Date: 22 November 2006
AACO Annual General Meeting, Kuwait
It is a pleasure to be here in Kuwait - which is famous for warm hospitality, a pioneering spirit, so much good news and potential. It is a pleasure to work in partnership with AACO on your most important business issues.
IATA’s presence in the region is strong with 9 offices and 60 people. Our settlement system is expanding, processing US$9 billion last year. We have new BSPs in Abu Dhabi, Yemen and soon Algeria. CASSs were launched in Jordan, Kuwait and the Gulf. We are dedicated to provide value for money. Efficiency gains will allow us to return about US$1 million to carriers in the BSP this year. Effectively, that makes our services free of charge.
IATA’s infrastructure work in the region shortened 11 routes, saving US$28 million. We we helped implement RNAV at 6 airports. Safe and efficient growth is our goal, and that is critical in the world’s fastest growing region. So, I welcome this opportunity to update you on the state of the industry and our activities.
State of the Industry
After 5 years and over US$40 billion of red ink, profitability is on the horizon. The airlines have done a tremendous job. Since 2001 labour productivity increased 33%, sales and distribution costs dropped 10% and non-fuel unit costs reduced 13%. But the high price of oil continues to hurt. It is the single biggest factor impacting profitability.
In 2001 the industry fuel bill was US$43 billion: 13% of operating costs. In 2006 the bill will be US$115 billion, now 26% of operating costs. In one year it increased US$24 billion. Remarkably airlines will still improve the bottom line from a US$3.2 billion loss in 2005 to US$1.7 billion in losses this year. European carriers will make US$1.8 billion and Asian carriers US$1.5 billion. US carriers will show operating profits but they will still end the year US$4.5 billion in the red. We expect carriers in the Arab world to post a combined profit of US$ 100 million.
The good news for the industry is that we will be in the black in 2007 with a small profit of US$1.9 billion. But that’s only a 0.4% return on US$450 billion in revenues so there is a much more work to do.
Growth and Profitability
Managing growth profitably is the challenge for this region. You are an emerging and impressive success story: double digit growth for the last 4 years. Year-to-date cargo traffic is growing at 17% and passenger at 15%. Both are about three times the global average.
Oil revenues are boosting the region’s economy. The Middle East will export US$791 billion of oil this year – up US$500 billion in four years. The economy is growing at 5% and inward foreign investment is US$52 billion. But the oil boom will not last forever. Far-sighted governments recognise aviation as a driver to diversify economies. Air transport employs a million people and generates US$122 billion in economic activity in the region.
Investing in cost-efficient infrastructure is at the core of many government strategies. The US$38 billion list of major projects is leading the industry:
- $4 billion to expand Dubai International Airport
- And another US$8 billion for its replacement at Jebel Ali
- $6.8 billion at Abu Dhabi International Airport
- $5 billion for the new Doha International airport and
- $8 billion more will be invested in Saudi Arabian airports
- Airlines are investing significantly to fill the airports with orders worth US$60 billion for 350 aircraft.
All this is good news. But I have two concerns: that we don’t lose the plot on cost-efficiency and that we clearly differentiate growth and profitability. For example: the United Arab Emirate suddenly increased air navigation charges by 63% in July, but we still have technical problems that deny use of RVSM flight levels. There are also plans increase charges for parking, landing and aerobridges. And all of this without consultation. We were pleased to give the UAE CAA an Eagle Award in 2003, so it is disappointing to see them moving in the wrong direction in 2006.
We are moving to a low-cost industry – this includes airports and air navigation service providers. And I will not be shy to shout politely to remind all governments that putting up charges is not the way to grow traffic or to use aviation as a catalyst for economic growth.
This leads me to my second concern. Understanding that growth is not a guarantee for profitability, running four enormous hubs in small geographic area such as the Gulf will be a challenge.
Look at Southeast Asia: Singapore, Bangkok and Kuala Lumpur have world-class hubs. Two are working to meet growing demand and one is struggling to attract traffic. This is with a regional market of 3.5 billion people. The whole MENA population is only 380 million. The critical question is: how do we make sure your emerging success story has a happy ending? I don’t have all the answers. But, along with controlling costs, I have some ideas to point us in the right direction.
Today I would like to discuss:
- Simplifying the Business and
Let’s start with safety—our number one priority. Air transport is the safest mode of transport and we can and should be proud of our achievements. The 2005 accident rate was 0.76 per million flights—the lowest ever. IATA members, benefiting from our programmes did much better at 0.35 per million flights. And the industry looks like it will do better than the 0.65 target for 2006.
But these figures mask some key realities. If we look at ALL aircraft types and all accidents globally the figure is three times higher—2.1 per million sectors. And the Middle East/North Africa is 6.5. We must take a business-like approach to safety and deliver even better results. That means setting achievable targets with deadlines. Our target for 2008 is a 25% improvement on 2006.
Within our 6 Point Safety Strategy, IOSA is our most important tool. It is the first global standard for airline safety management audits. IOSA raises the bar on safety and rationalises redundant auditing with a central database. We have already saved US$21 million by avoiding 400 audits and the registry is a strong public statement of our commitment to safety.
Our 2006 AGM decided that IOSA will become a condition of membership from 2008 adding a strong mark of quality to our association. Already 123 airlines are on the IOSA registry - 12 MENA members among them. Over 220 member airlines are in the IOSA process. AACO carriers have taken a leading role: Qatar Airways was the first carrier on the registry. And 24 of our members in this region are in the process.
Today, I have the honour of presenting Sheikh Talal Kuwait Airways’ IOSA certificate. I congratulate Kuwait Airways and all the IOSA-registered carriers of this region for effective leadership and commitment to safety.
There are still 10 IATA carriers in the region not yet in the process, including 4 AACO members. This is a concern for us because our job is not only to set targets but to help our members achieve them. We have commitments from most of these to begin the process and we recognise that some will need extra help for reasons from security to lack of resources.
Through our US$3 million Partnership for Safety we are helping our members prepare with training and gap analysis. In this region, we held IOSA awareness seminars in Tehran and Damascus. One gap analysis is complete and three more are scheduled this year. I am pleased that many governments in this region have seen IOSA as a complement to ICAO’s Universal Safety Oversight Audit Programme and are incorporating IOSA into their oversight programmes.
IOSA is a condition for AOCs in Egypt, Jordan and Lebanon. ACAC will require IOSA to operate to and from the Arab region. This is leadership that will improve safety in this region. And by this time next year, our target is to have all Arab carriers through the process.
While I am pleased with your progress and commitment to IOSA, performance on Simplifying the Business is absolutely disappointing. Efficiency is critical—everywhere. The emergence of low cost carriers in this region will add pressure. There are now 3 low cost carriers in the region. Experience in Europe, North America and Asia shows that there will be more. IATA’s Simplifying the Business programme will reduce costs and improve passenger convenience.
We will save US$6.5 billion with:
- Bar Coded Boarding Passes
- Common use kiosks for check-in
- E-freight and
- Radio Frequency Identification for Baggage management
The top priority is 100% electronic ticketing by the end of 2007, saving US$3 billion. We hit our 2005 target of 40% ET penetration in our BSPs. We will surpass our 70% global target for this year.
The Middle East/North Africa however is dead last at 13%. All other regions are much higher. It is a mixed picture across the region:
- Emirates 59%
- Oman 46%
- Royal Air Maroc 34%
- Gulf Air and Tunis Air are at 27%
- Recently Etihad and Kuwait Airways started issuing ET
- And all others have yet to issue a single ET through the BSP
As a region, this is more than disappointing. For a fast-growing region, it is an embarrassment. It is completely opposite your leadership in IOSA and it is a greatly missed opportunity. Why grow at 16% using old systems when there is modern technology that will lower distribution costs? We are doing all that we can to help you achieve the 100% target but we cannot slow the global process. And I cannot accept excuses like low internet penetration – it is a myth. You don’t need internet for ET. You need determination and speed.
I am ringing the alarm bell – not raising the white flag. Look at what happened in China. ET went from 11% in 2005 to 80% in a year. They went from nearly last to first, so there is no reason why Arab carriers can’t achieve the same. But the clock is ticking and only 405 days remain until the deadline. ET penetration must increase by over 6% per month and, working together, this is achievable.
E-freight is another opportunity. Arab carriers ship 2 million tonnes of international cargo a year and you have the conditions to support further growth:
- Reasonable labour costs
- Trade and tariff agreements
- And crriers that understand the importance of cargo
Despite the enthusiasm, not one country is a candidate for e-freight pilots scheduled for next year. They lack the legal framework, technology, and business environment so we are focusing elsewhere. Canada, Hong Kong, Mauritius, Netherlands, New Zealand, Singapore, Sweden, and the United Kingdom are prime candidates. We’re optimistic that Arab countries will be in the second wave of e-freight pilots. The time to lay the groundwork is now: press governments and customs authorities to move fast on the legal and regulatory issues. And participate in IATA’s EDI message improvement programme early next year.
With safety and efficiency measures in hand we need the freedom to do business. The future success of our industry must rest on our ability to serve markets where they exist and to merge and consolidate where it makes business sense.
We cannot rely on a 60 year-old bilateral system that requires governments to negotiate our markets. This worked in the 1940’s when we had 9 million passengers flying government owned airlines, but a 2 billion passenger a year business needs speed and flexibility. I speak a lot about the need for the US and Europe to lead on liberalisation. There is no excuse for them not to—except politics. And the recent US elections will make things even more difficult. But that is no reason for this region to take its foot off the gas. You have enormous airport and aircraft investments and the numbers don’t add up.
In 2012, the 10 leading airports in the region will have a combined capacity of 320 million passengers. The IATA forecast—based on airline expectations—projects 160 million passengers. Even if you captured the entire Asia-to-Europe market that would only add another 110 million passengers. Clearly, to fill the airports of the future, you will need maximum flexibility to develop new market. Liberalisation must be part of that equation. It stimulates traffic and is a catalyst for economic growth.
There are lots of examples: look at India. A liberalised treaty with the UK saw flights double and both Indian and UK carriers are sharing the opportunities. The European Single Market is another example – it became a reality in 1993 and traffic doubled by 2005. Now air transport is a leader driver of European integration. Dubai is an example within the region. With a very liberal policy, the Dubai government has created a successful airline, airport and 20% annual growth.
So my message is simple. The industry needs to move forward with a progressive approach to liberalisation. No need to change overnight, but governments must follow-up on the vision of a staged approach to liberalisations agreed at ICAO in 2003. I re-affirmed this message at the ICAO forum in Dubai earlier this year and I am pleased to see some progress in this region. Lebanon and Kuwait opened up their skies. And recently a bilateral agreement between Saudi Arabia and Egypt has opened up the two largest markets in the region. The 2004 Arab Transport Ministers Agreements have the potential to drive even further growth in regionally. And I hope to see positive results from bloc negotiations with Europe. And finally, we can expect airline privatizations in Saudi Arabia, Jordan and Egypt to help speed the process. This region has proven its ability to implement it’s vision for a strong air transport sector and your infrastructure development is leading the world. Now we need to see the implementation of real policy measures to support growth.
IATA, AACO and ACAC are holding a Regulatory Forum early next month in Bahrain. Liberalisation will be a main topic. Let’s use this an opportunity to send a strong message that governments need to deliver results faster.
In closing, MENA is one of the most exciting areas of the world for aviation. Double digit growth and booming economies are providing incredible opportunity. To maximise this airlines must:
- Press governments for much needed change on liberalisation to drive growth
- Move forward with IOSA
- And speed up the implementation of ET
If we work together to make this happen in this region the result will be a financially healthy air transport industry. And a happy ending to an emerging great success story.