Lui Tuck Yew: Low-cost carriers and new air hubs reshaping aviation sector

The growth of low-cost carriers and the rapid rise of new air hubs will shape the future of aviation, Transport Minister Lui Tuck Yew said at the opening of the Singapore Airshow Aviation Leadership Summit on Monday.

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Here is the full speech made by Minister Lui:

Welcome to the Aviation Leadership Summit 2014. To our foreign guests, a warm welcome also to Singapore. I am very happy to see many familiar faces from the Summit in 2012, as well as new faces with whom I hope to be acquainted in the next few days.

We are honoured to host this biennial Summit, where captains of the aviation industry can share insights on the challenges that the industry is facing, as well as their views on the way forward.

I recall the robust discussions at the 2012 Summit, especially those on the European Union's (EU) Emissions Trading Scheme. Those discussions enabled both the EU and the rest of the world to better understand each other's point of view. I look forward to similarly energetic discussions this year.

THE CHANGING FACE OF AVIATION

The civil aviation landscape is constantly evolving and the next 100 years of commercial flight will be very different from the one we know today. Just look at the first 100 years: commercial aviation began on 1 January 1914 with a flight within Florida USA, from St Petersburg to Tampa, and carried just a single passenger. Last year, commercial aviation carried more than 8 million passengers a day, supporting 57 million jobs and US$2.2 trillion in economic activity[1].

Today, I would like to focus on two major trends which I believe will continue to reshape the sector in the coming years, and how governments and regulators will need to respond.

GROWTH OF LOW COST CARRIERS

First, the growth of low cost carriers (LCC). Starting with Southwest Airlines, Easyjet and Ryanair with a handful of aircraft each, LCCs have now spread to every continent and have opened up new aviation markets. In Asia, the LCC share of the aviation market has grown from almost nothing 10 years ago, to close to 20% of the Asian aviation market today[2].

Within Southeast Asia, the growth of LCCs is even more remarkable. LCCs now make up more than 50% of the intra-Southeast Asia market, a phenomenal growth from less than 5% just ten years ago. Of the top 15 busiest LCC international routes, nine are found in Southeast Asia. The largest three LCC international routes in the world originate from Singapore: Singapore-Jakarta, Singapore-Kuala Lumpur and Singapore-Bangkok[3].

What is more meaningful in the LCC story is the benefits they have brought. LCCs have brought air travel to the mass market, a particularly significant point for Asia given the region's fast expanding middle class. With their business model, LCCs have also brought air travel to many secondary points that were previously not viable.

LCCs are still evolving and transforming. The traditional LCC eschewed interlining, and focused on short-haul operations. However, many LCCs are now emphasising connectivity to improve their value proposition to passengers. As such, LCCs today interline and even code-share on legacy carriers. In Asia, they have also set up affiliates in different countries to take advantage of the air rights in those countries, to expand and form a denser and better inter-connecting network to serve their customers. Long and medium-haul LCCs have also emerged, many of them based in Asia.

To fully capture the benefits that LCC can bring, governments would need to embrace the LCC sector and facilitate its growth.

RISE OF NEW AIR HUBS

A second trend which will reshape the international aviation landscape is the rapid rise of new air hubs. We are familiar with the growth of the Middle Eastern air hubs and airlines. They have benefited from their geographical advantage that allows for direct services to almost all the world's population. Their rapid expansion has transformed the landscape and brought the competitive aviation industry to a new level. In just 10 years, air passenger traffic at Dubai, Abu Dhabi and Doha jumped more than 350%, from less than 26 million in 2003 to 93 million in 2012.

Air hubs in the Asia-Pacific have also been growing from strength to strength. Take for example how Asia-Pacific airports have moved up in the world rankings. In 2000, only five of the 30 busiest airports in the world were in the Asia-Pacific. In 2011, the number of Asia-Pacific airports in the top 30 has doubled to 10.

This development rides on the strong growth in air passenger traffic in the Asia-Pacific. ICAO has projected that traffic in the Asia-Pacific region will grow at a compounded annual growth rate of 6.2% from 2010 to 2030, compared to 4.6% worldwide. It will become the largest market for air travel. By then, Asia-Pacific's air passenger traffic will be almost the same as that of both Europe and North America combined, a remarkable growth from 2010 when Asia-Pacific, Europe and North America all had an equal share of about 30% each. Major growth drivers in this region include outbound tourism from China that is expected to double to 200 million from now to 2020, the booming middle class in Southeast Asia which is expected to reach about 200 million by 2020, and rapid urbanisation in Asia, with 7 out of the top 10 most populous cities already found in Asia in 2010.

Implications for the Aviation Sector and Governments

These two trends - the rapid growth of LCCs and the new hubs - will shake up the business and operating models of traditional carriers and incumbent air hubs. Air navigation providers will have to manage more congested skies, with more frequent take-offs and landings. Hub airports will become more congested and more confusing for passengers, necessitating careful planning. Utilisation rates for aircraft will rise, and regulators will need to be more vigilant in ensuring that air travel remains safe. The pressure will be on governments which have air hub aspirations. Let me highlight three critical ways in which they will have to respond.

Ensuring Sufficient Capacity

First, ensuring sufficient capacity. Many governments in Asia are taking firm steps to respond to the strong growth and are increasing airport capacity. Beijing, Kuala Lumpur, Hong Kong, Jakarta and Seoul-Incheon among others have announced or embarked on major expansion plans, building new airports, terminals and runways. Several countries have also re-opened former airports or converted domestic airports to serve the growing demand for international air travel. Singapore's Changi Airport likewise plans to have a capacity of 135 million passengers per annum by the mid-2020s, when the new Terminal 5 and a third runway are in operation.

In addition to adding capacity on the ground, we also need to ensure that our air navigation systems stay ahead of growing air traffic. In June last year, the ICAO opened the Asia Pacific Regional Sub-office in Beijing, with a focus on improving air traffic management. This is testament to the importance for air traffic management to keep pace with the region's booming traffic. Singapore looks forward to strengthening our collaboration with Asia Pacific countries in air traffic management including through this office, such as in growing capacity and implementing new technologies. Later today, I will be inaugurating the new Singapore Air Traffic Control Centre, which houses the new Long Range Radar and Display System III. The system features more advanced surveillance technologies that will allow more aircraft to fly within the same volume of airspace in a more efficient and safer manner.

Growth in airport and air traffic capacity, however, has to be accompanied by growth in skilled manpower to handle the increasingly complex and larger systems and infrastructures. Governments have a critical role to play in this, and will need to work with the industry to provide adequate training places and programmes, and to enhance the attractiveness of a career in the aviation sector.

Rethinking the Needs of Air Travellers

Secondly, governments in their planning will need to rethink how to better meet the needs of air travellers, especially LCC passengers who are fast becoming the predominant segment of travellers. In Singapore, we believe that LCC passengers also want the same amenities at the airport as full service carrier passengers. There is also an increasing number of LCC passengers making onward connections. So we decided to tear down the Budget Terminal to make way for a new Terminal 4 that will be ready in 2017. The new Terminal 4 will deliver the "Changi Experience" to LCC travellers that Changi Airport is known for, rather than a "budget experience". It will also be well-connected and integrated to the other terminals, in order to provide a seamless and comfortable connection for transfer passengers.

Liberalising Aviation Policy

Finally, let me touch on one other key area where I think governments with air hub aspirations need to have a change of mindset.

Aviation needs to remain safe and secure. Governments clearly need to play a firm regulatory role in this. However, governments need to guard against over-regulation in other areas. It should instead strive to create space for their airlines and airports to respond to market changes and opportunities.

Instead of looking just at the interests of its airlines in its aviation policy, governments would do better to consider the wider benefits to the economy and society of a liberal air services regime. A liberal regime brings more choices and more competitive fares for the citizens, and enhanced connectivity enhances the proposition of cities in international business. On the other hand, restricting traffic rights does not necessarily shore up business for local airlines. It may in the short term, but in the longer term, funnels passengers to travel via other airports, negatively impacting the country's overall air connectivity.

This is not to say that it is painless to pursue liberal aviation policies. Uncompetitive airlines are likely to face severe pressures. But ultimately, liberal policies will benefit the sector as a whole, through better capacity utilisation and productivity, increased investment, higher profitability and increased market value, as IATA has pointed out. This was the experience of European and American carriers from the EU-US Open Skies Agreement[4]. It is also Singapore's experience. A liberal aviation policy allows carriers the opportunity to optimise their operations and gives them the flexibility to respond to market conditions nimbly. The open competition also spurs them to deliver better service and products. Passengers reap the benefits.

I expect to see more of such arrangements, including at the bloc or region level. The EU, for example, has concluded several liberal skies agreement with countries such as the US, Canada and Morocco, among others. Closer to us here in the Asia-Pacific, the Association of Southeast Asia Nations (ASEAN) is targeting an Open Skies by 2015 that will provide for unlimited market access for ASEAN carriers.

The ASEAN experience in air services liberalisation has encouraged similar collaboration with other countries. China and ASEAN, for example, had in 2011 concluded an Air Transport Agreement that allows carriers from both sides to mount unlimited air passenger and cargo services between ASEAN Member States and China. This was further expanded in 2013 to include carriers from both sides to fly beyond certain points in and outside ASEAN and China. The Agreement has brought not only greater connectivity and increased economic benefits to ASEAN and China, but more importantly, has helped China further cement a strategic relationship with ASEAN.

CONCLUSION

Let me conclude.

Aviation will continue to evolve and we may not know how it will change in the years to come. However, I believe that the roles of government I described earlier will remain relevant. We need to remain nimble and far sighted to ensure that our countries can continue to reap the benefits of aviation. We also need to work together across borders to tackle the common challenges, such as in safety, security and on the environmental front. I look forward to fruitful discussions today, to help chart the course for the aviation of tomorrow.

On this note, I would like to thank IATA and Experia Events for their excellent partnership with Singapore to make this Summit possible. I also hope that our foreign friends will find some time to take in the sights and sounds of Singapore, in addition to participating in the Summit.

Thank you.