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Date: 30 May 2005

State of the Air Transport Industry

Giovanni Bisignani
Director General and CEO
International Air Transport Association (IATA)

61st IATA Annual General Meeting
and
World Air Transport Summit

Tokyo
30 May 2005

Honoured guests, colleagues, ladies and gentlemen. The crisis in our industry continues. Our fuel bill this year will be US$83 billion. Equal to the GNP of New Zealand. This is US$39 billion more than 2003. The Fifth horseman of the Apocalypse—the extraordinary price of fuel—is destroying our profitability. Last year alone, the industry lost US$4.8 billion. But regional differences are astonishing.

North American carriers lost US$9 billion. Efficiency gains cannot make up for structural problems. Labour costs remain high. And low cost competition at major hubs drove yields down.

European carriers posted a profit of US$1.4 billion. Yields were better. And consolidation helped capacity management.

Asian carriers posted US$2.6 billion in profit. Strong growth fuelled by China and low labour costs are the competitive advantage. And India may be the next great market for the industry.

Middle Eastern carriers made US$100 million. Strong traffic growth led to profitability. But the economics of matching capacity to demand is the challenge.

Latin American carriers were near break-even. The situation is changing fast. Some of the region's airlines are making money, but the majority are technically bankrupt. And misguided airport privatisation makes matters worse.

African airlines lost over US$150 million. The region has major safety problems. And governments are not investing in infrastructure.

Traditionally, IATA has reported traffic growth.

My concern is the bottom line. Losses between 2001 and 2004 exceeded US$36 billion. And we will lose another US$6 billion in 2005.  Parts of the industry are profitable. But the margins are not acceptable for a US$400 billion industry. Urgent action and change are needed. Before we look at industry solutions, let's remember some of our achievements.

This is the 60th Anniversary of your association and there is much to be proud of.

  • Air transport has never been safer.
  • We are environmentally responsible.
  • More people than ever are flying.
  • And we are vital to the global economy.

2004 was our safest year ever.

Everybody in this room should be congratulated. Particularly at a time of such great financial difficulty.

Over 1.8 billion people flew safely last year. Tragically 428 people lost their lives. This is similar to 1945 when only 9 million people travelled by air. This is a great achievement. But we must and will do better. Last year we set a target to reduce the accident rate by 25% by 2006. We are on track to achieve this.

The IATA Operational Safety Audit is at the core of our efforts. This is the global standard for airline safety management. This year alone more than 100 audits will be completed. Regional differences in the accident rate are not acceptable.

To support existing regional efforts, I am pleased to announce IATA's "Partnership for Safety".
This is an IATA-funded programme to assist airlines preparing for IOSA.  The focus is on helping airlines from developing nations with training and pre-audit assessments. We are starting with Africa. And we will extend it to other regions. Your association is investing heavily in safety.

Air transport has never been more environmentally friendly.

Modern aircraft have a fuel efficiency of 3.5 litres per 100 passenger kilometers. The same as a small compact car.

The Airbus 380 and Boeing 787—are targeting efficiencies well under 3 litres. Last year, industry fuel efficiency improved by 3.4%. IATA contributed to this fantastic achievement with improvements on more than 100 air routes. This saved 2 million tonnes of CO2 emissions and US$1 billion. Our responsible approach to the environment started well before Kyoto. Over 3 decades emissions have been reduced by 70%. And we are committed to this approach by working effectively with ICAO. Why?

Because we are a global industry that needs global solutions.  The outcome of the last ICAO Assembly was important.  Governments committed to global economic solutions on the environment by the 2007 Assembly. In the interim, we will be tough in opposing any local or regional solutions. Inefficient infrastructure is compromising our environmental performance.

  • We waste US$300 million each year because of poor airspace design in China's Pearl River Delta area.
  • Failure of the Single European Sky costs us US$4.4 billion.
  • Inefficient traffic flows at just one airport—Mexico City—costs US$30 million.

ATC inefficiency means up to 48 million tonnes of unneeded CO2 emissions. We hear impressive words from governments on environment. A lot of hot air and no results. Governments must put their own house in order. They must match our efforts with efficient infrastructure.

Air transport has never been more accessible.

More people than ever are flying. New business models are meeting consumer expectations for lower fares. And you—our members—have done a great job at delivering. Not just point-to-point, but globally. In Europe and the US, fares have dropped by 30% in the last ten years.  And your great networks span the globe. They connect 14,000 city pairs with 75,000 flights daily.

The result is an industry that is vital to the global economy.

Airlines employ 4 million people and generate US$400 billion in economic output. We are not just the core of a value chain that is 4.5% of global GNP. We make global business possible. 40% of the value of goods traded fly on our aircraft. Take away air transport and you have a very different world.

With such great achievements, how did we end up in such a financial mess?

It is easy to blame governments. And trust me, I will. But let's start by looking at ourselves: 

  • We focused too much on market share. 
  • We did not effectively match capacity to demand.
  • We gave too much away to the GDS's.
  • We were slow to use the internet.
  • We were too weak with labour.
  • And we were not tough enough with suppliers.

But everything changed after September 11.

Facing an emergency, airlines dramatically re-engineered. Labour productivity has increased by 34%. And we urgently attacked costs. This year non-fuel unit costs will drop by 4.5%. You are re-inventing the industry.

Your Association is changing as well.

60% of our team is new. And we are 14% leaner. We have new expertise and a new culture. Your priorities are now our top priorities. Our obsession with efficiency has driven costs down. Cost cutting allowed us to return US$6 million to airlines in our settlement systems. We are investing US$11 million in industry projects like safety and Simplifying the Business alone. This is US$17 million.  This is more than we collect in dues.

More importantly, this year we expect to save the industry at least

  • US$1 billion in taxes, charges and fees; and
  • US$700 million in route improvements

I thank our Board and all our members for challenging us and for your great support. Together we have built a new IATA. IATA is at your side leading our race to a low cost industry.

We are working with you to turn the vision of a Simplified Business into a reality.

What's more, it is a win-win proposition.

  • Customers will have greater convenience.
  • And greater efficiency means lower costs.

The first step is 100% e-ticketing. We are moving fast:

  • Last June 19% of IATA tickets were ET.
  • Today we are at 30%.
  • And we will achieve 40% by the end of the year.

I am pleased to announce that we have just signed memoranda of understanding with 5 top global industry providers:

  • Amadeus
  • China TravelSky
  • Lufthansa Systems
  • Sabre
  • SITA

The goal is to ensure that technical support is available for all members. Progress on Common-Use Self-Service kiosks is gaining speed. I am pleased to announce memoranda of understanding with several airports:

  • Changi Airport in Singapore
  • Geneva
  • San Francisco
  • And—most surprisingly—Toronto

These agreements give airlines and airports a framework for working together. Importantly, they include defining a fair charging structure.  

Significant progress has also been made on the other projects:

  • A bar code standard for boarding passes is now operating
  • RFID trials have taken place on 3 continents

And we have added IATA e-freight to bring the same efficiency to the cargo world.

Moreover, we are building political support. An agreement with the CAAC has made Simplifying the Business a national project in China. Simplifying the Business is the future of our industry. Cost savings in excess of US$6.5 billion are possible. The first deadline is the end of 2007 for e-ticketing. The clock is ticking and the job ahead will not be easy. We visited each member airline to better understand your needs.

Change must come from the top. I am personally involved and driving the process in IATA. And I need your help to bring all airlines on board. Together we will deliver an industry revolution.

Airlines are changing fast to a low cost industry.
 
But we cannot do it alone. As I said, I have a few words about governments.

Governments have lost their way.

They are not delivering the change that everybody needs

  • the industry
  • our customers
  • and the global economy.

In the forties governments agreed to a set of standards to foster a global industry. The Chicago Convention has guided us well on safety and technical issues. IATA's 60 year history began at the same time. Governments needed an association to set global business standards. Governments could not agree, however, on how to regulate traffic. Instead of leaving it to the market, the bilateral system was born. Commercial opportunities became national rights. And airline ownership restrictions were written into national laws. Now the flags on our aircraft are so heavy they are sinking the industry.

In the 70's the US launched deregulation.

This was a great vision of commercial freedom and cheaper travel. It spread around the world but the industry did not grow stronger. Why?

Because governments delivered half-measures.

  • Creating a mass transit system but taxing us like luxuries.
  • Intensifying airline competition without regulating our monopoly partners
  • Preaching competition but subsidising our competitors.
  • Freeing markets but micro-managing the business.
  • Talking liberalisation but keeping nationalistic ownership rules.

This must change.

Today we are presenting governments with a five point agenda for change.

Point 1 -Governments must stop treating us like cash cows.

They see us as profit centres not as a catalyst for economic growth. In the United States, taxes on a US$200 ticket average 26%. This is a US$15 billion rip-off. On top of this we pay US$5.6 billion a year for our own security. A burden that no other industry faces. To add insult to injury our rail competitors are subsidised by $50 billion a year. And now Mr. Chirac and Mr. Schroeder want to make things worse.  To raise 7.8 billion US dollars for development assistance they plan to further tax airline tickets. 

Development is a serious issue that needs a serious solution. But taxing airline travellers is about the dumbest way possible to achieve it. Why? Because no industry has done more for development than air transport by linking nations and facilitating tourism.

I have some alternatives:

Let's start with European Common Agricultural Policy .

  • The EU spends US$65 billion depressing world food prices at the expense of developing nation farmers.
  • Each European cow gets a subsidy of US$910, but European Aid to sub Saharan Africa is only US$8 per person.
  • Reducing European farm subsidies by only 12% would generate US$7.8 billion.

And then look at the armament industry.

  • Europe makes US$50 billion a year selling arms—16 billion of which are exported.
  • Tax this by 15% and we have another US$7.5 billion.

Development needs commitment, not politics. And air transport needs common sense, not more taxation. This must change.

Point 2 - Governments must ensure that monopoly suppliers get serious about cost-efficiency

We pay US$42 billion each year to airports and ANSP's. That is 12% of our costs. Airlines don't expect a free ride. But, like travellers, we demand value for money. The days of "we spend and airlines pay" are over. The value chain is not in balance and that must change. Cost-efficiency is the new paradigm. Worldwide IATA's efforts achieved over US$1 billion in cost savings from airports and air navigation service providers last year. And we have some good news in Japan.  It seems that Narita has understood our message. A substantial decrease in landing fees later this week could be the start of a new relationship. But there is much more work to do around the world. Incredible inefficiency remains. We have one major currency in Europe but 35 air traffic control organisations. This is political nonsense. And we will not foot the bill. Shouting politely brought attention to the problems.

Now we are working with ACI and CANSO to benchmark efficiency. Our recent agreement with Air Services Australia may be a model for long-term relationships. We agreed service levels, costs and even future development. Where we cannot achieve partnerships, an independent regulator is needed. And, at the same time, governments need to look at oligopolies. Why have refinery costs for jet fuel jumped from US$6 per barrel to US$13 in the last two years? Is this anything other than an US$11 billion cash grab? We cannot continue with airlines flying and everybody else making the money. This must change.

Point 3 - Governments must stop distorting competition.

Fair competition is good for everyone. But calling yourself "low cost" is no justification for preferential pricing or indirect subsidies. "Low cost" is the goal, if not the reality, of everyone in this room. We must remind governments:

  • Point-to-point carriers do not bring global connectivity.

Challenging old business models and increased competition make our industry stronger. But we cannot accept governments that further distort fair competition. This must change.


Point 4 - Governments must stop micro-managing the industry.

New European compensation rules for cancellations and delays are a clear example. In response to 700 complaints we got $750 million of bad consumer regulation. We are fighting at the European Court of Justice. This is part of the last European Commission's $7.6 billion legacy of mis-regulation. We listed this in a polite but clear message to the new Commission:

  • You must do better.
  • And you must change fast

The honeymoon is now over. If the Lisbon Agenda for competitiveness is not just an empty promise, we need to see results. And we reject regulations anywhere that do not promote growth. This must change.

Point 5 - Give us the freedom to run our business like any other business.

Air transport and telecoms are both strategic industries that were deregulated. In ten years consumers of both benefited from a 30% drop in prices. But the telecoms industry is healthy—and we are sick. Telecoms have basic business freedoms

  • to serve consumers where markets exist and
  • to merge and consolidate across borders.

Our business is to fly, but airlines have regulatory anchors from another age. It is time to make progressive liberalisation a reality. Governments agreed to this vision at the last ICAO Air Transport Conference. Now we need results in the most advanced aviation markets:

  • the US
  • and Europe.

A commercial agreement on an Open Aviation Area is essential. The US and Europe must regain their lost leadership and set the tone for the structural change we desperately need. Governments have an important role to play in safety and harmonising operations. In other areas governments must get out of the way. We have business to do. This must change.

I am confident.

We have survived the most difficult time in our history.

  • Terrorism, disease, war, fuel, taxation, mis-regulation.

You know the list. We are survivors because of your hard work. Even if governments mis-understand and mis-regulate us. And even if our partners do not share our obsession with efficiency. We have one great advantage. We have a clear vision and we are passionate about our future. A future as

  • A low cost, environmentally responsible industry
  • that safely and securely connects the globe
  • provides value to passengers and shippers
  • and supports global economic development.

60 years after a group of pioneers created IATA, we have a great industry. We also have many tough challenges. But I can assure you that IATA will be at your side, supporting your efforts and leading change.

State of the Air Transport Industry by IATA's Director General & CEO, Giovanni Bisignani, Annual General Meeting, Tokyo, 30 May 2005
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