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Date: 30 October 2006

CEO Remarks, Buenos Aires

Good morning. It is a pleasure to be here in Buenos Aires. I feel at home. In fact Buenos Aires was my home for 8 years. I lived here as a child when my father was running Pirelli in the 50’s. While the great tradition of Argentine hospitality has not changed. Pretty much everything else has, and that includes air transport. Air transport is a critical to the global economy. We are a US$450 billion industry that supports US$2.9 trillion in economic activity. In Argentina, the industry will generate in 2006 over US$22.8 billion in economic activity. And that will generate 1,488,000 direct and indirect job positions for Argentineans over 2006 (9.5% of the total employment) in the air transport and travel industry .

 IATA

It has been some time since an IATA CEO has visited Argentina. For those of you not so familiar with IATA, we represent some 260 international airlines. Comprising 94% of scheduled international traffic. IATA has had an office in Buenos Aires since 1986. It’s primary function was to run our settlement operations. Last year, we settled US$1,000 millions in Argentina, and globally we settled over 240 billion.

But an industry that has been in crisis since 2001 needs leadership beyond effectively handling the airline’s back-office operations. IATA’s mission is to lead, represent and serve the air transport industry. To fulfill that mission we have changed. You will see that Rafael Schvartzman, our country manager, is here. He is IATA’s Ambassador to Argentina and works with Patricio Sepulveda, our Regional Vice President for Latin America, to promote our agenda for change. Specifically, I would like to update you on four issues that have special significance to Argentina:

  • Safety
  • Simplifying the Business
  • Infrastructure and
  • Liberalisation

  State of the Industry

Before that, let’s examine the state of the global industry. 2001 was the start of series of crises that changed air transport. Between 2001 and 2005 airlines globally lost in excess of US$40 billion. This year—2006—we expect losses of US$1.7 billion. An improvement on the US$3.2 billion loss in 2005. But there is a hidden story that is truly impressive. Airlines were able to improve their bottom line even as fuel prices skyrocketed. The industry fuel bill rose from US$43 billion in 2001 to US$91 billion in 2005. And we expect a fuel bill of US$115 billion this year. But increased efficiency—and a strong revenue environment—will likely see the industry return to profitability in 2007. We predict a profit of US$1.9 billion. Since 2001:

  • Labour productivity increased 33%
  • Sales and distribution costs dropped 10%
  • And non-fuel unit costs reduced 13%

The industry is moving in the right direction. But it is still a bit early to celebrate. A US$1.9 billion return on revenues of US$450 billion is a 0.4% margin. Much more work needs to be done—in Argentina and globally—to return the industry to health.

 

Safety

Safety is our industry’s number one priority. And despite the difficult financial situation of the industry. We continued to improve our record on operational safety. The global accident rate—measured by hull losses—was 0.76 per million flights in 2005. This was the lowest ever. IATA carriers did significantly better. 0.35 accidents for every million flights. The global hull loss rate improved by over 40% in the last decade. We are proud of this record. And IATA has played a significant role in this improvement.

The IATA Operational Safety Audit (IOSA) is at the core of our efforts on safety. It is the first global standard for airline safety management and from 2008 it will be a condition of IATA membership, adding a mark of quality to IATA membership.  Globally over 200 airlines are in the IOSA process, 9 Latin American carriers are already on the registry. But we have yet to register a single carrier from Argentina.

It is no secret that safety is an issue in this region. The 2005 accident rate for Latin American and Caribbean carriers was 2.59 per million sectors, 3.4 times the global average. To help carriers meet this tough standard, we initiated a Partnership for Safety program. The program is focused on Latin America and Africa and its goal is to help prepare carriers to meet the IOSA standards.

A partnership for safety seminar was here earlier this year. And we hope to see both LAN Argentina and Aerolineas Argentinas in the IOSA process by year’s end. Civil aviation authorities around the world are incorporating IOSA into their safety oversight programs. Among governments that have taken this step are Egypt, France, Switzerland, Lebanon, and Chile. I encourage the Government of Argentina to join this growing list.

 

Simplifying the Business

Another IATA program is changing the way that people travel and ship. Adding convenience and saving costs. We call it Simplifying the Business and it based on 5 key initiatives:

  • 100% e-ticketing by the end of next year
  • using bar codes on boarding passes
  • radio frequency identification for baggage management
  • common use self service kiosks for check-in
  • and e-freight—a program to take the paper out of freight processing

Together they will save the industry US$6.5 billion each year. E-ticketing is at the top of the agenda—it’s deadline is 426 days from now. Our global target for this year is 70%. At the end of September we achieved 65%. And Argentina is on the right path with 88%. E-freight seeks to do the same for cargo processing. But it is a more complex process as it means taking away the ticket and the passport. So we must work with governments—particularly customs authorities.

The first step is signing the Montreal Convention 1999 to recognise electronic documentation. Argentina has not done this. And its customs processes are among the most complicated. Efficient cargo operations are critical to the economy, 35% of the value of good traded internationally are transported by air. If Argentina intends to maintain economic growth in the range of the 7.5% expected for 2006. Simplifying the cargo handling process is essential.

I urge the government to quickly ratify the Montreal Convention as a first step towards modernising cargo handling. We have some good news on Common Use Kiosks (CUSS). AA2000—the airport operator—is also looking at deploying CUSS in Buenos Aires and Cordoba. This is an excellent initiative. It could be our first CUSS project in Latin America. Along with a planned deployment in Cancun. But we need to make sure that the pricing in correct. To be successful, CUSS implementation must help reduce costs. CUSS must not become another mechanism for AA2000 to gouge its customers.

 

Infrastructure

This leads us nicely to examining the abysmal situation at AA2000. It is an embarrassment in view of the Argentinean citizens and the international community. The government decision in 1998 to grant a 30 year concession to operate 32 airports in Argentina was a license to print money. AA2000 was the highest bidder, promising royalties of 171 million pesos. Which at that time was US$171 million as well. Several times higher than other bidders. The government, excited, accepted the bid—and the cash—with little consideration for the industry or Argentina’s economy.

This bad start got worse when in December 2001.  The Argentinean economic crisis exploded and the currency was devalued to 1:3. Faced with this currency crisis, the government converted airport fees to dollars for foreign carriers. The result was effectively a 300% increase in costs to use Argentina’s airports.

Discriminatory pricing contravenes international treaties and several legal actions are underway. Comparing fees based on purchasing power parity, Ezeiza became the third most expensive airport in the world. A competitive disadvantage for the Argentine economy. The investment programme for the airport remained in Pesos. So the infrastructure is suffering from lack of investment. The airport infrastructure plans established by the concession contract were in some cases delayed or not accomplished. When you enter the airport you see a beautiful terminal building. But the guts of the building—the baggage system, IT etc.—belong in a history museum. We had some hope in 2004 when the State began to renegotiate the concession contracts.

But the current proposal in the form of a Letter of Intent will only turn an embarrassing situation into a disaster. It will put US$3.7 billion directly into the pockets of AA2000 over the remaining 21 years of the contract—at the expense of the airlines. First, by reducing royalty fees for AA2000 by an estimated US$ 2.6 billion. And Second by reducing their investment requirement by US$1.1 billion. In the first year alone, AA2000 aeronautical revenues are estimated to increase 14% with no clearly defined investment plans or value added to the customers.

Moreover practices in contravention of international agreements will continue. User charges must be cost based. There should be no cost difference on the infrastructure for foreign and domestic operations. So large price discrimination contravenes the rules of the UN specialised body for aviation (ICAO). And the proposed renegotiation of AA2000 will see the Government take a stake. So the Government and the provider will have a cozy (if unhealthy) relationship. This is against international standards and completely unacceptable. Government hearings on this issue were held on Friday 27 October.

Our position with regards to the renegotiation of the concession contract is to request the Government of Argentina to cancel the concession contract granted to AA2000. I have chosen to make my comments to you in order to adequately explain the IATA position. I hope that we can settle this issue in the next 60 days—before the LoI becomes a legal contract. We must avoid further international embarrassment to Argentina. And I hope the government will address the issues of AA2000 urgently and with a different perspective. To start the discussion here is a list of three key demands.

  1. End price discrimination between domestic and foreign carriers and domestic and international operations
    International operators are subsidising the domestic operators in a 10:1 proportion. This is an unacceptable practice by the ICAO and constitutes a reality that needs to be changed. Argentina’s carriers are not faced with similar discrimination elsewhere.
  2. Implement robust, independent and effective economic regulation with teeth
    It is a joke that the Government, the regulator and provider have the same interest. And it is a mistake not to consult users in a meaningful way. IATA has achieved a commitment from the European Commission to require such regulation across Europe. And we would be very pleased to work with the Government of Argentina to build an efficient regulatory framework in line with international laws.
  3. Reduce international fees substantially
    Increase efficiency, decrease costs, to align fees with competitive levels. These actions, together with a traffic growth rate as the one projected by Argentina nowadays, would result in a reasonable ROI. The most incredible thing about this renegotiation is that the unpaid debt of the concessionaire, which amounts to U$S 280 million, is recycled and then re-introduced in future income-expenditure projection.  THE WORLD UPSIDE DOWN!! What the concessionaire has failed to pay must be paid by the users!

Let’s remember airlines are key generators of economic activity. An cost-efficient and effective infrastructure will generate enormous economic benefits. 2005 traffic data tells the story. Traffic in Venezuela and Chile grew nearly 10% and Brazil by nearly 20%. Argentina’s growth was only 6.2%. And annual traffic growth for Argentina for 2000-2005 is minus 3.2%. Clearly the situation at Argentina’s airports is limiting traffic growth and its economic benefits. A reasonably priced infrastructure will result in an increased traffic and greater income for airports. But a recent economics study shows that the resulting increase in traffic growth will add US$ 40 billions  to the Argentine economic activity in the next 12 years.

 

Air Traffic Management

While the airport issue is a disaster, we have made some impressive gains with air traffic management. Optimising routes between Buenos Aires and Lima reduced flight distance by 36 miles and saved US$2.2 million. Another million dollars in savings were achieved by cutting 30 miles off the distance between Buenos Aires and Santa Cruz. These are most welcome developments and there is much more work to be done on optimising routes. At the same time I ask the government to take a look at Argentina’s air traffic control charges. The principles of

  • cost-efficiency
  • non-discrimination
  • transparent consultation and
  • regulation

Must be applied to air traffic control charges. Again, Argentina should follow the UN rules as established by ICAO.

 

Liberalisation

Finally, we need a vision for a liberalised industry. Last month I addressed an ICAO conference on liberalisation in Dubai. It was a follow-up to the 2003 Air Traffic Conference 5. That agreed to a vision of progressive liberalisation. The agreement was a landmark. But the results are few. Air transport is stuck with a 60 year-old bilateral system. Designed for a luxury state-run industry flying 9 million passengers in DC-3s. Wake up to 2006—we are mass transport for 2.2 billion passengers about to use the A380 and Boeing 787. It is a different world. And the rules must change. Governments have an essential role in

  • Safety
  • Security
  • Regulating monopolies where markets don’t work
  • Full stop

We don’t need governments to determine markets. Our greatest hope for significant change is. A US-EU agreement on open skies and regulatory convergence. A successful agreement would allow us to start looking at ownership issues.

Airlines are businesses. But the flag on the aircraft tail is so heavy that it is sinking the industry. In Latin America clone or subsidiary companies have been a unique response. Look at the proliferation of the LAN network in the region. But there is no reason for governments to get in the way of the healthy development of route networks. We need to run our business as a business. No subsidies or handouts.

Governments must give airlines the same commercial freedoms that other industries take for granted. And my challenge to Argentina and other Latin American governments is simple. Bring your legal frameworks in line with business realities. Explore opportunities for geographical bloc liberalisation. It is time for governments to take leadership. And catch up to the advances already made by airlines with clone operations that clearly are appreciated by travellers.

 

Conclusion

The industry globally and in Argentina has come a long way. Today we have identified some key actions required of the Argentine Government. To ensure that air transport continues to support overall economic growth, we ask the government to:

  1. Complement airline safety efforts by incorporating IOSA into Argentina’s safety oversight program
  2. Match airline results on ET by implementing the legal framework for e-freight
  3. Deliver results regionally on the commitment to progressive liberalisation of air transport
  4. Position Argentina’s airports as a catalyst for economic activity with fair, cost-efficient and regulated pricing

Let me elaborate on this last point. And re-state our concerns for the current proposals for AA2000. Despite holding public hearings. The government is not interested in a definite and acceptable solution for the sector. The Letter of Intent perpetuates a relationship with AA2000 that benefits a few. At the expense of the users and the nation. I would like to give you a strong and clear message. Use the renegotiation of the AA2000 contract to

  • Turn the privatisation of Argentina’s airports from a national embarrassment and failure
  • Into a success story with broad economic benefits

This is my message to Minister De Vido and the entire Government of Argentina. IATA is here to help. A strong industry is in all of our best interests. After all the suffering the sector has gone through, it’s time we all contributed to change the course. Argentina is great Nation and deserves a MODERN, EFFICIENT AND SUCCESSFULL AIR TRANSPORT
INDUSTRY!!!

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