Date: 18 January 2007
UK Press Briefing
Air transport has been in crisis since 2001. The crisis was an opportunity to change the industry for the better. Labour productivity is up 33%, sales and distribution costs reduced by 10%, non-fuel unit costs dropped 13% and we even absorbed US$72 billion in extra fuel costs while improving the bottom line. It’s an incredible story.
Industry losses since 2001 exceed US$40 billion. This year we expect our first profit since 2000: US$2.5 billion. It’s peanuts for an industry that generates US$450 billion in revenues, but it shows that airlines have turned around a financial disaster by re-engineering the business. We have been less successful with government policy where change is still critical.
Impact of Aviation in the UK
And that includes the UK. The economic impact of air transport is enormous: over 11 billion pounds of direct activity and nearly 200,000 jobs. Moreover air transport is a net contributor to government coffers through taxes and charges - at least 450 million pounds a year or 2.8 pounds per journey. Chancellor Brown’s vacation tax will only increase that. More on that later, but for now compare that to the nearly 3 billion pound subsidy for the UK rail system. Today it’s a higher figure than when they were state-owned. So it is absolutely critical that we get policy right.
Today, I will update you on 2 of IATA‘s most important priorities: safety and efficiency. And then address the key policy issues of the Environment, Regulation of Monopoly Suppliers and Liberalisation.
Let’s start with some facts about safety—our number one priority. 2006 was our safest year ever. The industry hull loss rate was 0.65 accidents per million flights. IATA members did much better at 0.41. We should be proud of transporting 2.2 billion people safely in 2006.
But 2007 began with a tragic crash in Indonesia. It reminds us that the constant challenge is to be even safer. Our target is a 25% reduction in the accident rate by 2008. The IATA Operational Safety Audit (IOSA) will help achieve this. IOSA is the first global standard for airline safety management audits and we are absolutely serious about it. It is now a condition of IATA membership.
Last week I signed membership termination letters for 6 carriers that have not contracted for an audit. By the end of this year, all carriers must be audited or they are out as well. Our goal is not to eliminate members – it is to raise the bar on safety. 130 airlines are on the registry (on our website). We are working with all members to bring them up to standard, particularly in Africa, Latin America and Russia where we are addressing high accidents rates with our Partnership for Safety programme.
We are a global industry. It is not good enough to be safe in Europe or Asia or North America. And IOSA is making a much bigger difference than punitive actions like blacklisting. It is our responsibility to improve safety everywhere.
The other area where we are making a big difference is efficiency. In 2004 IATA launched Simplifying the Business with two goals: use technology to make flying more convenient and cut US$6.5 billion in costs with improved processes. Here’s a report card on the five projects:
Bar coded boarding passes:
- Save at least US$2.5 per check-in
- Potential savings are US$500 million with 20% penetration
- 32 airlines already use them
- And the target for 2007 is 80
- And the best news of all is that passenger feedback is great
- Travellers love selecting their own seat and printing their own boarding pass at home
Common-Use Self-Service Kiosks for Check-in:
- Save at least US$2.5 per check-in
- Potential savings are US$1 billion with 40% penetration
- 50 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 RFID could save US$760 million
- But we still need to strengthen the business case, including uses in catering
- And we need to get the incremental cost of the chip down to 10 cents or lower
- Our Board approved five pilot projects to test standards, processes and technical solutions this year. UK is one of five countries selected, along with Canada, Hong Kong, The Netherlands and Singapore.
- E-freight is our most challenging project. We need to eliminate 38 documents per shipment - equal to the ticket and the passport.
- The UK’s leadership in the cargo industry is critical. We are pleased to be working with all the cargo stakeholders from Her Majesty’s Customs to freight forwarders.
- Together we will revolutionise cargo. The target date is 2010 in countries with the correct legal and regulatory framework.
Finally, our flagship project: E-ticketing
- We will be 100% e-ticketing in 347 days, reducing industry costs by US$3 billion.
- Before the end of 2006 we were at 72%--ahead of 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 and the Middle East is still at 15%.
- But the project has momentum and we will meet our goal
Security and Processes
The next challenge is to re-design passenger processes for a Simplified environment. Heathrow T5 is a great opportunity. The first terminal designed for e-ticketing and self service check-in . RedevelopingT-1-T3 will offer another opportunity.
We must combine new business processes with the latest security technology. IATA is working with governments to redesign passenger processing. Effective security can be convenient. The UK authorities did a great job last summer catching potential terrorists long before they got anywhere near the airport - proving that effective intelligence is the best way to battle terrorism.
However, the airport failed completely to effectively handle the passengers who did get to the airport. They forgot that you need people to support emergency operations. The challenge for 2007 is three-fold: develop more effective contingency planning, harmonise procedures globally and improve the passenger experience. We will be working hard with governments to achieve these.
The important issue of the environment is at the top of our agenda and understanding the facts is the first step to a solution. 97% of carbon emissions are natural - 3% are manmade. Air transport contributes 2% to manmade CO2.
We have been successful at limiting our environmental impact. 70% improvement in fuel efficiency in 30 years, and investing billions in new aircraft means that we will be 25% more fuel-efficient by 2020. Nevertheless, aviation is growing—about 6% annually. Fuel consumption is growing by 2-3%. So by 2050 we could be 3% of total manmade carbon emissions.
Air transport—like all industries—must find ways to further improve. Unfortunately many politicians in the UK have got it all wrong. Instead of improving environmental performance, they see an opportunity to pad budgets. Gordon Brown is doubling the Air Passenger Duty. It adds a billion pounds to government revenue and is creating confusion on how it will be implemented. An issued I warned him about in December. But he is proceeding—regardless of the substantial costs. We estimate that airline revenues will drop by 1.1 billion pounds. More importantly, long-term UK GDP will suffer by 400 million pounds. And for what?
The Chancellor estimates a 750,000 tonne reduction in greenhouse gasses. Using the treasury’s 70 pound valuation for a tonne of carbon that implies a climate benefit of 53 million pounds. But keep in mind what is the cost for this? 400 million pounds of lost GDP. If I may be blunt, Mr. Brown is spending far too much of other people’s money to support his green credentials. I asked him a direct question in a letter a few weeks ago: to which environmental projects will the billion pounds be allocated? No reply—yet.
Don’t get me wrong. Airlines are committed to improving their environmental performance and the billions we are investing to improve fuel efficiency prove that economic measures are not the only method. Taxes and charges have no environmental benefit. Among economic measures, a properly structured emissions trading scheme could play a role.
Europe announced a plan to include aviation into its emission trading scheme in December. Starting in 2011 for European carriers, and in 2012 for all airlines serving Europe. The consultation process was a joke. Broadly leaking a proposal a month before the announcement. But we did have some success in influencing the outcome. I give credit to Vice-President Barrot for several improvements: permit allocations were brought in line with other industries, airlines will be able to trade permits, business aviation is now included and NOx emissions will be treated separately. What is lacking is global harmonisation.
When Kyoto was drafted, ICAO—the UN—was asked to give global guidelines for international aviation. Why? A moving source of emissions is different from ground based, and much of emissions occur over the high seas. So global agreement on how to handle aviation is needed. ICAO will produce guidelines at its Assembly in September. Europe is jumping the gun and the whole proposal could run into a diplomatic brick wall if it is not harmonised with what ICAO decides—in 9 months.
But economic measures are only half the story. Much can be done to reduce emissions, cut costs and improve the flying experience. I know because IATA has achieved a lot. In 2006 IATA achieved 15 million tonnes of carbon savings by making 300 routes, improving operating procedures and sharing best practices in fuel management. All this saved US$1.8 billion on the fuel bill. Let me give you an example. Working with the Chinese government cut 30 minutes from a round-trip between Europe and China – this saves 84,000 tonnes of CO2 annually.
Governments are quick increases taxes but slow to act on technical solutions. Look at Europe. It is the same dimension and complexity as the US but there is 1 Air traffic control provider in the US and 34 in Europe. The result is inefficiency: 30% less efficient that the US and 60% less than Australia. The answer is simple: consolidate into a Single European Sky and the benefits are concrete. A 12 million tonnes saving of CO2 each year and 2.2 billion pounds in cost savings.
Compare this to what Mr. Brown is getting for his billion pounds. But instead of action on a Single Sky—we get a European Special—talks, talks, talks and more talks. 15 years of hot air. It’s time for some results. The timing could be interesting. I hope that Chancellor Merkel will bring a commonsense vision to Europe’s environment policy, including a Single European Sky.
The next area of the policy crisis is economic regulation of monopoly suppliers. Airline deregulation produced competition. Efficiency resulted, and passengers benefited with more accessible flights. Real prices dropped 30% in a decade in the UK - exactly like the telecoms industry. But what is different is that our infrastructure was not liberalised? In some cases it was privatised. But without effective regulation, there were few incentives for efficiency.
The poor reaction of BAA to the security crisis last summer was cited by Nobel prize winning economist Joe Stiglitz. He said that the privatised BAA does not have the right incentives for efficiency. It is not just a matter of having a regulator, you need to have a regulator with teeth and a serious commitment to efficiency. Let me give you an idea of the scale of the issue. Airlines pay US$42 billion to airports and air navigation service providers each year - about 10% of our total costs.
IATA negotiates with both to encourage cost efficiency. In 2006 we achieved about US$390 million in savings at airports and another US$470 million by convincing airports not to put their prices up. But globally we saw increases of nearly US$2 billion mostly from 3 sources: BAA, Aeroports de Paris and Bangkok.
The situation in the UK is critical and the regulator is not being effective. Heathrow costs will increase 50% in the 2003-8 period and we will see another 50% increase for the 2008-13 period. BAA is out of control. Operating costs are increasing 30% a year. You hear the argument that they are investing. Airlines spend billions on aircraft but it is not an excuse to put prices up. We invest in efficiency. And remember that building new runways or terminal capacity opens new revenue streams.
We continue to fight at the national level. But we have also escalated our efforts in two important ways. We are taking airports and governments to court, in France and Argentina for example. And I was pleased to see the Office of Fair Trading start to look at BAA. We fully agree with John Fingleton’s finding that the current system is not working and we have high charges and poor quality. Our submission to the OFT said that more competition would help, and we support a reference to the Competition Commission for an in-depth investigation. We look forward to seeing all the comments in February.
We are also appealing to the European Commission for effective regulation – not an enormous European bureaucracy but a directive requiring strong national regulation. Much the same way as power and electricity is treated. Vice President Barrot is on board. The first draft we saw was far too weak and I hope to see a directive with some teeth in the coming months.
The final area that I would like to comment on is the important issue of liberalisation. Politicians stopped short of the mark when they deregulated airlines domestically. Internationally we are stuck with a bilateral system that makes commercial rights into political capital. And assigning nationality to airlines in this system prevents cross border merger and consolidation. The result is a fragmented and sick industry of easily a thousand players. THIS MUST CHANGE.
As you know I was deeply disappointed when the US backed away from liberalising ownership rules. It killed the discussions of an open aviation area that could have included a reform of out-of-date ownership rules. Changing the trans-Atlantic relationship is our best chance to move the industry forward. Traffic between and within the US and Europe is nearly two thirds of all aviation.
But I am an optimist. Europe is moving forward with liberal discussion. The latest is with Canada and the recent US mission to Brussels is clearly an attempt to conclude a limited agreement within the German Presidency. I am hopeful for a practical solution that moves us forward. I don’t think that it will be giant step but the most important thing is that we are moving in the right direction. Not just looking for flashy photo opportunities.
I will stop there—to leave enough time for Brian and for your questions. As a last thought: the UK has always been a leader in aviation but I am deeply concerned that the government may be losing the plot in some critical areas. I am also optimistic the government has some great advisors. The Eddington Transport Study is among the best that I have seen. While taking a comprehensive look at how people move around it recognised the priority to upgrade key international gateways to reduce congestion and improve reliability.
It recommended a policy process that balances economic and environmental goals, requires rigorous cost benefit analysis of all options and streamlines planning decisions for speed and consistency. There is a lot of hard work to get past the current crisis of policy. But if we can persevere we will be well on our way to an efficient and profitable industry contributing significantly to supporting the national economy.