Skip to main content

Test Home
You & IATA

Search

You are here: Home » Pressroom » Speeches
  • Print this page
  • Share this page

Date: 4 April 2005

Air Finance Conference, New York

Good morning and thank you for your kind invitation. I feel at home here. My first job was at First National City Bank in New York. Now I am representing another great, growing and sometimes strange, industry. Over 30 years world GDP increased by three times. In the same period passenger traffic increased seven-fold. With 6% annual growth, air transport is expanding at more than twice GDP. But the problem is that the more we sell, the more we lose. In 2004 1.8 billion people flew. And we lost US$ 4.8 billion. Total industry losses since 2001 exceed US$36 billion.

The industry has lost its balance.

There was a time when airlines looked at their costs, added a margin and that became the price. State-owned flag carriers dominated the international industry with luxury products for the elite. National pride and market share were more important than the bottom line. Deregulation brought competition to parts of the industry. Airlines were deregulated but governments did not look closely enough at the playing field or the rules. Some governments persisted with subsidies. Despite being a global industry, governments retained tight foreign ownership limits that restrict our access to global capital markets.

Meanwhile our monopoly suppliers—airports and air navigation service providers—were ignored by the regulators. Together, these monopolies account for 10% of our operating costs. This year fuel will take up another 20% of our operating costs. A third of our operating costs are completely outside of our control. On top of that labour relations have been difficult. Labour costs are significant—18 to 38% of operating costs, depending on the part of world. The cooperation of labour is critical to building a competitive industry.

Unfortunately many airlines have been crippled and airline jobs lost because labour did not understand the need for change. All the while the number of planes increases. Airplanes ordered in boom-times, arrive in less fortunate times. Then leasing companies further complicated the picture by giving more mobility to our assets. But the rules of the game—the bilateral system—restrict our markets. Consumers are happy because air travel has never been so cheap. More precisely, airline yields have never been as low. Yields in the two most deregulated markets—intra-Europe and US domestic—dropped by over 30% since 1992. Airlines worked hard to take out 2-3% out of non-fuel unit costs each year.

But governments responded by milking the industry with taxes and charges. They treat us as if we are as sinful as alcohol or tobacco. The situation in the US is particularly disappointing and I will speak of this later.

 

Let's remember what airlines bring to the global economy:

  • 4 million direct jobs US$400 billion in output.
  • 24 million related jobs or US$1.4 trillion
  • in total 4.5% of global GNP.

Too often governments forget how important we are to the economy. This is a strange industry: More people are flying but we bleed red ink. If I knew this 35 years ago when I was a young New York banker, I might have stayed where I was. Instead, I am at IATA—representing 270 airlines and 94% of scheduled international air traffic. IATA's job is to lead the industry to solutions for safe, reliable and efficient air transport.

First, let's understand the current state of the industry.

The best news is that 2004 was our safest year ever. 1.8 billion people flew safely in 2004. Tragically there were 428 fatalities—the same level as in 1945 when only 9 million people traveled by air. This is a great achievement but we will do even better. In 2004 we set a target:  a 25% reduction in the accident rate by 2006. IATA's Operational Safety Audit (IOSA) is at the core of our safety efforts. IOSA is the first global standard in airline safety management.  Already 28 airlines are on the IOSA registry and we will have 100 by the end of the year. Many regulatory bodies have endorsed IOSA, including the FAA.  I hope that the leasing and insurance communities will make use of this tool.

The financial story is not positive.
Shocks such as SARS, terrorism and war have interrupted the normal business cycle. The shock for 2005 started last year—the price of oil. Fuel will be 20% of operating costs in 2005. That means a total fuel bill of US$76 billion based—if the average price per barrel (Brent) is US$43 for 2005. This is up from US$63 billion in 2004 and US$44 billion in 2003. And hedging levels will fall from 40% in 2004 to 20% in 2005. Fuel was responsible for the US$4.8 billion industry loss in 2004. And we are now forecasting a US$5.5 billion loss for 2005. This will mean total industry losses of US$40 billion between 2001 and 2005.

The picture is not clear until you look at regional performance.
US airlines lost about US$10 billion in 2004.   They are doing a strong job in bringing down non-fuel costs—particularly labour. But their fuel bill grows faster than they can drive down other costs. We saw small profits in other regions:

  • Asian carriers US$2.5 billion
  • European carriers US$1.5 billion
  • Middle Eastern and Latin American carriers US$1 billion.

Let's compare the three major regions: US, Asia and Europe.
Asian carriers operate in a dynamic economic climate, but with more traditional competitive regimes. It is lower labour costs that really give Asian carriers a competitive advantage. Labour costs for Asian carriers are between 3 and 7 cents per ATK or 18% of operating costs. For US carriers the cost is 16-18 cents or 38% of operating costs.

On top of this we have the different route mix. US carrier long-haul operations are cost efficient. But long-haul operations are a smaller share of their total operations compared with Asian carriers. There is low cost competition on some short haul routes in Asia. But the already low operating costs of Asian network carriers and a good mix of long-haul traffic are mitigating the impacts.

Europe is a different story. Europe's cost base may be higher than the US but so are the yields. Two points to make:

  • European airlines have a larger proportion of higher-yielding long haul traffic.
  • And the decline in short haul yields has been moderated by airport capacity.


Low cost is 45% of US domestic travel. In Europe the proportion for intra-European travel is smaller—32% if we combine low cost and charter. The impact has also been different. In the US, low-cost airlines compete directly in the network carrier hubs. Premium business and leisure yields suffered equally. Capacity restrictions and costs at Europe's major hubs encouraged the low-cost sector to use secondary airports. The result is that European business traffic yields have been somewhat protected. So, while the European cost base is higher, higher yields have protected profitability.

Governments have also played a role in creating regional differences.
In the US, the level of taxes and charges is incredible. A US$200 round-trip ticket purchased in 1972 had an average tax of 7%. In 2004, this had risen to 26%--totaling US$15.8 billion. With taxes at that level, the ability of the airlines to price in line with perceived value is limited. European Governments have a love affair with the rail system—at the expense of air transport. Total annual European rail subsidies are US$50 billion. The story is different for air. Take France for example:

  • Airlines and their passengers pay 117 Euros per 1,000 passenger kilometers to cover infrastructure costs.
  • But the government's costs are only 50 Euros.
  • So the government makes 67 Euros for every 1,000 passenger kilometers traveled by air.

Overall, the approach by the previous European Commission is one of micromanagement. It does not understand the industry's fundamental problems. The total burden of European Commission mismanagement on the airline industry is 5.9 billion euros each year. I am hopeful that the new commissioner, Mr. Barrot, will take a different approach to rebuild European competitiveness.

Asian Governments in general treat air transport better. In place of excessive taxation and rail subsidization, we see strategic investments to promote air transport along with economic growth. The results are impressive. Our recent passenger satisfaction survey of airports ranked Singapore, Hong Kong and Seoul highest among the world's airports. In Singapore, the government has just re-committed itself to an air hub development fund to promote aviation. And in China we see over 23 airport projects underway and a grand plan for further liberalization and 30% growth. It is not coincidence that Asian airlines and economies are doing well and leading global growth.

The question for the global industry is: How do we cope with total losses of US$40 billion since 2001?

Airlines are responding by re-engineering their businesses.
Air transport is evolving to a low cost industry. But many processes are paper based, complex and expensive. Simplifying the Business will reduce costs and enhance service. IATA is leading this revolution in the way people travel and ship with:

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


Most airlines have a piece of the benefits of this technology. IATA's job is to make them available industry wide. We print over 300 million tickets and handle over US$183 billion in industry settlements. By itself e-ticketing will bring at least US$3 billion per year in cost savings. The task is enormous. But savings billions while making travel more pleasant is worth the effort.

Governments must also be part of the industry solution.
They cannot continue to burden the industry with costs, mis-regulation and out-dated rules. We need Government action to

  • Regulate monopoly suppliers
  • Take responsibility for security
  • Let airlines run their businesses like businesses—liberalize

Let's start with effective regulation of monopoly suppliers.
US$40 billion is the annual bill that airlines pay to our monopoly suppliers—airports and air navigation service providers (ANSPs). This is 10% of our operating costs. Governments fostered airline competition but gave us phantom regulators for monopoly suppliers. Globally airlines pay US$8 billion for international air navigation. The European air navigation bill is a US$5.6 billion headache. And it is 70% less cost efficient than the US. Eurocontrol data helped identify inefficiencies. We are now challenging European providers to achieve a 20% efficiency gain.

It is the same story with airports. We see record profits at airports when airlines have record losses. Airlines do the flying and everybody else makes the money. We need profitable airport partners that are efficient and dedicated to cost-reduction. Some of worst nightmares are in North America. We have a long running battle in Canada with Crown Rents and Toronto's extravagance. In place of an efficient airport we got Versailles with boarding bridges and out-of-control costs. Closer to here, costs at JFK and Newark have sky-rocketed due to their charging structure. Both now have a place of dishonour at the top of the list of the World's most expensive airports. We can no longer accept the failure of governments to ensure cost-efficient infrastructure.

And we cannot accept governments passing national security costs to airlines.
Three and a half years after September 11, security is tougher, but the system is still a mess.  Global standards, harmonization and international cooperation are the backbone of our great safety achievements. In safety, our work with the US FAA is a model for cooperation. Security is being handled in a completely different and inefficient way. Airlines and their customers get the US$ 5.6 billion bill for the resulting inefficiency. With a new team at Homeland Security, I am hopeful that we will be able to take a different and more effective approach. Governments cannot continue to ask air travelers to pay for their own security when it is a state responsibility everywhere else. And they cannot continue with unilateral half-measures. We need to use our resources efficiently to battle terrorism, not bureaucracy.

Finally, governments must give airlines the freedom to run their businesses like real businesses.
Deregulation without the freedom to do business is not a responsible policy—and it is killing the industry. The outdated bilateral system has been with us since 1944—when state-owned airlines flew DC-3's. Now, competition and markets should define the future of our industry. Governments must not be afraid to lead and facilitate this change. We lost a great opportunity when US-EU talks on an open aviation area failed last year. The US and Europe are mature markets with similar size and levels of development and technology. There is intense competition and consumers are sophisticated. There is no alibi for governments to stand still. This industry desperately needs change. And the US and Europe must have the courage to lead.

 

Let me leave you with one final thought.
These lines compare what happens to yields in deregulated markets. The blue shows telecom yields in the UK. The red and black show airline yields. Both have the same importance as strategic industries. And the results are the same but the playing fields are completely different. The telecom industry has access to global capital. Cross border mergers are commonplace. Customers are well-served and the companies are financially healthy. In air transport we are fragmented, constrained and, quite frankly, in many places a financial disaster. The number of significant cross-border mergers is basically 2—Air France-KLM and Lufthansa-Swiss. And even these are complex and restrictive. Governments agreed on progressive liberalization through ICAO. It is time for government leadership to implement the vision.

 

And the time for half-measures is over.

Some of you may be surprised by how liberal IATA's thinking is. Others may have noticed a new and bolder approach by IATA to industry issues. I am shouting, in a polite way, to ensure that governments address our most pressing issues.

Why?  Because change is critical. We cannot live with half-measures and contradictions of the past.

  • Intensifying airline competition without effective regulation of monopoly suppliers.
  • Creating competition to lower fares while taxing beyond reason.
  • National rules for a global industry
  • Mis-regulation and micro-management in place of leadership.


Today we have a new IATA that is tough and focused on delivering relevant results. Our members—network airlines—have changed. They have restructured and cost reduction has become a religion. As a result they are competing, without subsidies, in a global market. But the extra-ordinary price of fuel makes the situation urgent and the clock is ticking. Airlines have a limited future as profitable businesses if governments do not change as well. This industry is too important to "wait-and-see". The livelihoods of 28 million workers and US$1.4 trillion are at stake. Governments must act quickly in areas that are clearly their responsibility. And then get out of the way….. because we need to get on with business.

'Air Finance Conference', New York - 4 April 2005
ADVERTISEMENT


Additional information

© International Air Transport Association (IATA) 2014. All rights reserved.