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Date: 28 November 2007

The AeroClub of Washington, Washington DC

Washington-DC - It is a pleasure to be in Washington, home to many of the great ideas that shaped our industry. IATA shares a critical role in the industry’s development with global standards and global programmes.

This year our financial and settlement systems will handle over US$300 billion, similar to the GDP of Greece. The IATA Operational Safety Audit is a condition of IATA membership and the global standard for airline safety management. 177 airlines are on the registry, covering 80% of global traffic.

IATA’s Simplifying the Business programme is on track to reduce industry costs by US$6.5 billion. We are launching a revolution in the US$55 billion cargo industry. Cargo travels around the world with over 30 documents, the same way it did 40 years ago. IATA’s e-freight programme is live in six key cargo locations with a goal to eliminate paper.

This follows the e-ticketing revolution for passengers. That will save US$3 billion in costs while making travel more convenient. Globally we are at 89% e-ticketing and the USA is well ahead at 96%. In 186 days, I look forward to donating the last paper ticket to the Smithsonian’s historical collection. And we are not stopping there - our goal is to transform the entire passenger experience. You will see IATA standard common use kiosks for check-in at 80 airports, 9 of them in the USA. 91 airlines use IATA standard two dimensional bar-coded boarding passes, including 4 in the USA, and our new mobile phone standard will give passengers even more flexibility. RFID for baggage management is live in four airports including Las Vegas and San Francisco.

We are already looking to the next phase of Simplifying the Business. Next week I will present to our board two major programmes:

First, a strategy for self-service to integrate technology into a seamless passenger experience, and secondly, a baggage management improvement programme to help solve one of the great hassles of travel. As a result of increased security measures we now handle more checked bags - over 2 billion pieces a year. The systems are overloaded and we are developing a smarter way to deal with the volume. The progress on Simplifying the Business is good news and contributing to an improved financial outlook for airlines.

FINANCIAL OUTLOOK

For the first time since 2000, the industry will turn a profit this year: US$5.6 billion. After US$40 billion in losses that is good news. It reflects tough leadership decisions that improved productivity 56%, reduced sales and distribution costs 13% and cut non-fuel unit costs15%. Cost reduction and careful capacity management are showing positive results.

US carriers have gone from “industry sick-man” to the most profitable, with a US$2.7 billion return. Congratulations to all for this incredible turn-around. Europe has had stable profits at US$2.1 billion, largely as a result of strong long-haul markets, particularly for premium traffic. Asian carriers have seen their profits drop to US$700 million. Capacity expansion of 42% since 2001 made yields weaker.

GROWING CHALLENGES

While our 2008 outlook is for stronger profits - US$7.8 billion - the challenges are not getting any easier. The credit crunch throws a shadow over the economic expansion that underlies our good performance. Airlines are US$200 billion in debt and we could be heading for a downturn with little cash in the bank to cushion the fall. And fuel costs are rising. The industry fuel bill this year will be US$132 billion - over four times what it was in 2002. It is now 28% of our expenses after squeezing costs and postponing investments. 35% of the US fleet is over 25 years old. The impact on competitiveness is big, the advantage on depreciation costs is disappearing and the disadvantage on fuel costs is acute.

There is a revenue aspect as well. The top five US carriers fill 15% of their trans-Atlantic flights with premium passengers. For the top 5 European airlines it’s 25%. That translates into a 30% yield premium for Europe. Re-fleeting for the US carriers will not be easy. In light of the credit crunch with debt at 8 times cash flow, lenders will be cautious and even if orders are placed today, production lines at Boeing and Airbus are virtually full for the next 3 years.

Labour is also coming under pressure. They are 23% of our cost structure, down from 28% in 2001. Unfortunately, as the industry shows even fragile profitability, labour starts to look for a free lunch. Already we have seen strikes from France to Japan. Several key US contracts will be negotiated next year - if labour pursues an agenda as an irresponsible adversary our common future is limited.

The industry is out of intensive care, but the industry is not financially healthy and many risks lie ahead. Cost control remains a priority across the business, including labour.

Policy Challenges

We also face many challenges with governments. Let me focus on four key policy challenges where Washington plays a key role:

  • Security
  • Liberalisation
  • Congestion and
  • The Environment

SECURITY

Let’s start with security. We are more secure today than in 2001. But the airlines’ bill is huge—US$5.9 billion a year - US$300 million higher than our last estimate.

Since 2001, over US$30 billion has been invested in security as industry has been forced to comply with new regulations. But our approach has not been responsible or effective. To be blunt, I see more hassle than value. Let’s be open and transparent with the problems and the solutions:

  • First, the process has become too political. Too many decisions are made based on fear. The result is security enhancements that protect us from improbable threats. For example, TSA revised its cargo security programme four times in the last 12 months and a fifth seems to be on the horizon. All for a threat that is unchanged! We are wasting limited and precious resources.
  • Secondly, we are adding patches to legacy systems. We are putting complicated processes into infrastructure that was designed for a different age. It’s not sustainable.
  • Thirdly, we are too bureaucratic. We live in the electronic age, but the DHS is flooded with paper. A paperless security programme is long overdue and Europe’s decentralised approach to passenger information will be a nightmare of 27 different requirements. We should be focused on fighting terrorism instead of battling bureaucracy.
  • Fourthly, we are not focused on needed harmonisation. Within DHS, TSA and CBP don’t even have harmonised processes. The result: costly duplication on screening and data collection. And passengers face a security gauntlet that is inconsistent. Shoes on or off? One bag or two? Laptop in or out? How can we expect them to have confidence in the system? What’s the solution? We need a re-think that starts with a change of mindset from the parochial and political to a global results-oriented approach.

Risk management must replace fear as the key driver so that we match our efforts to the probable risk. Then we need to simplify the process with harmonisation and global standards, for everything from data collection to screening. It’s not rocket science, but it does require governments to coordinate across borders.

Technology must play a role - millimetre wave, backscatter, and biometrics. These are not future fantasies. These technologies are available today and can help governments and airlines make our industry more secure. While the problems are many, the answers are surprisingly simple: Security must be smarter, faster and easier to manage.

We look to the USA for leadership with an agenda based on risk-management, harmonisation and global standards and renewed cooperation between industry, TSA, EC and others.

LIBERALISATION

Liberalisation is another area where we must move beyond the parochial. The US-EU agreement on Open Skies was a step in the right direction, but it was also a missed opportunity fundamentally to change the industry by addressing ownership. Open skies agreements were cutting edge a decade ago. Today they are the norm; we see them on all continents. We must go further and tear down the bilateral system. It played an effective role over the last 60 years, but times have changed. The bilateral system belongs in the Smithsonian, next to the paper ticket.

For the unions that fear liberalisation, look to Europe - the common market increased competition, made the airlines stronger and is facilitating consolidation. Air France/KLM and SWISS/Lufthansa are delivering some of the best individual results in the industry. The process is creating healthier companies, providing jobs and opportunities for hard working employees. We may see some further consolidation in the USA and there is no reason why this should not happen over the Atlantic. Many politicians dig trenches in the name of protectionism. But they are only graves for weak industries and companies. We need a serious result from ownership discussions at the next round of US-EU discussions in 2010.

CONGESTION

More people are travelling - 2.2 billion this year. And in 2011 we will have to cope with 620 million more passengers. Without significant improvement, infrastructure will put the brakes on an industry that supports 32 million jobs and US$3.5 trillion in economic activity. The problems are global - from Mumbai, where we cannot build fast enough, to New York where neglect has left one of the biggest international gateways to the USA with an airport and air traffic management infrastructure that cannot cope and where the slow pace of improvement is an embarrassment.

Delays at JFK paralysed air traffic on the East Coast this summer. Average take-off delays were 39 minutes and at peak times people waited for hours. The impact was felt across the country. Without significant change, we will suffer the same next year. The problem is lack of capacity. Short-sighted politicians—particularly the Congress—did not give the FAA the means to improve air traffic management. With over 60 IATA members servicing JFK, this is a global concern. The short-sighted DOT proposal to cap traffic at 80 movements an hour makes no sense. Newark’s three runways handle 100 movements per hour; JFK’s four runways should handle more!

President Bush’s headline announcement to solve the problem by opening some military air space is a political placebo for a serious illness. The problem is a lack of capacity. The system cannot handle the volume; there is no magical cure, but practical measures to expand capacity will help. Instead of addressing the problem, DoT wants to change the way people travel by making it more expensive to travel at peak times. Congestion pricing has never worked for air transport. Congestion pricing for roads is an incentive to use public transport.

If you are going to Europe, flying is the only way, and the only time to do it is from late afternoon to evening. Neither parameter will change. That’s why congestion pricing has failed in a long list of countries: Australia, the UK and the US included.

How does the rest of the world deal with congestion? 140 of the world’s busiest airports, including Chicago’s O’Hare use the IATA Worldwide Scheduling Guidelines. Even the DoT designation of JFK as Level Three, meaning that it is congested, is based on these guidelines. They are the global standard - a fair, transparent and neutral system, administered by the airlines, that takes into account market and network realities including incumbents and new entrants.

I call on the DoT to use this ready-made tool that can be implemented immediately to manage the problem more effectively. But operational and infrastructure improvements are the only real solution. The ARC  Work Group is focused on just that. IATA worked with the ARC group and our priorities are aligned:

  • Use all four runways with RNP  technology
  • Move aircraft more efficiently on the ground with better taxiways and modern ground surveillance
  • Increase airspace capacity with next generation ATM
  • Get aircraft out of the congested area without capacity delays with flexible routes over the North Atlantic
  • Consolidate New York and Philadelphia into a single region managed by a direct report to the FAA COO.

Many of these are longer-term projects, but some can be implemented quickly to achieve significant improvements by next summer. For example, RNAV  and RNP procedures are tried and tested. Implementation requires little more than training, but they are stuck in bureaucracy. To be successful we must cooperate: Airlines, airports, regulators, pilots, air traffic controllers. As the main coordinator, the FAA must be aggressive and prioritise the 75 recommendations of the task force to deliver real results fast.

ENVIRONMENT

The final issue is environment. According to the Nobel Prize winning IPCC , aviation is responsible for 2% of carbon emissions. Efficiency gains will limit our global CO2 contribution to 3% in 2050. Aviation is and will remain a small part of the big problem of climate change. But our carbon footprint is growing and that is not acceptable.

IATA has a four-pillar strategy to address climate change:

  1. 1. Invest in new technology
  2. 2. Build and operate efficient infrastructure
  3. 3. Fly planes effectively
  4. 4. And once we have achieved all of that, consider all economic measures, from tax credits for re-fleeting, to offset programmes and emissions trading.

The strategy is producing results, with shorter routes, best practices in fuel management and better operational procedures. IATA achieved up to 15 million tonnes of CO2 savings in 2006. Our goal is carbon neutral growth in the medium-term and our vision is a carbon-free future. We took our strategy and goals to ICAO  where all member states endorsed the IATA strategy. Congratulations to Secretary Peters who led a strong delegation and to Jeff Shane for skilfully chairing the debate. One of the biggest satisfactions was the US acceptance, not just of the strategy, but also our fuel efficiency target: to achieve a 25% improvement by 2020. In fact US carriers are committed to 30% by 2025.

The biggest disappointment was Europe. Despite its support, its only action is emissions trading. The approach is irresponsible and politically motivated and does nothing to improve environmental performance. This is a breach of the Chicago Convention. I fully support the USA in challenging this at ICAO, WTO  or elsewhere. I need to ring the warning bell here as well. In Europe we underestimated how quickly public opinion could change and we found ourselves in a public relations crisis. Don’t make the same mistake here: communicate transparently with facts and figures - they tell a good story. It is not just PR about our past.

Our vision of zero emissions technology is critical. This must be an industry effort, not just the airlines. So I am pleased that Boeing, GE, Pratt & Whitney and others are all aligned with our vision. No other industry has aimed so high on environment. Nobody has all the answers but air transport has always turned dreams into reality. In 50 years we went from the Wright Brothers, to the jet engine. Now we safely transport 2.2 billion passengers each year.

So I am optimistic.

CONCLUSION

Aviation is the world’s most exciting industry. Financial prospects have improved and many challenges remain. IATA’s job is to be open and honest about the problems, to find correct solutions. If government and industry work together with a common vision for a safe, secure, efficient and liberalised industry that is environmentally responsible, our future is very bright.

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