Date: 12 March 2007
Board of Trade, Vancouver
It’s a pleasure to be in this great country and this wonderful city. IATA’s main offices are in Montreal and Geneva, so Canada is like a second home. I have visited Vancouver very often both for pleasure and for business. And more importantly from 3-5 June Vancouver will be the world capital for aviation.
The 63rd IATA Annual General Meeting and World Air Transport Summit will take place here in this very hotel. It is the most important event on the aviation calendar attracting CEOs, Chairmen and Senior Management from our 250 member airlines, representing 94% of scheduled international traffic, as well as the leadership of our partners - airports, air navigation service providers, manufacturers and governments. In total, up to 800 leaders will gather in Vancouver to discuss the most pressing issues of the airline industry. I am pleased to have the opportunity to brief you in advance.
First, a few words about IATA and the general state of the air transport industry. IATA’s mission is to lead, represent and serve the air transport industry. In these challenging times, that role has been relevant. Our top priority is safety. The
IATA Operational Safety Audit (IOSA) is the first global standard for airline safety management. Since the first audits were conducted in 2003 the publicly available IOSA Registry has grown to 137 carriers. The next time you travel, have a look.
We have made it a condition of IATA membership. By the end of this year, all of our members must complete an audit and all findings must be closed at the end of 2008. If an airline misses either deadline it is out of the association. This is serious. We are a quality association. I have already terminated the memberships of 6 airlines that did not make the first deadline at the end of 2007. Naturally, our goal is not to reduce the size of our membership – it is to improve safety.
IOSA is a tough standard so we established a ‘Partnership for Safety’ programme to help our members where the needs are greatest - Africa, Latin America and Russia. So far we helped 180 airlines prepare for IOSA. The numbers prove that we are making a difference. 2006 was our safest year ever. We measure this by the hull loss rate. Last year there was one accident for every 1.5 million flights. And one for every 2 million flights if you just look at IATA members. Clearly IOSA is making a difference. Air Canada and Transport Canada have been leaders in our commitment to safety from the very beginning.
We are also involved in the business side of aviation. Our
Settlement Systems are the back-office engine of the industry processing US$275 billion each year. Combined with our global standards for ticketing, this enables passengers to buy tickets anywhere, in a single currency and be assured that when he or she shows up at the airport the ticket is recognised. That is a difficult task and one of our biggest challenges now is to offer the same service but without the paper.
Simplifying the Business programme will make paper tickets history in just 294 days. We are converting the world to e-ticketing. An enormous task—but we are on target at 77% globally and 89% in Canada. The programme has four other core components.
Our global standard for bar coded boarding passes is behind the convenience of web-check-in. Common-use kiosks for self service check-in will make airport check-in as easy as using a banking ATM. Radio frequency identification for baggage management will reduce mis-handled baggage and speed-up recovery when things do go wrong.
But our biggest challenge is e-freight. Taking away the 38 documents that can accompany an air shipment in passenger terms it is equal to taking away the passport and the ticket for travellers who cannot walk or talk. Canada is one of five pilot projects for e-freight. A partnership of Air Canada, the government and Schenker, the official forwarder for the Vancouver Olympic Games. In total, Simplifying the Business will remove US$6.5 billion in costs from the industry while improving the way that we travel and ship.
State of the Industry
It is no secret that the last 6 years have been the most challenging for our industry. Since 2001, airlines have lost over US$40 billion. That was a catalyst for change. In North America major cost items have been reduced by up to 30%: crew, distribution and maintenance. The biggest cost challenge remains the price of oil. The industry fuel bill went from about US$40 billion in 2001 to nearly US$120 billion this year. Airlines are a US$450 billion industry so you can imagine the impact that this had on our business. But with a lot of hard work, the bottom line has improved in each of the last 6 years.
IATA has helped. But all the credit should go to our members. One of the biggest success stories is right here. Air Canada went from bankruptcy to being one of the industry’s strongest players by making some very tough decisions and rebuilding the airline on a brand new business model. And their success is helping to change the industry globally. So 2007 will be the industry’s first profitable year since 2000 with a global net profit of US$2.5 billion.
The ink is the right colour but it’s still peanuts. No investor is going to get too excited by a 0.5% return on revenues generated. We need to be at 7-8% just to cover our cost of capital. So where do we go from here? More change. Today, I will highlight four important discussions that will take place at the IATA Annual General Meeting (AGM): environment, security, liberalization and taxation.
The current debate on climate change has drawn attention to aviation. It is an extremely important issue. Unfortunately, politicians—particularly in Europe—are turning mis-information into mis-regulation. So let me start the discussion with some facts.
• The UN attributes 2% of carbon emissions to aviation
• Aviation is growing by 5-6% a year
• But efficiency gains are improving our performance
• New aircraft currently on order will improve fuel efficiency 25% by 2020
• So the UN estimates that our contribution to emissions will grow to 3% by 2050
No matter how you look at it air transport is a small part of climate change, but that is not an excuse to do nothing. Air transport—like all industries—must be committed to environmental responsibility. We started long before the Kyoto Protocol and improved fuel efficiency by 70% over the last 40 years. The problem is that when some governments think ‘green’ they see cash. How else would you explain the US$2.5 billion in proposed new environment taxes in the UK and the Netherlands in the last 2 months? It is short-sighted governments at their worst, robbing us of the cash needed to invest in more fuel efficient technology.
Emissions trading schemes could offer a better alternative. Science tells us that carbon emitted anywhere impacts the entire planet so common-sense must point us towards global solutions. The Kyoto Protocol asked ICAO, the UN’s Montreal-based specialised agency to provide the technical guidance and this should be completed in September of this year. But the real solution to limiting emissions is in technology and efficiency. Every minute of flying-time that we can save reduces fuel consumption by an average of 60 litres and CO2 emissions by 160 kilograms. So, IATA is spreading best practice in fuel efficiency and working with individual airlines—big and small.
We are also working with our partners in air traffic management. The UN identified 12% inefficiency in ATM globally. That means that we are burning US$13.5 billion in unneeded fuel which generates 73 million tonnes of carbon emissions. Our goal is to straighten routes and improve efficiency. Doing this we saved up to 15 million tonnes of carbon emissions last year alone. Here are some examples. Our efforts cut:
• a half hour off round-trips between Europe and China
• 30 minutes each way between Singapore and London
• Up to 7 minutes off flights between North America and Europe
Each has a direct benefit to the environment. But each is only achieved after battling with governments. It is a win:win solution. Governments need to come on board. You don’t have to look far for results. Air Canada’s fleet renewal and operational measures improved fuel efficiency by 24% and are contributing to a commitment to a 1.1% annual reduction in greenhouse gas emissions.
Finally we have launched a campaign to shout politely about the hypocrisy of governments that are always quick to tax but slow to deliver on critical efficiency.
Security is another major issue that will be front and centre at the AGM. Flying is much more secure than it was in 2001 but the costs are too high. In terms of inconvenience too often processes are complex, time consuming, uncoordinated—and quite frankly—inefficient. In dollar terms airlines and their passengers are paying US$5.6 billion each year for security measures implemented since 2001. Governments must understand that harmonisation and technology can make security both effective and convenient. It is time to put the pieces of the puzzle together into a seamless global system.
The technology exists to change the processes. Biometrics to better identify passengers, interactive passenger information systems to share information among governments where needed and advanced canine techniques to help secure cargo shipments. But governments have not learned from our safety success where harmonisation and global standards drove improvements. The industry can help with efficient implementation but the first step is for governments to talk with each other and agree to common standards.
And while they are at it they must do something about the bill. There is no reason for governments to give their citizens a separate bill for aviation security – it should be included in national security. But the Canadian government has made airport security into a very profitable business. Between 2002 and 2005 the air travellers security charge collected C$1.25 billion for the government. They spent only C$820 million and surpluses are expected through 2008. Where are they spending the money? On other modes of transport. Canada is investing C$115 million each a year on marine security and another C$110 million will go to rail and public transport security. I will be polite and characterise this sky-way robbery as unfair. It’s time for the federal government to accept the cost burden of aviation security.
Liberalization is another hot topic in the industry. Airlines cannot do business successfully if our arms are tied by a 60-year-old bilateral system that requires governments to negotiate our markets. Consumer demand must shape the future of our industry.
But governments are taking at least one step back for every two steps forward and avoiding fundamental changes to archaic ownership rules that treat airlines in a completely different manner than any other business and prevent the consolidation of an industry that is far too fragmented. We are a US$450 billion industry with at least a thousand players globally. Auto manufacturing is a US$2.6 trillion industry with 48 players around the globe. Clearly we need a new industry structure and the best hope of achieving that is with the US and EU, which represent 60% of the global market for air transport.
Earlier this month, the US and EU announced a draft agreement to open the skies. We welcome the agreement. It was a step in the right direction. But the real destination is still far ahead and we missed the opportunity to fundamentally change the industry. We need to replace the 60 year-old bilateral system and let consumers—not governments—guide our activities. If we cannot achieve this change in the biggest markets our attention will turn to the growing markets. By 2010, flights to, from and within Asia will account for half of the global market. India and China are the stars of the industry supporting double-digit growth with a planned and effective liberalization of their markets.
Vancouver is a natural North American gateway to Asia. Canada’s Blue Sky policy will help to develop business in this community and the signing of an expanded open skies agreement with the US today will add further opportunities.
And I am pleased to see that Vancouver Airport is seizing the opportunity and reducing landing fees to attract new traffic. Vancouver is a great airport—one of the best. It consults with its users and it builds quality and cost effective capacity to meet demand. If all airports were this forward-looking we would not be pursuing regulation in so many markets and the industry would be a much better place to do business.
But regardless of Vancouver Airport’s good efforts, you will only be successful if you are supported by an aviation policy that promotes competitiveness. I’ll be open and honest. Taxation, taxation and more taxation is not a recipe for competitiveness. And having thrown open the doors to competition, it is time for the government to make fundamental changes.
Canada’s tax revenue from aviation rose nearly 20% per year between 2001 and 2005 totalling C$800 million annually or 20% of the industry’s production value. If Canada is serious about aviation as an economic driver this must change. A good place to start is Crown rent at airports. It is 38% of the Federal Government’s revenues from aviation, so it is nearly a C$300 million burden that only has its equivalent in Ecuador and Peru. And, to be polite again, it’s a rip-off.
The Federal Government does nothing for its cash. Yes, it is the owner of the property but since airports were given to local authorities in 1992 the government has collected over C$2 billion in rent from airports that were only worth C$1.5 billion when they were transferred to local authorities. And all improvements in facilities since then have been fully funded by users, not the government.
Look at the situation in Toronto. Toronto’s Pearson Airport is Canada’s largest gateway with a brand new terminal building. But instead of being well-regarded for service and efficiency, it is famous for being the most expensive place to land a 747. A third of the charge is just to pay the rent. Pearson alone has paid over $1 billion in rent. By 2020 the government will collect another C$3 billion. And that is for an asset that was valued at C$300 million.
The Montreal Economic Institute and the CD Howe Institute came to a common conclusion: Canada’s aviation sector is an enormous generator of wealth, C$4.1 billion a year, and 80,000 jobs. But its potential is being compromised by the lack of policy vision for competitiveness. It is time that we do something about it. I ask that you join me in calling on Ottawa to eliminate Crown rents and give Canada’s aviation business a fair chance to compete globally.
As you can see, we will have a lot on the agenda in June. As the industry turns the corner on profitability, it will be a meeting full of passion and focused on a future built on the solid foundations of safety, security and environmental responsibility. And seeking commercial freedom and government policy vision to allow airlines to compete like any other global business.
I know from experience that Air Canada and Vancouver will be wonderful hosts for our event. And I thank you in advance for your warm and welcoming hospitality. I am now happy to take your questions.