Date: 12 April 2005
Foreign Correspondent's Club of Japan, Tokyo
Good afternoon and thank you for your kind invitation. It is great to be here in Tokyo. Tokyo will host IATA's 61st Annual General Meeting and World Air Transport Summit in just 6 weeks' time.
Japan has played a tremendous role in the development of international air transport. Japan Airlines and ANA are among our industry's largest players. Japanese are among the world's best travelers Last year 17 million Japanese traveled overseas. The "Yokoso Japan" initiative will bring 10 million travelers to Japan each year by 2010—4 million more visitors than in 2004.
Starting in 1971, our Japan office was the IATA's first agency program. It is also our biggest, processing over US$26 billion last year alone. So it is fitting that the world's air transport leaders will meet here to celebrate our 60th anniversary. This is the first time that we will meet in Japan since 1959. Many things have changed since that time.
But we still remain a strange but wonderful industry
Over 30 years world GDP increased by three times. In the same period passenger traffic increased seven-fold. With 6% annual growth, air transport is expanding at more than twice GDP. The problem is that the more we sell, the more we lose. In 2004 1.8 billion people flew—more than ever. And we still lost US$ 4.8 billion. Total industry losses since 2001 exceed US$36 billion. Shocks such as SARS, terrorism and war have interrupted the normal business cycle.
The shock for 2005 started last year. The industry's fuel bill grew from US$44 billion in 2003, to US$63 billion in 2004. If the average price of fuel for this year is US$43 per barrel (Brent) then the bill this year will be US$76 billion. So, we are now forecasting a US$5.5 billion loss for 2005. This will mean total industry losses of US$41 billion between 2001 and 2005.
The industry has lost its balance
Some of our problems result from unbalanced deregulation. Airlines were deregulated but governments did not look closely enough at the playing field or the rules.
Despite being a global industry, governments retained tight foreign ownership limits that restrict our access to global capital markets. And the rules of the game—the bilateral system—restrict our 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 our control.
The largest remaining cost item is labour which accounts for between 18 and 38% of total operating costs. But it has proven stubbornly difficult to reduce.
Competition intensifies as more aircraft enter the fleet—airplanes ordered in boom-times, arrive in less fortunate times. Leasing aircraft has further complicated the picture by giving more mobility to our assets.
Consumers are happy because air travel has never been so cheap. More precisely, airline yields have never been as low. But governments responded by milking the industry with taxes and charges. They treat us as if we were as sinful as alcohol or tobacco. They forget that airlines create:
- 4 million direct jobs US$400 billion in output.
- 24 million related jobs and US$ 1.4 trillion in related output.
- In total this is 4.5% of global GNP.
Airlines have worked hard to take out 2 to 3% out of non-fuel unit costs each year. And I must commend our Japanese members for their success in restructuring. They have done a great job, but they still face the same problems that have unbalanced the industry.
IATA represents 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. Today I would like to highlight:
- Our success in safety
- The challenge to Simplify our Business and evolve to a low cost industry
- The need for our partners to match our efficiency efforts
- And the urgency for governments to look at our industry in a different way.
I will cover the highlights now, and you will hear much more about these themes at the AGM.
Safety: The best news is that 2004 was our safest year ever
1.8 billion people flew safely in 2004. Tragically there were 428 fatalities—but this is the same number 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. One hundred airlines will be on the registry by the end of this year. ANA is on the registry and JAL has just completed its audit.
Many regulatory bodies have endorsed IOSA, including the FAA. Our members deserve a round of applause for taking this giant step forward in safety management.
The question that follows is how do we match our stellar performance on safety with similar financial performance?
Turning US$40 billion in losses into profits will not be easy. Airlines are responding by re-engineering their businesses. The merger of JAL and JAS is an example of the structural change that has taken place.
Why?—because consolidation is an essential step as air transport evolves to a low cost industry. Consumers value the great network that we have developed. But they get no value from the processes that make it possible. Many of these are paper-based, complex and expensive. We have to keep the value but cut the cost.
IATA is leading a program to Simplifying the Business that will cut costs and enhance service. We are creating a revolution in the way people travel and ship with:
- 100% e-ticketing by 2007
- paperless cargo
- bar coded boarding passes
- common use kiosks for check-in
- radio frequency identification for baggage management.
The technology exists. Most airlines have a piece of the benefits of this technology. IATA's job is to make them available industry wide. We print over 300 million tickets and handle over US$ 225 billion in industry settlements.
Japan is well on the way. We moved from 13% e-ticketing in Japan in 2004 to 24% for the start of 2005. We expect 40-45% by the end of 2005. And we will meet our target of 100% by the end of 2007. JAL and ANA are among the carriers leading trials on RFID for baggage. And both they are leaders in kiosk technology.
The cost savings from Simplifying the Business are great. By itself e-ticketing will bring at least US$3 billion per year in cost savings to the industry. The task is enormous. But savings billions while making travel more pleasant is worth the effort to change.
Similarly, our partners—airports and air navigation service providers—must match our efficiency efforts.
US$40 billion is the annual bill that airlines pay to our monopoly uppliers—airports and air navigation service providers (ANSPs). This is 10% of our operating costs. We pay when we fly, land and park.
Governments fostered airline competition but gave us phantom regulators for monopoly suppliers. And now we are seeing the privatization of these suppliers. Quite frankly, I do not care who owns the airport or air traffic control. But I do care about the service standards and the bill. Remember, we are a business and the bottom line matters. So we are challenging our partners to show the same efficiency gains as airlines.
Airlines have taken 2 to 3 % out of their non-fuel unit costs over each year. The break-even fuel price went from US$33 per barrel in 2004 to US$36 this year. We need our partners to be profitable—but also tough on costs.
Some governments and airports understand this. Singapore is a great example. Air transport is critical to Singapore's economy. They have created an airport that is top class in customer service with reasonable costs. And the government has just announced the expansion of its air hub development fund to S$300 million.
The airport situation in Japan is a little different. Japan's airports are the most expensive in the world. Some Japanese airports have shown understanding of the problem. We convinced Centrair to lower its landing charges to 31% below Narita's level. Kansai continues with a discount scheme of 10 to 20% to encourage more traffic. These are good developments, but they do not go to the root of the problem.
There is much more that can and must be done on cost efficiency. For example, in Kansai we see enormously expensive infrastructure development, but no overall plan. The construction of a second runway at Kansai and the opening of Kobe airport later this year make this urgent.
The cost burden is enormous and airlines cannot pay for the billions that are being spent.
As for Narita, it is a year since privatization and we see improved profitability. This is a golden opportunity for Narita to demonstrate the success of its privatization by addressing its high charges. IATA would be very disappointed if we do not see a substantial reduction in Narita's charges soon.
Finally, governments must show leadership and look at our industry in a different way
Specifically, they must address:
- Taxation and
Three and a half years after September 11, security is tougher, but the system is still a mess. Global standards, harmonization and international cooperation are the backbone of our great safety achievements. But security is being handled in a completely different and inefficient way. Airlines and their customers get the US$ 5.6 billion bill for the resulting inefficiency.
We need 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 we cannot continue with unilateral half-measures that ignore the need for global solutions.
We see the same in Japan with the implementation of the National Aviation Security Program and related matters. Unilateral government action with no consultation and an unrealistic implementation scheme is simply not good enough. Airlines and governments have a common goal: to ensure a secure industry. We must work together to achieve it. And we need to use our resources efficiently to battle terrorism, not bureaucracy.
Governments must also change the way that they tax our industry
Too often air travel is taxed at the levels of taxation similar to the "sins" of alcohol and tobacco. As fares drop, the level of taxes and charges can be more than the price of the ticket. Globally we have seen a 10% drop in yields in the past five years. And there seems no end.
The "Stamp Duty" being enforced in Japan on tickets goes against international agreements. And it adds complexity to an industry that is trying to be paperless and simplify.
Mr. Chirac was in Tokyo a short while ago and discussed his plans for a tax on aviation fuel to pay for developing nation debt. The problems of the developing world are serious. But the solution is not to tax the industry that is at the backbone of global tourism. Making travel more expensive will do more harm than good in the developing world.
It is time for governments to take a more realistic look at the tax burdens they place on the industry and its customers.
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 the 1940's—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 excuse for governments to stand still. This industry desperately needs change. And the US and Europe must have the courage to lead.
In China we see a plan and action. Open skies were declared for Hainan. Liberal bilateral agreements are being signed. And China's airline industry is growing and generating profits.
Government's must not be afraid of letting markets work and airlines doing business!
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 and our partners address our most pressing issues. Why? Because change is critical.
We cannot live with half-measures and the contradictions of the past:
- Intensifying airline competition without effective regulation of monopoly suppliers.
- Creating competition to lower fares while taxing beyond reason.
- Nationalistic rules for a global industry and
- 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 done a great job. Our record on safety speaks for itself—2004 was our safest year ever. And we are the safest mode of transport.
We are working hard to simplify our business and deliver the value that our customers and shareholders deserve. These are the pressing issues that will be discussed at our upcoming AGM.
Giovanni Bisignani, IATA Director General & CEO addresses the Foreign Correspondent's Club of Japan