Geoff Dixon, CEO, Qantas addresses Asia Pacific Aviation Media Association

Mr Geoff Dixon, Chief Executive Officer of Qantas spoke yesterday to the Asia Pacific Aviation Media Association (APAMA) in Singapore. As his speech not only covers a lot of ground, but is also very interesting, we have decided to publish it in its entirety, with only slight modifications.

START - Speech by Geoff Dixon

Let me begin by saying I am honoured to address this association. I have a high regard for the role played by specialist aviation media in reporting on developments in our industry. 

This is only the second APAMA oration. Yet so much has happened to aviation since this assembly convened in June last year. Not long after that, we had the terrorist attack in Bali, then the war in Iraq and the terrible impact of SARS.

Many speeches have been given in this, the 100th anniversary year of the first flight. Very few have been messages of celebration. We cannot blame the speakers for that - the past year has been diabolical for airlines and anyone associated with travel and tourism. Indeed, the Director General of IATA called the combination of September 11, the world economic slowdown, the war in Iraq and SARS, the four Horsemen of the Apocalypse.

State of the industry

And no wonder - consider the toll taken by the events of the past two years. Famous airlines gone. Billions of dollars and hundreds of thousands of jobs lost. Billions more taxpayer dollars ploughed into propping up airlines. Security and other costs spiralling upwards.

In the wake of these developments, enormous challenges lie ahead for this industry. Not all of them can be attributed to the impact of terrorism, war and SARS. The underlying pressures for structural change are intensifying. They result from changing market circumstances and customer requirements as well as the success of low cost airlines. Many traditional network carriers have found it necessary to review their business models, find greater efficiencies and look at opportunities for consolidation.

Dealing with these pressures will require a willingness to lead and innovate - to shape the future, not just to follow along behind.

And I believe the airline industry is well placed to respond to these challenges. Here in this region, we have some of the best-equipped and managed airlines to be found anywhere.

Nowhere was this more evident than in our collective response to SARS. The virus was so devastating it led to the collapse of travel overnight. The public's confidence in aviation was severely shaken. In the past, many airlines would have hung on, losing money in markets which no longer existed. When the market did show signs of recovery, they would have flooded it with unsustainable capacity. This time around, the industry responded with good sense. Market offerings were kept strictly in line with market demand. As a consequence, there was an orderly return of capacity and a containment of losses.

Opportunities in Asia

As we know, it is not possible to depict a single view of Asia. This region is characterised by its exciting diversity. Landscapes, peoples, histories and cultures vary widely. There are great differences in the size, strength and development of regional economies.

For those of us engaged in aviation, there is similar diversity. It's not just the varying age, size, strength and form of the region's carriers. It's also the variations between regional governments in their approaches to public ownership and support of airlines, competition regulation, industrial relations, treatment of aircraft depreciation, the allocation of aviation security costs, and so on. All of these impact on the commercial environment, tilting the playing field in one direction or another.

However, of one thing we can be sure - aviation and tourism in the region has a very exciting future. Traffic growth in the Asia pacific is forecast to be 4.9 per cent in 2004 and 6.8 per cent in 2005 reflecting the strong prospects for travel and tourism. Asia pacific recorded the second highest traffic growth in the world during 1991 - 2001, with an annual average growth rate of 7.6 per cent. The region now accounts for close to 20 per cent of world tourism and the World Tourism Organisation expects this to climb to over 25 per cent by 2020.

For Qantas, whatever happens in Asia will vitally affect our interests. Our future is tied to this part of the world and we count ourselves extremely fortunate that it is. On any given day, the ten Asian countries that Qantas serves make up more than a quarter of the seats on offer across our entire international network.

In addition, we have important code share partnerships with many of the airlines based in the region. We have offices all around Asia and long haul cabin crew bases in Bangkok and Tokyo that employ many local staff.

The global strategic focus over the past few years has been on the Middle East, for obvious reasons. But the big economic story - the good news story, if you like - is right here in Asia.

In the past, Japan has been the region's dominant travel market and, obviously, will continue to be of major importance, particularly for outbound travel. But China is rapidly emerging.

Consider this:

* The World Tourism Organisation predicts that by 2020, China will be the world's fourth largest outbound source of tourists.

* China will be one of the most - if not the most - important market for the world's aircraft manufacturers into the future, with Chinese airlines reportedly set to buy more than 1,900 aircraft by 2020.

* Over the next decade, China is set to build a second international airport to service Beijing, after expanding the existing airport for the Olympic Games in 2008.

China is by no means the only growth story. We can see examples right around Asia Pacific - Australia and New Zealand included.

As Asia's economic transition continues there will be constant growth in international travel to and from Asia. I think growth in intra-Asian travel may be even more dramatic.

Changing Customer Requirements

Let me turn now to consider the changing requirements of customers. APAMA was formed with the explicit goal of keeping a demanding new generation of customers informed about aviation issues - on matters such as service, punctuality, security and price.

Meeting the information needs of this new, more complex generation of air travellers is no doubt a challenge for you. I can assure you it is even more challenging for anyone running an airline.

There is no "one size fits all" in this business. There is simply no typical customer. Sometimes, he or she is a corporate business traveller, looking for unsurpassed convenience and comfort, while travelling to many destinations within a short time. Sometimes it is a family, looking for a quick and direct getaway to a reliable holiday destination, at the right price. Or it may be a young backpacker with no time restrictions, who just wants to get to the next stop in the cheapest possible way.

Travel was once an expensive outlay and holiday travellers would select that special destination well in advance and with great deliberation. Now we know that the savvy traveller makes his or her decision much closer to the departure date. Factors as varied as global events, weather conditions, special attractions and the latest armchair travel book may influence the ultimate holiday decision. And, increasingly, the internet has become this person's travel agent.

Qantas wants to meet the needs of all of these travellers but cannot be confident of doing so with a single, traditional business model. Changing customer demands will continue to have dramatic effects on the way we operate. That is why we have decided to segment our flying businesses into four stand alone units - to give them a greater capacity to meet specific customer needs.

We are also on a concerted drive to lower our cost base. This includes tackling labour costs, and rethinking our distribution chain. And we are progressively simplifying and modernising our fleet.

Some of you may not know that Qantas invented Business Class back in 1979 and airlines around the world followed our example. We have recently spent $385 million reinventing International Business Class travel. We believe the new Business Class experience has once again set a new world standard of comfort in the air.

This is just part of a much broader investment in our product, service and fleet to make sure we are at the forefront of 21st Century service.

And all this is occurring against the backdrop of continually evolving aircraft technology that will offer new opportunities. The advent of new long range aircraft will also have implications for Singapore, and other regional hubs, with carriers gaining the option to fly non-stop to previously unreachable destinations. Just this month Singapore Airlines announced plans to operate non-stop flights from Singapore to Los Angeles and New York from next year.

For the international leisure market, last year Qantas established Australian Airlines, which specialises in carrying holiday makers to and from Asia. With this in mind, we carefully designed everything, from uniforms and timetables to meals and the recruitment of Asian language speakers, to fit the demands of this special market segment. Australian Airlines has now expanded into the predominantly outbound markets of Bali and Sabah. Only a fortnight ago, we announced our intention to launch a low cost airline in the Australian domestic market. This, I assure you, will be a very serious and well-prepared endeavour and I am confident that, unlike what has happened in other parts of the world, Qantas will be able to run successful low-cost and full-service models in the same market. 

While it may not yet be universally accepted in the Asia Pacific region that low cost point-to-point airlines are the way of the future, I do foresee a day when they will be a powerful force in this part of the world, particularly on shorter haul, international routes.

The population, geographic and income characteristics of the region are ideally suited to the development of low cost carriers. Asia has some of the largest - and fastest growing - urban concentrations in the world, with 130 cities having a population of more than 1 million. Greater urbanisation brings a greater tendency to travel by air. And more countries in the region are reaching the average income thresholds for international travel. China, the Philippines, Thailand and Indonesia are examples of countries that have only recently reached this threshold, and we can expect to see well above average aviation growth from these markets in the next few years.

What all this adds up to is a big opportunity for point to point travel.

Regulatory Change

There are powerful forces of globalisation at work in this industry. Aviation should be moving rapidly down a similar path to industries like vehicle manufacturing and telecommunications. Consolidation is necessary and inevitable. The stumbling block is outmoded regulatory frameworks.

Consider this: the regulatory framework in international aviation is almost sixty years old. It was hatched in a very different era. In the aftermath of World War II the system was based on bilateral agreements between nation states and built around the direct participation of governments in their national airlines.

That system is now outdated in many important respects, but two issues stand out. National governments, through their regulatory agencies, continue to constrain the consolidation of airlines which is necessary for them to achieve scale. And government restrictions limit foreign investment and therefore the ability of airlines to tap global funding sources.

Government ownership compounds the problem. It is quite astounding to look at the extent to which this remains a feature of the aviation industry. Of the world's top 30 airlines, 12 - that is 40 per cent - are partially government owned. In this region, 11 out of 17 airlines in the Association of Asia Pacific Airlines (AAPA) - 65% of the membership - retain some level of government ownership.

Contrary to popular belief, Qantas does not suggest that government ownership is always, or necessarily, a bad thing. Of course, it is not. It becomes a problem only when airlines have the normal commercial disciplines removed or when they become vehicles to satisfy governments' strategic, rather than commercial, aspirations. The effect of this is like any other subsidy - it makes it harder for other airlines to compete. It distorts the market. And ultimately the burden falls on the consumer.

I would add one further point: given these constraints and market distortions, the notion that the liberalisation of market access or "open skies" will alone deliver a level playing field, or a more consolidated industry, is fanciful. It won't.

There are signs that change is happening but I doubt that progress will be rapid. Talks have commenced between the EU and the US about dropping barriers between their two enormous aviation markets to form a Transatlantic Common Aviation Area. Only two weeks ago, Air France and KLM signed their merger agreement. The merged entity will serve 226 destinations, operate 540 aircraft and employ 106,000 people. This will be a mega airline. Compare it to Qantas with only 77 international destinations, 196 aircraft and 37,000 staff.

British Airways is now talking of reviving its plan for deeper cooperation with American Airlines. And discussions amongst other airlines are, no doubt, under way.

There are many hurdles to be jumped before serious rationalisation occurs across the Atlantic, but when it does we might expect to see new, very large and powerful airlines. They will use their scale to lower costs considerably, setting new benchmarks for the industry.

We may in future see attempts at cross border consolidation involving carriers from our immediate region. I do not claim to have any special insight here. But any such moves will have to accommodate, or overcome, significant barriers and restrictions.

As you will be aware, Qantas and Air New Zealand have failed in their bid to gain regulatory approval to enter into an equity based strategic alliance. This proposal is in the national interest of both countries. The attitudes of the competition regulators in this case are extremely disappointing, not to say, discouraging.

This case demonstrates that consolidation cannot happen without a regulatory mindset that is attuned to the big, long-term picture rather than the short-term impact on individual markets.

Here in the Asia Pacific we have been slower than Europe and North America to come to the view that regulatory change is needed. In fact, the Asia Pacific region is sometimes characterised as being too protectionist, too conservative and unadventurous. This is a little unfair. Governments and airlines must make their own assessments according to their particular circumstances.

And in fact, liberalisation is occurring in this region. Earlier this month, Thailand announced that it had lifted foreign ownership limits for domestic airlines from 30 per cent to 49 per cent. China and Vietnam are offering greater bilateral access to their markets.

In Australia, the government has established one of the world's most open systems for anyone who wants to start a new domestic airline. However, in the absence of any reciprocal regime for openness it has been more cautious about permitting international carriers to expand their access to the Australian market.

In my view a sensible transition cannot mean just throwing open the doors and letting cut-throat competition loose. It means making changes in a carefully planned way with due regard to the pace and sequence of change.

In Qantas' view, a more effective approach is for governments to release airlines from ownership constraints and merger limitations so that new, larger, stronger companies or partnerships can develop. Then the industry will be better placed to deal with the lifting of restraints on market access that appears inevitable. 

I should say here that Qantas, as one of the more profitable airlines in the world, has shown a consistent belief in the inevitability and value of consolidation. Because of this, we would look at any opportunities that would enable us to have a larger and more cooperative presence in Asia.

Conclusion

So let me sum up. Life in aviation is never dull. However, the past few years have been far too interesting. We must expect that there are more shocks in store for us all, but we now have more confidence that we will be able to cope well and recover reasonably quickly. In Asia we must adapt to changing customer requirements, respond to dramatic growth and change in the market, and we must try to make the most of the transition from the international regulatory system to the global system.