Date: 18 February 2008
Singapore Air Show Aviation Leadership Summit, Singapore
Singapore - Since I joined IATA I have been calling for change all across the industry. In the years since 2001 we faced an emergency situation and we needed efficiency to survive. So airlines improved productivity by 64%, cut sales and marketing unit costs by 25% and reduced non-fuel unit costs by 16%.
After over US$40 billion in losses 2007 finally saw the industry return to profitability. Airlines made US$5.6 billion on revenues of US$490 billion. That is less than a 2% return, so no investor is going to get too excited. And tough times will continue. Airlines are US$190 billion in debt. Oil is pushing US$100 per barrel and accounting for 30% of operating costs or a total bill of US$149 billion. The revenue cycle peaked in 2006 and the negative impact of the credit crunch is still being calculated. Airlines may be out of intensive care but the industry is still sick.
Asia - A Star Performance
Throughout the crisis Asia was a rare good news story with double digit growth, fast developing new markets in India and China, legendary service levels and Asia is home to some of the industry’s strongest carriers and best and newest airport infrastructure. Air transport plays a pivotal role in the region’s economy supporting 10.5 million jobs and US$807 billion in economic activity.
Asia - Rising Challenges
So all is good? There is no need to change? I see a region full of promise but with some very big challenges. First the competitive challenge from the Middle East. Just look at Dubai. With nearly 35 million passengers, it now handles nearly as much traffic as Changi. And it serves 159 destinations—37% more than Changi. Already Dubai is developing Jebel Ali airport to serve 120 million passengers a year. In total, the Middle East is spending US$38 billion on infrastructure. So the competitive challenge will be broad and it will not only be competition for market share and infrastructure.
Finding skilled personnel will be another challenge. To pilot the 16,000 new aircraft needed by 2020, we need to train 17,000 pilots a year. That is 40,000 more pilots than current capacity. With fast growing markets the need in Asia will be large for all licensed personnel - pilots, mechanics and cabin crew. But competition is always good. It breeds innovation and change for those who engage. For those who don’t … the competition ends quite quickly.
The third is a deteriorating bottom line. Asian carriers topped the profitability chart in 2002 with US$1.7 billion.That declined to US$ 700 million last year, even as the industry went from huge losses to a US$5.6 billion profit. Capacity expanded by nearly 40% over the same period and yields dropped, taking profit margins with them. Asian margins went from 4% in 2002 to less than 1% last year. Going forward, I see more of the same. This year Asian capacity will expand by 8.8% with 427 deliveries expected in 2008 and another 450 aircraft in 2009. Demand is only expected to grow 6.4%. This is not a recipe for long-term health.
Asia - Opportunities
But growth does bring opportunities, even if we need some short-term business adjustments. And no matter how you do the math, Asia will grow. It is over 50% of the world’s population. And by 2010 it will be our largest single market, accounting for 27% of all travel and nearly 300 million more travellers than today. The question is: can Asia handle this growth responsibly… and profitably? Along with the commercial race for market share, we need to see a race to lead the industry with sound policies and innovation.
Today we have a great opportunity. We have government and business leaders from Asia-Pacific and around the world. This is not an official meeting. There is no protocol. It is about ideas, not positions.
Aviation’s top issues form the agenda
- Changing Business Models
- And Security
Let me plant some provocative seeds for today’s discussion. I hope that they will develop into a good debate.
Business Models and Liberalisation
Let’s start with business models and liberalisation. The bilateral system was a great idea in 1945 when airlines were state-owned and we were a luxury enjoyed by 9 million elite passengers. Deregulation brought price competition and open skies changed the dimension of the basic bilateral. Today airlines form an intensively competitive mass transit system with thousands of players serving 2.2 billion passengers. But the archaic bilateral system still tells us where we can sell our products, who can own us, and by consequence, how we can access capital. The result is fragmentation. The largest airline represents less than 5% of global capacity. In Asia 13 airlines compete to supply just 50% of that market. Compare that to cell phones. Nokia and Motorola supply 50% of the market and consumers have enormous choice.
Where will the leadership to modernise come from?
The US and Europe have failed. The US is basically protectionist and Europe assumes that being big means that you can set the rules. Their agreement on Open Skies is just a very big bilateral…with a lot of good PR. But it was a missed opportunity to lead industry change. So it’s Asia’s turn. Falling profits and rising competition are a great case for change and the influence that comes with growing size is a great enabler. Asia has a responsibility to define a new framework that will re-shape our industry. And that starts with throwing out the bilateral system.
There is momentum for a world without borders. Europe’s low cost sector shows that multiple hub structures can work in a unified political environment. In Latin America we see network carriers using subsidiary companies to overcome the bilateral system and achieve the same result. Asia has seen the economic benefits of liberalization. The liberalised bilateral between Malaysia and Thailand created 4,300 jobs, boosted the GDP of both countries by US$114 million and stimulated the market by 37% with 370,000 new travellers.
Liberalisation between capital cities in ASEAN is a bigger step in the right direction. But it does not break the mold . We need leadership that is bolder … the courage to break the mold and set the industry on a completely different course. Why not open markets completely in a staged approach starting with completely lifting restrictions on intra-ASEAN traffic? In parallel, why not implement common licensing for pilots, mechanics and cabin crew? This would allow capacity to move freely where markets demand. Risky?
Liberalisation will come to aviation as it did every other industry. The real risk is if governments fail to lead by setting targets for progressive liberalisation. And for those that fear the consolidation, I say look to Europe. Air France and KLM and Lufthansa-SWISS are among the industry’s strongest financially and national identities remained. Liberalisation is inevitable. It is better to be a leader than a follower.
Institutions for Leadership
Regional leadership needs strong country leaders that can build-up strong regional institutions. In Latin America we have LACAC. The Arab Countries have ACAC. Europe has ECAC. These are great institutions built for another age, and unable to cope with today’s business requirements. Asia needs a modern institution capable of leading change including both governments and broadly defined industry from airlines to tourism. Difficult? New? Ground-breaking? Yes - but completely possible with political commitment. Where will the commitment come from? China? India? Singapore? Japan? It must come from all-over with a common recognition that with a stronger voice, Asia can change the industry. There are some ready-made projects that could prove its worth.
The first is security. We have become a much more secure industry since 2001 but the system is still an uncoordinated mess. There is hope for something better in the common approach for liquids and gels. ICAO took leadership and delivered the start of a good result. States implemented individually and Europe developed a standard for its 27 countries. What happens to passengers travelling to and from these zones? Their duty-free gets confiscated because governments do not mutually recognise standards. Singapore took a major step forward gaining European recognition for its standards at Changi. Good job. But why did this recognition not extend to the rest of Asia? Because the only way to move forward is country by country. The process is slow and inefficient. Our passengers deserve much better leadership than the patchwork of differing standards and procedures we have today. Asia should be thinking of a regional security area with harmonised rules and tools using the best of modern technology.
Operations is another area. Air traffic management systems in Europe and the US are over-stretched forcing implementation of new systems in both markets. The US is developing next generation technology as the future for satellite based air navigation. Europe is developing SESAR for the same purpose. There is a promise to harmonise but I don’t see many concrete actions. China and India are buying technology to accommodate their growth. Without harmonisation, traffic growth across the region will soon bring the same inefficiencies we see in Europe’s complicated skies. If Asia had a regional institution the dynamics of the debate would change from the divide and conquer approach of Europe and the US today, to three relatively equal blocs. And it could deliver real leadership to the industry by mapping a path for a harmonised ATM in the region - in line with the ICAO ATM Roadmap that we all agreed to - and by casting the deciding vote for the adoption of technology globally.
The Environment and Climate Change
Environment also provides an area for natural Asian leadership. Aviation generates 2% of global carbon emissions. Our responsible approach to the environment will limit this to 3% even in 2050. But aviation’s carbon footprint is growing and this is not acceptable for any industry. So we are doing something about it. Our members are committed to IATA’s four pillar strategy to address climate change that delivers real and measurable results.
1. Invest in new technology
2. Fly planes more effectively
3. Build and use efficient infrastructure and
4. Use effective economic measures
The first target is a 25% improvement in fuel efficiency by 2020. Late last year, ICAO endorsed our strategy and the target. But we are determined to do much more. Our vision is to achieve carbon neutral growth leading to a carbon-free future. What is Asia’s role? You have a head-start with a younger, more fuel efficient fleet that averages 9.8 years, beating the industry average of 11.8. The key will be to accommodate growth responsibly with further efficiencies. An Asian institution could commit to regional efficiency targets setting the benchmark for others to follow.
The wealth of the region could play an even bigger role. If we agree that aviation is critical to bringing together this region, then why not look at the Asian sovereign funds? They have shown enormous leadership in financial circles recently, Why not commit to backing critical investments in achieving zero emission flight with alternative fuels or a radically different aircraft?
I don’t have all the answers to climate change, or liberalisation, or security for that matter. But I have proof that great ideas can change an industry. IATA achieved this with our Simplifying the Business programme. In just four years we will convert the world to e-ticketing from remote island airports with no stable power supply to the largest hubs. What is needed are the tools and the opportunities to see outside the box and develop a vision of what can be. If we start with a clean sheet of paper - and are not afraid to think big - I am convinced that Asian leadership can help define the future of air transport.
But we must change our mindset. Asia is our present….and our future. The race to growth that has characterised this region must become a unique race for leadership in which all participants are winners. Why? Because the result will be an industry that is even safer, more secure, financially sustainable and environmentally responsible. And that it is in the interests of everyone in this room. Today is a great opportunity. I look forward to great discussions that lead to innovative solutions. I will be following today’s developments closely and look forward to sharing more thoughts with you at the end of the day.