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Date: 20 August 2008

Australian National Aviation Press Club

It’s a great pleasure to be in Australia, great aviation nation. Because of your geographic location and enormous size, effective aviation links are critical.

Australian Leadership

As a result Australia has carved out an important global leadership role. QANTAS is a leader among airlines with great technical achievements and one of the industry’s best balance sheets. The Ministry of Transport is a policy leader. Australia’s very liberal domestic markets show that market forces deliver great results.

And CASA is a safety leader. It was involved in developing industry standards for the IATA Operational Safety Audit - IOSA. Today IOSA is a condition of IATA membership. By the end of the year carriers that are not on the IOSA registry are out of IATA. We will be tough but our goal is to raise the bar on safety not reduce our membership. Already 227 airlines are on the registry. All our efforts are focused on bringing all our carriers up to the IOSA standard.

AirServices Australia is a leader in air traffic management. It won IATA’s prestigious Eagle Award twice - in 1999 and 2005. It was a pioneer for ADS-B technology. And in our five year pricing agreement with AirServices we agreed on investment planning and risk-sharing. This is a model partnership for others to follow. Unfortunately, Australia’s leadership reputation is being damaged by unacceptable ATC delays and service disruptions that increase fuel burn and emissions. An urgent solution is needed in line with the industry’s drive to improve both efficiency and service-quality.

The situation at Australia’s airports is improving. As a result of the 2006-2007 review, economic regulation was strengthened with a better monitoring framework, expanded scope of regulated charges and asset valuation guidelines. In 2007, long term pricing agreements were signed with Sydney, Melbourne, Brisbane and Perth. These agreements achieved cost avoidance of US$ 53 million and cost reduction of US$51 million. Despite these agreements Sydney’s 57% EBIT is still a cause for concern. It shows that there is room for more efficiency today. At the same time we must look forward ensuring that Sydney has sufficient capacity to meet Australia’s economic needs. That means maximising use of the existing infrastructure and carefully planning for the next stage of development. If all stakeholders - industry, government - work together I am confident that Australia will find cost-efficient solutions to these challenges.

Crisis

I am much less confident about the state of global industry. Airlines posted a US$5.6 billion profit in 2007. This was our first profit after six years of losses that exceeded US$40 billion. Backed by a strong economy, airlines worked hard to reduce sales and marketing costs 25%, improve fuel efficiency 19% and drop non-fuel unit costs by 18%. The result was 1.1% margin - not enough to get any investor too excited but in the airline industry even this was a reason to celebrate.

Now sky-high oil prices are destroying our profitability. In 2002 oil was US$25 per barrel and the industry fuel bill was US$40 billion. Nobody can predict where the price will go but even a US$1 increase adds US$1.6 billion to industry costs. In July oil went over US$140 per barrel. In that range the 2008 bill would be US$190 billion. Now it is around US$110. It is good news that it is going down but few expect it to go below US$100 any time soon and efficiency gains are a long way from filling the gap. Moreover, the unstable geo-political situation in Russia and the Middle East could easily send prices sky-rocketing again.  At the same time growth is slowing. Cargo traffic dropped 0.8% in June while passenger growth slowed to 3.8%, about half the 7.4% recorded last year.

So we are in a perfect storm of uncontrollable fuel costs and falling demand. Airlines could lose as much as US$6.1 billion this year. Already some 25 airlines in our financial systems have gone bust - greater than immediately following 9.11 - and we are bracing for more. Despite some relief in the oil price, wee are a fragile industry that is in a crisis. “Wait-and-see” is not an option. Major changes are needed.

Istanbul Declaration

At our June AGM airlines rang the alarm bell with an Istanbul Declaration. The CEOs of 230 airlines demanded that governments stop crazy taxation, effectively regulate monopoly suppliers, fix the infrastructure and give airlines greater commercial freedoms. Labour must recognise that jobs will disappear if costs don’t come down and that our airport and ANSP partners must deliver greater efficiencies.

AirServices Australia was among the first to respond with a A$1 million charges reduction and an early payment of US$25.8 million in rebates. Australia’s airports must join in these efforts. The Australian government can also help by reversing the A$9 increase in the Passenger Movement Charge that is a US$500 million burden to the industry over 5 years. These emergency measures will help but the reality that we must face is that oil prices seem to be permanently higher than five years ago. Fuel went from 13% of cost to over a third. High oil prices are re-shaping the business in a way that demand shocks of SARS or 9/11 did not. This points to the need for some very fundamental changes to the business of aviation. Australia has a leading role to play in at least three major challenges:

1. Making travel convenient and efficient with technology
2. Improving environmental performance
3. And giving airlines the commercial freedoms to do business like any other business

Improving Processes

Let’s start by examining processes. In June 2004 we launched a revolution. Our mission was to Simplify the Business by improving convenience and delivering US$6.5 billion in cost savings. The results speak for themselves. In 48 months we delivered 100% e-ticketing. The last IATA paper ticket was issued on 31 May. By 2010 we will achieve 100% bar coded boarding passes enabling options like home or mobile-phone check-in. Nearly 100 airports operate common-use kiosks - I hope that Australia will soon join - and nine countries are live with e-freight. Australia starts in a few months. In total, e-freight will operate in 14 countries by year-end. Airlines proved that they can deliver relevant change fast. Now we are looking to the second phase. Our vision for Fast Travel will bring more self-service options to passengers from self-boarding to re-booking for delays and missed connections to the recovery of mishandled baggage.

While airlines have improved processes on a global scale, governments are not delivering on security. We are much more secure than in 2001. But as every traveller knows, the system remains an uncoordinated mess because governments are not thinking or acting globally. The global standards and cooperation between industry and government that made air the safest way to travel is the model to follow. We have a global ICAO standard for liquids and gels. So why does Australia require screening at the gate at the last port of call? Doing the same process twice does not add value. The only impact of this extra-territorial duplication is confused passengers and added cost.

Decisions driven by fear cannot build a more secure global air transport system. Governments must take a risk-based approach and harmonise with global standards. Australia is the natural leader in this part of the world. And the process of developing a National Aviation Policy Statement is a golden opportunity for Australia to demonstrate its leadership by improving security standards with a global approach.

Environment

Climate change also requires a global approach. Air transport contributes 2% of global CO2 emissions - 670 million tonnes of CO2 annually. Like all industries we must reduce our carbon footprint. That means burning less fuel. With a potential fuel bill of US$190 billion, we have the biggest incentive to do so. Our track record proves that we can be successful. Over the last 40 years fuel efficiency improved 70%, 19% since 2001 alone. IATA’s four pillar strategy to address climate change is focused on reducing fuel burn and emissions by:

  • Investing in technology
  • Flying planes effectively
  • Building efficient infrastructure and
  • Using positive economic measures

179 governments attending the ICAO assembly endorsed the strategy. And in April the CEOs of Airbus, Boeing, Bombardier and Embraer, CFM, GE, Pratt & Whitney, Rolls Royce as well as airports and ANSPS made IATA’s strategy an industry commitment. Along with a target to improve fuel efficiency 25% by 2020 IATA’s vision is even more ambitious - carbon-neutral growth leading to a carbon-free future. We are delivering results. IATA saved 11 million tonnes of CO2 last year by optimising 395 routes and working with our members to implement best practice in fuel management. I am proud to say that aviation’s approach to climate change is a benchmark for other industries to follow.

I am less impressed with governments. Too many think green but only see cash. Instead of delivering operational efficiencies we get taxes, taxes and more taxes. Look at the UK. After doubling Air Passenger Duty to GBP 2 billion annually, the government now plans to change the name and collect even more - GBP 3.6 billion a year by 2012.  By the Government’s own estimation GBP 1.9 billion would completely offset aviation’s climate change costs. Environment has become a big revenue generator for governments, but there are no guarantees that any of this will be spent on environment projects. On top of that, the UK supports Europe’s rush to unilaterally and illegally bring aviation into its Emissions Trading Scheme (ETS) with an escalating cost starting at EUR 3.5 billion in 2012. While Europe rushes to charge for emissions it is slow to help airlines reduce emissions. Instead of a Single European Sky that could save 16 million tonnes of CO2 each year we get decades of talks, hot air, and more talks.

Tackling international emissions is also part of the vision of the Kyoto protocol which gives ICAO responsibility for international aviation emissions(ICAO will establish a global framework for emissions management that will likely include an ETS). Australia signed Kyoto. You have a responsibility to defend it. What right does Europe have, for example, to tax an Australian plane flying from Asia to Europe for emissions over Afghanistan? To achieve an internationally coordinated approach, Australia must strongly challenge Europe at ICAO and other international forums.

Australia must also re-examine its draft domestic ETS proposal - the Carbon Pollution Reduction Scheme. The approach is blunt and focused only on economic measures. Where are the plans for operational efficiencies? As an international observer, I see some big concerns in the proposed economic mechanism. Auctioning permits would set a very bad precedent. And while airlines have been good at limiting our emissions with constant efficiency improvements, carbon-intense industries with less impressive records
are given breaks that airlines are not. Why punish the good?

Moreover, the cost could impact Australia’s competitiveness in tourism which contributes 7.1% of GDP. The Productivity Commission recognised the need to maintain a level playing field for “footloose” industries. Anything that makes an Australian vacation disproportionately expensive is an incentive for tourists - domestic or international - to go elsewhere.

That is why, as Kyoto envisaged, the focus must be on global solutions brokered through ICAO. It is the only institution with the technical expertise developed through its Committee on Aviation and Environment Protection. And it is building political momentum with GIACC - the Group on International Aviation and Climate Change. As a member of GIACC, Australia has an important role to play by facilitating a global solution in line with the Kyoto protocol, by challenging Europe on its unilateral action and supporting the ICAO process.

Commercial Freedom

Lastly, I believe that Australia can take global leadership in helping change the 60 year-old rules that govern air transport. Air transport facilitated the global village but we are among the last industries to benefit. The Chicago Convention is not the issue. Its global standards are basis for global safety. The bilateral system must change because it prevents airlines from acting like normal businesses. Airlines cannot serve markets until governments negotiate access. And we cannot merge or consolidate across borders because of foreign ownership restrictions. Who cares who owns an airline so long as it is safe and provides efficient service? It’s time to move from the world of flags and politics to brands and business.

There is some movement. ASEAN is liberalising in stages and considering an open aviation area. Australia’s talks with the EU could be a step in the right direction. The US-EU agreement on open skies was a missed opportunity because it did not address ownership. This movement tells me that governments understand that change is needed. But in a crisis that is re-shaping the industry tweaking bilateral arrangements is not enough. Governments must act more boldly. I am a realist. Unwinding 3,500 bilateral agreements may not be impossible but it certainly will not happen in time. And ensuring a level playing field in a diverse industry requires careful consideration. But these are challenges, not excuses to do nothing.

Our vision is for governments to ensure a level playing field and effectively regulate safety, security, monopolies and environmental standards so airlines can do business like any other business. I believe that we can work through the bilateral system to achieve this. Following the Istanbul Declaration, IATA is taking the extraordinary measure of facilitating this discussion among progressive governments at an Agenda for Freedom Summit to be held in Istanbul this October. Australia has an important role to play. Your domestic aviation policy is already the most liberal in the world. I am counting on the Australian government to be a force for real change.

Conclusion

Many of the challenges that I have discussed today were considerations in Australia’s National Aviation Policy Review. We look forward to working with Australia to further develop its leadership in this important industry as 32 million people and US$3.5 trillion in business depend on air transport. They rely on an industry that is safe, secure, environmentally responsible and financially sustainable. At this moment of crisis the courage to change will be the key to survival and to fulfilling this important responsibility.

In conclusion it is my pleasure to present to the Australian National Aviation Press Club one of the last paper tickets ever printed. I hope it will be a reminder of this great industry’s power to drive change quickly.

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