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Date: 11 March 2005

Aviation Day, Berlin

Good afternoon. I am pleased to be here at the first ITB Aviation Day. Air transport is going through its most difficult period. Our business has changed dramatically. And we can expect even more fundamental changes to come. Standing still is not an option.

So I congratulate the organizers of ITB for creating this opportunity to discuss aviation. Aviation, travel and tourism are linked. Our customers are the same and our problems are common. Understanding each other is the first step towards finding solutions.

What "problem" is at the core of the airline industry today? The value proposition is changing. Customers demand cheaper travel. Airline yields have fallen by at least 10% in the last 5 years. It has never been cheaper to travel. More people than ever are flying—1.8 billion people traveled in 2004. And yet airlines have never lost so much money—US$ 35 billion since 2001. Our challenges are:

  • to meet customer expectations
  • to retain the value of the network system and
  • to return value to our shareholders.

Airlines have worked hard to restructure and reduce costs. Despite our financial difficulties, 2004 was our best year ever in terms of safety. And profitability is slowly returning to the industry.

Asia and Europe are starting to show some positive results. Losses by US carriers continue to absorb the industry's profitability. But the high price of fuel—now over US$50 per barrel—is a very real threat to everybody's bottom line. This is not a comfortable time.

We need to become a low cost industry. The industry crisis means that we must change fast. What needs to be done? We need to Simplify the Business. This is IATA's greatest leadership challenge ever. IATA represents:

  • 270 airlines
  • 94% of international traffic
  • US$180 billion worth of settlements.

IATA is at the heart of many of the complex industry systems that make global networks possible. Our customers value the network, but will not pay for the complexity. And IATA's mission is to Simplify the Business. This is a revolution in the way we travel and ship cargo that consists of 5 core projects:

  • 100% e-ticketing by the end of 2007
  • bar-coded boarding passes
  • radio frequency identification for baggage management
  • common use of self-service kiosks for check-in
  • and paperless cargo.

Each project has three common elements:

  • Using existing technology
  • Making travel more efficient for passengers
  • Reducing costs for airlines.

Turning achievements by individual airlines into industry-wide solutions is an enormous task. E-ticketing is the top priority. Why? It saves US$9 per ticket. This means US$3 billion in savings each year. It also means more convenience for our customers. And opportunities for travel agents to operate more flexibly. By the end of 2004 19% of tickets processed through IATA were e-tickets. By the end of 2005 we will be at 40%. And IATA will stop printing paper tickets by the end of 2007. Let's also remember that this is not ET just for the big boys.

Over the next 3 years IATA will work with airlines large and small to help them prepare. We will take the same approach with the other projects.

Infrastructure

The industry needs to improve efficiency. Airlines have reduced their non-fuel unit costs by 6% in the last two years. Airlines pay for their own infrastructure.  We get billed every time we land, park or fly. So we demand the same efficiency from our airport and air navigation partners. Their US$40 billion bill is 10% of our operating costs. IATA negotiates with these partners on behalf of the industry. Last year IATA's efforts saved the industry over US$1 billion in user charges. That is progress, but there are still many battles to fight. Let me focus on Germany where airports and the air navigation service provider—DFS—are not responding to our call for efficiency.


German Airports

Firstly, Germany's main airports are living in the wrong age. They are among the most expensive in the world and there is no effective economic regulation. They increase fees as airlines struggle to meet consumer demand for cheaper travel. Both Frankfurt and Munich increased charges for 2005. With the 15% rise in global traffic, you would expect cost savings on volume alone.

So, this is not an acceptable result. It is time to get serious about efficiency and cost reduction. Airports must understand that airlines bring the business. If you owned a shopping mall, would you charge the taxi drivers who bring you business? It is outrageous that the so-called regulator permits Frankfurt to over-recover aeronautical fees.

Airports are monopolies. Airlines should not be cash cows. And the regulators are phantoms. German airports need real independent and effective economic regulation.

DFS

DFS, the provider of air navigation services in Germany is no better. Between 2001 and 2003 en-route unit rates increased by 53%. Admittedly, they decreased by 3.2% in 2004 and a further 20% this year.  But this was largely a result of two factors completely outside the efforts of DFS:

  • An increase in traffic volumes
  • Proper allocation of meteorological costs.

Meanwhile their cost base continues to rise unchecked—12% planned for the next three years.  Instead of reducing costs, DFS plans to increase charges by 3.0% in 2006 and nearly 8% in 2007. Where is the commercial discipline? We are starting to hear of government plans to privatize DFS. Airlines really don't care who owns an airport or an ANSP. But we do care about having the right incentives in place for efficiency.

If DFS behaves this badly as a public monopoly, how will it act as private monopoly? The bottom line is that we need:

  • Open and transparent consultations during the privatization process….and
  • A real economic regulation that encourages efficiency

Governments

Governments continue to play a critical role in our industry. Unfortunately, all too often they lack vision. Here in Germany the Standort Deutchland initiative is the kind of government/industry partnership that is needed. The initial results of an airport infrastructure strategy underline the critical importance of the industry to the German economy. Joint efforts which can ensure that hub infrastructure keeps up with growing demand are essential. I look forward to seeing more positive results from this initiative. Going forward, I hope that this initiative will also tackle the need for effective regulation of our monopoly suppliers.

The European Commission is at the other end of the spectrum. It does not understand the complexities of air transport. And it does not have a vision for where the industry needs to go.
Instead, it takes a bureaucratic approach to a dynamic industry. The result is micromanagement and mis-regulation. Let me illustrate this with three stories from Europe.

First, Compensation for Denied Boarding, Delays and Cancellations
 
It is a good example of this micro-management and mis-regulation. Over 400 million people travel by air in Europe each year. The commission receives just 700 complaints annually about delays, cancellations and denied boarding. That means one complaint for every 570,000 travellers. However, to solve what the Eurocrats see as an enormous problem we have consumer protection legislation that is no protection at all. It is not good law. It contravenes the Montreal convention that EU member states signed. In addition, it makes no sense. Airlines will be accountable for bad weather and other situations beyond their control.

We can do a lot, but we cannot guarantee sunshine. It will add costs to the industry without adding value.  And, at the end of the day, the consumer will pay for this protection. If the Commission is serious about adding value to the European travel experience, it would make the Single European Sky a reality. Frankly it is a 15-year story of failure.

We have a single currency and a single market. But we have 34 air navigation service providers with uncoordinated operating standards where 1 could to the job. The result is unnecessarily high cost and low efficiency. It's time for serious solutions.

Fuel Tax

My third example is the recent debate over proposals for a fuel tax to fund everything from third world debt to AIDS research. Third world debt and AIDS are important issues that need effective solutions. A fuel tax on aviation is not the answer. Let's set the record straight. European trains receive subsidies of US$ 50 billion per year. Where transport taxes are applied, the normally fund infrastructure costs.

In aviation we pay our own infrastructure bill. We recently studied this issue in detail. In Germany the Government collects, through taxes and charges a net of 11 Euros per 1,000 passenger kilometers traveled by air.  But it subsidizes rail with 51 Euros for every 1,000 passenger kilometers. Governments need to be reminded that aviation directly supports 4 million jobs.

Indirectly there are 28 million jobs tied to aviation and US$1.3 trillion (EUR 1 trillion) of economic output dependant on aviation. The role of travel and tourism in the economy of developing nations is enormous. Governments that are serious about development should encourage travel, not discourage it. I am pleased that Commissioner Barrot does not support a fuel tax. We had a first meeting in Brussels and agreed to work together on this and other issues. I hope that it will be the start of a new relationship with the industry.

Environment

Our industry is also subject to misunderstanding on environmental issues. Let's start with the facts. In the last four decades aircraft noise has decreased by 75% and emissions by 70% per transport unit. The noise contour of a modern aircraft is no wider than a high-speed train. And it is contained within the airport area.  With rocketing oil prices, fuel efficiency is critical.  The fuel bill last year was over US$ 63 billion and this year the situation remains critical. Already new aircraft have fuel efficiencies of 3.5 litres for 100 passenger kilometers. This matches that of a compact car, but delivers 6 times the speed. The A380 and Boeing 787 are both targeting fuel efficiencies under 3.0 litres per 100 passenger kilometers. In short the industry's record on the environment is one to be proud of.

But a good record is not enough.  We will be challenged to map a future of further improvements. Aviation was excluded from Kyoto because much of our activity does not fit within national boundaries. We operate over the high seas.  ICAO was given the task to deliver a solution for emissions. We are a global industry that requires global solutions. Investment in new technology will continue to be the main driver of improved performance. Governments must do their part to improve operations with more efficiency.

  • Routings
  • Air space management.

And together we must avoid economic solutions that penalize aviation and reduce its ability to invest in new technology. We support ICAO's approach to study all options, including emissions trading. Governments must focus on global solutions and solid facts.

Conclusion

Together—air transport, travel and tourism—we are a great industry. We facilitate global business and we make dreams come true. We are a part of the fabric of modern life. Together we face the challenges of providing the value that our customers expect. We expect the same efficiency of our infrastructure providers.  And together we must approach governments with a strong message on our need for an effective globally harmonized policy vision. Understanding each other better is the first step. I have given you the airline side of the story. I look forward to learning more about the other side of the industry during my time here. Thanks to ITB for organising this occasion.

'Understanding Each Other' Aviation Day, ITB Berlin
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