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Date: 9 May 2007

China Civil Aviation Development Forum, Beijing

It is a pleasure to be in Beijing. Some describe China as a great market of the future. I see it as an important and growing player today. And a future global leader for air transport. Last year IATA signed an MoU with the CAAC making us a strategic partner in the development of Chinese aviation. We are working closely with the CAAC to avoid the mistakes that others have made and help build an efficient air transport sector based on global standards that contributes to China’s economic prosperity. Let me start with two outstanding examples of this successful strategy.

Safety

In the 1990s China’s results on safety were not good. Now China’s record is among the best in the world. And last year, there were no accidents. This is an enormous accomplishment for any region. But given high speed growth of 14% this accomplishment is truly remarkable.

Global standards are at the core of this success. The IATA Operational Safety Audit—IOSA—is the global standard for airline safety management. And it is a condition of IATA membership. Already all 9 of our Mainland China members are on the IOSA registry. And we are encouraging the CAAC to incorporate IOSA into its safety oversight programmes.

Simplifying the Business

Simplifying the Business is another great success story for China. In 2004 IATA announced a global vision to reduce costs and improve customer convenience. It is centred around five core projects.

  • 100% e-ticketing by the end of this year
  • E-freight
  • Common-use kiosks for check-in
  • Bar coded boarding passes for web-check-in
  • And applying RFID to the business of aviation

Two years ago on a visit with my good friend Minister Yang I told him that I was concerned about China’s e-ticketing. Our biggest settlement system by volume for transactions between travel agents and airlines is China. Each year IATA handles over 91 million tickets or US$12 billion. And e-ticketing penetration was the lowest in the world. The Minister told me not to worry. China was making Simplifying the Business a national project. Today, China is at 95%--top of world---ahead of the 79% global figure. We stopped printing paper tickets for domestic travel. The industry and China Travel Sky—our partner—should be congratulated.

I am confident that our Chinese partners will quickly succeed in the next critical challenges:'

  • Bring China’s ground handlers up to speed with ET
  • To facilitate the use of ET by China’s carriers overseas
  • To enable greater ET use by foreign carriers in China
  • And expand the use of ET in for interline and code-share flights

Another important and even more complex project is e-freight. Hong Kong is one of our 5 e-freight pilot locations. Air China and Cathay are capable of using IATA standard bar coded boarding passes. 7 airports across China use CUSS kiosks with 3 more coming on line by year end. And Hong Kong is among the leading airports for RFID. China is clearly building the structure of its industry on the systems and processes of tomorrow.

Future Challenges

What are the other challenges that China will face in building a cost-efficient, safe and competitive industry? Let me briefly highlight 5 areas to focus on:

  • Efficient air traffic management
  • Environmental sustainability
  • Cost-efficient airport infrastructure
  • Internal cost control
  • Commercial freedoms

Efficient Air Traffic Management

A successful industry needs efficient infrastructure. Inefficiency and lack of a Single European Sky Europe costs the industry up to US$5 billion each year. My first message is: don’t follow the European model of a fragmented system. China is on the right track. And we have some good success stories. Last year, working with civil and military authorities we opened Y-1, cutting 30 minutes off a round trip to Europe. We are so proud of our work together on this that we unofficially call it IATA-1. And we are working closely for an Olympic bypass in Beijing to avoid congestion. These are impressive accomplishments but big challenges remain. Congestion delays in the Golden Triangle can be measured in hours—not minutes. Implementing RVSM later year will help and better coordination with the military is essential. The situation in the Pearl River Delta is critical. The airspace design is inefficient. Aircraft approaching Hong Kong from the North can waste up to 25 minutes of flying time. The cost is up to HK$1 million a day with Chinese carriers being the most affected.  All stakeholders recognise the problem. Now we need a solution quickly.

We have also made tremendous progress with international routes to and from China. Polar routes facilitate some of the longest international flights. The next challenge is flexibility. We need to expand the limited number of entry points to Chinese airspace. Our goal is to use global standards to make Chinese air space among the most effective in the world—to meet demand safely and efficiently. We have had excellent cooperation with both military and civil authorities and we are working hard to speed the process of changes because it is a win-win situation. Airlines win because each minute of flight costs US$120. It’s good for the passenger who gets to destination reliably and quickly. And there is an important third win—the Environment.

Environmental Sustainability

Climate change is among the biggest issues facing aviation today. Airlines—like all industries—must do more to limit their carbon footprint. Air transport’s environmental record is good but we have been poor at communicating. As a result—in Europe—airlines are often painted as climate villains, ignoring our record and the critical role we play in the economy. I understand that the Chinese government is incorporating environmental targets in development plans. This is a positive step provided aviation is treated fairly. My message for China has two components. First ensure that the government continues to recognise the vital role of air transport in China’s development. Second, join the IATA environment agenda which is based on four pillars.

First, use technology to further improve the fuel efficiency of aircraft. China’s average fleet age is 6.3 years. This gives you a great advantage compared to a global fleet with an average of 12 years. By 2020 the global fleet will be 25% more fuel efficient. And we must keep the pressure on our manufacturing partners to do even better.

Second keep pressure on air traffic management. Every minute of flight costs US$120 and emits 160 kg of CO2. So making the air traffic management system as efficient as possible is good for airlines and the environment. Third, avoid taxes and charges. They only limit our ability to invest in new technology.

Finally, adopt global solutions. Climate change is a global issue. So I was encouraged by China’s support for global guidelines on emissions trading earlier this year.

The September ICAO Assembly is an opportunity for all ICAO member states to support a global approach. I urge China to help drive the Assembly to a conclusion that we can implement worldwide.

Cost Efficient Infrastructure

Another area where global standards can play a role is infrastructure cost. ICAO has guidelines for infrastructure charges. They must be cost-related, non-discriminatory, transparent and decided in consultation with users. China has some of the highest infrastructure costs in the world and the highest in Asia—outside of Japan. While they are transparent, they are definitely not cost-related as we have uniform charges for all Chinese airports. We are working with the government to develop a new system of charges that will enhance competitiveness. At the same time, the government is moving ahead with privatisation of some airports. Frankly, airlines don’t care who owns the airports, so long as they are cost efficient with good services.

But I will take this opportunity to remind all here of the disaster that we have in Europe. Look no further than Heathrow—the largest hub. It’s a private monopoly earning a 42% margin. An ineffective regulator let it raise charges by 50% in the last three years and we will see a similar increase over the next three. Airports are monopolies that must be regulated effectively with tough efficiency targets. Vice President Barrot of the European Commission has accepted our arguments and we are working with the Commission on stronger draft legislation now.

China must avoid falling in to the difficult problem that Europe is facing. We are working closely with the government to urgently realise a fair and transparent charges regime that challenges airports on efficiency, provides a reasonable return to investors and supports a competitive industry that contributes to national development.

Internal Cost Control and Financial Practices

The government has wisely guided the development of air transport. In the 1990’s the centrally controlled system was divided into regions to foster growth and manage safety more effectively. In 2002, the industry was consolidated around the three most successful players to create stronger airlines competing in global markets. Competitiveness may be improved with further consolidation. But it is also time to start looking at some other fundamental issues.

The first is cost. Low labour costs are a competitive advantage for China’s carriers but the gap is narrowing. Restructuring in the US and Europe saw labour costs fall from the 40% range to 28% in 5 years. China has been consistently in the 10% range. It is easy to overlook productivity issues when you are growing quickly. Everything gets absorbed into the bottom line. But the US and Europe learned the hard way that it is very painful when growth slows. My message to China’s carriers is that you don’t have to wait for a crisis to improve. . Now is the time to focus on productivity. Effective cost allocation is also an important tool in managing costs. It is the only way to understand where the gaps are and identify areas for improvement.

China’s carriers have a few other handicaps managing internal costs. For example, only one mainland of China carrier—Air China—is able to hedge its fuel bill. Another example is fleet purchasing. This is primarily a central government function. While it has the advantage of stability, it can also limit management flexibility. China has always fostered strong technical partnerships—such as the AMECO partnership between Lufthansa and Air China. I am pleased to see strong commercial partnerships now forming—the Cathay Pacific deal with Air China, Chinese carriers joining global alliances or the Bank of China moving into aircraft leasing with their purchase of SALE. All these will help align China’s industry with global standards. These developments will also make management flexibility even more critical.

Liberalisation

Flexibility is not just a Chinese issue. The 60 year-old bilateral system limits the commercial freedoms of airlines around the world. In 2003, Minister Yang gave an impressive speech at the Fifth ICAO Air Transport Conference conveying a vision for a staged approach to liberalisation. It was the most forward-looking of any government there. Since then, he has followed-up with action—opening Hainan as a free port for aviation services, liberalising bilaterals with the US, ASEAN, Japan and Korea—among others. China’s fast growing economy demands efficient air transport links and the domestic industry alone cannot meet demand. So progressive liberalisation is playing an important role.

What is the next step? More liberalisation and less government. Running an airline is the same as any other business. Identify market opportunities. Find investors to fund business development and charge more than your cost. Airlines worldwide do not have these basic commercial freedoms. Governments must negotiate our international markets. And the bilateral system limits our ability to access global capital. What’s worse, half-measures at liberalisation intensify competition but limit our ability to compete effectively.

The US and the EU have traditionally been the policy leaders. The recent open-skies agreement moves the industry in the right direction but fall shorts of the fundamental change we need. The industry’s centre of gravity is moving East. By 2010 the largest single market for aviation will be intra-Asia accounting for nearly a third of all air travel—with China at the centre. So there is an enormous leadership opportunity to shape policy in a very meaningful way. Nobody is asking to change the system overnight but it is the role of Government to anticipate and lead change. So a staged approach to liberalisation is not an excuse to stand still. Competition is coming.

We are at a critical moment that is a great opportunity—for China to speed-up the re-engineering of its airlines with consolidation, effective cost allocation and access to best practice in global financial and management tools—and so on so that Chinese carriers are even better prepared to face strong global competition. A market that can achieve a perfect safety record, implement ET in a year and grow the business by 14% certainly has the ability to lead and manage change in Asia and globally.

Partnership

I am a China optimist and have followed developments here for over 30 years. Your achievements are impressive and point to an even stronger and more prosperous future. I congratulate Minister Yang and the government for their leadership and wisdom. They set the course for success. IATA has strengthened our presence in China with one goal: to support that future with our 60 years of experience— avoiding the mistakes made in other parts of the world, working as partners to implement global standards and leading critical change. China has an important role in the industry today. And we are working together to build an even more successful future.


 

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