Prof. Tae H. Oum, Air Transport Network Development and Challenges to East Asian Airlines and Policy Makers Prof. Tae Hoon Oum President, The Air Transport Research Society (ATRS) UPS Foundation Chair of Transport & Logistics, The University of British Columbia, Canada www.atrsworld.org *Some slides used in this presentation was adapted from Oum and Yamaguchi, the keynote presentation given at the Inauguration Ceremony of the ITPU at Tokyo University, December 15, 2005)
Prof. Tae H. Oum, Outline Global Economy and Air Transport Air Transport in East Asia: Present and Future Challenges for regulatory reform Goals for Regulatory Reform and A Proposal
Prof. Tae H. Oum, Global Economy and Air Transport
Economic Growth and Air Traffic Prospects Stable economic growth expected: global economies to continue to grow: 3-4% per year in average. Growth continues in most Asian countries, although significant differences in per-capita incomes will persist -World s air traffic will continue to grow in average 4-5% per year (passenger) and 5-7% per year (cargo) Prof. Tae H. Oum,
Prof. Tae H. Oum, International Trade Global trade to grow continuously; so will cross-border investments East Asia, now the manufacturing hub, and growth engine of world economy. China-Japan-Korea+ASEAN accounts for ¼ of global trade. East Asian free trade region may be realized some point in the future;
17,000,000 Global Trade (Export+Import) Global Trade $ million 15,000,000 13,000,000 11,000,000 9,000,000 2,817,849 (+165%) 834,250 (+174%) (18.4%) (5.4%) Japan+China+S. * Korea ASEAN Rest of the World 7,000,000 1,062,387 304,499 5,000,000 5,723,222 3,000,000 (15.0%) (4.3%) (80.7%) 11,684,848 (+116%) (76.2%) 1990 2003 Source: World Bank Prof. Tae Oum, Sauder School of Business, UBC
Prof. Tae Oum, Sauder School of Business, UBC Growth exceeds GDP growth; Asia-Pacific expected to out-perform other markets Data Source: Boeing
Prof. Tae Oum, Sauder School of Business, UBC
Prof. Tae Oum, Sauder School of Business, UBC Mid to Long Term International Aviation Demand Forecast Agency ICAO IATA ACI FAA Boeing Airbus Period 2002-2015 2005-2009 2004-2020 2005-2017 2005-2024 2004-2023 Pax Growth (%) Asia/Pacific 6.1 6.8 6.1 7 5.5 6 Worldwide 4.4 5.6 4.1 5 4.8 5.3 Cargo Growth (%) 6.3 5.4 6.2 5.9 Source: ATRS 2006 presentation by Mr. Masahiko Kurono, President of Narita International Airport Authority, Japan
Global Trends in Air Transport Liberalization of international air transport will continue, via bilateral and/or multilateral process; But the regulatory system may have to move closer to the WTO approach: tying with trade liberalization; Cross-border investments in airlines to increase Low cost carriers will advance to short-/medium distance international markets EU single market and North American open skies market will continue to be integrated; Network airlines will benefit from multiple-hub airline systems and/or by linking up their networks with strategic alliance partners Prof. Tae H. Oum,
Global Trend in Air Transport cont d Regional Bloc formation: Continentalization EU market integration begun in 1997. Australia = New Zealand Single Aviation Market (Trans- Tasman) Arrangements initiated in 2000. In regional markets, LCCs have established their business model, starting from US, then in EU, and now in Asia. Challenges legacy carriers business model even in middistance markets. Large liberalized markets in US and EU have driven the industry to become pro-competitive and more efficient. Prof. Tae H. Oum,
U.S. Hubs United San Francisco, Chicago, Denver and Washington Prof. Tae Oum, Sauder School of Business, UBC
U.S. Hubs - Northwest & Continental (Northwest: Detroit, Memphis, and Minneapolis Continental: Newark, Houston and Cleveland ) Prof. Tae Oum, Sauder School of Business, UBC
Air Canada (Toronto, Montreal, Vancouver, Calgary) Prof. Tae Oum, Sauder School of Business, UBC
Air France and KML merger: toward multi-hub network first case after single market created in 1997 Prof. Tae Oum, Sauder School of Business, UBC
Prof. Tae H. Oum, Air Transport Network in East Asia
Prof. Tae Oum, Sauder School of Business, UBC Population and Intra-regional Passengers, 2004 (millions) China+Japan +S.Korea US EU15 Population 1,493 291 380 intra-regional passenger 206 587 367
Prof. Tae H. Oum, Air Transport in East Asia: Present and Future: East Asian networks have been shaped historically by restrictive bilateral ASAs; fragmented and inefficient single hub networks.
JAL Network; inadequate to serve Asian market Prof. Tae H. Oum,
KAL Network; inadequate to serve Asian market Prof. Tae H. Oum,
Major Chinese carriers have single hub networks; inadequate to serve Asian market Prof. Tae H. Oum,
Cathay Pacific network; inadequate as an Asian network carrier Prof. Tae H. Oum,
Prof. Tae H. Oum, Air Transport in East Asia: Future Carriers should eventually become pan- Asian and multi-hub airlines; - just as the U.S. carriers have shifted to multi-hub system after the deregulation (25+ plus network carriers integrated into 6 major networks); - Similar integration is slowly happening in the EU market
Air Transport in East Asia: Future: cont d Each carrier would keep their current hub airport, but will establish secondary hubs in different airports in other regions of Asia (benefits on cost side; market side; and growth prospects); These pan-asian network carriers would compete vigorously in most of the Asian markets. Prof. Tae H. Oum,
Intra-regionally: Japan has 10% of Chinese population Domestic RPK (Boeing, CMO, 2006) China 2004 2024 110 billion 596 billion Japan/Korea 83 232 Asian air transport networks to be largely shaped around Chinese market; Scandinavian countries: 10% of continental western Europe population; SAS is now being marginalized in Europe Prof. Tae H. Oum,
Forward Looking Policy is needed: Pan-Am and TWA once were sources of American pride; We need to look back what happened with Pan-Am, TWA and why? (US protected their international markets; Most of the US domestic carriers were not allowed to enter Int l market); Protection of carriers may help flag airlines in the very short-run, but may put them in jeopardy in the long run by mortgaging their future! Prof. Tae H. Oum,
An Example of Asian Multiple Hub Carrier -1 Seoul, Shanghai and Hong Kong Prof. Tae Oum, Sauder School of Business, UBC
An Example of Asian Multiple Hub Carrier -2 Tokyo, Beijing and Singapore Prof. Tae Oum, Sauder School of Business, UBC
Prof. Tae H. Oum, Emerging Issues for Air Transport in East Asia (1/3) How should the air transport system be designed to serve the intensifying intraregional trade and economic integration taking place in the region? International air accessibility and airline network patterns will influence the long-run economic geography of East Asia. Policy makers should provide business environment within which regional air transport networks develop with an overall network efficiency in mind.
Prof. Tae H. Oum, Emerging Issue for East Asian Air Transport (2/3) Recent EU-US Trans-Atlantic Single Aviation market proposal, if ratified, would have a profound impact for the world s air transport industry Stronger competitive forces would make air carriers on both sides of the Atlantic to be far more efficient and competitive than Asian carriers (whose productivities are already much lower than U.S. or most European carriers)
Prof. Tae H. Oum, Emerging Issues for East Asian Air Transport (3/3) Major barriers to Air Transport Liberalization: Differential capabilities between flag carriers of different countries (more on this in next slides); Relatively easy to see who wins and who gains when liberalize the bilateral markets, especially in the short run; Nations tend to equate the gains/losses of flag airlines as the national gain/losses. Government policy makers and negotiators are closer to vested interests (airlines) than consumers or national economic interest.
Prof. Tae H. Oum, Japan But in recent years, Japanese carriers (especially JAL) has not performed as high growth as other Asian carriers, mainly because of their high unit cost situation; Japanese carriers are having to purchase much of their inputs from high-cost Japanese sources. Regional market integration would provide airlines with opportunities to source inputs from optimal location.
China Strongest and major growth market in the world. Problem for the industry is how to secure modern management skills and human resources; They feel they are less competitive than competitors Sharp difference between highly developed coastal regions and underdeveloped inland areas poses serious political problem. Some carriers will create secondary hubs in interior and western regions of China.. Prof. Tae H. Oum,
Prof. Tae H. Oum, Figure 5b China's Export by Country of Destination - 2001 other 4% North America 22% Asia 52% Latin America 3% Europe 19%
Prof. Tae H. Oum, Figure 5a China's Imports by Country of Origin - 2001 other 5% North America 12% Europe 20% Asia 60% Latin America 3%
Prof. Tae H. Oum, S. Korea At the moment, Korean carriers are in the most advantageous position among the three countries. Development as East Asian logistics/distribution hub similar to Netherlands and Singapore is in progress, although they fight uphill battle against Shanghai and other Chinese ports. Trade and transport liberalization important for the success of Korea s regional logistics hub initiatives. Although their optimal policy is really Singapore-style open skies policy with all major countries, their bilateral ASA process continue to be influenced heavily by flag carriers.
Prof. Tae H. Oum, Challenges to regulatory reform: - Effects of Current Regulatory Framework - Challenges to Regulatory Reform
(A) Effects of Current Regulatory Framework Bilateral Air Services Agreements (ASAs) require the airlines designated to serve on international routes be majority owned and controlled by citizens of the country; Bilateral ASA processes are too heavily influenced by flag carriers; leading to capacity/market sharing between the bilateral carriers in most markets, against the interest of consumers and overall economic interest of the nation. Prof. Tae H. Oum,
Prof. Tae H. Oum, Current Regulatory Framework and Effects cont d Domestic markets and international markets are regulated separately without an explicit coordination between the complementary networks (Domestic markets are reserved solely for own carriers); Since China has a very large domestic market, in the long run Chinese carrier network patterns will be largely shaped by the needs for efficient collection and distribution of domestic traffic.
Prof. Tae H. Oum, Current Regulatory Framework and Effects cont d Current system offers limited growth opportunities to Asian airlines, and has prohibited development of efficient multiple hub networks by Asian carriers No airline in Asia is truly an Asian carrier having an effective coverage of Asian markets
Prof. Tae H. Oum, (B) Challenges for Regulatory Reform - (1/2) Negotiators are charged to protect/enhance national interest. But, policy makers and negotiators influenced too heavily by the vest interests (flag airlines); The misguided notion flag carriers interests equal the national interest that many governments hold are probably the most serious barrier to liberalization. As a result, those governments and negotiators, in fact, work against the true economic interest of the nation for whom they are doing negotiations. creating negative sum bilateral games.
Prof. Tae H. Oum, Challenges for Regulatory Reform - (2/2) Such mis-guided action on national interests (myopic world) lead negotiators to turn the bilateral negotiations into a non cooperative game; They are driven to protect the markets where national carriers may lose, and to expand traffic rights for the flag carriers in the markets where their flag carriers can win (Mercantilistic approach existed in the 19 th century) In this myopic world, tough negotiators are respected despite the fact that in many cases, they fail to find positive-sum games via which both countries can increase economic pies.
Prof. Tae Oum, Sauder School of Business, UBC So how could we achieve a positive sum game? Consumer benefit; Other industry benefits Regional cooperation True Asian Carrier Dynamic competition Competitive edge against US and EU Vested interests National interest? Low risks Autonomy 一 般 管 理 費
Prof. Tae H. Oum, Goals for regulatory reform Long-run goal: East Asian single aviation market Medium term goal: Creating cross-border subregional (East Asian) Open Skies bloc, a stepping stone for Asian continent-wide crossborder open skies Short term: Rapid liberalization of the East Asian market
Strategy for Securing Positive-Sum Game in Northeast Asia Repeated/frequent interaction and common goal setting among different players can turn the negative-sum or zero-sum game into a positive-sum game. Such constructive approach would foster development of common grounds that may facilitate market integration. Therefore, it is important to formulate an institutional environment that encourages repeated interaction and common goal setting. Prof. Tae H. Oum,
Prof. Tae H. Oum, How do we achieve the staged liberalization? (1) Preliminary work needed (before any formal negotiation): Creating a transparent environment within which analysis are done and negotiations can take place: This will ensure that all parties can focus on creating positive-sum game. All costs and benefits of adopting specific stages of liberalization or open skies must be calculated and tabled; There should not be any hidden agenda by any country participating in the negotiation;
Prof. Tae H. Oum, Preliminary work needed cont d Clear understanding of who gains? what? and by how much?, and who loses, what? and by how much?, etc.; Negotiations will focus on sharing and distributing gains and losses. Also consider pooling of gains and loses between air transport, international trade and foreign direct investment (FDI) sectors
Preliminary work needed cont d Canada-US Open Skies Example: Negotiations focused on creating positive-sum game increasing size of the economic pie; Structural weakness of Canadian carriers were handled in two ways: US allowed Canadian carriers 3-years head-start in all US markets; U.S. carriers allowed phased-in entry into Toronto, Montreal, and Toronto markets over the three years; US gave Canadian carriers significant numbers of airport slots at congested airport like Chicago O Hare and Washington National. In the end, the political will of President Clinton and PM Chretien for open skies agreement played an important role Prof. Tae H. Oum,
Prof. Tae H. Oum, A Proposal Joint Study Team: An effective way is to set up a joint study team in which all necessarily studies are done ON VERIFIABLE DATA and in a very transparent way; The results are computed, verified, and tabled to all members of the three countries negotiation teams. This team will interact with the negotiators of each country to understand the benefits and costs to that country.
Prof. Tae H. Oum, A Proposal - (2/2) Establishment of a trans-national Committee consisting of governments, industries and academia would go a long way to foster close relationship, creating common grounds, finding positive sum approach, and phased-in agenda for negotiation. This Trans-national committee would set the research agenda for the trans-national study team proposed above
Prof. Tae H. Oum, Concluding remark It is about time for the East Asian countries government to seriously consider changing approaches to air transport policy in order to develop efficient regional air transport networks which also serves long term interests of the region and their own nation s economic benefits as well as of the long-term interest of their flag carriers
Prof. Tae H. Oum, Thank You 2007 ATRS World Conference: 21-23 June; Univ of California-Berkeley ATRS Global Airport Benchmarking Reports 5 th Year www.atrsworld.org