Date: 8 November 2007
Latin American Aviation Leadership Summit, Cancun
Cancun, Mexico - It is a pleasure to be in Cancun at this important leadership summit. For the first time since 2000 airlines will turn a profit this year - US$5.6 billion.
After US$40 billion in losses it’s good news. It reflects tough leadership decisions that have improved productivity by 56%, reduced sales and distribution costs by 13% and cut non-fuel unit costs by 15%.
IATA’s work in this region is contributing to those results. In Latin America, we handle US$21.6 billion of your money in 28 BSPs and 15 CASS operations. And we do it effectively - the default rate is 0.0003%. In total, IATA collects US$14 million in dues and we are re-investing US$55 million in projects and activities to help your business.
Patricio Sepulveda and Humberto Rivero are leading a revitalised regional office. And 16 country managers are bringing us closer than ever to you and your business.
Simplifying the Business
But the best example of our work in the region is e-ticketing. This region is at 90% e-ticketing, up from 69% last year and ahead of the global rate of 88%.
In 204 days the paper ticket will be history.
I am concerned that Latin America is falling behind on other Simplifying the Business initiatives. 89 airlines are using bar coded boarding passes, but only 8 in this region. Over 80 airports are operating CUSS kiosks worldwide but only Cancun is operational in the region; and only with US carriers. RFID is operational at 4 airports world-wide - none are in the region. And six e-freight pilots started on Monday of this week: in Hong Kong, Singapore, The UK, The Netherlands, Sweden and Canada.
Now is the time for you to prepare by urging your governments to ratify the Montreal Protocol so that you are ready for electronic documentation.
The region has done a good job at e-ticketing and it’s time to look more broadly to get your share of the US$6.5 billion in annual cost savings.
Cost savings are important to improve the bottom line - it’s still a tough industry. A US$5.6 billion profit is a 2% return on US$470 billion in revenues. We predict a US$7.8 billion profit in 2008, but even that is nowhere near the 7-8% we need to cover the cost of capital.
There is no end in sight to high fuel prices. The bill this year is US$132 billion accounting for 28% of our costs. The strong revenue growth cycle has peaked and we could be heading into a downturn with little cash in the bank to cushion the fall. Our US$200 billion debt will continue to put pressure on balance sheets for many years to come.
Profits by Region
To get a clearer picture let’s look regionally. US carriers have gone from “industry sick-man” to most profitable with a US$2.7 billion return, after squeezing costs and postponing investments. US carriers now fly some of the oldest aircraft in the world. While watching the balance sheet, investment in competitive fuel efficient aircraft is a priority. And airlines must be tough with labour unions who hear the word profit and start looking for a free lunch. We saw the first signs of this last month in Europe where carriers will post a US$2.1 billion profit and immediately Air France crew went on strike. Asia profits will decline to US$700 million as a result of lower yields in the wake of a 42% capacity increase since 2001. I was just in Middle East - Carriers there will post a US$200 million profit, unchanged since 2005, despite 18% growth.
Latin America has turned the recession of 5 years ago into 5% growth. Stable economic policies in Brazil and Argentina combined with growing Asian trade are behind the turn-around. Only a few years ago the US credit crunch would have meant disaster, but the impact is limited. The Latin America industry, however, is divided into two groups. Some are in great financial difficulty. Great aviation names like Varig and Aerolineas Argentinas are struggling to re-structure. Others - LAN, TAM and COPA to name a few - are riding high. The combined market capitalisation of these three is well over US$9 billion, clearly showing that investors see promise. But today, the net result for this region is still a US$100 million loss. This is half the 2006 losses and we expect a US$100 million profit in 2008 - the first since 2004. Good news, but let’s also remember that this will be 1.2% of global profits, unbalanced with your 7% share of traffic.
Business leadership is strong, but government policy is often inconsistent and weak. To build a healthier industry, policy leaders need a clear picture of what is going on. We are an important industry. In Latin America airlines support 2.7 million jobs and US$157 billion in related business. We must explain ourselves better, focusing governments on the economic benefits we bring. IATA and CLAC funded a study of aviation’s impact on five key economies - Bolivia, Chile, Colombia, Mexico and Panama. The studies are now complete and are available.
Let me give you two examples that highlight the important role that we play.
In 6 months, a new route from Santa Cruz, Bolivia to Madrid increased passenger traffic by 34,000, added US$2 million to the Bolivian economy and supported 500 new jobs, generating US$1 million in wages and US$500,000 in tax revenue.
In its first year of operation, a new route from Santiago to Auckland and Sydney generated over 112, 000 passengers adding US$26 million to Chile’s GDP, supporting 880 jobs, generating US$10 million in wages and US$4 million in tax revenue. We must use these good examples to illustrate the importance of effective policy decisions and avoid the mistakes of the past.
1. Like the failed privatisations of airports. The latest example is the 46% royalty fee planned for the privatized Bogotá airport.
2. Or the US$2.5 billion we pay in user charges, with no accountability as to where the money goes, including the 150% unjustified increase in Jamaican over-flight charges.
3. Or the US$160 million in new taxes we saw in the last two years with no re-investment to improve safety or environmental performance. We are fighting the Chirac tax in Chile, the 50% illegal surtax - ATAERO - we pay in Brazil and increased tourism tax in El Salvador.
Transparency about the benefits we bring and the detrimental effect of these policies will help us make more convincing arguments against policy myopia.
Today I will discuss four areas critical for this region:
Safety, Infrastructure, Liberalisation and Environment.
Our top priority is safety. 2006 was our safest with one accident for every 1.5 million flights. But the Latin American record was not good: one accident for every 550,000 flights. This result is an embarrassment for the region. You are 5% of traffic and 14% of accidents. In the aftermath of the recent Brazil tragedies, an IATA technical mission assessed Brazil’s ATM and airport situation. We provided advice to the Minister, the DGCA and the military. Now we are following-up to turn the study into action. Our strategy is to address safety issues, wherever they exist.
The IATA Operational Safety Audit (IOSA) will help. Over 170 carriers are on the registry - 78% of international scheduled traffic including 16 Latin American carriers. Our Partnership for Safety programme is helping 21 airlines to prepare for IOSA. We are a quality association, committed to bringing all our members on board with the highest standards of safety. But we are also tough on targets. I terminated 6 airlines that did not make the first deadline and we will be tough again at the end of this year with any carrier that does not complete its audit.
Governments must share our commitment to safety. I applaud the leadership of la CLAC and the passion of its Director General who recommended that IOSA be incorporated into national legislation. Chile was the first government to implement, Costa Rica announced last week. The announcement of the Minister today that Mexico will use IOSA in its oversight programme is music to my ears. Political leadership and commitment to safety is critical to improving the region’s safety record. There is no time to wait and see. The other 36 governments in the region must follow-up these wise decisions with urgent action. IOSA is free. It enhances safety oversight. Let’s all use it effectively.
Infrastructure is also on the agenda. The region is home to our Eagle Award winner for ATM - DGAC Chile. Panama’s Tocumen Airport was given a special mention. Both are case studies in value for money, unfortunately, they are the exception - not the rule. In too many places running an airport or ATM monopoly is a licence to print money. The biggest problem is the airport concession-fee structure that guarantees profits with no incentive to invest in efficiency or better facilities. Look at the nonsense at Quito, the most expensive airport in the region because today’s users are paying the bill for tomorrow’s facilities.
In the case of Aeropuertos Argentina 2000, we have succeeded in reversing a situation where users were not consulted or were discriminated against without acknowledging the contribution of the industry to the economy. Charges were not in line with ICAO principles.
We worked hard through the political system - the Minister, the Senate and the Politicians. By showing facts and figures with our position in the press, at ICAO and to Ministers from Washington to Madrid we mounted a strong campaign. We finally agreed to a settlement with AA2000, which begins with a reduction in charges for airlines. Now all that is needed is the signature of the President.
But this victory is only a placebo for a serious illness. Effective independent regulation is the only way forward. We are moving in that direction in Europe with a draft Commission Directive. You already have a regional example - Mexico’s independent regulation of secondary airports. But it is also needed at Mexico City - the main gateway to stop the abuse of the band pricing structure that maximises revenues and limits investment. I personally brought this to the attention of the Minister who understood our concerns. We have established a very constructive relationship and are delivering real results. On October 1 the President of the Federal Competition Commission recommended improved regulation. The battle is not won, but we are moving in the right direction on this and other important issues.
Governments everywhere must understand that infrastructure monopolies are not cash cows. To get the greatest economic benefit from aviation we need transparent policies that result in efficient infrastructure.
Governments must also give us the freedom to run our businesses like any other business. Bilateral agreements cannot keep pace with market developments and they prevent the consolidation needed to build strong global competitors. Latin America is 5% of global traffic, divided into 39 markets. Maintaining the status quo is a one-way ticket to remain regional players in a global industry. The European approach could be a model with a staged approach to a single market that has made consolidation possible, starting with Air France-KLM followed by SWISS and Lufthansa and Brussels with Virgin Express.
The US-EU Open Sky Agreement will move the agenda further. The next round of talks will be an opportunity to deal with the ownership issue and facilitate similar consolidation across the Atlantic. But there’s no need to wait for Europe and the US. The building blocks for liberalisation exist in the region. LAN and others have cross-border clone operations to get around bilateral rules. Now governments must catch-up with commercial reality, defining a staged approach to full liberalisation with transparent and challenging targets.
Environment is now a high priority. Aviation is 2% of global carbon emissions. According to the Nobel Prize winning IPCC, efficiency gains will limit our global CO2 contribution to 3% in 2050. But even being a small part of a big problem requires action. Action begins with people. This week we announced that Paul Steele, Chief Operating Officer of WWF International will join IATA as Director for Environment
Environment: The Strategy
Paul will start with some strong tools, IATA’s 240 members agreed a four point strategy:
- One: Invest in new technology, both new aircraft and research into next generation technology.
- Two: Build and use efficient infrastructure to eliminate the 12% inefficiency that the IPCC has identified.
- Three: Operate planes effectively - we see the potential for another 6% efficiency gain
- And Four: Once we have achieved these three let’s look at economic measures. First, positive measures to encourage technology investments - Tax credits for re-fleeting and grants for research. But we also work with governments to define an emissions trading scheme that is fair, global and voluntary. The strategy is not just words. In 2006 IATA’s fuel programme saved a lot of CO2 - 6 million tonnes by shortening 350 air routes, 8 million tonnes by our GO Teams working with airlines on best practices and 1 million tonnes through better operational procedures. This region has benefited:
7 RNAV routes will save 24,000 tonnes of CO2 and US$6.9 million in fuel. A re-design of flight procedures at Mexico City will save nearly 300,000 tonnes of CO2 and US$53 million yearly. This is good news for your business and good news for the environment
But it is only good news if we communicate transparently with figures and facts. Four Latin American airlines use IATA’s ad campaign in their inflight entertainment. The website
www.enviro.aero is helping to set the record straight. Governments are starting to understand our message. All 179 states attending the ICAO Assembly in September endorsed IATA’s four pillar strategy and the 25% fuel efficiency target by 2020. Our biggest disappointment was Europe. It is pursuing a unilateral emissions trading system, this is politically driven and totally irresponsible
Environment: The Vision
While Europe plays politics we are pushing ambitious goals realising that a growing carbon footprint is not politically acceptable—for any industry. Our AGM endorsed a vision to become carbon neutral in the medium-term and zero emissions in the longer-term. Engine and air frame manufacturers agree that this must be our aim and fuel suppliers recognise this as a customer priority. Some potential building blocks for a carbon-free future are here: Fuel cells, solar powered aircraft and bio-fuels. Nobody has all the answers but I have faith in this great industry, built by turning dreams into reality. The Wright brothers first flew in nineteen-o-three, 50 years later we welcomed the jet age and now we fly 2.2 billion people safely each year.
We are the world’s most exciting industry. Everything is possible, and Latin America is a region of great promise with enormous distances, growing economies and fantastic tourism resources. It’s a winning combination: IATA as your global association and we will be working effectively with ALTA to deliver the results that your businesses need.