Date: 5 October 2004
AACO 37th Annual General Meeting, Jordan
It's a pleasure to be in Jordan—land of history, culture and friendly people. We made progress in the last year, but much still needs to change. The industry lost over US$30 billion since 2001.
We have been rocked by crisis after crisis—SARS, terrorism, and two wars. And now we have the fifth horseman of the Apocalypse—the high price of fuel. These are shocks—well beyond our experience of normal business cycles. And all are beyond our control.
The question is: Do we simply accept their consequences?
After 2 years of firefighting, it is time to build a stronger industry. To handle shocks, we must become a low cost industry with an effective regulatory framework. Airlines, our partners and governments must change in order to achieve this.
The Middle East
Let's start by looking at this region. First half growth was extraordinary. Passenger traffic increased by 44% over last year. Much of this growth is from a robust regional travel market. Cargo performance was similar—up 38%. As we compare to the post-SARS period, the numbers are moderating.
However, compared to 2000 this region led world growth. Against world passenger growth of 8%, carriers here grew 48%. For cargo, growth of over 50% was recorded against a world figure of 15%. And for the next five years we anticipate average passenger growth of 8%. More importantly, several airlines returned to the black last year. In an industry full of bad news, this is refreshing. I congratulate you for the great job you have done.
Some issues remain:
· Growth is uneven—some of you are still struggling.
· Growth is not profit—don't confuse the two.
· Over-capacity plagues our industry—fleet expansion must match market development.
We need to handle capacity carefully. The future is a competitive world, free of subsidies. Airlines in this region have placed ten billion dollars in orders for new aircraft. This is by far the most aggressive of any region.
Small problems can become critical when growth slows. This is not a time to relax. This is the time to build a low cost structure that will be a solid base for future growth.
Use this growth period to:
· consolidate your gains
· manage capacity effectively
· reduce unit costs
Working with IATA
Let me turn to issues that we are working on together. Our cooperation with AACO is effective and is increasing. We cooperate on the Simplifying the Business project. We cooperate on training projects. Today we are signing an agreement reinforcing our longstanding joint collaboration on training.
IATA is dedicated to serving your real needs. This means reducing costs and building a more efficient industry. To achieve this we are changing and emphasizing regional work and issues.
Majdi is now the Regional Vice President. He is supported by a renewed team of country managers with an expanded role. You are seeing the results of their energy and passion. Let me focus on two critical areas: safety and cost reduction.
You can be proud of progress in safety in this region. The 2003 hull loss rate for the Middle East was half the ten year average—1.89 per million sectors. This is much higher than the Europe, North America or Asia Pacific. All of these regions are less than 0.4 per million sectors.
There is clearly a challenge to do better. The IOSA audit system will help. Qatar Airways was the first airline to undergo IOSA. Today 12 airlines from this region are in the audit process or have expressed a strong interest. I challenge you all to commit to this important programme to raise safety levels in this region.
Cost reduction is critical to our survival. Airlines have reduced their costs. Now its time to work together to reduce industry costs.
The industry settlements system—BSP and CASS—is a good example. Last year IATA processed US$6 billion in settlements in the Middle East. This is 3.3% the 180 billion dollars we processed globally. We all benefit from the timely cost-effective global collection of sales. Automation and elimination of manual documents drove processing costs down by 50% last year.
Operations are expanding—a BSP was started in Abu Dhabi and one will open in Yemen. CASS operations began in Egypt, and Saudi Arabia will be next. In 2005 BSP's will open in Syria, the Palestinian territories and Iraq, external conditions permitting.
Simplifying the Business
Cost reduction and enhanced customer service are at the heart of Simplifying the Business. The lead item is 100% E-ticketing by 2007.
The business case if convincing. An e-ticket costs US$1 to process, compared to US$10 for paper. Eliminating IATA's 300 million paper tickets will save the industry US$3 billion per year in processing costs.
Further savings will come from:
· Bar-coded boarding passes
· Common use self service kiosks for check-in
· And radio frequency baggage tags
We are gearing up our team to push these initiatives forward. MEA and Emirates are taking on ET aggressively. All parties must be involved from the start of the process.
We are already working with carriers in the region to ensure successful implementation. To date IATA has organised two in-house seminars in Bahrain and Beirut. One more will be held in Amman at the end of November. We have also participated in two AACO conferences and a Middle East IT forum.
But overall use of ET in the region remains negligible. A regional action plan will help address your special concerns. Together we will find solutions to regional challenges like low Internet penetration. Urgency is building.
For example, because of IATA's new project, Continental delayed canceling Interline agreements with non-ET carriers. But plans remain in place to do this in 2007. With Kuwait, Egypt and Lebanon leading, the region's BSPs are preparing.
Your cooperation in your home markets is essential to success. And let's remember that ET is only the first step in a process that will touch all areas of our business. I urge all the regions airlines to attend the Simplifying the Business conference. This will be held at IATA Geneva November 16-18.
Fuel Savings Action Plan
Fuel is the greatest threat to profitability. Based on an average price of US$37 per barrel (Brent), we will see losses of 3-4 billion dollars. We cannot influence the price of fuel. But we can change inefficiencies that unnecessarily increase fuel use.
IATA launched an emergency Action Program to achieve cost savings and a more robust profitability. Specifically we ask that governments and our partners work with us to:
· Make air routes and operational procedures more efficient
· Reduce airport fuel charges
Globally IATA's target is to achieve this year $1.5 billion in fuel savings. In the Middle East we are targeting $200 million in savings mainly from:
· Resolving RVSM monitoring issues
· Introducing four new RNAV routes focusing on Damascus and Ankara
· Restructuring routes in key areas
· Expanding implementation of GNSS/RNAV and enhancing flow sequencing at the region's major airports
Already we are seeing results. IATA helped restructure the Empty Quarter air routes. For this we had the cooperation of Saudi Arabia, United Arab Emirates, Bahrain and Oman. Similar action is ongoing in Egypt, Yemen and Jordan. Additionally we are launching programs to help airlines better manage fuel hedging.
We cannot afford to lose this opportunity to achieve greater efficiency.
Governments have an essential role in industry change. I have just come from the ICAO Assembly where I presented an agenda for government action. It focuses on security, insurance, liberalisation and regulation of monopoly suppliers.
Governments must take greater leadership in security. The situation following September 11 was absolutely urgent and required quick action. Three years on, the lack of coordination and harmonisation is simply not acceptable. We must fight terrorism, not bureaucracy.
The cost of this uncoordinated confusion is five billion dollars a year. This is paid for by airlines and the flying public. I challenged ICAO states to increase the effectiveness of security measures with greater coordination.
And I challenged governments to stop passing the buck. They must accept their responsibility to pay for national security.
A consequence of not solving the security problem is insurance. Despite great efforts, Globaltime failed. The industry still faces a massive insurance problem. Underwriters plan to exclude coverage for:
· Dirty bombs
· Electromagnetic pulse devices
· And biochemical materials
Airlines cannot face this exposure alone. And governments cannot afford to have us stop flying. The urgent need for a stable solution is obvious.
But the government response has been slow and ineffective. I asked governments to:
· Provide individual or collective guarantees to cover insurance deficiencies
· Agree to a limitation of liability regime for war and terrorism losses.
I congratulated ICAO member states for giving us a clear vision of a liberalised industry. This came at ICAO's Air Transport Conference Five last year. But the lack of follow-up is disappointing. I don't see any relevant changes to national legislation. The failure of the US-EU talks on an open aviation area was a great lost opportunity.
The US sacrificed industry needs for domestic politics. The ineffective European Commission regulates seat pitch instead of developing meaningful policy. After the US elections and with a new commission in Brussels, I hope for progress.
Significant change, like the open aviation area, is needed to kick-start the liberalization that was agreed 18 months ago. We cannot wait forever for basic freedoms that other businesses take for granted. I do see some interesting change in this region.
Last year in my remarks at this Assembly, I noted that Arab carriers were not involved in alliances. Today five Arab carriers are now looking at an alliance. And Arab carriers have signed a number of code sharing and joint venture agreements.
Since June AACO, the Arab Civil Aviation Commission (ACAC) and the Arab Council of Transport Ministers worked to establish a legal framework for an Arab entity to conduct bloc negotiations. ACAC is moving forward with a pan–Arab multilateral agreement for regional liberalisation.
If it creates a fair commercial environment, it could be a foundation for broader open skies. The results of liberalisation are already being enjoyed by Lebanon and the United Arab Emirates. This is all good news in line with vision of Air Transport Conference Five. I look forward to your continued support for a stepped liberalisation with governments in this region.
Rebalancing the Value Chain
Our agenda with industry partners has a government dimension. In this case our partners are airports and air navigation service providers. Let's be frank: the value chain is broken. We do the flying and everybody else makes money.
Airlines in a competitive world struggle to achieve 2-3% profit margins. Airports make margins over 25% in the industry's worst years. We all need to focus on cost reduction. But many airports and air navigation service providers continue a happy monopoly life based on cost-plus pricing. We have some good partners like the United Arab Emirates Civil Aviation Authority.
Or Yemen which reversed a 25% overflight charge increase. We now await further reductions both in Yemen and elsewhere in the region. Our mission is to instill a mindset of efficiency targets in our partners.
An example is in Europe. We are challenging ANSPs to meet the best-performance levels of their peers. This would yield a 20% efficiency gain with cost savings of a billion dollars. This year Eurocontrol's user charges were reduced by 3%. For next year we are negotiating an even more significant reduction. Things are starting to move in the right direction.
We are taking this same approach globally with all of our partners. I reminded the ICAO Assembly of one important point. Government must provide effective economic regulation of airports and ANSPs. A competitive industry cannot accept their abuse of monopoly positions.
Slowly I believe our messages are getting across we are making progress. But you can be sure IATA will not relax. As you may know, I am impatient.
And I shout in a polite way to defend our industry's positions. The problems that our industry faces are massive. I worry that incremental progress will not achieve change fast enough. The fuel crisis adds urgency to our case for change. I will continue to fight for the industry with all external parties.
IATA will continue to support the industry achieve greater efficiency and reduced costs. And with your help at the regional level, the chances for success are great.
AACO 37th Annual General Meeting