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Date: 7 October 2003

Arab Air Carriers Association (AACO), Annual General Meeting, Muscat

It is a great pleasure to be with you today in this beautiful historical city of Muscat.  Last year I had the opportunity to meet a number of you in Tunis.  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 one hundred-year history.  Terrorism, an economic slowdown, a military conflict in Iraq and a deadly virus have hit our industry.  Total airline losses from September 11 through 2002 were 25 billion US dollars.

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.  If we include domestic traffic, losses could approach $10 billion.  Effectively, every round-trip international passenger was given 25 dollars by the airlines in 2003.

That cannot continue.

Future recovery 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.

OUR VISION

Since joining IATA, I have stressed the importance of responding with speed, passion 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 serving an elite.

It is an industry that must now be run more like 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  Outdated regulations, inconsistent policies and misplaced competition worries are among them.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.

For the past year we have asked governments and our industry partners to look at the new reality of air transport.  Safety and security require government regulation. 

But much of the commercial regulation is outdated.  National ownership limits should be liberalized whenever and wherever governments think it is feasible.

Don't get me wrong, we are not trying to push national governments to do things they don't want to do.  We ask them to liberalize whatever they feel they can.   IATA has no dogmatic blueprint for the regulatory future of air transport. 

We would like to move to a "business-like" environment at different speeds in different regions.  However, in most places, 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" wherever governments deem it feasible.  Airlines should be free to form alliances and merge to achieve the needed economies of scale.  However, the normal rules of global business consolidation do not yet apply.  Cross-border acquisitions are virtually impossible.  Until the rules are changed, airlines have come up instead with the system of global marketing alliances.

The ICAO ATC5 Conference, represented the first success in modernizing the system.  IATA's position was endorsed by the ICAO Assembly with the strong personal support of Dr. Assad Kotaite.  The next US-EU round of open skies negotiations will be the first concrete example of this new approach.

The world of air transport is changing fast.  The impact of any agreement over the North Atlantic will be felt around the world.  No region can stand still, all have to look ahead!  Africa, the Mercosur and the Andean Pact countries are already involved in regional liberalization.  Singapore and Australia just signed a far-reaching agreement.

Each region should at least look into the feasibility of creating a regional open skies.  The US and the EU are single markets.  Is it unconceivable to imagine an Arab single market?  Is it really so extravagant?

LATEST STATISTICS

We have, on the business front, some encouraging news.  Traffic recovery is underway.  The August figures show traffic only 0.3% down compared to a year before, but still below August 2000.

After scoring the highest regional growth in 2002, the Middle East has now also fully recovered from the war.  So far in 2003, the growth rate stands at almost 9%, the second highest in the world.

Europe is also now in positive figures and Asia/Pacific is recovering at an incredible speed.  However, the recovery is not uniform.  North American carriers' international traffic is down 6.5% from August 2002 levels.

Overall international passenger traffic levels in 2003 will be 1% 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.  Cost cutting has become an obsession for all airlines.

My job takes me everywhere around the globe.  Believe me, from Washington to Singapore and from London to Tokyo, the leitmotiv is cost control.

In North America, in Europe and now in Asia, network carriers are under pressure from low cost carriers.  Prices there are now largely influenced by the Low Cost Carriers.  Here in the Middle East, you probably don't feel this kind of pressure yet.  However, it would be unwise to say: "It can't happen here!"

Let me open a short parenthesis since we are here among friends and colleagues.  I just mentioned alliances.  There is no doubt that they are playing an important role in shaping our industry's recovery.  I am sure that all of you are well aware of the costs and benefits of joining an alliance. 

AACO in itself is a kind of alliance.  Frankly, I am quite impressed by what AACO carriers have achieved by cooperating to reduce costs in areas such as distribution, ground handling and fuel purchase.  But will this be enough to achieve the needed cost reductions?

Some airlines have decided that they would rather stay independent and develop their own bilateral network of relationships.  As long as this decision is the fruit of a careful analysis, it can only be respected.  However, I am surprised by the fact that no AACO Member is active in any of the large alliances.

Perhaps some of you would benefit from taking a fresh look at this issue taking into account recent developments. 

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.

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 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 efficiency and savings as well.

In the face of SARS, IATA led a campaign to get airports and air navigation service providers to help us keep costs down.  The result was 227 million dollars in cost savings due reductions in charges reductions in 16 major airports alone.

Most of these reductions came in SARS-affected countries in Asia and the war-affected countries in the Middle East.  In your region, we had reductions in charges in Jordan, Lebanon, the United Arab Emirates and at Damman Airport.

Low airport charges are at the root of the development of international hubs such as Dubai or Sharjah for cargo.  The United Arab Emirates' General Civil Aviation Authority is an example of a good Air Navigation Service provider.  It actually won our Eagle Award this year.

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 reductions in charges 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.

REGIONAL ISSUES

Let me spend a few minutes talking about regional issues that are relevant to AACO's membership.  It has been a busy year, unfortunately!  It went just like the Chinese curse: "May you live in interesting times".

IATA carefully began planning alternate routes for our operations as soon as tension heated up over Iraq in the autumn of 2002.  Our main purpose was to cause as little disruption as possible to regional traffic flows while guaranteeing safety and security.

AACO Members, regional governments and ICAO played a crucial role in the planning of the alternate network.  As military operations ended in Iraq, IATA began to play a role in rebuilding the civil aviation infrastructure of the country.

The Iraqi people have been deprived of access to the international air transport network for over a decade.  It is time for Iraq to re-join the international civil aviation community.

IATA is playing an important technical role there.  It is re-establishing communications.  A total of eight VSAT terminals are being installed, by IATA, with VHF Remote Communication Air-Ground to cover Iraqi airspace.

The re-opening of Iraqi airspace will allow more direct routing from the Gulf to the north and from Lebanon, Syria and Jordan to the east.  An expected 150 flights per day will see flight times reduced by an average of 20 minutes.  The reduced fuel burn alone will save airlines up to 110 million dollars per year.

IATA stands ready to extend its co-operation with the Iraqi authorities in terms of ATS routes and the collection of user charges.  These charges will be used to finance infrastructure rehabilitation.

IATA AND YOUR REGION

IATA initiatives have been numerous in your region.  I just mentioned a few.  But IATA is always present on many fronts:  shortening air routes, training your staff with the excellent cooperation of AACO, lobbying on behalf of members on issues such as insurance or radio spectrum, just to name a few.

In a different area, IATA's BSP system had 6 billion dollars of gross sales in the Middle East last year or 7.5% of the world's total.  The recent re-structuring of our Middle-East regional office is obviously geared at serving you better.

Under one roof, you have now at your disposal a centralized and efficient organization reflecting IATA's new dynamic approach to doing business.

It is a focal point for identifying member priorities.  Majdi Sabri, our Regional Vice President, is here to serve you and from what I have heard he does it well.

CONCLUSION

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.  One hundred 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 "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.

Thank you.

Arab Air Carriers Association (AACO), Annual General Meeting: "Air Transport's Future: The View from Muscat"
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