Date: 12 December 2006
Global Press Briefing, Geneva
Welcome to Geneva. It’s a busy day. So let’s not waste any time.
Brian briefed you on our new forecast. The bottom line is improving. We expect losses of US$500 million this year. Much better than our September US$1.7 billion loss projection. And, without the US$6 billion restructuring costs in the US. 2006 would have been profitable. 2007 will see our first profit since 2000—US$2.5 billion. Regional differences remain.
- Europe will have the biggest profit—US$1.5 billion
- Asia will show a profit of US$1.2 billion
- The US will follow with US$200 million
- Middle East and Latin America will show profits of US$100 million
- And Africa will likely lose US$500 million
Let me emphasise 2 points. First: an industry profit of US$2.5 billion is peanuts. It is a margin of 0.5% on US$450 billion of revenues. Or a 2.2% EBIT. Second: The revenue cycle has peaked. We forecast revenue growth to fall from 8% in 2006 to 4.5%. We are recovering from US$41 billion in losses. A significant economic downturn would hurt a fragile industry. 2007 will be another year of
- Hard work, challenges and change
- With tough targets to meet
- So let’s save the champagne for another year!
At that time we can also celebrate our business success with our customers who will be travelling in a different way. With 100% e-ticketing and simplified processing. In an environment where safety is more transparent than ever. Thanks to the IATA Operational Safety Audit. And hopefully benefiting from more cost efficient infrastructure. These are some of the issues discussed by our Board last Friday. Today I would like to update you on how IATA is making a difference by improving safety and Simplifying the Business as well as covering
- External costs
- Environment and
2006 could have the lowest accident rate ever. As at 30 November the accident rate was 0.65 hull losses per million flights. This is better than the 0.76 achieved in 2005. And our members are doing significantly better. At 0.29 accidents per million flights. In 10 years we cut the accident rate in half. How?
- With global standards
- And hard work
Our board has set another tough target. To reduce the accident rate a further 25% by the end of 2008. Or 0.49 accidents per million flights. The Paris AGM made IOSA—the IATA Operational Safety Audit—a condition of IATA membership. With some tough targets. In 19 days—all of our members must contract to have an audit. And by 31 December 2007 they must be audited. Or they are out of IATA. Full stop.
So, targets are important. 97% of our members are in the IOSA process. 105 are on the registry. And 21 non-members. IOSA is a high bar .And some of our members may not make it. Our goal is not to reduce our membership—but to improve safety. So our Partnership for Safety Programme is targeted at the areas with the greatest need. Africa, Latin America and the CIS. Over 30 gap analyses on carriers in these regions are complete. And 45 gap analyses are planned for 2007. Using IOSA and our safety expertise we are working closely with governments to improve safety in critical areas.
The accident rate in Russia is over 30 times the global average. Today we have a delegation in St. Petersburg. Presenting proposals for action. And in Africa. A small number of countries are spoiling impressive results. Flags of convenience in
- Sierra Leone and
Are a tragic embarrassment. And other countries like Nigeria have the will but just need some help. It will be a priority country for us in 2007. In the meantime more Governments are using IOSA. It is a requirement for an Air Operators Certificate in Egypt, Chile and Madagascar. France used the IOSA standard in their Label Air programme. Switzerland expedites traffic rights for IOSA carriers. And so on.
IOSA is now a critical part of the global vision for airline safety. We are now applying the IOSA model to ground handling safety. Ground handling incidents are a US$4 billion problem. There is no global standard for ground handlers. So we began working with Airbus, Boeing, the Ground Handlers Association and others. To create the standards for an audit programme that will commence in 2008. As you can see, safety is at the core of our activities. And we have Mike O’Brien here to give you a further briefing this afternoon.
Security equals safety as an industry priority. We had some great successes in 2006. The most memorable was the London terror plot. Intelligence worked. Even if the airport’s contingency plan was a failure. ICAO played an effective role in coordinating an international response. That helped kick-start the harmonisation of hand baggage rules in Europe and the US. The system is not perfect. But it is a step in the right direction. The US-EU agreement on passenger data was an important reminder of the need to cooperate. The agreement will take us to next July. Then we will have another test of governments’ ability to cooperate.
We even made progress on funding. The European Commission agreed that national governments should fund security. Now governments must take on the US$5.6 annual bill we have been paying since 2001. Global standards and harmonisation will continue to be the focus in 2007. I am confident that the German Presidency of the EU will put effort into further harmonisation with the US. This would be a major catalyst for further global alignment.
One important development is a new process to simplify passenger travel that Georgina will explain this afternoon. Five years after the enormous changes from 9.11. It was time for us to look at how the whole process fits together. To make it more efficient with global standards and technology. IATA and our partners have agreed on the basics. The target for 2007 is to bring governments on board. To achieve even better results. Building on our success in safety.
Simplifying the Business
Simplifying the Business was also discussed. The programme launched in 2004 with five core projects. 2.5 years later the results are impressive.
Bar coded boarding passes
30 airlines already use them. And the target for 2007 is 80.
Common-Use Self-Service Kiosks for Check-in
48 airports deploy them today. And the target for 2007 is 70
Radio Frequency Identification for Baggage
A 10% improvement in mis-handled baggage is possible. With more than 2 billion bags a year this is significant. But we still need to strengthen the business case. Including uses in catering and cargo.
The Board approved five pilot projects to test standards, processes and technical solutions in 2007. These are
- Hong Kong
- The Netherlands
- Singapore and
- The UK
E-freight is our most challenging project. We need to eliminate 38 documents. Equal to the ticket and the passport. It will be a revolution—and the target date is 2010 in countries with the correct legal and regulatory framework.
The deadline is 384 days away. As of 30 November we were at 72%—ahead of our 2006 target. There are some great success stories including. China that went from 10% to 90% in a year. And there are some worries. ET is illegal for Russian airlines. It is the only place in the world where the government requires paper. IATA proposed a legislative solution. It’s been a year and the government has not acted. The danger is that Russia gets left behind. The other is the Middle East at 13%. There are no technical or government issues. The business case for savings is clear. It is simply a matter of delivering. I am sounding the alarm bell. Not waving the white flag. We have 150 people dedicated to helping our members meet the target. And achieve the promised US$3 billion savings.
The task for 2007 will be to look at how we can simplify other areas. We need to see efficiency in all aspects of our business. This is one topic that will never go away!
I should also say that we are practising what we preach. Our financial services will handle US$275 billion in settlements this year. We are remodelling it to bring more efficiency. And pushing many functions to the web. The result is a 37% reduction in operating costs for the airlines.
Balancing the Value Chain
Unfortunately, not all in the value chain have the same vision of efficiency. The real issue is value for money. We have some great partners. Both airports and air navigation service providers. But we have too many that abuse their monopoly position. The results with Air Navigation Service Providers are better than with airports. We achieved cost savings larger than cost increases. US$399 million in savings with US$374 in cost increases. We still have many issues to resolve. But we understand the same language.
We are not there with the airports yet. In 2006 we used legal action for the first time. We took the Government of France to court over abuses in Paris. We did the same at Schipol. And in Argentina.
We addressed our worst offenders with high profile campaigns.
Auckland is an example:
We are asking the New Zealand Government to look at Auckland airport. And ask how it can make an EBIT of 60%. Without abusing its monopoly position.
Argentina is another:
There is price discrimination between foreign and domestic carriers. And the cosy relationship between the airport and the government. That is going to turn a failed privatisation into a disaster. By giving the airport concessionaire an extra US$3.7 billion over the remaining 22 years of the contract. An interesting footnote—the government plans to take an equity stake in the airport concessionaire.
Airline Business made a nice summary of the world’s top airports. Among the top 50. 40 had double digit margins. 15 were above 30%. and 6 were above 50%. Making profit is a good thing. But abuse of monopoly power has no place in our industry. Our most significant achievement could be in Europe. A directive on charges could come as soon as 20 December. Vice President Barrot has promised that it will require. Strong, independent national regulators for airports. Follow ICAO principles. And really challenge airports to increase efficiency—not prices. Unfortunately, the draft that we have seen is far too weak to achieve real results. Among other issues….It has no teeth. And it lacks incentives for cost efficiency.
In the meantime, we continue to battle for efficiency. IATA’s efforts in 2006 were impressive. US$1.8 billion in savings from charges, fuel and taxation. This is good news, but look a bit closer. We saved US$771 million in our negotiations with airports. But overall costs increased US$1.9 billion. US$1.3 billion of which came from just 3 airports
- And BAA/Ferrovial
In fact BAA is fast becoming a nightmare. For 2003-2008 charges increased 50%. And the latest proposal for 2008-2013 will see another 50% increase. The justification is investment. Yes we need investment—but in efficiency! The regulator is not doing its job. Allowing BAA to reach an EBIT of 42% at Heathrow is an embarrassment. We must stop this nonsense now.
Taxation is even more discouraging. US$127 million in savings were completely wiped out. By over US$2.5 billion in new taxes. Most of this was from the creeping invasion of the Chirac Tax. Now disguised as UNITAID. It is only supported by a few countries—but the precedent is dangerous. Governments must understand that airlines are catalysts for economic activity. Milking the industry with outrageous taxes is not acceptable and not sustainable.
But last week Gordon Brown added to our problems. By announcing that he will double the billion pound a year UK passenger duty. If the goal, as he says, is to help the environment. I want to know how he is going to use the additional billion pounds? Buying emissions permits for airlines?
Environment is an important issue. We are not trying to get elected. So we don’t have a political agenda. But we do have a business to run. That means taking our environmental responsibilities seriously as a management issue. Let’s start with an important fact. Air transport contributes 2% of global man-made carbon emissions. Stop flying completely, and the gain is minimal. Of course, that does not exempt us from doing better. That means considering everything from technology to emissions trading.
First, it is a fact that technology drives progress. New technology improved fuel efficiency 70% in the last 40 years. Average fuel efficiency is 4.0 litres per 100 passenger kilometres. New aircraft achieve 3.5. And the A380 and Boeing 787 will be below 3.0. Better than any hybrid car. By 2020, fuel efficiency across the board will improve 25%.
Second, if governments could optimise air traffic control, fuel efficiency would improve by 12%. An example is IATA’s efforts to shorten routes and optimise procedures. In 2006 this will save over 4 million tonnes of CO2 with a real and direct benefit to the environment. We could do much more if governments were more committed to efficiency.
Third, among economic options, emissions trading is the most interesting. Particularly for an industry that where demand is growing faster than efficiency gains. Kyoto recognized that global guidelines would be needed. To deal with the simple fact that operations over the high seas need a different land-based industry. And we have been working on guidelines with ICAO. With a target of September 2007—in 10 months time. A lot of work needs to be done. But the message is that that we are not oppose to emissions trading. But we must have global guidelines that don’t distort competition.
Unfortunately, the current European proposal on emissions trading has got it almost all wrong. First, the proposal is to treat airlines differently from other industries. With a requirement to eventually purchase more permits than other industries. Second, if we are going to be billed for emissions. Then governments must ensure that we can fly as efficiently as possible. Let’s see a government commitment to a Single European Sky. And the 12 million tonnes of CO2 that it would allow us to save. Third, we need some protection against the competition amongst politicians to prove they are green. By adding tax to our industry. Even if there is no benefit to the environment. Finally….why rush? It will be a EUR 3 billion cost in 2011. Making it successful is important. And global guidelines will be critical to that success.
In summary, the debate in Europe needs some cooler heads. LET ME EMPHASIZE TO BE ABSOLUTLELY CLEAR: A properly designed emissions trading scheme could be an effective tool. But it must be the right scheme. And governments need to come to the table with more efficient infrastructure.
The last item is liberalisation. The US decision to withdraw the NPRM on ownership last week was enormously disappointing. In speaking with Secretary Peters, I know that the White House wanted a deal. But the new congress has moved the goal posts. And it’s hard to be optimistic. Once again a business decision has been taken hostage by short-sighted politics. And the US and Europe have lost an opportunity for industry leadership and change. And we are stuck with a 60 year old bilateral system designed for another age.
There is some hope elsewhere with far sighted governments. India is a good example. Liberalisation with the UK saw flights double. Opportunities were created for both Indian and UK carriers. And consumers have more choice. Governments have a clear role in safety, security and regulating monopolies. Full stop. After that, they need to get out of the way and let us run our businesses like any other businesses. Governments must lead change. Not fear it.
This year was a turning point. After 6 years, 2007 promises some black figures. Efficiency has made the industry stronger. But the recovery is fragile. And we must get governments on board with change. I am confident that we are moving in the right direction. And that we will have even better news at our AGM in Vancouver in 6 months. I am happy to take your questions.