestically.The Qantas Groups international

business is its weakest. The QantasGroups industry-related protdeclined drastically, suffering lossesin 2010-11. The company plans torestore competitiveness byestablishing a new premium airlinebased in Singapore. The new platformis expected to drive company growthin Asia and bypass Australiasgeographical isolation. The strategy

will also lower Qantas labour costs.Qantas international ight revenuehad already started to decline before theglobal downturn, illustrating thebusinesses anti-competitiveness.Demand for both passenger and freighttransport dropped further during theeconomic downturn in 2008-09. Themost signicant decline was in the sale ofbusiness-class tickets. The Qantas Groupis estimated to have lost market share inthe International Airlines industry overthe past ve years. Competition from

foreign carriers resulted in fewertravellers choosing Qantas to y overseasor to Australia. The change is due tostronger competition from VirginAustralia, foreign airlines and relativelynew airlines like Tiger Airways.

International ights by Jetstar areexpected to account for 15.3% ofindustry-wide passenger numbers in2009-10. The company began to yinternationally in 2005. Jetstarexperienced phenomenal growth in

numbers over the years due to its low-

Qantas Gop fnancial peomance

yearevene($ billio) (% chage)

EbIT($ millio) (% chage)

2005-06 13.06 8.0 726 n/C

2006-07 14.53 11.3 976 34.4

2007-08 15.63 7.6 1,318 35.0

2008-09 14.55 -6.9 136 -89.7

2009-10 13.77 -5.4 468 244.1

2010-11 14.89 8.1 644 37.6

SOURCE: AnnUAL REPORT AnD IBISWORLD


26/37


Majo Companies

Plae Peomance Singapore Airlines is Singapores nationalairline and operates its hub atSingapores Changi Airport. The airline ishighly prominent in the South-East Asianregion and is considered a major playerin the Europe-Oceania route. The airline

began in 1947 as Malayan AirwaysLimited, ying from Singapore to KualaLumpur. Following several namechanges, the airline as it was knownceased operating in 1972 followingpolitical disagreements betweenSingapore and Malaysia, resulting in thecreation of two separate entities,Singapore Airlines and MalaysianAirlines Systems.

Singapore Airlines experienced stronggrowth during the 1970s as it added to itslist of destinations and eet of aircraft,

ying to India and other destinations inthe subcontinent. In the 1980s, theairline commenced ying to the UnitedStates, Canada and Europeandestinations. Continued expansion of theairlines eet saw it grow protablyduring the 1990s and it became one ofthe rst airlines to order the new BoeingA380 in 2000, placing an order for 19 ofthe aircraft in that year.

Singapore Airlines has made repeatedand continued attempts to gain better

access to the Australian market, withforeign ownership regulations andairspace agreements preventing the

airline from expanding the services itoffers into the Australian industry.Qantas has been its main opponent in theAustralian market, ercely defending itsmarket territory. Since the purchase ofthe new A380 by both companies,

competition has intensied. In 2009,Singapore introduced the aircraft to y toand from Melbourne, which makesSingapore Airlines A380 ights availablefrom all the major cities in Australia.

Financial perormanceSingapore Airlines industry salesincreased at an annualised rate of 1.2%over the ve years through March2010-11. This is a slower rate of growthcompared with the industry as a whole.The reason for the slow growth lies in

very low takings during 2009-10, as thecompany cut capacity and lowered pricessubstantially. Singapore Airlines lost alarge chunk of market share in that year.The large drop in business travel affectedrevenue substantially. In addition, theSouth West Pacic region revenue(including ights to and from Australianand New Zealand) accounted for 9.9% ofsales in 2009-10, which was down from10.9% the year prior. As such, thecompany directed its focus towards more

protable routes. Singapore Airlines lostmarket share over the past ve yearsfrom an estimated 8.2% in 2006-07.


cost airline status, while lower pricesprevented it from developing revenue atthe same rate. Because of Jetstars

popularity, the Qantas segmentsinternational ights lost passenger shareover the past ve years.

Singapoe Ailines fnancial peomance*

yea**revene($ billio) (% chage)

EbIT($ millio) (% chage) Emploees (% chage)

2005-06 10.66 9.9 969.7 -8.8 28,558 0.0

2006-07 12.12 13.7 1,098.6 13.3 29,125 2.0

2007-08 12.48 3.0 1,659.9 51.1 30,088 3.3

2008-09 14.31 14.7 808.5 -51.3 31,834 5.8

2009-10 10.51 -26.6 52.3 -93.5 33,222 4.4

*SGD conveted to Astalian dollas sing eal aveage exchange ate **yea end Mach

SOURCE: AnnUAL REPORT

Singapoe AilinesLtdMarket share: 6.8%


27/37


Majo Companies

Plae Peomance Virgin Blue Holdings Limited is theparent company for Virgin Blue AirlinesGroup, which encompasses the followingairlines: Virgin Australia (formerly VirginBlue, V Australia and Pacic Blue) andPolynesian Blue. Virgin Blue startedoperations in Australia in 2000, offeringno-frills cheap air travel between capital

cities around Australia. The company hadsupport from federal, state and localgovernments, who provided incentivesfor Virgin Blue to service routes thatwould otherwise be subject to high-pricemonopoly. Virgin Blue participates in theindustry through its international ights.

Since oating on the security exchangein 2005, Virgin Blues immediate focuswas to win a greater share of the lucrativecorporate market following theintroduction of revamped passenger

lounges, a new frequent-yer program(Velocity) and internet check-ins to lurebusiness travellers. Virgin unveiledradically transformed airport lounges inMay 2006. The new lounges offered anenhanced range of business facilities andservices. Virgin Blues focus on thecorporate market became necessary

because the company underestimated thenumber of leisure travellers thatmigrated to Jetstar.

Virgin Blue was involved in trying tosecure code sharing and joint ventureagreements with foreign airlines toincrease its position on internationalights to and from Australia. Alliancesare part of Virgin Blues strategy to buildan international network thatcomplements their domestic business.Air New Zealand strengthened ties with


Vigin ble HoldingsLimitedMarket share: 6.8%

Vigin ble Holdings (intenational flights) fnancial peomance

yearevene


($ millio)

2005-06 182.3 n/C n/C

2006-07 216.9 19.0 n/C

2007-08 258.9 19.4 n/C

2008-09 523.3 102.1 -69.0

2009-10 764.0 46.0 -25.2

2010-11 953.8 24.8 22.4


Singapoe Ailines (Astalia and Ne Zealand) fnancial peomance*

yearevene


($ millio) (% chage)

2005-06 891.5 10.2 101.4 n/C

2006-07 900.4 1.0 102.1 0.7

2007-08 1,068.0 18.6 177.6 73.9

2008-09 1,281.3 20.0 90.5 -49.0

2009-10 805.7 -37.1 5.0 -94.5

2010-11 946.9 17.5 103.6 1,972.0

*EstimateSOURCE: AnnUAL REPORT AnD IBISWORLD


28/37


Majo Companies


Virgin Blue in 2010-11, with Air NewZealand purchasing 14.9% of Virgin Blue.The newly cemented alliance solidiesplans to coordinate prices, schedules,capacity and routes. Virgin Australia andSingapore Airlines also began interliningights in 2011. The partners also offeredaccess to each airlines lounges.

Virgin Blue introduced V Australiaduring 2009. V Australia was aninternational airline with direct servicesfrom Australia to Los Angeles. In March

2007, Virgin Blue conrmed itsintentions to start V Australia, with thesigning of an order for six Boeing 777-300ER aircraft. V Australia launcheddirect services between Sydney and LosAngeles on 27 February 2009, with anarray of ights from Australia to theUnited States since. In December 2009,V Australia began services to South Africaand Thailand. V Australia now forms partof the Virgin Australia brand.

Financial perormance

Virgin Blue is a relatively new majorplayer. The companys launch of VAustralia in 2009 doubled the companysinternational passenger trafc. As thecompany expanded its internationaloperations, its international revenuerapidly expanded at an estimated 39.2%per annum over the ve years through2010-11. International passengersaccounted for approximately 39.9% ofcompany trafc in 2010-11 up from

10.0% in 2005-06. Internationalpassenger transport became a moreimportant activity for Virgin Blue overthe past ve years.

The companys focus is affordablepassenger transport, with tickets salesrepresenting an overwhelming 90.3% ofrevenue. The rest is from freight,holiday bookings, frequent-yerprograms, and fees and charges.Revenue from other sources grew overthe past ve years. The rise in revenue

from other sources was due to extracharges introduced by the company andto success in other programs.

The number of internationalpassengers ying Virgin Blue during2010-11 accounted for 9.5% of industry-wide totals, up from 4.5% in 2005-06.However, the average price of theservices is lower compared with Qantasights, which means that Virgin Blueaccounts for less revenue share in theindustry than it does in passengernumbers. IBISWorld estimates that

Virgin Blue rapidly gained market shareover the past ve years up from 1.8% in2005-06. Much of the growth occurredduring the introduction of V Australia.

The slowdown in passenger numbergrowth due to the global downturn, andrapid increases in fuel prices in the fewyears prior, negatively affected thecompanys industry protability.Additional pressure on earnings camefrom costs associated with establishing

Vigin ble Holdings Limited fnancial peomance



2005-06 1.82 9.3 132.5 n/C

2006-07 2.17 19.2 324.3 6.5

2007-08 2.33 7.4 168.0 -48.2

2008-09 2.64 13.3 -162.3 n/C

2009-10 2.98 12.9 90.5 n/C

2010-11 3.27 9.7 -46.6 n/C



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Majo Companies


V Australia and its continual expansion.Since then, the bottom line has improveddue to cost cuts and overcapacityreduction. Boeings decision to defer the

production of 777s aircraft used by VAustralia allowed the new airline toreadjust capacity on the new routes tomatch the climate of falling demand.

Emirates GroupEstimated market share: 6.2%Emirates, launched in October 1985, isthe main subsidiary of the EmiratesGroup and is the international carrier of

the United Arab Emirates. Dubai-basedEmirates is a privately owned airline withthe royal family of Dubai the majorshareholder. It has an international cargosegment and a travel management andleisure segment. Emirates goal is to beable to y all its eet from anydestination on one side of the world toany destination on the other side of theworld with just one stop in Dubai.Emirates is responsible for more than60% of ight movements in and out ofDubai International Airport.

Emirates has been slowly buildingcapacity through Australia since its rstight into Australia in 1996. The airlinedoes not compete directly on price on theinternational market but on productdifferentiation. The airlines passengershave the ability to y one-stop to mostmajor European cities, rather thanhaving to stop in Asia and then transitthrough Heathrow.

Group sales increased at an annualisedrate of 15.8% over the ve years through

2009-10. Emirates grew at a rapid ratebecause of new route introductions,attractive packages, loyalty programs andcompetitive behaviour in new markets

(such as that in Australia in the early2000s). The Far East and Australasiaregion accounted for 28.1% of companysales in 2009-10, up from 27.8% in 2004-05. The expansion was a result of

increased demand for travellers in theregion and pricing in the upper ranks. Asa result, market share increased from3.7% in 2005-06 to 6.2% in 2010-11.

Air New ZealandEstimated market share: 3.4%Air New Zealand commenced operationsin April 1940 with the incorporation ofTasman Empire Airways Limited (TEAL).It began with trans-Tasman servicesusing ying boats. The company steadilyexpanded the size and scope of its

operations with the introduction of itsinternational network. In October 1953,TEAL became jointly owned by the NewZealand and Australian governments,and in April 1961, the New ZealandGovernment assumed full ownership. In1999, Air New Zealand became a fullmember of the Star Alliance Group.

Air New Zealands involvement in theAustralian aviation market is signicant,driven by its purchase of 50% of AnsettAustralia in 1996 and increasing that

stake to 100% ownership in February2000. Ansett was effectively operating ina duopoly environment for the signicantmajority of its existence. With strong

Othe Companies

Emiates Gop fnancial peomance*

yea**revene($ billio) (% chage)

EbIT($ millio) (% chage) Emploees (% chage)

2005-06 8.77 24.8 1,064.2 1.0 17,296 9.1

2006-07 11.09 26.5 1,294.9 21.7 20,273 17.2

2007-08 13.17 18.8 1,475.7 14.0 23,650 16.7

2008-09 15.98 21.3 967.9 -34.4 28,037 18.52009-10 14.62 -8.5 1,328.1 37.2 28,686 2.3

*Conveted to Astalian dollas sing eal aveage exchange ate **yea end MachSOURCE: AnnUAL REPORT


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Majo Companies

Othe Companiescontined

brand recognition across the Oceaniaregion, the airline was an Australian icon.Ansett entered into voluntaryadministration on 13 September 2001, asthe company struggled to adapt itsoperational structure in an increasinglylow-cost environment. In the absence ofany buyers for the airline, the companyceased operating on 4 March 2002.

Air New Zealand strengthened tieswith Virgin Blue in 2010-11, with Air NewZealand purchasing 14.9% of Virgin Blue.

The newly cemented alliance solidiesplans to coordinate prices, schedules,capacity and routes.

Company sales increased at anannualised rate of 2.2% over the veyears through 2009-10. This was a slowerperformance than the industry as awhole. The Australia and Pacic Islands

region of destinations accounted forapproximately 14.0% of revenue. Thecompany experienced weak conditions in2009-10 because of a global downturn indemand for ying. Furthermore, Air NewZealand lowered international ticketsconsiderably during the rst half of theyear, as part of a price war in the globalindustry at the time.

As a percentage of industry revenue,Air New Zealand is estimated to haveheld 3.4% market share in 2010-11,

down from 3.9% in 2005-06. Thecompany remained protable duringthe global economic downturn, unlikeits counterparts in Europe and theUnited States. This is mainly due to aminor fall in demand in the region,compared with North Americaand Europe.

Ai Ne Zealand fnancial peomance*



2005-06 3.41 n/C 132.5 n/C

2006-07 3.73 9.4 253.0 90.9

2007-08 4.00 7.2 308.0 21.7

2008-09 3.76 -6.0 63.6 -79.4

2009-10 3.22 -14.4 120.4 89.3

*Conveted to Astalian dollas sing eal aveage exchange ateSOURCE: AnnUAL REPORT


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Capital Intensit The International Airlines industry has ahigh level of capital intensity.Approximately $1.58 worth of labour isrequired for each $1.00 spent on capitalinvestment. The industrys high capitalintensity owes to the large capitalinvestment required to operate an airline.Airplanes can be leased to ease capitalrequirements, although most airlinesprefer to own airplanes as assets. Inaddition, efcient communicationsequipment, newer aircraft and computer-

assisted booking, strong and exiblepacking equipment and route planningfacilities can reduce the need for non-ying and maintenance labour. Over thepast ve years, capital expenditure rosedue to a large number of new aircraftpurchases and upgrades of existingvehicles. As such, capital intensityincreased over this period.

However, many labour functions in theindustry, such as piloting, safetyrequirements and customer service, aredifcult to make less labour intensive.Wages are estimated to account for 12.2%

Opeating ConditionsCapital Intensit | Technolog & Sstems | revene Volatilit

reglation & Polic | Indst Assistance

Tools o the tade: Goth stategies o sccess


LabouIn

tensive

Capita

lIntensive

Change in Shae o the Econom

Ne Age Econom

receation, Pesonal Sevices,Health and Edcation. Firmsbeet rom persoal wealth sostable macroecoomic coditiosare imperative. Brad awareessad iche labour skills are key toproduct dieretiatio.

Taditional Sevice Econom

wholesale and retail. Reliato labour rather tha capitalto sell goods. Fuctios caotbe outsourced thereore rmsmust use ew techologyor improve sta traiig toicrease reveue growth.

Old Econom

Agiclte and Manacting.Traded goods ca be producedusig cheap labour abroad.To epad rms must mergeor acquire others to eploitecoomies o scale, or specialisei iche, high-value products.

Investment Econom

Inomation, Commnications,Mining, Finance and realEstate. To icrease reveuerms eed superior debtmaagemet, a stablemacroecoomic evirometad a soud ivestmet pla.

AicatManacting

Toism Petolem wholesaling

Non-SchedledAi and SpaceTanspot

Tavel Agenc SevicesIntenational Ailines

Capital intensity

1.0

0.0

0.2

0.4

0.6

0.8


Dotted line shows a high level of capital intensity

Capital units per labour unit

InternationalAirlines

Transport andStorage

Economy

Level

The level o capitalitesity is High


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Opeating Conditions

Technolog& Sstems

The International Airlines industry ishi-tech, even though most of itstechnologies are imported from theUnited States, Europe and major globalassociations such as the International Air

Transport Association (IATA) andInternational Civil Aviation Organization(ICAO). The elds of advancementsinclude the manufacturing of morefuel-efcient aircraft, online booking andcheck-in, self-serve kiosks at airports,e-ticketing and similar improvements.

Aircrat efciencyGiven the rising climate changeawareness among individuals, businessesand governments, airlines have turnedtheir focus onto reducing greenhouse gas

emissions. The most important tool forcombating this issue is the use of aircraftmanufacturing technology, which allowsfor more efcient fuel consumption.

Aircraft that are more efcient arealready in production, including theAirbus A380, which is the largestcommercial plane in the world. Largeraircraft available to airlines provideeconomies of scale and help alleviatecongestion at airports. The A380 cancarry 555 passengers in a three-class

conguration or up to 853 passengers ina single-class economy congurationand is sufcient to y from Chicago toSydney non-stop (a maximum range of15,000 kilometres).

However, Boeing is developing the 787Dreamliner, which it claims will be themost fuel-efcient aircraft made. It willdeliver the 787 into service in 2011. This isapproximately two years later thanoriginally anticipated. The 787-8Dreamliner will carry 210 to 250passengers on routes of 7,650 to 8,200nautical miles, while the 787-9 Dreamlinerwill carry 250 to 290 passengers on routesof 8,000 to 8,500 nautical miles. A third

787-3 Dreamliner will accommodate 290to 330 passengers. It will be optimised forroutes of 2,500 to 3,050 nautical miles.The 787 is designed to provide airlineswith more fuel efciency, with the airplaneusing 20% less fuel for comparable ights.Boeing has announced that as much as50% of the primary structure includingthe fuselage and wing on the 787 will bemade of composite materials. In addition,Boeing is considering incorporatinghealth-monitoring systems that will allow

the airplane to self-monitor and reportmaintenance requirements to ground-based computer systems.

Airline efciencyDevelopments in the operational efciencyof airlines have been plentiful over the pastve years, particularly in the eld ofadministration. This includes onlinebooking, payment, scheduling, check-inand other online self-service functions.The IATA accomplished the task of making

all major airlines paperless by issuing onlyelectronic ticketing by June 2008. Thismeans that costs related to paper andother administration were eliminated.Other technological advancements includeself-serve kiosks for check-in, bar-codedboarding passes and e-freight.

Technology also allowed for higherlevels of competition among airlines.Consumers expect advancedentertainment systems onboard a ight. Assuch, airlines have upgraded their systemsover the past ve years. Technologicaladvancements include the availability of awide range of entertainment for eachpassenger and internet access.

Capital Intensitcontined

of industry revenue. Moreover, long orquick turnaround trips (and certain typesof aircraft) require extra crewmembers toadhere to federal safety requirements.

The average wage in this industry is highat $113,249, because staff duties requirehigh skills (for pilots) and long hours,overtime and travel expenses.

Level

The level o

TechologyChage is High

Aircraft efciency will leadto fewer greenhouse gasemissions by airlines


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Opeating Conditions

reglation & Polic The framework under which Qantas andother airlines operate has a regulatorybasis dating back to the ChicagoConvention of 1944. At the convention,attendees agreed that every state hascomplete and exclusive sovereignty over

the airspace above its territory andterritorial waters, and scheduled airservices cannot be operated over, or into,the territory of a contracting state exceptwith the authorisation of that state. Theyalso agreed that each state is to complywith uniform standards when practical todo so. If not, deviation from standards isto be documented and communicated tofellow member states. The attendeesagreed that a non-scheduled ight hasthe right to y across the territory ofanother state and to make stops fornon-trafc purposes, and the ICAOwould be formed to supervise theprovisions of the convention.

The ICAO, with its assembly andcouncil arms, is geared to develop bettertechniques of navigation and othertechnical matters. Recently it hasinvolved itself in capacity controls andfare setting.

The IATA is an organisation ofinternational airlines. It involves itself inall aspects of airline operations, and mostnon-government discussions within theindustry take place under IATA auspices.In the past, airfare negotiations were anintegral function of IATA, but with theemergence of more non-IATA membersand increased market siz

Documents

I6401 International Airlines in Australia Industry Report