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Date: 18 October 2005

Confederation of Indian Industry Luncheon, New Delhi

Good afternoon ladies and gentlemen. It is a pleasure to be here in India—one of the great potential markets for aviation. My first duty for today is to re-introduce IATA to India. As you know, IATA represents:

  • 94% of scheduled international traffic and
  • 265 airlines operating international services

We have some great member airlines in India;

  • Air India
  • Jet Airways
  • Indian Airlines
  • And Air Sahara

Our global settlements system efficiently handles over US$225 billion each year. In India we have over 2,200 agent locations and expect to process US$3.2 billion in passenger settlements this year. We are involved in every aspect of the industry from training to flight operations. Our mantra is to make the industry more efficient—saving costs and enhancing the flying experience. Like many, we see tremendous potential for aviation in India.

So we are expanding our presence in India. It is a pleasure to formally introduce our country manager, Robey Lal. I am sure that you are all familiar with him from his days at the Airports Authority of India. Robey is joined by PC Goel our technical expert, based in Delhi. And Sunil Chopra heads our settlement systems from Mumbai. With this new team, we will expand our presence in India and help to further develop India's aviation sector

Global Picture

To start, let's first look at the global situation. It is no secret that the aviation industry has many problems. Quite simply, we are in a crisis. Between 2001 and 2004 airlines lost US$36 billion. The extraordinary price of fuel is inflating costs exponentially. Our fuel bill increased from US$44 billion in 2003 to US$97 billion this year. And that will result in another US$7.4 billion in industry losses this year. Looking behind the numbers, the regional picture is very different:

  • North American carriers to lose over US$8 billion this year
  • Our European colleagues will break even
  • And Asian carriers will likely make a billion

 

It is good to be able to visit India, where the news about air transport is very positive.

The airline sector is vibrant. Indian carriers placed over US$12 billion in new aircraft orders at this year's Paris Air Show. Air India, Jet Airways and Indian Airlines all posted profits last year—despite the high price of fuel. The number of carriers operating in India has grown from two state-owned players in 1991 to 11 today. And another four carriers are set to start operations soon. Traffic is expanding rapidly. Our own forecast for India shows international passenger traffic growth of 8.4% annually between now and 2009. If you add in domestic traffic, that figure comes close to 12%. Freight is no different. The Indian market for international freight expected to grow by nearly 10% annually over the next five years.

The expansion of air transport in India is among the fastest in the world.

But I believe India could be doing even better. Generally air transport grows at twice GDP. With Indian GDP expected to expand at 7.2% for 2005-2009, we would expect growth in the 15% range. The airlines are moving fast. Government policy is moving in the right direction. But infra-structure must catch up. This needs the urgent attention of the government with consistent and coherent application of policy. We need results fast—or a great start could turn to disaster. Why?

The potential for air transport is too great to take lightly.

Globally airlines are a US$400 billion industry that generates US$1.3 trillion in economic activity. We are the backbone of the tourism industry. That is 11% of global GDP. The positive impact of freight is enormous. Globally, over 40% of the value of goods traded internationally are transported by air. The great economic achievement of Bangalore would not be possible without efficient air links. Oxford Economic Forecasting estimates that a 10% increase in air transport utilization leads to a 1.6% increase in economic activity. Air transport is absolutely vital for economic development.

In order to take full advantage of the air transport's potential, change is absolutely critical.

We must develop more efficient ways of doing business. As India continues to open its aviation industry, I see five challenges that could put at risk the government's aviation policy initiatives:

  1. Enhanced safety
  2. Cost-efficiently improvement of infrastructure
  3. Reasonable taxation
  4. Letting us run our business as a real business
  5. Effective use of technology—Simplifying the Business

If we handle these correctly, the positive economic impact on India will be great. Let me handle each separately.

Enhancing Safety

Air transport is the safest mode of transport. 2004 was our safest year ever. The hull-loss rate decreased from 1.34 per million sectors in 1998 to 0.78 per million sectors in 2004.

This is a truly great achievement. But we cannot rest until the accident rate is 0. We are committed to further improvements. IATA is leading airline efforts on safety with a comprehensive safety plan. The core of our efforts is IOSA—the IATA Operational Safety Audit. IOSA is the first global benchmark for airline operational safety management. In 2003 IOSA standards were developed in cooperation with the leading authorities on safety, including:

  • ICAO
  • US FAA
  • Europe's JAA
  • Australia's CASA
  • Transport Canada

As part of our commitment to safety, IATA offers the management of the IOSA program free of charge to member and non-member airlines. Seven independent accredited commercial organizations conduct the audits. IOSA is quickly on its way to becoming an industry standard. Already ICAO recommends states to include IOSA in their safety oversight programs.

In fact IOSA complements ICAO's Universal Safety Oversight program which audits state compliance. We expect to have 140 airlines in the IOSA audit process by the end of the year. Air India is among the 67 carriers already on the publicly available IOSA registry and Jet Airways begins its audit this month. The current European debate on airline blacklists could present an interesting role for IOSA. While we do not believe that blacklists improve safety, we understand that they are a political reality. So we are promoting IOSA among governments as a transparent benchmark. As India's air transport sector grows, safety must be the number one priority. And the strong attention of the regulatory authority is essential. India's record is good—but constant effort is needed. I hope to see all of India's carriers committed to IOSA by our Annual General Meeting in June next year. And I encourage the Government of India to make IOSA a part of its safety oversight program.

Improving Infrastructure

We all know that India's air transport infrastructure is out-of-date. In fact the overall situation is critical. A recent report by McKinsey suggests that half of India's highly qualified graduates are located in cities without international airports. Without massive change, infrastructure will not be able to handle growth. Airports in Delhi, Mumbai, Chennai, Kolkata and Bangalore are not adequate. Among them, Mumbai is the worst:

  • Service levels are not acceptable
  • Delays are common
  • And future growth cannot be accommodated

A commercial centre needs an efficient airport. We need to move fast to address Mumbai's issues. On top of that we have crowding in many critical air routes. For example 80% of the flights between Europe and Asia funnel through only 2 crossing points between India and Pakistan. We need to increase this to 4. Delays due to bottlenecks are costly to the airlines and inconvenient to passengers. And when the aircraft India has on order are delivered, we risk chaos.  We must move quickly now.

My first message is that airport and airspace capacity must be expanded to fully gain the benefits of a vibrant airline sector. I know that you are in the process of considering private participation at Delhi and Mumbai. Frankly, IATA does not care who owns the airports. Our only conditions are that airports are;

  • Safe
  • Cost-efficient with acceptable service levels
  • Financed without cross-subidization and
  • Provide adequate capacity to meet growth

An effective economic regulator will be critical to future success. You do not have to re-invent the wheel. Australia and the UK are good examples of effective and transparent regulations. Improved cost-efficiency is achievable. Look no further than the Airports Authority of India. They showed a return on capital employed of 20% in 2003 and 2004. Reducing the landing and en-route charges by 20% would still give a return on capital employed of 10%. That would be enough to for future investment and a dividend to the government shareholder.

In fact we have proposed a Five Year Pricing and Infrastructure Investment Agreement. We want profitable partners—but not at the expense of efficiency. As good industry partners, I urge AAI and the Ministry to move forward together with IATA. Let me also say that airlines have made enormous progress on efficiency;

  • Fuel efficiency improved by 3.4% in 2004
  • And non-fuel unit costs will reduce by 4.2% this year

Our airport partners must be a part of this process. On bottom line is that private participation in any airport project must:

  • Benefit all—the government, the airport, shippers, passengers, local communities and airlines
  • Result in greater efficiency—lower costs
  • Result in better service levels
  • And come with effective economic regulation to ensure the commercial discipline of natural monopolies

We have followed privatization in other parts of the globe. There are more failures than successes. Air transport is too important to India's economic future to fail.

Taxing Reasonably

Governments over-tax our industry. Most recently, European proposals at the G8 and the UN are targeting air transport for a new tax for development. Making air travel more expensive makes no sense as a means to improve conditions in the developing world. Freer trade would be much more effective. There is an impression that air transport is under-taxed. Airlines were exempted from tax for international services by the Chicago Convention. Instead, we pay for our infrastructure directly. That is a US$42 billion bill each year .

We are happy that the Indian government abolished the illegal fuel uplift levy in 2002. But we are disappointed that, to date, the US$36 million collected by this levy still has not been returned to the airlines. We urge the timely resolution of this issue. The recently imposed 10.2% service tax fee on is another example.
 
There is no reason for India to collect taxes from airlines for landing, airport and air navigation fees. We are challenging this on legal grounds. And we believe that this will reduce the competitiveness of India's air transport sector. To gain the full economic benefit of aviation, India needs a common-sense approach to taxation. That means recognizing that we fully fund our own infrastructure. And ensuring that any taxes or charges that are collected are transparent and are re-invested in the sector.

Running the business as a real business

National flags have always played a role in our industry. But today the flags on the tails of our aircraft are so heavy they are sinking the industry. The Chicago Convention made safety regulation a government responsibility. Failure to agree to a formula for commercial regulation resulted in the bilateral system. Both are 60 years old. The industry has changed, and so too must the rules of the game for airlines. As a hobby, airlines are too expensive for governments. And we are far too vital to the economy to restrict our growth. So what is the answer? .Let us run our business like real businesses. We need basic commercial freedoms;

  • To serve markets where they exist
  • To be able to access global capital markets
  • And to be able to merge and consolidate where it makes commercial sense

We are not looking for handouts or subsidies. But Governments must provide cost-efficient and effective infrastructure, safety oversight and a level commercial playing field.

In 2003 governments at ICAO's 5th Air Transport Conference agreed to a vision of progressive liberalization. I am disappointed at the slow pace of implementation. The US and Europe are two markets where there is no reason not to change. The US industry is in crisis and crying for change. Both markets are equal in size, level of technology and ability to compete. I am hopeful that the current round of talks will put the US and EU on the road to an agreement that will be revolutionary. The industry is sick. Hiding behind government protection does nothing to make the industry healthy. It is time for great ideas and meaningful change. We see some progress.

China has a clear plan to liberalize its industry that is producing tremendous results. Liberalized agreements among ASEAN nations are leading to full open skies by 2015. SAARC is moving in the same direction by lifting some capacity restrictions. I hope that the implementation of South Asia Free Trade Agreement next year will a catalyst for liberalization. The open bilateral between India and Sri Lanka is also a model of how liberalization results in economic growth. Since signing the number of services between India and Sri Lanka has increased 100 per week. This has created employment opportunities in both countries.

Liberalization is not something to be feared—but to be anticipated. In a global marketplace there is no place to hide. I hope that India will continue to take the lead in SAARC by promoting regional liberalization. We are not looking for the world to change overnight. But that is not an excuse not to get started on progressive liberalization. Governments must not be afraid to challenge their carriers with targets and a plan of action. With proper lead time, competition will make the industry grow stronger.

Let's get the ball rolling. There are economic benefits just waiting to happen with progressive liberalization balanced with effective infrastructure development.

Simplifying the Business

I have talked a lot about what governments need to do. Let me conclude with a topic that is being lead by the airlines—Simplifying the Business. The same change that we demand of governments, we are leading ourselves. We are in a race to a low cost industry. In 2003 we launched Simplifying the Business focusing on industry processes that IATA is responsible for. There are two goals;

  • To reduce costs
  • And to improve passenger convenience

For IATA this means five core projects;

  1. 100% e-ticketing by the end of 2007
  2. taking the paper out of freight processing
  3. common use of self service kiosks for check-in
  4. radio frequency identification for baggage management and
  5. bar coded boarding passes

In total this will be a revolution in how we ship and how we travel. And it will save US$6.5 billion each year. Let me highlight two of these: e-ticketing and IATA e-freight.

e-ticketing

E-ticketing is the most pressing because it has a deadline of the end of 2007. At that time we will stop printing the 350 million paper tickets that are used today. Some airlines may say that this deadline is too soon. Many others think that it is too slow. E-ticketing will happen. We need the US$3 billion in cost savings that e-ticketing will bring. My job is to preserve a global system with a compromise—in this case the end of 2007 as a deadline. Let me be frank—India is far behind.

Our target is 40% global e-ticketing penetration by the end of 2005. Globally we are at 33%. Asia-Pacific is near that at 30%. But India, at just 5.4%, has not made acceptable progress. It is extremely disappointing that a country as advanced in software development as India can be so far behind. India must be a leader in this region—not the last to get on board.

IATA is putting resources to bring all carriers on board by 2007. We have already conducted a seminar in India that was attended by 12 South Asian carriers. We started a buddy system to help airlines with limited skills or resources. But airlines must take the first step. We can provide up to 15 days of free consultation once a carrier has shown its willingness to implement an interline e-ticketing agreement. I am confident that India will make the deadline. But with just over 800 days to go, we need to see some better results soon!

IATA e-freight

Alongside e-ticketing is e-freight. The amount of paper that accompanies any shipment of good by air is enormous—up to 38 pieces of documentation. Each year that paper could fill 39 Boeing 747-400s or 81 A 300's. It took an average of 6.5 days to process cargo in 1972. In three decades we have only been able to reduce that to 6 days. We need to change. In two weeks time we will kick off our first e-freight conference in Geneva. Our target is to eliminate paper from the cargo process by 2010 to save US$1.2 billion a year.

But we will need the help of governments and control authorities. India is among the five BRICK markets that are expected to lead in cargo growth: Brazil, Russia, India, China and Korea. I encourage the Indian government to join the airlines and make India a model for both e-ticketing and e-freight. You have the technology to achieve this. And with double-digit growth, the pay-off on investments will be quick.

One important first step must be taken. India must sign either Montreal Protocol 4 or the Montreal Convention of 1999 to enable the limits of liability from the Warsaw Convention. I urge the Government of India to make this a priority. And do not lose this opportunity to make the industry more cost effective and more convenient.

Challenges

The challenges that face India are enormous. Minister Patel has done an excellent job of bringing India to a crossroads. What were dreams are now becoming reality. But urgent decisions on infrastructure, liberalization, safety oversight and taxation are critical. The Indian Government must move quickly. To support a safe and effective air transport sector, my message to the Indian government has five parts:

  1. Strengthen safety oversight with IOSA
  2. Urgently improve infrastructure capacity, quality and cost-efficiency—starting with Mumbai which is the most pressing
  3. Give airlines the freedom to operate as real businesses
  4. And take a more reasonable approach to taxation
  5. Work with the industry to adapt regulation to a paperless environment

Airlines are moving forward with change by Simplifying the Business. IATA has strengthened its presence in India to help both its members and the government at this time of great potential. Robey and his team have some great challenges ahead. Great challenges and great opportunities. The stakes are high—but the rewards for our efforts will be enormous. Governments, airlines and IATA working together will make a very positive contribution to this wonderful country.


 

Aviation in India: Great Opportunities and Great Challenges
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