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Date: 22 March 2006

Wings Club Address, New York

It is a pleasure to be here—where I began my career at First National Citibank. It was a challenging job. And I have lots of good memories of this great city. New York is still a great city—and my current job is even more challenging. Air transport has never faced greater challenges. But these are also opportunities for the change that our industry desperately needs. I am sure that you are all familiar with IATA. IATA has 265 members—12 of these are in the US.

  • We have offices in more than 130 countries
  • We represent 94% of scheduled international traffic
  • Our financial systems process over US$225 billion annually

In the current crisis, the industry needed a strong global association to lead change. IATA needed to change in order to deliver.

  • We replaced 60% of the staff and 75% of management

Today we are delivering leadership to change the air transport industry. The industry numbers tell powerful stories. Between 2001 and 2005 airlines lost US$43 billion—a financial disaster. In 2005 airlines lost US$6 billion. US losses were US$10 billion.

  • Largely due to the cost of restructuring
  • European carriers made US$1.8 billion.
  • Consolidation helped
  • Asia's carriers reported a US$2.9 billion profit.
  • Low labour costs with strong long-haul markets is their secret.

Fuel and Outlook
If we are looking for a common villain, it is fuel. The industry's fuel bill went from US$44 billion in 2003 US$92 billion last year. High fuel prices are a long-term reality. Refinery margins on jet fuel more than doubled—from US$6 to US$16 per barrel—in the last two years.

  • This was US$14 billion gift from the aviation industry
  • Instead of investing in new capacity, over the next two years the oil companies will return US$250 billion to their shareholders

Governments must

  • Encourage investment in refinery capacity
  • Support research into alternative fuel sources

Airlines are being effective at cost cutting

  • The break-even price of oil went from US$22 per barrel in 2003 to US$48 for 2005

Cost cutting and the economic recovery have been so strong that we cut our 2006 loss projection in half—to US$2.2 billion. And that is with an oil price expectation of US$57 per barrel! Let me highlight two other changes in the right direction.

  • Improvement in the US
  • And developing markets.

US
US carriers will lose US$5 billion in 2006—half the loss of 2005.

  • A 3% domestic capacity reduction (November-January) is strengthening pricing power
  • I hope that yields will hold up with the 8.4% increase on international routes
  • Carriers are effectively using Chapter 11 to build a more competitive cost structure including labour costs
  • The cost gap with the low cost sector has narrowed to 30%
  • Labour productivity is improving—34% since 2001

Clearly the carriers have been effective in re-inventing themselves. The US situation is improving, but many concerns remain.

  • Debt-financing alone is a US$4 billion burden

Much more still needs to be done.

Developing Markets
China and India are rising stars. China's double digit growth is impressive. It is supported by an effective set of government policies that

  • Consolidated and strengthened local carriers
  • Liberalised to improve service levels with competition
  • And built infrastructure to keep pace with demand

The sleeping giant of India is waking-up quickly.

  • We went from 2 state-owned carriers to more than a dozen in less than ten years
  • India has over 330 aircraft on order—more than the existing fleet of 210

Infrastructure could be the Achilles heel.

  • If we do not upgrade quickly, a great start will end in failure

IATA is working closely with all players in both these markets. We can be confident in their future.

New Optimism
I believe that there is a new optimism in the industry. We just released results from our new CFO Confidence Survey.

  • Over half saw an improvement in profitability during the first quarter of 2006
  • 70% expect improvements in profitability over the next year
  • Stronger prospects are based on
    • Efficiency gains that have averaged 4% per year
    • And market growth which is expected to be in the 6% range
  • There is little expectation of a reduction in input costs
  • There are some wild-cards beyond our control—avian flu and security among them

Our outlook is more optimistic. Our 2007 profit projection increased from US$6 billion to US$7.2 billion. Good news—but save the champagne.

  • A 3% return on capital for a US$400 billion industry does not even cover the cost of capital
  • And over-capacity is always a risk following record aircraft orders
  • Fortunately, the fleet replacement rate will peak at 5.7% in the next two years—below the 7% rates of previous peaks
  • Careful matching of capacity to demand will be critical

So where do we go from here? Airlines need to keep up their solid performance in

  • Safety and
  • Cost reduction

Our partners—airports and air navigation service providers—must match our efficiency. And we need a fundamental change in the approach of governments to

  • Security
  • Taxation and
  • Liberalisation

Let me handle each of these separately.

Safety
Air transport is the safest way to travel. The accident rate for 2005 was 0.76 per million flights—the lowest ever. And the record for IATA member airlines was even better—0.35. US carriers has the best record at 0.2. This shows a sound commitment to safety at a time of enormous financial losses. Every accident is one too many—and we are determined to make our industry even safer. The IATA Operational Safety Audit (IOSA)—the first global standard for airline safety management—started in 2003. Governments have understood its merit. The US FAA recognises IOSA data for foreign code share partners. And we are working with several governments—in the Middle East, Africa and Latin America—to incorporate IOSA into their certification process.

IOSA standards are the industry's best practices that raise the bar on safety. We launched and funded a Partnership for Safety to help our members.

  • Our first target is Africa where the accident rate is 12 times the global average

And by 2007, IOSA will be a condition of IATA membership—further transforming IATA into a quality association.

Cost Reduction
Our industry is burdened with substantial legacy of costs. Airlines have been tremendously efficient at cost reduction. Labour still must understand that the only guarantee of long-term employment is constant dedication to efficiency. In the same way that airlines are challenging their internal costs, IATA is challenging industry partners to match our efforts. Our Simplifying the Business project is the cornerstone. It has five core programmes:

  • 100% e-ticketing by the end of 2007
  • taking the paper out of air freight
  • and improving passenger processing with
    • bar coded boarding passes
    • common use kiosks for check-in and
    • radio frequency identification for baggage management

In total these programmes will deliver US$6.5 billion in savings each year. While e-ticketing may be standard here, it is a revolution for other parts of the world. We reached 40% worldwide ET last year and we will be at 70% by the end of this year. And we will make 100% by the end of 2007. E-freight is an even bigger challenge as it requires the consensus of governments around the world as well as the industry. It is a great story—but I will save the details for another visit…

I must emphasize that—alongside our members—IATA is driving cost efficiency across the industry. For example, in 2005 we achieved for our members:

  • US$2 billion in savings airports and air navigation services charges
  • US$ 1.2 billion in savings with 300 new routes
  • And another US$1.2 billion with operational improvements

Efficiency is a matter of survival. We have no patience for inefficiency among our monopoly suppliers. Aeroports de Paris will increase charges by 5% per year for the next five years—following a 26.5% increase over the last five.

  • As they privatise, you would expect efficiency and transparency
  • Instead, they are going in the opposite direction
  • We will not give-up—even it means legal action

We convinced the European Commission to start hearings in April for an effective and independent regulation scheme. In the US, the airport funding model is different. We have great relationships with some

  • San Francisco Airport earned an Eagle Award in 2003 for their efficiency improvements

But others are not matching the efficiency gains of their airport customers. The Port Authority of New York and New Jersey is case in point.

  • Newark is the most expensive airport in the world and JFK is number five
  • Service levels certainly do not justify costs
  • And the lack of transparency, political interference and cross-subsidization make benchmarking impossible

US airspace on the other hand is among the most efficient in the world. Do not put this at risk in the FAA re-authorisation discussion. There is a need to modernize. And IATA is a willing partner to achieve results. The Federal Fund must be kept for projects that are not financially viable.

But the main solution must come from a change in governance

  • Ensure a cost-based funding model—through taxes or charges
  • Allow the system to become more efficient—airports self-sustaining with non-aeronautical revenues
  • Effectively allocate costs for ATC based on distance not weight
  • And install an independent regulator with full transparency

Worldwide, airlines and their passengers pay US$42 billion to airports and air navigation service suppliers—11% of our revenues. At this time when efficiency is critical, governments must pay more attention to ensure the efficiency of our monopoly suppliers.

Governments
This brings me to the role of governments in our industry. Quite frankly, government action in the industry crisis has been disappointing. This great country has started many of our industry's leading ideas. Deregulation was born here almost three decades ago. And it changed our industry forever. Unfortunately—and despite many opportunities—the US (and I would say Europe also) have lost leadership.

Look at the situation with respect to security
Four years after September 11 security is still a mess. Security levels are higher—no doubt. But we still confuse

  • effectiveness with inconvenience
  • and unilateral actions with leadership

How did we make progress on safety?

  • Global standards and cooperation

We need the same approach with security. Instead

  • We are paying US$5.6 billion a year for additional security
  • Our passengers are still being hassled\
  • Governments have failed to harmonise regulations internationally and internally

And airlines are left with ambiguity, bureaucracy and a high bill to pay. We need:

  • Harmonization of US security requirements with privacy laws in Europe and elsewhere
  • Mutual recognition of baggage and cargo screening
  • And standardization of information requirements among US government agencies

This is only the start of a long list. Politics and fear must not dominate the agenda. And security is too important to waste time and resources battling red tape. Michael Jackson, Deputy Secretary at DHS, who is taking a leading role on aviation issues, is moving in the right direction. I am confident that he will be effective at resolving these issues—but we need faster action.

Taxation
Air travel is at risk of collapsing under the weight of massive taxation. The US has been helpful in resisting French President Chirac's misguided idea to tax aviation to help the developing world. It is clear that making air travel more expensive will not help developing nations. But we have problems in the US too…

  • The average tax on a US$200 ticket sold is still 26%
  • We are being taxed at the rate of alcohol or tobacco—a US$15.8 billion rip-off

Governments must understand that we are a mass transit system carrying 2 billion passengers each year. We should not be taxed as if we were a luxury of the rich. It is time to bring some common sense to taxation.

Liberalisation
Governments must get out of our business. Sorry for being blunt, but this is an important message. Governments must play an effective role in safety, security and regulation of monopolies. Our industry is in an emergency situation and the best thing that governments can do is to let airlines run their businesses like businesses. Consolidation is not a dirty word. We have seen some

  • In Japan with JAL and JAS
  • In Europe with Lufthansa and SWISS
  • In India with Jet Airways and Sahara
  • Even in the States with US Airways and America West

Essentially this is all in domestic markets. Airlines need the same access to global capital that other industries take for granted. Regulators have no problem with an auto industry that is dominated by a handful of global players. Why is air transport different?

I do not buy arguments about national security. Golden shares or other legal measures can handle this effectively. It makes no sense that the industry that facilitated globalisation is the last to benefit. The Flags on the tails of our aircraft are sinking the industry. The NPRM on increasing foreign ownership opportunities is just a first step in the right direction. It may have a substantial role if it helps facilitate the US-EU agreement on open skies with regulatory convergence. But it must pave the way to full liberalization of markets and ownership—the final goal. Remember there is no alibi for not moving forward.

The US and Europe are markets of similar size, dimension, level of development, technology etc. Combined they represent nearly two thirds of aviation so a change here is a real signal to the world. But if the agreement fails, it could be the last opportunity for the US and Europe to regain leadership. The populations of China and India combined are 4 times that of the US and Europe. Their industries are developing rapidly with modern rules of the game. Already China is the fourth largest economy in the world. Both China and India have liberalisation at the core of their development policies. Governments must have the vision to foresee a world where air transport is a business like any other

  • Serving markets where they exist
  • Consolidating when it makes business sense
  • Competing efficiently with one set of global rules
  • Supporting a value chain that is balanced
  • Generating profits and increasing shareholder value

After 60 years, it is time to give a nice retirement party to the bilateral system. The US and Europe must have a clear vision and not be afraid to change. The age of liberalisation must begin.

We are at a crucial junction. As an industry we have made tremendous progress. Profitability is in sight. But there is still some turbulence ahead. I am confident of success if all stakeholders

  • Governments
  • Airlines
  • And Partners

Remain dedicated and have the courage and the commitment to implement a real agenda of change.

Wings Club Address by Giovanni Bisignani, New York
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