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Date: 18 April 2005

PATA Annual Conference, Macau

Good morning. It is great to be with Asia-Pacific's tourism leaders here in Macau. You have wonderful, developed destinations from great cities to beautiful beaches and dramatic mountain landscapes. Diverse cultures and traditions fascinate visitors. And the friendly people of Asia make any visitor feel at home. And some of your people are great travellers:  Japan, Australia and Korea to name a few. On top of that, you have the markets of the future: China and India. Except that things are changing so fast that they are really the markets of today. And, Asia-Pacific has some of our industry's most dynamic airlines connecting Asia's vast geography to the world. In short this region has all the elements for a successful tourism industry.

But the future is in no way guaranteed.

Industry's stakeholders must continue to build a successful industry. Mutual understanding to address industry issues is critical. We are part of a tightly connected value chain that links

  • travel agents
  • global distribution systems
  • airlines
  • airports
  • tour operators
  • hotels
  • restaurants
  • souvenir shops
  • and so on

Globally tourism is responsible for 5% of GDP. In PATA countries, tourism directly accounts for up to 50% of GDP. And in the Maldives if you add in the indirect contribution we are at 80% of the economy. If one link in the value chain is weak or broken, everybody suffers. This has been the lesson of Asia Pacific's recent crises:

  • SARS
  • Terrorism
  • Tsunami
  • Earthquakes

Everyone in this room has felt their impact. In a global world of instant news, coordinated action is critical. IATA and PATA have worked effectively in the aftermath of many of these crises. Most recently, we worked together on a number of issues.

  • IATA participated in the PATA task force after the Bali bomb
  • We are partners in the ".travel" top level domain project
  • PATA supported our efforts to improve security after 9.11 with more effective use of technology
  • And PATA supported our call for governments to step up to the mark on war risk insurance which was cancelled after 9.11
  • Together we fought mis-information during and after SARS
  • And we were both involved in the Tsunami recovery efforts

And I congratulate the organisers of this conference for picking a theme that is so relevant to current times.  The current discussion of bird flu and global pandemics means that we must continue to work well together. Connecting Tourism's Stakeholders is fundamental to our shared future.


The Airline Perspective

I represent IATA:

  • 270 member airlines
  • 94% of scheduled international traffic
  • 71BSPs for 390 airlines covering 150 countries worldwide
  • 79,000  travel agents
  • over 300 million tickets annually
  • and US$225 billion in industry settlements.

Our activities cross all the industry's stakeholders. My role is to bring attention to the actions needed for safe, reliable and efficient air transport. But as we are interlinked, we share the same customers and the same future. Working together to understand and face industry challenges will benefit us all. IATA is close to the Asia-Pacific region. Our regional offices in Beijing and in Singapore are the first point of contact for our 51 airline members based in the region. Today, I will present some of our industry's most pressing issues. And I am eager to learn about PATA member perspectives on the industry.

Before I get into the issues let me describe the State of the Industry

It is no secret that air transport is going through its most difficult period. What "problem" is at the core of the airline industry today? The value proposition is changing. People expect to fly cheaply. Global airline yields dropped by 10% in the last five years. In deregulated markets we have seen yields fall by up to a third in the last 15 years.

Our challenges are three-fold:

  • to meet the expectation for cheap travel
  • to retain the value of the network system and
  • to return value to our shareholders.

Airlines are cutting costs and reducing non-fuel unit costs by 2-3% each year. But yields are dropping equally as fast, if not faster. It has never been cheaper to travel. And it has never been as safe—2004 was our safest year ever. More people than ever are flying—1.8 billion people traveled in 2004.

But we have never lost as much money—US$36 billion between 2001 and 2004. Profitability is slowly returning to some parts of the industry. Asia-Pacific carriers are among the industry's strongest. But the continuing high price of oil is challenging all carriers. Our fuel bill rose from US$44 billion in 2003, to US$63 billion in 2004. In 2005, if the average price is US$43 per barrel (Brent) another US$ 13 billion will be added to bring the total to US$76 billion. At that price, 2005 will be another year of losses—US$5.5 billion. We need to become a low cost industry. To do so, we must change fast.

Here is our agenda for change

It begins at home with airlines simplifying their businesses to deliver value without the costs of complexity. Then we ask our airport partners to

  • be dedicated to cost efficiency and to
  • preserve fair competition.

Governments must

  • re-think the way that they tax the industry and
  • give us the freedom to run our businesses as businesses

And we must learn to cooperate and communicate better as industry stakeholders. I will cover each of these individually.

Starting at home: we need to Simplify the Business

This is IATA's greatest leadership challenge ever. We are at the heart of many of the complex industry systems that make global networks possible. Airline 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.  It 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. Eliminating paper tickets will open up tremendous opportunities for our travel agent partners:

  • Remote business opportunities will increase.
  • Customer care after departure will be much easier.
  • Settlements will be more efficient.

Agents will have more time to concentrate on adding value to their client's travel. It is truly a win-win-win situation for customers, airlines and agents.

The second agenda item concerns airports.

Airports must be dedicated to cost efficiency and fair treatment of their customers.

Cost efficiency is the industry's mantra.

As I mentioned airlines have reduced their non-fuel unit costs by 2-3% each year. Airport charges are about 5% of our operating costs. Combined with air navigation charges, this becomes 10% of operating costs—and a US$ 40 billion annual bill. We pay when we fly, when we land and when we park. And we are at the mercy of monopoly suppliers. So we are right to demand that they are part of the industry's evolution to a low cost industry. IATA negotiates these charges 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. In Asia, we have some governments that truly understand the importance of air transport. Singapore's is among the best in Asia—and the world. Not only do they run an efficient hub, they are cost-competitive and are strategically investing to gain the economic benefits of aviation. I was pleased that the Singapore Air Hub Development Fund of S$300 million is to be continued beyond  2005.

In the last decade, more new major airports have been built here than anywhere else in the world:

  • Seoul
  • Osaka
  • Nagoya
  • Hong Kong
  • Macau
  • Guangzhou
  • Shanghai and
  • Kuala Lumpur.
     

And soon we will have a new facility in Bangkok. Many governments in this region understand the need for effective infrastructure capacity. What is less understood is the need for cost efficiency. Airports in China and Japan are among the most expensive in the world. We are fighting in Bangkok to simplify a complex charging structure that hides the real and high costs that users pay. The trend to privatise infrastructure is further complicating the picture. In Hong Kong we are against any proposals to increase charges to prepare for—or as a result of—privatisation. If privatisation means less efficiency and higher costs, then why privatise?

Quite frankly, we don't care who owns the airport so long as it is cost efficient with effective services. It has been one year since the privatisation of Tokyo's Narita Airport. Their charges remain the highest in the world—and their profits have gone up with privatisation. They have a great opportunity—and the profits to achieve it—to become a model of the benefits of privatisation. I will be very disappointed if I do not see a significant drop in Narita's charges levels. In fact we should all be disappointed. At the end of the day, we need to recoup our costs from cost-sensitive customers. We can't support a part of the value chain that has a license to print money. The cost of inefficient infrastructure gets passed through the value chain to our common customer. We should all be concerned that airports understand the need to be a responsible cost-efficient partner in the travel and tourism value chain. And where this does not happen, we all need to send a strong message to governments:

  • Install an independent regulator as a proxy for competition.

Airports must also preserve fair competition among their customers.

In response to consumer demands for lower fares, point-to-point carriers have developed a great business. This started in the US, spread to Europe and we now see it in Asia. Lower fares are generated from reduced costs due to lower service levels with no network operations. As new start-ups, they also benefit from:

  • Simple fleets
  • Low cost, recently hired labour
  • And the ability to cherry pick the most delicious routes

But the cost gap between network and point-to-point airlines is closing rapidly. Network carriers are en-route to a low-cost industry. And the point-to-point carriers are taking on costs as they expand. Finally, competition and consumer choice is always positive. But we must make sure that the competition is fair. Providing discounts because a carrier calls itself "low-cost" makes no sense. Airports must work reduce costs for all carriers. And, where purpose-built facilities are constructed for the low-fare sector, cost allocation must be accurate. We will not accept any subsidies—it simply is not fair.

Finally, I believe that there is room for many business models to compete. But, in the rush of enthusiasm for the point-to-point carriers, we need a reality check about what they bring to the table. The point-to-point model is not going to provide the global connectivity that travellers take for granted. The network model provides the broad distribution links that make global air travel convenient. Without it, the prospects for long-haul tourism are limited.

Governments also play a critical role in our industry.

Unfortunately, all too often they lack vision. Here we have two issues of common interest:

  • Taxation and
  • Liberalisation

Taxation

Air transport is an essential service that provides 4 million direct jobs and US$400 billion in direct economic activity. Indirectly, we support 28 million jobs and US$1.4 trillion in economic activity. That is 4.5% of global GNP and the proportion is much higher for many developing countries. In some countries it can be up to 50% of GNP. Too often air travel is taxed at levels similar to the "sins" of alcohol and tobacco. In the US, the tax on a US$200 ticket rose from 7% in 1972 to 26% in 2004. Recently we even heard European proposals to add a tax to air travel to pay for developing nation debt. This is a serious problem. But the solution is not to tax the industry that is the backbone of global tourism. Making travel more expensive will do more harm than good in the developing world. As an industry we need to be united in focusing the attention of governments on the importance of our industry. And we must oppose extra taxes that will penalise travellers.

Next, we need the freedom to run our businesses like real businesses.

The industry must move forward with progressive liberalisation. Markets and demand should define the future of air transport. Governments agreed to a vision for progressive liberalisation at an ICAO conference. ICAO is our United Nations counterpart organisation. Now we need to see some concrete results. Asia has made some positive steps. China and India are the stories with greatest potential. And both are moving in the right direction. The liberalisation of Hainan's skies is the start of a progressive liberalisation of the Chinese market. Future plans for the ordered liberalisation of passenger services from the interior towards the coast is a wise policy. Similarly, India has a white paper that will move the industry in the right direction. Both have enormous potential markets for inbound and outbound travel. And this is exactly the change that air transport and tourism needs. Governments must give us the freedom to develop our businesses and serve the needs of our customers. 

Finally, we must learn to cooperate and communicate better as industry stakeholders.

The crises of the last years have taught us many lessons. Information is immediately as global as our businesses or customers. There is no such thing as a local story. From SARS, to terrorism to tsunamis when crisis strikes there is a global audience that needs accurate and effective information. The current system of government warnings is a piece of the puzzle, but not the full picture. Politics plays too great a role in too many cases. Information on SARS was confusing. For example, CDC, WHO, governments and industry all had similar positions. But the differences in presentation were also striking and often confusing. Information is disseminated throughout the value chain.

If there is one area for immediate cooperation with a need to produce results it is on more effective industry communications. I do not mean "happy talk" to say that all is good when it is not. Credibility is fragile. That seem to be the most imminent threats do not always appear. Fears of global pandemics should be a wake-up call to start planning for the worst. Nothing is lost if all is OK. But the consequences of not planning could be disastrous. I would challenge IATA and PATA to join forces and bring other industry stakeholders together. We need to discuss this issue and come up with a plan that keeps the industry informed so that we can keep our customers informed. This is critical to the future of global tourism.


Conclusion

United—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 must

  • face the challenges of providing the value that our customers expect
  • expect efficiency from our infrastructure providers
  • approach governments with a strong message on our need for an effective policy vision.

Mutual understanding through Connecting Tourism's Stakeholders is the first step. We have proven that we can work together in the aftermath of some terrible disasters. We must also work together to build a stronger industry. Talk is cheap—so I suggest an agenda that will contribute directly to the bottom line of our memberships:

  • Simplifying the Business
  • Maintaining fair competition
  • Optimising infrastructure efficiency
  • Promoting an agenda with Governments that lets airlines run their businesses like real businesses without excessive taxation
  • And preparing to deal effectively with crises.

These are all winning solutions for the industry--airlines, economies, travellers and tourism. Our industry needs to change fast—so let's get started. I wish you a great conference and hope that I have provided some food for thought and discussion over the next two days.

 


 

'Connecting Tourism's Stakeholders', PATA Annual Conference, Macau
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