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Date: 4 August 2003

Aerospace Forum, Hong Kong

INTRODUCTION

I last spoke to this Forum in October 2002.

So much has happened since then.  Iraq and SARS being the most prominent, yet many of the challenges remain the same.

The start of this century is characterized by crisis following crisis.

Moaning, however, will get us nowhere.

We need to understand where we are and move forward.

This year marks the 100th year of flight.

Civil aviation is a tremendous factor of social and economic development.

Nowhere is this more true than in Hong Kong.

As we saw with SARS, when the air hub stops functioning, the impact is felt throughout the economy.

The importance of aviation to Hong Kong cannot be over-stated.

So it is fitting that this Forum exists for the discussion of aviation.

I want to share some thoughts on changes needed to ensure that Hong Kong continues to benefit as a major player in this great industry.

OUR VISION

When I spoke to this Forum last year, I stressed that IATA must adapt and respond quickly to the industry's many challenges.

IATA must be the voice of our industry and an agent for the change that our industry desperately needs.

There are external obstacles to change, many from governments.

Inadequate regulation, inconsistent policies and misplaced competition worries are among them.

Despite our current difficulties, we will return to rapid growth.

In 12 years, the number of passengers will double from 1.5 billion to 3 billion per year.

Our regulatory system was established in 1944, when less than 10 million people flew.

It needs to change to keep pace with our industry's challenges.

In 2001 and 2002 airlines lost $25 billion.

This year, we expect to lose between $5 and $6.5 on international services alone.

We are an industry in crisis.

I understand that crisis in Chinese made up of "Danger" and "Opportunity."

We must use this "opportunity" to modernize our industry.

IATA is leading this effort with a clear vision.

I will speak more on this later.

LEARNING FROM SARS

I don't need to tell you how badly SARS affected this region.

Traffic recovery however is underway.

Today, we will announce January to June traffic results.

May 2003 was 20% below May 2002 for passenger traffic.

June was 12% down on 2002 levels.

Clearly we have turned the corner.

July will certainly recover more traffic.

The strength of the traffic rebound is tremendous.

This is proof that our industry is essential to modern life.

It is also the result of the leadership and hard work of airlines like Cathay Pacific and Dragonair.

For the first half of the year, we remain 7% below 2002.

We will face many challenges on the way to recovery.

COST CONTROL: PILOTS

Let me remind you that traffic recovery is not profitability.

Repairing damaged balance sheets is a long term challenge.

Under tremendous pressure, our industry showed its ability to change.

Capacity cuts, fleet modernization and network adjustments through alliances are all good examples.

Strict cost control is an industry priority.

Airlines alone will shed over 100,000 jobs this year as part of this effort.

A new approach to labor relations has also begun but much more must be done.

For example, pilots must work with management to safeguard this industry.

And not hide behind old work rules, such as seniority lists, which are out of touch with today's competitive world.

This industry needs flexibility!

This industry needs to reward performance, not age or seniority! 

COST CONTROL: PARTNERS

Our industry partners must join our cost control efforts.

In the face of SARS IATA led a campaign to get airports and air navigation service providers to share our obsession with cost.

The result was US$100 million in cost savings.

Hong Kong Airport, although slow to join, is contributing to this.

We thank them for their efforts.

Now, we must make these temporary reductions permanent.

There is room to achieve this.

Recently Deutsch Bank compared airline operating margins to those of airports.

Most airports showed 4 year average operating margins over 20%.

Airlines were all under 10% and many were negative.

I am not saying that airports should make less profit….we need healthy and profitable partners.

And airports need healthy airlines.

Together, we must improve efficiency.

And together we must share the benefits of the industry and provide reasonable returns to our shareholders.

TRAVEL ADVISORIES

Our industry is vulnerable to crises.

SARS is the first health crisis to cause chaos across our industry…it will likely not be the last.

We need a better system of health and travel advisories.

The world is full of risks.

Travelers have a right to understand the risks of travel.

Travel warnings and advisories are complicated, un-coordinated, and often inconsistent.

Too often politics plays a role.

We need to find a way to provide factual information without causing irrational fear and over-reaction.

The World Tourism Organization will take this up at the UN…and we will support their efforts.

ROLE OF GOVERNMENTS

Iraq and SARS speeded our re-structuring.

Our industry is more efficient but more needs to be done.

In contrast, governments are moving slowly.

New security regulations cost airlines 5 billion dollars in 2002.

Why are people paying for their own security in the air and not on the road?

Why should they pay for it at airports and not in train stations?

The US government recently acted to compensate its airlines and paid for extra security costs.

This approach must be followed by other governments. 

Protection of their citizens is a state's responsibility.

THE THREE PILLARS OF STAGNATION

Now let's turn our attention to some broader issues

I had the opportunity at a recent ICAO conference to talk about the obstacles to change.

The bilateral system
National ownership rules
The attitude of competition authorities.

I called them "the three pillars of stagnation".

And we need to modernize them!

Safety and security regulation is needed.

Some commercial regulation, however, is outdated.

We must build a framework relevant to the reality of today and ready for tomorrow's challenges.

BILATERAL SYSTEM

From bilateral "Open Skies" we should now move to regional liberalization.

The "Open Skies" must now become "wide open."

NATIONAL OWNERSHIP LIMITS

Airlines also need the freedom to merge, acquire and go to international financial markets.

In short we need to operate like normal businesses.

National ownership limits should be liberalized wherever governments think it is feasible.

And no state should block those who want to liberalize further.

I was pleased that the ICAO conference delegates agreed with us

COMPETITION POLICIES

Dogmatic competition policies restrict our freedom.

Competition is strong in air transport.

This competition has made our industry more dynamic and strengthened those airlines that reacted effectively.

But our industry is still too fragmented.

It needs economies of scale.

Competition authorities world-wide are too cautious with our industry.

The rules need updating and Governments must find a better of way of dealing with aviation.

AIRPORT PRIVATIZATION

Finally, I understand that Hong Kong is considering privatizing the airport.

This will be an important development and I would like to make a few comments.

Airports are a key concern for airlines.

Airports are our partners. Without them we have no business.

Without airlines, the airports also have no business.

Hong Kong is a natural aviation hub.

Government and Industry developed an airport that is brilliant.

It is consistently ranked among the world's best.

Airlines have experienced many airport privatizations.

When governments were greedy, they were disasters.

Privatizing Hong Kong's airport is not a short-term solution to the government's budgetary problems.

It must be viewed as part of Hong Kong's a long-term vision for its economic development.

We must recognize two things:

Airports bring benefit to the overall economy
Airports are natural monopolies

Privatization should benefit the airport operators and the Government.

It MUST ALSO benefit the public, passengers, airlines and shippers.

The airport will drive overall economic growth long after the privatization deal is signed.

To prevent abuse, a strong and independent economic regulator is needed.

The regulator should ensure:

just and reasonable charges
timely and cost-effective infrastructure development
acceptable service standards

Privatization must not give a private monopoly a license to print money.

Economic regulation is required to balance the weak bargaining position of the airport's users.

Airlines and airports are partners.

We should be partners in the privatization process too.

Transparency is critical.

Appropriate investor expectations must be set.

Valuation of the asset base and a realistic return should be determined in advance of the sale.

Benchmarking against best practice and incentives to stimulate efficiency should be part of the process.

I look forward to being a part of this important development.

CONCLUSION

Yes, we are going through the worst crisis in aviation history.

But our global economy needs air transport.

100 years after the Wright Brothers, the world is inconceivable without aviation.

Aviation is the backbone of our global village.

We will keep on working for our industry with the same speed, passion and commitment that you are now seeing.

Governments and our partners need to play their part.

I am optimistic.

On my next visit I am confident that I will be able to report on positive changes and a healthy industry.

Thank you.

Hong Kong, China at the Aerospace Forum Asia
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