Date: 2 June 2008
State of the Air Transport Industry
Istanbul, Turkey - Ladies and gentlemen, US$5.6 billion was last year’s bottom line (1), our first profit since 2000. With oil averaging US$73 (2) per barrel (3), delivering even a 1.1% margin was an amazing achievement. Since 2001 your hard work improved fuel efficiency 19% and reduced non-fuel unit costs 18%. But just as we started to recover we face another crisis of potentially even greater dimension. Our industry is like Sisyphus - after a long uphill journey a giant boulder of bad news is driving us back down.
It’s another perfect storm. The spreading impact of the US credit crunch is slowing traffic growth. At best we expect 3.9% (4) this year. After enormous efficiency gains since 2001 there is no fat left and skyrocketing oil prices are changing everything. If the consensus of experts is correct and oil averages US$ 107 (5) per barrel (Brent) the fuel bill will be US$176 billion, US$40 billion more than in 2007. This would push us back into the red with a loss of US$2.3 billion in 2008, US$7.9 billion less than 2007.
For every dollar the price of oil goes up, costs go up by US$1.6 billion. If oil stays at US$135 for the rest of the year, losses will be much worse at US$6.1 billion (6). The situation is desperate and potentially more destructive than our recent battles with all the Horsemen of the Apocalypse combined.
September 11 brought enormous change to the industry making us tougher, leaner and more efficient. Now even more massive changes are needed. Your Association is at your side fighting the crisis and leading change. We are most successful when we control our destiny in projects like Simplifying the Business or where government and industry are aligned such as on safety. We struggle when governments do not cooperate with issues such as security, regulation of monopolies, the environment and liberalisation.
We can be proud of our record on safety, our number one priority. Last year 2.3 billion (7) people and 44 million tonnes of cargo flew safely. This is the result of government and industry working together with global standards. But the hull loss rate took a step backwards in 2007 from 0.65 (8) to 0.75 hull losses per million flights. So, we must work harder to make a safe industry even safer.
The IATA Operational Safety Audit (9) is now a condition of membership. Our next AGM will only have seats for IOSA registered carriers. The goal is to raise the bar on safety, not to reduce our membership. But to help all our members achieve IOSA your Association is injecting US$8.2 million (10) in Partnership for Safety Programmes and flight data analysis. As part of our commitment IATA is also spending US$22 million (11) to pay for member audits.
IOSA is now an industry-wide tool, with 60 non-member airlines among the 206 (12) carriers on the registry and a growing list of governments (13), using IOSA. The IATA Safety Audit for Ground Operations (14) is taking the same approach to improve safety and reduce the US$4 billion cost of ground accidents (15).
Even in crisis we must look ahead to address the shortage of skilled labour. 18,000 (16) aircraft will be delivered over the next 10 years. To fly them we must train 19,000 pilots each year (17), but current capacity is only 15,000 (18). The current downturn could help us gain ground. Your Association is acting with the IATA Training and Quality Initiative (19) to fill the gap by attracting more qualified people, and updating training standards.
Unlike safety, security is an uncoordinated mess. Since 2001 airlines and their customers have paid over US$30 (20) billion for security measures. For this we get more frustration than value. We are pushed back because fear drives decisions; the infrastructure cannot cope; governments are not cooperating; and nobody is taking leadership. Passengers are suffering because they face a maze of duplication, bureaucracy and hassle.
In Italian I would say BASTA! This must change.
We developed Simplifying Passenger Travel (21) to make security effective, efficient and convenient. Now governments must do their part. They must focus on risk management, harmonise global standards, use technology and intelligence effectively and take responsibility for the bill.
Alongside the uncoordinated security mess we have an unregulated mess with monopoly suppliers. Shouting politely IATA achieved a record US$3.7 billion in cost savings (22) in charges, fees and taxation.
We pushed some heavy loads uphill: a 10% reduction at Seoul Incheon (23); a 4% reduction in NavCanada charges; and US$1 billion in Brazil’s infrastructure (24). But like Sisyphus we were forced back by airport cost increases of US$1.5 billion (25). Too many airports still live happy days, isolated from commercial discipline. Why? Because governments have failed to regulate.
This year’s Worst Regulator Award goes to the UK Civil Aviation Authority. Look at Heathrow. Service levels are a national embarrassment but still the CAA increased charges by 50% over the last five years, and plan 86% for the next five. Could anyone in this room ask for a fare increase of 86%? Nobody. That only happens in “Monopoly-land”.
What can I say? BASTA!
We are in crisis and it’s time for governments to get serious. Effective regulation means delivering results on cost-efficiency and good service, not a licence to print money and abuse monopoly powers.
The crisis is also a catalyst for governments to deliver results on environment that reduce fuel burn. Even before the fuel crisis our vision to address climate change set the benchmark for all industries - carbon-neutral growth, leading to a carbon-free future. IATA’s four-pillar strategy is driving progress to deliver real reductions in CO2, by investing in technology, flying planes effectively, building efficient infrastructure and implementing positive economic measures. Governments endorsed our strategy at the ICAO Assembly along with our target to improve fuel efficiency 25% (26) by 2020.
Last month IATA led the signing of a declaration by a great team of top industry leaders from manufacturers, airports and air navigation service providers. We made the IATA four pillars an industry-wide commitment. It’s not just words. The industry is taking action - airlines invested billions of dollars in new aircraft and flew using bio-fuel (27).
IATA’s own efforts achieved 10.5 million tonnes of CO2 savings. Our Green Teams helped members operate more effectively. Working with Air Navigation Service Providers we shortened 395 routes. Combined, this also saved US$2.1 billion in fuel costs. Already airlines (28) have signed up for the industry carbon offset programme that we will deliver this year.
Our attention to the environment also includes the little things. This is our first carbon neutral AGM (29). Looking ahead, we are studying carbon-neutral growth. Already one conclusion is clear - carbon neutral growth is not a pipe dream. It is achievable but we must push technology even harder - beyond incremental to fundamental change - to deliver even greater fuel savings.
The industry is united and making progress, but short-sighted governments are pushing us back. With oil at US$130 per barrel we have the biggest incentive of any industry to improve environmental performance. Governments fail to understand this, they remain fixated on punitive economic measures. In November the European Parliament voted on 100 amendments to their emissions trading proposal. For every minute of discussion the cost increased by 1 billion Euros. Thank God they stopped after 30 minutes!
The European Council limited the madness. But we still face a bill of 6.4 billion (30) Euros for a misguided and unilateral proposal that will inspire international legal battles but do very little for the environment. These are reckless decisions when the industry is in crisis and oil prices have changed the game completely.
To the European Parliament, I say BASTA!
We have had enough of governments that talk green and quickly take cash but don’t deliver real solutions. In 17 years Europe has not achieved the 12 million tonnes of annual CO2 savings (31) from a Single European Sky. It’s time for governments - including Europe - to understand the dimension of the current crisis and join our commitment.
Here are three ideas:
First, take politics out of air traffic management and move forward to fix the Pearl River Delta, implement NextGen in the US (32) and let’s have a Single European Sky. I challenge President Sarkozy to make this his legacy as President of the European Union.
Second, think global. Governments must make ICAO successful in developing an emissions trading scheme that is fair, voluntary, and global.
Third, use positive economic measures to drive innovation. That means funding research in bio-fuels (33) and new generation airframes and engines. Innovation is the only answer for sustainability.
IATA teamed-up with Solar Impulse (34) in a project to fly around the world using only the power of the sun. Solar power alone is not the solution but the pioneering spirit of Solar Impulse is an example of the innovation we need. Our industry turns dreams into reality. If governments come on board a carbon-free future is absolutely possible.
We will have no future without financial sustainability. The world’s most global industry is the most fragmented. Over a thousand airlines compete for rare profits. In the last 60 years airlines made US$11 trillion in revenues but net profits of only US$32 billion, an average profit margin of just 0.3%. Even at the peak of the cycle, margins were less than 3% (35) and the industry is US$190 billion in debt. Like Sisyphus we are always recovering ground.
Today the oil crisis makes it clear that we must find solutions urgently. Re-regulation or re-nationalisation is not the right answer but it may be the only one unless governments can keep pace with the urgent need for change. Governments must stop treating us and our passengers as cash cows and they must control monopoly suppliers who do the same. Taking a more responsible look at the impact of oil speculation should also be on the agenda. Thinking even bigger, it is clear that we must redefine the structure of the industry. The Chicago Convention and its technical standards, are not the issue. The bilateral system is the problem. The so-called freedoms of the air are really restrictions on our business. We cannot fly to new markets without an international agreement. We cannot look beyond national borders to try new ideas, grow our business, access global capital, or merge and consolidate. We fight crisis after crisis with our hands tied because flags, not brands define our business. This must change.
Thirty years after deregulation began we must complete the task. We are in stormy waters. The situation is desperate and we must act quickly. It’s time to move from politics and agreements to brands and business. To fight this emergency I propose an agenda for freedom. Let’s rip up the 3,500 bilaterals and replace them with a clean sheet of paper without any reference to commercial regulation. Airlines would be free to innovate, free to compete, free to grow, free to disappear, and free to become financially healthy.
On that same sheet of paper the role of governments would be clearly outlined, ensuring a level playing field, bringing commercial discipline to monopolies and regulating global standards for safety, security and environmental performance. Radical? Maybe for airlines but almost every other industry takes these freedoms for granted.
For banks, governments regulate safety with liquidity standards and fair business practices. Any bank that meets the requirements can buy a license and start business. So HSBC can claim to be the world’s local bank with 10,000 offices in 83 countries (36). Nobody cares that it’s owned by investors from 100 different countries.
Global operations also help to manage risk. Vodafone mitigated the impact of the US downturn with a 65% expansion in the Middle East and Asia. Their stock gained 15% while some airline stocks dropped up to 50% - more than after September 11th 2001.
Some signs of this future are visible today. Consolidation in domestic markets was the starting point. JAL with JAS, Air India and Indian Airlines are recent examples and if regulators approve, we hope to see Delta with Northwest. But the fuel crisis means that we must think more globally and act more quickly. Cross-border mergers are delivering shareholder value. Look at Air France-KLM or Lufthansa/SWISS. International brands can work safely. Look at BA’s franchise in South Africa, LAN across Latin America, or the many Virgins: Atlantic, Nigeria, Blue and America. Customers don’t care about the flag. Look at Ryanair and Easyjet in Europe or Tiger and Jetstar in Asia.
How do we move forward? Giving every airline the commercial tools to manage crises effectively and the opportunity to compete globally on a level playing field. ICAO adopted (37) this vision in 2003 but States have not acted. Our traditional leaders - the US and Europe signed a big bilateral “Open Skies-Plus”- an important hop, but it did not break the mould. Their Stage Two talks will address ownership - a skip in the right direction - but to break the cycle of crises we need to jump, to think much bigger.
IATA’s role is to lead the industry but in extraordinary times of crisis we must also facilitate solutions for governments. Urgent action is needed to communicate clearly to governments the dimension of the crisis, the potential impact on the global economy if our industry fails, the measures we are taking, and the action that we need from them. To achieve this we will organise an Agenda for Freedom Summit this autumn here in Istanbul where East meets West. The Summit will build on the pockets of progress we see around the world (38).
The goal is to drive much bigger change that frees airlines from national flags, secures financial stability, and creates global opportunities. The bilateral system shaped the industry starting with two states and one agreement. Already states from all continents have agreed to participate; Canada, the US, Panama, Chile, Morocco, the European Union, Turkey, the United Arab Emirates, India, Singapore, Australia, and New Zealand. The invitation is open to any country that understands the value of aviation in driving their economies. And that has the courage to free our industry to build a financially sustainable future.
I am confident in our ability to change. Our success in Simplifying the Business proves it. Four years ago we had a vision to modernise our business with technology, improve convenience and save US$6.5 billion.
SIMPLIFYING THE BUSINESS
Crises are opportunities to drive bold changes. Four years ago in the wake of a crisis we had a vision to modernise our business with technology, improve convenience, and save US$6.5 billion. Today that vision is a reality. E-freight operates at six locations (39) and three more are about to start (40) and our target is a total of 14 countries by the end of the year. 135 airlines use bar coded boarding passes and millions of passengers use CUSS Kiosks at 94 airports. We are moving ahead with a new revolution, Fast Travel, to meet customer demand for more self-service options from check-in to baggage tracing and re-booking.
But the star of the show is e-ticketing. IATA’s involvement in ticketing began in 1930 when the first ticket standards were agreed. In 1972 we implemented neutral ticket stock with the start of the BSP system in Japan. In 2004 when this Assembly decided to go for 100 % e-ticketing, 81% of IATA BSP tickets were paper. Our task was to convert over 235 million (41) tickets to ET. Nobody knew how to achieve it. Many thought it was an impossible dream. Over the last four years we worked together with speed, passion and commitment to eliminate paper: from a remote island airport in Kenya with no electricity or access road to the fast growing markets of China and India and the mega-hubs on every continent.
Today it is time to celebrate a great achievement: US$3 billion in cost savings; the making of history; the end of the paper ticket; and the convenience of ET everywhere and for everyone. Ladies and gentlemen, together we made 100 % e-ticketing a reality. Congratulations. Thanks to all of you, a great industry team, and for a great industry effort. Working together we achieved enormous change.
The celebration is short lived. Twenty-four airlines went bust (42) in the last six months and US$130 per barrel oil is reshaping the industry even as we speak. In the next 12 months we could face US$99 billion in extra costs from oil (43). In advance of the Agenda for Freedom Summit we must sound the alarm with an Istanbul Declaration to governments, industry partners and labour. Airlines are struggling for survival and massive changes are needed. Governments must stop crazy taxation, regulate monopolies effectively, ensure that the cost of energy reflects its true value, fix the infrastructure and change the rules of the game. Labour must understand that jobs disappear if costs don’t come down. And to our partners a simple message -we are in this together so don’t bite the hand that feeds you. Airlines transport 2.3 billion passengers safely and efficiently. US$3.5 trillion of business and 32 million jobs depend on our success. Our responsibility is to fight together with common goals; to survive this perfect storm; return to profitability; and build a sustainable future.
Thank you very much.
- (1) Net profit for airline operations only. Excludes profits and asset sales from non-airline businesses such as MRO (Maintenance, Repair and Operations), GDS (Global Distribution System), hotels. Operating profit for 2007 was US$16.3 billion, according to data from ICAO.
- (2) Average actual price of oil per barrel (Brent) for 2007.
- (3) Per barrel Brent
- (4) Compared to passenger demand (system wide revenue tonne kilometres) growth of 5.9% in 2007
- (5) Forecast industry-wide fuel bill during 2008 based on financial market consensus generated by 60 experts.
- (6) US$6.1bn would represent the industry loss during 2008 based on spot price of crude oil of US$135 per barrel for the rest of the year. The average to date has been US$105 a barrel so this would bring the average spot price for the year to US$122 per barrel.
- (7) 2.25 billion rounded to 2.3 billion
- (8) In 2006. 0.65 hull losses per million flights was equal to 1 accident for every 1.5 million flights. A hull loss is defined as an accident that results in a Western-built jet not being operable.
- (9) IATA Operational Safety Audit is the first global standard for airline operational safety audits that assesses airline operational management and control systems.
- (10) US$ 3.7 million for Flight Data Analysis, US$3 million for Partnership for Safety (PfS). PfS helps airlines in developing countries prepare for an IOSA audit. Since launch in June 2005 over 180 airlines participated. PfS plus is a US$1.5 million programme that helps airlines close IOSA findings.
- (11) Estimate of spending over the next 3 years
- (12) As of 26 May 2008,
- (13) Arab Civil Aviation Commission (ACAC), Brazil, Chile, Costa Rica, Egypt, Madagascar, Mexico, Panama and Turkey, are mandating their carriers to be IOSA registered.
- (14) ISAGO is the acronym
- (15) ISAGO’s global standards have been launched. IATA will conduct 60 station audits and 8 headquarters audits in 2008.
- (16) 17,650 based on an average of the latest forecasts from manufacturers.
- (17) 18,800 pilots will be needed annually based on aircraft orders.
- (18) 15,200 rounded to 15,000. The average annual shortfall is 3,600 pilots.
- (19) Reference to ITQA on IATA Website
- (20) US$5.9 billion a year is the current annual security spend by airlines and passengers
- (21) SPT members include airlines, airports, customs and immigration authorities, industry suppliers, system integrators and consultants. IATA contributes project management support.
- (22) In 2007 IATA negotiated US$2.9 billion savings with airports and air navigation service providers, saved US$138 million in fuel charges and US$642 million in taxes.
- (23) In 2007, a 3-year pricing agreement with Incheon Airport (IIAC) resulted in a 10% landing fee reduction for the period of 2008 to 2010 saving US$75 million. All other charges are to be frozen at 2006 levels for 2007-2010.
- (24) Brazilian Government provided US$1 billion to airport operator INFRAERO to offset costs of infrastructure investment instead of airlines paying through higher charges.
- (25) US$1.45 billion rounded.
- (26) Compared to 2005. The 25% fuel efficiency goal was developed by IATA's Environment Committee and accepted by the IATA Board in June 2007. It represents an improvement in fuel efficiency from 40 litres per 100 RTK in 2005 to 30 litres per 100 RTK 2020. All numbers are rounded and represent aggregate averages for the total IATA member airline fleet.
- (27) Virgin Atlantic flew a Boeing 747-400 in early 2008 with one engine operating on a 20% biofuel mix of babassu oil and coconut oil
- (28) IATA also published Carbon Offset Guidelines for airlines to use in setting up their own programmes: www.iata.org/environment
- (29) For its AGM in Istanbul, IATA will offset the unavoidable CO2 emissions generated through air travel, energy consumption, accommodation and travel to and from Istanbul airport with a contribution to the Anemon Enerji wind farm project. This is an International Gold Standard premium carbon credit project certified by Climate Friendly ( www.climatefriendly.com)
- (30) The European Council of Ministers brought a compromise solution that would result in a total cost of EUR 3.1 billion in 2012 increasing to EUR 6.4 billion in 2020.
- (31) Annual CO2 savings that would be generated by a Single European Sky.
- (32) NextGen is a new ATC system for the US
- (33) Refers to third generation bio-fuels that produce less GHG emissions over their life cycle and do not compete for land with fuel crops
- (34) On February 18, 2008 IATA became an Institutional Partner of Solar Impulse – the solar airplane that will fly around the world with no fuel and zero emissions
- (35) In 1997 net profit margins peaked at 2.7%. Operating margins were 5.6% but this is lower than required to meet the industry’s cost of capital, which averages 7-8%.
- (36) Source: www.hsbc.com
- (37) The 5th Worldwide Air Transport Conference was held in Montreal on 24-28 March 2003 under the auspices of ICAO. The conference supported the idea of separating commercial ownership from regulatory control and endorsed the liberalisation of national ownership restrictions. However, little has actually happened in practice since 2003.
- (38) US-EU Second Stage, ASEAN liberalisation, CREW, etc.
- (39) Canada, Hong Kong, the Netherlands, Singapore, Sweden and the UK
- (40) Germany, Mauritius and South Korea
- (41) During 2004 IATA BSP processed over 290 million tickets. 81% of these, or 235 million, were paper.
- (42) Airlines that have been suspended or terminated from IATA financial systems due to cessation of operations or bankruptcy.
- (43) A spot price for oil of US$135 per barrel compared with US$73 per barrel in 2007 represents a $US99 billion rise in fuel costs over a 12 month period, based on US$1.6 billion in added cost per US$1 increase in the price of oil per barrel (Brent) excluding the impact of hedging.