Date: 9 September 2003
Aerospace Congress and Exhibition, Montreal
It is a great pleasure to be with you this morning. Montreal is IATA's historical home. Your presence here just reinforces this city's eminent role in international civil aviation.
I would like to focus on some of the important challenges that the airline industry faces today.
Our industry is just now beginning to emerge from the worst crisis in its 100-year history.
Terrorism, an economic slowdown, a military conflict in Iraq and a deadly virus have hit our industry.
Total airline losses since September 11 through 2002 were $25 billion. Our industry has lost at least three years of growth and development.
This year, we can expect to lose almost 5 billion US dollars on international services.System-wide losses could approach $10 billion.
Effectively, every return international passenger will be subsidized in 2003 to the tune of $25.
That cannot continue.
Future planning is a challenging task not only because of the unexpected but also because of restrictions placed on the airlines.
So today I will speak of several areas where changes must take place in order for airlines to be run like any other business.
Since joining IATA, I have stressed the importance of responding with speed and commitment to these difficult times. IATA is now acting as an agent of change for our industry.
I am sure you are already seeing the concrete results of IATA's new, aggressive approach. Our purpose is simple; to have our industry recognized by governments for what it is: a mass transit system that provides vital global economic benefits to travelers, tourism and industry. It should no longer be treated as a luxury product catering to an elite. It is an industry that must now be run as a normal business.
Unfortunately, there are external obstacles to change, many coming from governments. Outdated regulations, inconsistent policies and misplaced competition worries are among them. Our regulatory system was established in 1944, when less than 10 million people flew. We need to modernize this regulatory framework.
MODERNIZE THE SYSTEM
For the past eight months we have pushed governments and our industry partners to look at this new reality.
We have flagged three key areas that need immediate attention.
;I called them the three "pillars of stagnation".
· The bilateral system
· National ownership restrictions
· The dogmatic attitude of competition authorities
Safety and security require government regulation. But much of the commercial regulation is outdated. National ownership limits should be liberalized wherever governments think it is feasible.
Airlines need access to international capital markets in order to face tomorrow's challenges. The bilateral system of air traffic agreements should give way to regional "wide open skies".
Our market is too fragmented with too many players. Airlines should be free to ally and merge to achieve the needed economies of scale,
The ICAO ATC5 conference, held here in Montreal, represented the first breakthrough.
The next US-EU round of open skies negotiations will be the first concrete example of this new approach.
We have, on the business front, some encouraging news.
Traffic recovery is underway.
June was 12.4% down on 2003 levels.
The July figures show traffic 3.6% down compared to a year before, but still 8% below July 2000.
The recovery is not uniform, however, N. American carriers' international traffic is 7.8% below July 2002 levels.
However, Europe is now in positive figures with a 2.4% year on year growth.
Asia/Pacific is recovering at a very fast pace.
Traffic from carriers in the region is still down 14% in July compared to a year ago but it was at minus 32% in June.
Overall international passenger traffic levels in 2003 will be lower than 2002, and still below year 2000.
Our most recent IATA forecast indicates a rebound of international passenger traffic in 2004/05.
Increases will likely reach about 7% for 2004 and 2005.
Domestic traffic will grow more slowly at 4-5%.
A solid recovery is vital to the world economy.
But we will face many challenges on the way to that recovery.
COST CONTROL: AIRLINES
Let me remind you that traffic recovery is not profit recovery. Repairing damaged balance sheets is a long-term challenge.
Meanwhile airlines have responded quickly to the current crisis. Capacity cuts, fleet modernization and network adjustments through alliances are all good examples. And cost cutting has become an obsession for all airlines.
COST CONTROL: LABOR
Controlling labor costs is an endless challenge in our industry.
Salaries need to be more closely linked to productivity and economic efficiency. More flexibility must be introduced in managing staff, especially the flight and cabin crews.
Here in Canada, Air Canada and its unions worked hard to achieve savings of 1.1 billion Canadian dollars, primarily through more flexible work rules.
It is a positive start, but is it enough?
Seniority rosters and their rigidity are a major problem for airline mergers. If mergers are to deliver significant cost savings, the issue of pilot seniority lists will have to be addressed with the unions.
OTHER NECESSARY CHANGES
Airlines must continue to outsource what does not belong to their core business.
Capacity control is also a key issue: we must stop producing seats and space we cannot sell.
Too often in the past, our industry has been focused on market share at the expense of profitability.
As a result, our shareholders and the financial markets are tired of financing an economic sector with endemic financial losses.
COST CONTROL: PARTNERS
Airlines aren't the only ones who need to reduce and control costs.
40 billion dollars are paid annually by airlines to airport and air navigation service providers. On international traffic, it represents about 10% of airline costs.
So we ask airports and air navigation service providers to achieve efficiencies and savings as well.
In the face of SARS, IATA led a campaign to get airports and air navigation service providers to help us hold down costs. The result was over 200 million dollars in cost savings due to charges reductions in 12 major airports alone. Most of these reductions came in SARS-affected countries in Asia and the war-affected countries in the Middle East.
Unfortunately, in another SARS-affected country, Canada, the airports, air traffic control providers and governments did little to share in the burden of the crisis.
Toronto Pearson International airport has shown no sign of even attempting to implement any cost-cutting measures, despite the fact that it has increased its landing charges by 142% since 1999.
Toronto is well on its way to being one of the top 10 most expensive airports in the world. This is a typical monopolist behavior: my revenues are down and I must cover my costs: therefore I increase my prices.
Air Canada is Toronto's number one customer, just think of its situation. Traffic is down, lower revenues and now it faces higher landing charges so that Toronto Airport can avoid having to reduce its own costs and gain efficiency! It's like Alice in Wonderland!
IATA has been tackling this issue of user charges for decades. It is extremely interesting however that for the first time, our message has been heard loud and clear by many governments and partners.
We have achieved significant savings and this is a very encouraging sign for the future. Now, we must make these temporary charges reductions permanent.
Recently Deutsche Bank compared airlines operating margins to those of airports. Most airports showed 4-year average operating margins of over 20%. Airlines were all under 10% and many were negative.
I am not saying that airports should not make profits…we need healthy and profitable partners. But they are natural monopolies and as such they should be properly regulated, and measured on a range of performance criteria.
At the same time, we must ask ourselves some questions:
Why does Eurocontrol charge 55% more than the FAA for the same services?
Why are Australian and New Zealand air navigation services so cost effective?
What will be the impact of new US legislation for overflight fees that have no cost-based definition?
Cost reductions are essential for our long-term viability.
Here in Canada, after some initial progress, and some 400 million dollars of cost reduction, NAV Canada is no longer delivering value for money. It has just announced a charges increase of almost 7%.
Don't get me wrong, IATA is in favor of the corporatization or privatization of infrastructure service providers when it brings costs down.
Competition is tough in our industry. I think this is healthy.
I am frequently asked what I think of competition from the so-called "Low Cost Carriers". They have created a new business model for aviation. In local markets they can be tough competitors.
On the other hand, international network carriers provide a full range of services that the LCCs can't offer.
There is room for both models.
Network carriers would, however, like to enjoy some of the LCC freedoms.
LCCs are not limited by bilateral agreements since they work in single markets.
International carriers are held back by rigid government limitations on ownership, cross-border investments and the bilateral system.
And they don't have the necessary flexibility to survive in today's tough market.
Finally, competition is healthy between LCCs and network carriers but it must take place on a level playing field.
Recent cases in Europe where some airports are effectively subsidizing low cost operations just end up distorting competition.
Since the last time this forum met, security has become a kind of obsession for our vulnerable industry.
The post-September 11 crisis led governments to quickly impose new security measures:
In short, new security regulations cost airlines 5 billion dollars in 2002.
Why are people paying for their own security in airports and not in railway or subway stations?
The US government has recognized this contradiction and compensated the US airlines paying for extra security costs.
The European Commission shares our views and is waiting for the national governments to act.
This approach must be followed by other governments, including here in Canada.
Travelers flying to and from Canada face the highest airport security fees in the world.
The security fee now stands at $7 for domestic flights and $24 for international.
This discriminatory treatment towards international passengers is contrary to ICAO rule.
Despite almost two years of non-stop crisis, we are working hard to secure aviation's future.
We have had the worst financial losses in aviation history.
But we are a resilient industry and our global economy needs air transport.
100 years after the Wright Brothers, the world is inconceivable without aviation.
Airlines must continue doing their part in cost-cutting, modernizing labor relations and making their business more flexible and sustainable.
Governments and our commercial partners need to play their part in the recovery.
Along with bilateral "Open Skies", governments should explore regional liberalization—and what I call regional "wide open" skies.
Airlines need the freedom to merge, acquire and go to the international financial market.
In short, we need to operate like any normal business.
Our commercial partners must move away from monopolistic practices and implement effective cost-cutting measures to increase efficiency and share the benefits.
That is what, in the end, will be the basis for a healthy industry that will produce real benefits for consumers.
Aerospace Congress & Exhibition, Montreal, 9 September