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Date: 13 February 2006

ICP Press Lunch, Brussels

It is good to be here in Brussels. Air transport is critical to Europe's success. And, as you may know we have many open issues in Brussels, which need solutions.  Before I get to these issues, let me first update you on the state of the industry and closing numbers for 2005. Then I will ask Brian Pearce our chief economist to give a more detailed industry outlook and to introduce IATA's network benefits study.

State of the Industry

Our industry remains in crisis. Simply put, it is sick.

Profitability

The bottom line tells the story. Since 2001 airlines have lost over US$42 billion. And we will add another US$4.3 billion in losses this year if oil averages US$53 per barrel. Our most recent losses are being driven by the high price of fuel. The industry fuel bill increased from US$44 billion in 2003 to nearly US$100 billion last year. Fuel is about a quarter of the industry's cost. Regional differences in performance are important.

  • Last year US carriers lost US$10 billion
  • European Airlines made US$1.3 billion

Airlines like BA, Air France/KLM, Lufthansa, Iberia and SAS are showing profits. But many others are struggling. Even the profitable airlines are not covering the cost of capital—7 to 8%. We expect the situation to get more difficult. In 2006 we expect smaller profits for European carriers—less than a billion. Hedging at current fuel price levels will be less effective. Major airlines hedged 70 to 80% in 2005. This has fallen to 50 to 60% in 2006 and the oil price is US$10 more expensive. We expect a slowdown in the revenue environment.

  • And continued weak GDP expansion— just over 2% this year —will limit traffic growth

In 2005 European carriers grew below the global average.

  • European passenger growth was 6.4% compared to 7.6 % globally
  • Capacity was handled well
  • The European load factor was 76.4% compared to 75.1% globally
  • European freight growth was 1.1% compared to 3.2% globally

We expect traffic to increase globally by 5 to 6% in 2006. With fuel prices at record high levels, how can we turn growth into profitability? The short answer is cut costs and improve efficiency. And that is exactly what airlines and IATA have been doing. Let me highlight just a few of our efforts.

We are attacking our own processes. Programs like the IATA Simplifying the Business initiative will cut US$6.5 billion in costs while making travel more convenient. The flagship project is 100% e-ticketing by the end of next year. At the end of 2005 we achieved our target of 40%. We are on track to be at 70% by the end of this year. This is an enormous task, but we are on track to meet the target. IATA is leading a comprehensive campaign to reduce fuel consumption by:

  • Shortening routes
  • Improving fuel operational efficiency
  • And working directly with airlines to improve fuel efficiency
  • In total this program saved nearly US$2 billion last year.

We are also challenging our infrastructure partners to improve efficiency.

  • Last year we achieved nearly US$2 billion in savings from airports and air navigation service providers.

Combined with individual airline efforts we are generating amazing results.

  • The break-even price of fuel went from US$22 per barrel in 2003 to nearly US$50 today.

Unfortunately, the price of fuel is racing ahead of this. And, as I said, we will lose US$4 billion this year. We cannot sustain these enormous losses. Things must change. Governments and our partners must match airline efforts. Why? Because we are a critical part of the economy. Globally air transport is a

  • US$400 billion industry
  • That supports 29 million jobs
  • And nearly US$3 trillion in economic activity

In Europe air transport directly employs 4.1 million people generating US$274 billion in economic output. And air transport supports over 7 million jobs generating over US$1 trillion in economic activity. Air transport means business. We conducted a study of 625 businesses in 5 countries—including the Czech Republic and France:

  • 25% of sales were dependent on effective air links
  • 80% reported that production efficiency required quality air service
  • 70% said it helped them access bigger markets and economies of scale
  • 56% said it helped to reduce costs

Brian will explain this in more detail later. But my key message is that air transport is too important for governments to continue to ignore or mis-regulate. I will meet with Mr. Barrot later today.

The previous commission left a legacy of mistakes on the air transport agenda. My mission today is to discuss the way forward. I have a specific agenda that I can share with you. It focuses on

  • Monopoly Service Suppliers
  • Taxation
  • Regulation
  • Safety

Monopoly Service Suppliers

Airlines and their customers pay airports and Air Navigation Service Providers US$42 billion each year—10% of our operating cost. These monopoly service suppliers must join our drive for efficiency. Some airports are great partners. Copenhagen comes to mind. Recently we signed a three year pricing agreement that will reduce charges and encourage growth. We have made similar progress with Vienna, Geneva and elsewhere. But other airports are live in another age of monopolistic bliss.

Paris-Charles de Gaulle is among the worst examples. Charges increased by 26.5% in the last five years. And now the French government has just approved another 5% per year increase in charges for the next five years. The Minister approved an increase that is even higher than the 2.5% per year to a maximum of 11% plus inflation that his advisors proposed. This horror story is symptomatic of several things.

  • The airport is a classic monopoly with no understanding of efficiency
  • Airline yields have dropped by 30% in the last decade
  • Can you imagine an airline increasing fares by over 25% in five years?
  • Moreover the Government ignored its responsibility to regulate an out-of control monopoly
  • Instead it has given the airport a license to print money.

Europe is home to 15 of the most expensive airports in the world. Combined, European airports account for half of our global airport bill. I support free competition. We all know that airlines are desperately competing to survive.

  • But where there is no commercial discipline and no competition—as is the case with monopoly suppliers—governments must take responsibility.
  • The Lisbon agenda will fail if governments do not wake up and control abusive monopolies
  • The days of airports spend and airlines pay must end.

We do not ask for a free ride—only a fair deal. I am calling for a European Authority to take care of economic regulation for airports handling over 5 million passengers per year.

  • It must be fair, transparent, independent and quick
  • And there must be a dispute settlement mechanism

Air navigation service providers are a problem, but we are moving slowly in the right direction. We are working closely with their association—CANSO—to benchmark efficiencies. This is major progress. But we still have massive problems. Failure to implement a successful Single European sky is costing airlines.

  • Delays alone amount to EUR 1.8 billion in costs
  • And the bill we pay for this poor service is nearly EUR 6 billion

Denmark, Italy, Netherlands, Sweden, Switzerland and UK have started to reduce their costs and charges. But we would like to see similar reductions from all of our ECTL suppliers. And we need political will to change. CEATS is an example of how politics can ruin a great idea.

The goal was to rationalize the ATCs of

  • Austria
  • Bosnia and Herzegovina
  • Czech Republic
  • Croatia, Hungary
  • Northern part of Italy (Padova)
  • Slovakia
  • and Slovenia

But the idea was killed by politics and bureaucracy. Since 1999 EUR 40 million was spent with no result.

  • Instead of efficiency we got more bureaucracy
  • In place of effectiveness we saw duplication and inefficiency

Worse, airlines were paying the bill. IATA was the first to pull the plug. Last month I wrote to the Ministers concerned. My message was that airlines were no longer willing to waste their money supporting a project that had lost its way. So the project is dead, if not yet buried.

My message to Mr. Barrot will be that we appreciate his new approach.

  • we must learn from the mistakes of CEATS
  • we appreciate and will cooperate fully with plans to implement the Single European Sky—SESAR
  • It is time to end this 15 year European failure

Let's bring Common Sense to taxation

European Governments are in a race to burden the industry with senseless taxes. First President Chirac wants to solve the world's development problems by taxing airlines and their customers. No industry contributes more to development than air transport. Making air travel more expensive will do nothing to help development. In fact it will hurt developing economies that rely on tourism.

  • It will hurt Charles de Gaulle's position as an air hub
  • And it is against ICAO Document 8632 on taxation.

It is high time they stopped treating us like cash cows. If the French Government is really serious about development there are alternative funding sources. Why not divert some of the US$50 billion that Europe uses to subsidize our rail competitors. Reducing this by just 2% would generate four times what the French government currently proposes.

The Swedes are about to do something equally senseless

The government of Sweden plans to levy an environmental tax on air passengers starting in July. The goal is to discourage air travel in order to reduce emissions. This is the wrong approach.

First, let me be clear—our environmental record is excellent. In the last 40 years we have made a 75% reduction in noise and aircraft are 70% more fuel efficient. Modern aircraft have a fuel efficiency of 3.5 litres per 100 passenger kilometres—similar to a small compact car. The A380 and Boeing 777 will move us below 3.0 litres. At the same time, Europe's air traffic control is a mess. The inefficiency of over 30 providers wastes fuel and harms the environment. The industry strongly supports the position the Prime Minister Blair articulated last week.

  • Technology and efficiency are the keys to even better environmental performance.

So he opposes taxes but supports research and efficiency measures. Let me be a bit provocative. The airline fuel bill is approaching US$100 billion. Last year oil refinery margins sky-rocketed and oil companies pocketed nearly US$14 billion—with no additional value being created. I challenge governments to mandate that this be used to explore alternative fuel sources. This would be much more effective than any arbitrary tax.

Better Regulation

Air transport needs strong regulation for safety and security. Deregulation has made air transport more accessible than ever. But politicians and the previous Commission put this at risk with costly regulation that serves nobody's best interest. The Regulation on Compensation for Denied Boarding, Long Delays, and Cancellations is a good example. It is a US$700 million cost to the industry. But it will not result in effective consumer protection. Penalizing airlines for things beyond their control—snow for example—simply does not make sense. A new rule for Passengers with Reduced Mobility is similarly misguided. It require airlines to rent wheelchairs from a single supplier—the airport. And airlines are forbidden to deliver the service themselves. Yet another license for our airport partners to print money.

And who suffers? Passengers who want cheap air travel. We look forward to working closely with Mr. Barrot to adjust and improve these and other absurd regulations.

Using tool Effectively

I don't want to complain all the time. But I cannot be silent when there are problems that must be fixed. My last point is to say that governments should take advantage of a great tool that IATA and airlines have developed. Regulators including the FAA, Transport Canada were also involved. I am talking about IOSA—The IATA Operational Safety Audit. It is the first global standard for airline safety management. By the end of 2007 it will be a condition of IATA membership.

  • This will add a mark of quality to our Association

Already nearly 140 audits have are complete or being processed.

  • This is 70% of global traffic.

More importantly it is making aviation safer.

  • It is the highest of standards that is challenging for any airline to pass.
  • The registry itself is transparent and available to anyone on our website.

We have a tough target with respect to safety.

  • To make the safest mode of transport even safer.

And IOSA will be critical to achieving that.

The list is long

But I am hopeful that Mr. Barrot will address the mistakes of the last Commission. Europe's competitiveness is at stake. If air transport is allowed to flourish and grow, its contribution to the European economy will be great. It is worth fighting for change.


 

Brussels Press Lunch Remarks - IPC
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