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Date: 20 February 2006

Asia Pacific Aviation Summit, Singapore

It is great to be back in Singapore for our second Asia Pacific Aviation Summit in partnership with Asian Aerospace and Air Transport World. Our first summit took place in 2004. At that time, the region was recovering from the SARS crisis. SARS is a distant memory but the global crisis of red ink continues. Airline losses since 2001 top US$42 billion. We will see another US$4 billion in losses this year. Something is wrong with the industry. The global figures do not tell the complete story.

Macro

At the macro-economic level Asia Pacific growth is impressive. India and China are growing between 8 and 10% each year. China is now the world's 4th largest economy. Excluding Japan, Asian economic growth was 7%—double the world average of 3.5%. And strong economic growth will continue.

Traffic

Traffic results for 2005 were mixed. International passenger traffic grew 7.6%. This is slightly higher than the historical average. Asian airlines were slower—at 6.3%— and below GDP expansion. Asian freight traffic grew by only 4.2%. This was below the double digit growth of previous year but above global growth of 3.2%. The difference between economic growth and traffic growth has two messages. One, Japan is dragging down the regional numbers. Two, Asian markets have lots of potential.

Forecast

We are optimistic and expect growth in Asia that is above global averages. Until 2009 we expect.

  • passenger traffic to grow at 6.5%
  • and cargo traffic to expand at 8.5% per year

Profitability

But growth means nothing if the bottom line is red. Globally airlines lost US$6 billion in 2005. US carriers lost US$10 billion. European carriers made about US$1.3 billion. Asian carriers led profitability with US$1.5 billion. Even within Asia it is a mixed picture. Some carriers are among the most profitable. Others however are struggling. In the region operating margins averaged less than 2%, still the best performance in the world.

  • Singapore Airlines is returning 12%
  • But this is the exception, not the rule

Most are below the 7 to 8% needed to cover the cost of capital and give our investors an acceptable return.

Efficiency

The high price of fuel is killing our profitability. In two years the industry fuel bill more than doubled to nearly US$100 billion—23% of operating costs. And there is no relief in sight. So what are airlines to do? Improve efficiency is the answer. Progress to date has been dramatic. The break-even price of fuel rose from US$22 per barrel in 2003 to nearly US$50 in 2005. Unfortunately, fuel prices are above that. Airlines will not return to profitability until 2007 when we expect a break-even fuel price of US$55. Even then the projected profit is only US$6 billion. Asia will remain profitable in 2006 posting US$2 billion in profit. But do not start opening the Champagne. That is still less than a 2% net margin.

Threats

And there are some threats that could potentially rob even this small profit.

Avian Flu

This is a wild card. Now the best advice is to avoid poultry farms. But if we see human-to-human transmission, then the negative impact on air transport could be enormous. We have the experience of SARS. So IATA is in close contact with the World Health Organisation—the expert in these matters. And we have published industry best practices for communicable diseases.

LCCs

Low cost carrier competition is new to this region. Asian network carriers are better prepared than many of their US or European counterparts. Their operating costs are 6 US cents per ATK on route lengths of 1500km. But the competition will also be tough. Air Asia's costs are the lowest in the world—2.5 US cents per ATK. Labour costs in Asia are the lowest in world—19% of operating cost. This is a significant advantage against US and European carriers with an average costs of above 30%. If you compare Asian network carriers to their low cost rivals, the story changes. Average labour costs can be up to 7 times lower at low-cost startups. There is no finish line in the race to reduce costs and improve efficiency!

Capacity

Air shows are all about ordering aircraft. In a normal industry ordering new capacity would be good news for the future. 2005 was a record year for aircraft orders. The backlog for orders is over 4,000 aircraft—29% of the existing fleet. Asia will add 48% to its fleet—1,357 aircraft. Why so many orders in an industry that is losing billions?

Supporting growth of new markets like India is one reason. But the fuel crisis is another. Modern aircraft consume 3.5 liters per 100 passenger kilometers. The A380 and Boeing 787 will take this below 3.0. This is good for the environment and good for airline economics. Unfortunately, there is no mechanism to eliminate existing capacity. We must learn from our past experience. Excess capacity and reduced profits followed the previous peak delivery years in 1991 and 1999. This time we seem to be managing our deliveries better. These will peak at 5.7% of our fleet over the next two years. This is lower than the replacement rates of 1991 and 1999 which were 7.5% and 6.5% respectively. Carriers are managing capacity as carefully as they manage costs. The industry cannot afford the negative impact of over-capacity.

Opportunities

The challenges facing the industry are enormous. But I do not want to sound too negative. Air transport supports US$3 trillion of global economic activity. That is 8% of global GDP and 29 million jobs. In Asia Pacific almost 10 million air transport jobs support US$688 billion in economic activity. We are the backbone of tourism. And our growth is strongly linked to GDP expansion. In short, a successful air transport industry supports successful businesses which is the key to economic development.

Singapore

Success does not happen all by itself. Our host for this conference is Singapore. A coordinated approach to air transport brings broad economic benefits. Changi airport is among the most preferred airports by passengers. The reasonable charges at Changi—supported by commercial revenues—make it an economic airport to hub regional traffic. And the quality and quantity of connections available at Changi attract businesses to Singapore. The success of Singapore Airlines is no accident.

  • Strong management, an effective hub and solid government policy all play a role

The overall result is a virtuous circle that brings benefit to Singapore and is a model for others to follow.

China

China is another model of effective policy coordination. We are seeing consistent economic growth of 10% per year. The World Tourism Organization estimates that as many as 100 million Chinese tourists will travel internationally by 2020. The government is challenging its carriers to compete globally with a staged and transparent approach to liberalization. Consolidation is strengthening the competitiveness of its carriers. Technology is helping.

  • In one year e-ticketing levels jumped from below 1% to over 15%
    Infrastructure investment will meet demand.
  • 12 major airport projects are underway—and 3 more are about to start
    IATA is working closely with Chinese officials to improve efficiency and reduce costs.
  • One of our biggest involvements is with ATC
  • Shortening routes and increasing entry points
  • Efficient ATC will be critical to support further growth.

India

India is following a slightly different model. A change in government policy has brought new life to the Indian airline sector. Speed is critical. There is no place for bureaucratic institutional processes that slow change. Progress has been impressive. In a decade we have moved from 2 state-run airlines to a vibrant industry with more than 10 players. Indian carriers stole the show in Paris with US$12 billion of orders. Air India is almost completely re-equipping.

  • They have done a great job in a short period of time.

We need quick action to address infrastructure deficiencies in Delhi and Mumbai. I was pleased to hear of Minister Patel's decisions to push forward improvements in Mumbai. Remember, India is our greatest potential market. Only 40 million people travel by air—4% of the population. If that increased to 25% the market would be 250 million—the size of the UK. Correct and quick decisions could result in tremendous success. Slow or incorrect decisions, however, put this great potential at risk. I visited India in last October. IATA is fully engaged in the market and supporting its development. I am more than confident in its future. The key players here today share their insights.

  • Minister Patel, the architect of India's great vision.
  • Vasudevan Thulasidas who is re-shaping Air-India.
  • And Peter Hill of Sri Lankan, the largest non-Indian airline serving the market.

Agenda for Change

Let me summarise before moving on.

  • Air transport is an important industry
  • Regional differences are enormous
  • Asia has some great potential markets
  • Effective policy is essential for healthy growth
  • And change is critical to turn-around the industry

We have a broad agenda for change that starts with the airlines on:

  • Safety
  • Simplifying the Business
  • We need our partners—airports and air navigation service providers—to bring cost savings
  • And Governments must give us greater freedom to do business

Safety

Air transport is the safest way to travel. The global accident rate for 2005 was 0.76 per million sectors. We are committed to achieving 0.65 next year across the board. Meanwhile, IATA members are at 0.57. The IATA Operational Safety Audit (IOSA) is a key tool to move the entire industry forward. This is the first global standard for airline safety management. There are four important messages that I want to pass on. First, the audit is a recognised industry benchmark.

  • 140 airlines were in the audit process at the end of 2005
  • That is 70% of international scheduled traffic

Second, our investment is growing.

  • IATA provides the standards free to any commercial airline
  • We have 7 accredited audit organisations that make up a competitive commercial environment.
  • Our Partnership for Safety programme will assist airlines in developing countries to get on board.

Third, governments are using the audit in new ways.

  • The FAA accepts IOSA audits for codeshare arrangements
  • We are helping Egypt, Jordan, Chile and Madagascar incorporate IOSA into their airline certification process
  • And I would encourage Asian governments to look at ways to incorporate IOSA into their oversight process

Fourth—and most important—IOSA will be a condition of IATA membership by the end of 2007.

  • This is a giant step for IOSA
  • The registry is online—transparent for all to see
  • And it adds another dimension of quality to IATA membership

Simplifying the Business

We launched Simplifying the Business at our 2004 AGM in Singapore. It is IATA's biggest project ever. Actually it is five projects that will save costs while making travel and shipping more convenient. Our top priority is e-ticketing. We hit our 2005 target of 40% ET penetration in our BSPs in November of last year.

  • By this time next year we are aiming for 70%
  • And 100% by the end of 2007.

The target date is a must. We will not print any more paper tickets after 2007. IATA has a global team of 140 people to achieve this. Delivering ET for an airline's own flights is challenging enough. But that is just the beginning. There are over 17,000 interline arrangements in place. They make up the global system that we all take for granted. Converting these agreements will be difficult—but achievable if we move quickly. And Asia is not moving fast enough.

  • Overall ET was at 34% for 2005—
  • This is an improvement from 23% in 2004, but below the 40% target
  • Markets like Micronesia, Singapore and New Zealand are leading with penetration of 81%, 76% and 56%
  • But Sri Lanka is 0% and India is only 9.5%
  • This is a wake-up call
  • We must move faster
  • We want to have all carriers on board by 2007. We cannot afford to risk the US$3 billion savings that ET will bring.

The second dimension of our agenda is for our monopoly partners—airports and air navigation service providers.

The annual bill for these is US$42 billion—10% of operating costs. We have some good news in Europe. Last week I met European Transport Commissioner Barrot. He agreed that airport charges are too arbitrary and we need to bring more transparency. The process will start with a public hearing in Brussels in April. And I am hopeful that we will move quickly from there. Airports spend and airlines pay is not the basis for a successful partnership. IATA proposed a European regulator and a dispute settlement mechanism for airports that is

  • Fair, transparent, independent and quick.

Why are we so concerned? Airports are monopolies and many have no commercial discipline. By challenging monopoly suppliers, IATA delivered US$2 billion in savings last year. But that is not enough—we must change their mindset. Asia is home to some of our best partners.

  • We have complete transparency on investment and charges with AirServices Australia
  • Changi Airport is focused on attracting carriers with high service levels at reasonable costs
  • We awarded Brisbane for its dedication to efficiency
  • Even Tokyo's Narita Airport reduced charges by 10% last year.
  • But we have problems as well
  • Manila will introduce a discriminatory security charge
  • India's airports are expensive and service levels are low
  • And China's airports are among the most expensive in the region

In Europe, we have a new poster child for bad behaviour—Aeroports de Paris.

  • On top of increasing charges by 26% over the last five years, they will increase by 5% for the next five
  • Outrageous is the only polite word I know to describe this

Running an airport cannot be a license to print money.

Governments and the Freedom to Do Business

Airlines were among the first companies to operate globally. But we are among the last to benefit from globalization. Airlines have been deregulated with half-measures. Governments are far too involved in the industry. For example the 60 year-old bilateral system denies airlines basic commercial freedoms.

  • Governments negotiate our markets
  • And we cannot merge or consolidate when it makes business sense

Singapore benefits from an open aviation policy. Peter Hill of Sri Lankan can attest to the benefits of Sri Lanka's liberal bilateral with India. The recent US-EU agreement could be a step in the right direction. Open skies and regulatory convergence must define our future. Airlines are businesses like any other. The world will not change overnight. But Governments must move forward with progressive liberalisation to build a stronger industry.

The agenda for a successful airline industry is not complicated
It has three dimensions—airlines, partners and governments. Airlines and IATA are well on their way by

  • First raising the bar on safety by making IOSA a condition of IATA membership
  • And second by moving to a low cost industry with Simplifying the Business.
;Some of our partners are beginning to change their mindset.

  • And we see governments starting to look more closely at those living in the age of airports spend and airlines pay.

Governments need to give us basic business freedoms and if these three dimensions are correct—the chances of a safer, more secure, environmentally friendly and profitable industry in 2007 are good. I look forward to a healthy discussion of these and other issues today. It is my pleasure to call on the Singapore Minister for Transport, Mr. Yeo.

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