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Date: 1 April 2008

FIDAE Wings of Change Conference, Santiago

Santiago, Chile - Tough times are getting tougher.  After US$42 billion in losses, airlines made a US$5.6 billion profit in 2007, in a US$500 billion industry. Latin American carriers showed a modest profit.  Airlines had to make difficult decisions to achieve a 64% improvement in labour productivity and an 18% reduction in non-fuel unit costs. Increasing oil prices were offset by expanding economies.

The world has changed - the economy is in chaos and oil prices are still rising and are now at over US$100 a barrel.  At this level, the 2008 fuel bill will be US$156 billion, almost 4 times what it was in 2002.

Today we are announcing a more pessimistic forecast for 2008. Industry profits will fall to US$4.5billion and Latin American carriers will break even. The bottom line will not be red and that is good news.  But nobody knows how bad the global economy will get.

The important news for this region is that the economic reforms over the last decade could provide some insulation from the situation in the US.  The region’s current account surplus is US$20 billion and newly developed trade relationships with Asia-Pacific seem immune to the chaos in US markets. While much better positioned than a decade ago, the basic reality for Latin America is the same than the global industry agenda: change is absolutely critical.

Change

We have proven that we can react quickly. We started Simplifying the Business in 2004 to save US$6.5 billion in costs and make travel more convenient. The first target was 100% ET and many thought this was simply impossible. At the end of February the penetration was 93% both globally and with the Latin American carriers.  In just 61 days the paper ticket will be history. Frame yours and put it in a museum! Congratulations to all on this great achievement.

On the other Simplifying the Business projects, the Latin American track record is not as positive. On the passenger side, only 7 of the 22 IATA members in Latin America use bar coded boarding cards. CUSS is only being used in 2 airports and there are no RFID initiatives. If we can deliver ET, the rest should be easy.  Latin America must speed up.  Already we are expanding Simplifying the Business and two important programmes will be launched at our AGM in June. 

The first programme is Fast Travel, linking the technology tools developed in the Simplifying the Business programme to a process that is efficient for the passengers. The second is a Baggage Improvement Programme to reduce the US$3.8 billion cost associated with mishandled bags.
Cost efficiency is important for all carriers.  IATA’s Latin America team is here to assist and ensure that the region shares the benefits of these programmes.

The same is true of cargo where we have two big projects. E-freight will reduce costs and improve competitiveness by eliminating paper from the processes. And Cargo2000 will improve quality by implementing common standards.  Not a single Latin American carrier participates in either programme.  And the Government of Chile has not even signed the Montreal Convention that recognises electronic documentation - to make e-freight possible.

This is disappointing given the region’s performance on ET. This must change quickly to remain competitive in the US$50 billion air cargo market.

Region without Borders
Change is critical in all parts of the world and in all business areas.  The theme of this conference reflects this concept. The Antarctic has no borders and it should be a model for aviation. Aviation is an important industry with some 700,000 jobs that add US$22 billion to this region’s GDP.

Last year IATA worked with the Latin American Civil Aviation Commission (LACAC) to quantify the benefits of aviation for this region. The conclusion was that investment in aviation generates important economic benefits. For example: in Chile 28% of sales are directly dependent on air transport and in Mexico 88% of tourists arrive by air, adding US$25 billion to the local economy.

How can we build an industry without borders that delivers economic benefits across Latin America? Let’s look at five critical areas:

  • Safety
  • Security
  • Infrastructure
  • Regulation and
  • Environment

Safety
Safety is the natural starting point as global standards have made air the safest way to travel. Industry-wide we have 1 accident for every 1.3 million flights. In Latin America, it’s one accident for every 600,000 flights. This is much improved from 2005 when there was 1 accident for every 400,000 flights. But it’s still twice the global average and that is not good enough.

The IATA Operational Safety Audit (IOSA) is the global standard for aviation safety management. It is also a membership requirement that is fully funded by IATA. 20 Latin American airlines are on the Registry and 8 more of our members are in the quality control process. Our Partnership for Safety Programme is helping Latin American governments and airlines to make the most of IATA’s safety programmes - including IOSA.

We focused Partnership for Safety in Brazil, following 2 tragic accidents.  Furthermore, we developed a safety strategy that is being implemented by the Brazilian government.  It comprised elements such as eliminating ATC deficiencies resulting from weak English language proficiencies, infrastructure improvement, correcting the impacts of airport under-investment and looking for ways to incorporate IOSA into oversight programmes.

IOSA is a free and effective tool for any government to use. Already 88% of the world traffic is covered. Chile was the first to mandate IOSA in 2007 and they had announced it at the 2006 Wings for Change. LACAC made this a priority, Mexico and Costa Rica have implemented it and last week Brazil announced their intentions. I am hopeful that we will have some good news from Panama today.  But this is only 5 countries and I hope to see more states joining quickly.

There is an even more fundamental regulatory issue in this region. Post-war civil aviation began with a high degree of commonality based on US FAA standards. It then developed into a patchwork of national safety regulations and a long list of 250 deficiencies from ICAO standards.
This is a dangerous embarrassment for this region.  Safety knows no borders and safety regulation much converge again.  The spectacular geography of this region presents unique infrastructure challenges.  Many airports are located on limited ground, close to mountains.
Today’s technology can make them much safer.

Here is a “to do” list of projects to start with:

  • Expand GNSS/RNAV terminal procedures to reduce the danger of controlled flight into terrain. Our targets for this year are Cuzco, Toluca, San Pedro Sula, Tegucigalpa and San Jose.
  • Develop a regional ADS-B implementation plan to replace the antiquated radar system.
  • Improve runway safety with new technology like Engineered Materials Arresting Systems. This would mitigate 42% of the region’s accidents that were runway excursions.
  • Last is the need to improve runway surveillance.  The FAA has already invested US$400 million to improve ground surveillance but much more needs to be done in this region.

Security
We must also address the US$5.9 billion uncoordinated mess that is aviation security.  IATA has worked with some airports on improving processes.  Wait times in Bogota and Lima improved by as much as 20 minutes. And this year we will work with San Jose, Caracas and Sao Paulo airports.

But that is only the tip of the iceberg. Governments must work together coordinating Passenger Data Exchange processes.  Last year many governments moved in the opposite direction, increasing non-standard requirements.  It makes no sense for airlines to devise individual systems for each country they fly to, particularly when the main data is largely the same. The Caribbean Community, Brazil, Peru, Cuba and El Salvador took a step in the right direction, dropping non-standard requirements.  But we need to think bigger and broader to a Latin American Security Zone with harmonised best practice processes and standard data requirements that could eventually be harmonised globally.

Infrastructure
Take this borderless concept a step further to infrastructure. Air transport is critical to this region’s economy and effective infrastructure must support the industry. But too often governments use the infrastructure as a cash cow.  IATA is tackling this issue. In some cases we have been successful.  In Bolivia we managed to reverse a US$12 tourism tax that would have negatively impacted tourist arrivals. In Argentina, after 2 years of discussions, we have solved an historical problem and found a beneficial solution and a 30% reduction in charges to airlines. The Argentinean Government, the Congress, ORSNA and AA2000 have cooperated in this effort and we expect a successful conclusion in June 2008.

But in many parts of Latin America, the battles continue.  We oppose the illegal ATAERO 50% surtax on Brazilian ATC charges.  The local courts agreed and now we must convince the government to give up this US$650 million illegal collection.  Chirac has already transferred the government to President Sarkozy but Chile has not reversed the Chirac tax. Taxes levied on passengers must be related to services received - this is an ICAO Principle.  In Colombia we are fighting passenger taxes as well a misguided airport concession contract with a 46% royalty payment to the government.
And in Quito Ecuador, we are fighting a 64% increase in airport charges that will be followed by many more increases, to pay for a terminal that will not open before 2010.  This is madness and I am only at the beginning of the list!

It is time to bring common sense back to aviation charges and taxes, to correct the mistakes of failed privatisations and to avoid mistakes in the future. The next challenge is Brazil. We avoided a US$180 million congestion charging proposal that would have made Sao Paulo - Guarulhos the most expensive airport in the world.  Some innovative proposals on aircraft parking demonstrated the benefits of airports and airlines working together.

Now we are looking at the Brazilian government’s plans for infrastructure privatisation. They see it as a quick fix solution to safety issues - it’s not.  If you privatise problems - like airports in need of investment, you need a strong regulator to encourage investment, adequate capacity, quality services and cost-efficient prices or the problems will just get bigger.  Look at what is going on in the UK. The regulator gave the BAA a license to print money approving 86% charges increase over the next five years at Heathrow.  And this is when the airport’s profit margin is 37%.  ICAO has solid guiding principles for infrastructure that starts with transparency, consultation and economic oversight.  This region needs to start complying with these internationally accepted principles. Government policy around the region must support efficiency. If not, high infrastructure costs will choke economic growth.

Liberalisation
Airline regulation is also an issue. Some regulations don’t allow us to operate like normal businesses. Business reality has seen Latin America develop multi-hub transborder airlines with clone and subsidiary operations.  It works.  The flag on the tail is irrelevant to customers.  They are interested in travel, not politics and everybody enjoys efficient services.

Our industry is far too fragmented.  The largest airline in the world has only 5% of market capacity. Why? Because it is impossible to develop into global businesses.  The bilateral system must go.  Protecting carriers with restrictive bilateral agreements only creates small weak players.
Europe is the most profitable region of the industry.  The single market intensified competition and many airlines did not survive.  But the result is a competitive industry that is beginning to consolidate.  Look at the bottom lines of Air France/KLM or Lufthansa/SWISS. Cross border mergers can be successful.

What does that mean for Latin America? First, government policy must catch-up to commercial reality.  The entire region represents only 5% of global traffic.  This percentage will drop if we don’t correct this now.  Multi-national carriers are this region’s best hope of developing globally competitive players.  Governments must support this with a solid legal framework.  Second, Latin American governments must achieve a real single market for aviation services in clearly defined stage so that airlines can deliver real economic value.

Environment
This is the ultimate issue in the without borders ideology.  Even regional solutions mean nothing - climate change is a global challenge.  Airlines are a global industry and we need a global solution to deal with our 2% contribution to man made CO2.  It is the basis of IATA’s four pillar strategy:

  • Invest in fuel efficient technology
  • Fly planes effectively
  • Build and use efficient infrastructure and
  • Develop  economic incentives, not just emissions trading - which has its place only if it is global.  As well, develop tax incentives to re-fleet or research grants into alternative fuels.

Last September, all 179 states attending the ICAO Assembly endorsed this strategy, along with our target to be 25% more fuel-efficient by 2020.  I would like to thank Mr. Roberto Kobeh Gonzalez for his visionary leadership and wise guidance.
 
IATA is focused on delivering results.  In 2007 we saved 10.5 million tonnes of CO2. Optimising over 395 routes saved 3.8 million tonnes of CO2 and our Green Teams identified savings of 6.7 million tonnes CO2. .   For example, 10 new RNAV routes in Latin America saved 30,000 tonnes of CO2 and knocked US$5.8 million off the fuel bill.  This is small compared to a fuel bill of US$156 billion. 

The IPCC identified 12% inefficiency from air traffic management.  That would represent US$18 billion.  Governments have a role to play.  But not like Europe’s misguided unilateral pursuit of emissions trading that will only spark trade wars and distract attention from the real issues.  If they were serious we would have a Single European Sky and reduction of 12 million tonnes of CO2 .  Instead we are playing politics.

I am pleased that ALTA is working on an Environmental Action Campaign that is in line with IATA’s approach. And I look forward to hearing LACAC’s green initiatives this afternoon. Latin America must continue to support the ICAO process and contribute to our four pillar strategy. 

I see three practical measures for Latin America governments:

  • Improve routes and operations with RNAV and ADS-B
    • Implement economic incentives for fleet renewal
  • And support a global emissions trading scheme that preserves a level playing field

All involved in the industry must better communicate our great story on environmental performance: our track record, a 70% improvement in fuel efficiency over the last 40 years; our strategy to keep delivering improvements and our vision. 

Last June, I outlined a vision for our industry to achieve carbon neutral growth leading to a carbon-free future.  No other industry has aimed so high. We will be the benchmark for other industries to follow. The manufacturers are aligned with this vision and our history tells us this is achievable.  In 50 years we went from the Wright brothers to the jet age.  And today we safely carry 2.2 billion passengers a year. 

Some potential building blocks for a carbon-free future already exist:

  • Hydrogen cells
  • Alternative fuels and
  • Solar Power

To give life to our vision IATA joined forces with Solar Impulse. The famous explorer Bertrand Piccard is determined to fly around the world - day and night - using only solar power. This alone will not solve all our problems but is a concrete example of innovation that will lead to real solutions on climate change.

Conclusion
The slumping economy will make life more difficult for us but I remain confident in this great industry.  We all have to take responsibility and ensure that this industry grows in a sustainable and profitable way, contributing to a better world. Let us focus on a future with no borders - like the Antarctic and I am convinced that there are no limits on how far we can go. 

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