Date: 6 October 2008
Annual Industry Cash Management Conference, Rome
Good morning. It’s a pleasure to be back home and to have the opportunity to address an audience that contains many future CFOs. As your interest is in the bottom line, let me get right to it
Our industry is in a financial crisis. You could argue that has always been the case. In the last 60 years, airlines generated US$32 billion in profit, an US$11 trillion in revenues, an average margin of just 0.3%. Even at the peak of the cycle, margins were less than 3%.
Post-September 11, airlines lost US$ 42 billion and built up US$190 billion in debt. The emergency forced airlines to improve efficiency:
- 64% increase in labour productivity
- 25% drop in distribution costs
- An 18% reduction in non-fuel unit costs
- And a 19% improvement in fuel efficiency.
In 2007 airlines made US$5.6 billion. A celebration because the number was finally black. But it was only a 1% margin, and a long way from the 8% needed to cover the cost of capital. As we prepared to celebrate at our Annual General Meeting, the perfect storm arrived. Oil shot up to US$135, and the growing credit crunch was slowing traffic. These two factors plunged the industry back into losses. For 2008 we expect losses of US$5.2 billion, with an average oil price of US$113.
Oil is completely unpredictable and it has changed the game. In 2003 the bill as US$40 billion (14% of costs). This year we expect a bill of US$186 billion (36% of costs).
Even the recent relief in fuel prices Is bad news. Because it indicates weakening economies that will dampen traffic and lower revenues.
August passenger demand growth was 1.3% while cargo contracted by 2.7%. Last year we were seeing growth of 7%. Careful capacity management will be critical. There are over 8,500 aircraft on order with 4,000 deliveries by the end of 2010.
I was just in India, a great market where the carriers chasing market share instead of profits will lose US$1.5 billion this year. This is the largest loss outside of the US where losses will be about US$5 billion. There are extra-ordinary losses in the US and India, but the airline casualties are spread around the world.
Over the past year we had to suspend over 25 airlines from our financial systems. Far more than after 9/11, we can say that this crisis is re-shaping the industry.
So how can we survive? The CEO’s at our June Annual General Meeting in Istanbul called for fundamental change. We sent a strong message around the world, outlining a survival plan. In our Istanbul Declaration, what did it say? Labour must realise the jobs disappear when costs don’t come down. Airports and ANSPs must deliver greater efficiencies and governments have a long list of critical actions:
- Stop crazy taxation
- Effectively regulate monopoly suppliers
- Fix the infrastructure
- And give airlines the freedom to do business.
In July IATA turned this into a crisis plan to support the industry by:
- Reducing external costs
- Improving operational efficiency
- Simplifying the Business
- Pressing governments for liberalisation
- And keeping airline cash safely flowing through our financial systems
Airlines pay US$43.5 billion to Airport and ANSPs. So 11% of our revenues goes to monopolies. Some are good partners but many have not matched the efficiencies of the airlines. IATA’s job is to negotiate on behalf of airlines. Last year we delivered US$3.7 billion in cost savings in charges, fees and taxation.
In the wake of this crisis IATA is challenging 133 airports, 66 ANSPs and 106 DGCAs for greater efficiency gains and cost reduction. Some responded:
- Korea Airports cut domestic landing and parking charges by 10%
- Toronto Airport reduced cargo landing fees by 25%
- Fraport froze charges for 2009
- Bulgaria ANSP will cut charges by 20% to 2011
- And Nav Canada announced a 1% reduction in rates.
Others continue to live happy monopoly lives.
You just have to look at the EBITs of some key airports:
- Auckland – 69%
- Atlanta – 63%
- Beijing - 51.4%
- Johannesburg – 49.5%
- and BAA Group – 45.2%.
Can you imagine any airline making that kind of margin? Still governments stand by and watch.
In June at our Annual General Meeting I gave IATA’s first Worst Regulator Award to the UK Civil Aviation Authority. Heathrow service levels are a national embarrassment but still the regulator increased charges by 50% over the last five years, 86% for the next five. We are calling for massive change in the UK. Breaking-up the BAA monopoly and re-structuring the regulator to be more than just a phantom.
We are in crisis. It’s time for all governments to get serious about regulating monopolies to deliver cost efficiency and good service.
Improving operations and infrastructure efficiency
With a fuel bill of US$186 billion, every drop of fuel is critical to our financial survival and our environmental performance. Our four-pillar strategy on climate change is:
- Invest in new technology
- Operate planes effectively
- Build and use efficient infrastructure
- And implement positive economic measures.
It is good for business and for the environment. 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. This comes with a tough 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. This year IATA will save 10 million tonnes of CO2 and US$3 billion in fuel by shortening routes, improving operational procedures and by sharing best practice with our Green Teams.
Since we launched our Fuel Campaign in 2005 IATA has saved US$8 billion and 40 million tonnes of CO2.
And there is much more to do. While we are focusing on results and real savings, governments are fixated on lining their treasuries with new taxation. They think green and see cash.
Europe is having a carnival of taxation. The Netherlands introduced a green tax. We fought and they changed the name to departure tax. And are cashing EUR 2.4 billion. Over the next five years in the UK, after the doubling the Air Passenger Duty to GBP 2 billion annually, the government now plans to change the name and collect GBP3.6 billion a year by 2012.
On top of that Europe is continuing with its plans to incorporate aviation into a unilateral and illegal emissions trading scheme and cash at least another EUR3.5 billion.
It is time to say BASTA. We have a strategy on environment, and we support emissions trading, provided that it is fair, global and voluntary. We are fighting the taxes and pushing for improvements in line with our strategy. Like a Single European Sky that could save 16 million tonnes of CO2 and US$5 billion each year. We get decades of talks and hot air, but no results. In this time of crisis governments must re-focus to deliver efficiencies that save fuel, carbon and dollars as win-win-win solution.
Simplifying the Business
We are not just talking about efficiency, we are delivering it. IATA’s Simplifying the Business Programme is a good example. In 48 months we got rid of the paper and delivered US$3 billion of annual savings with e-ticketing.
And that is not all:
- 162 airlines use Bar coded boarding passes, saving over US$5 per passenger.
- By 2010 it will be 100% CUSS operated in 114 airports, saving US$2.50 per check-in
- E-freight will operate at 14 locations by year-end with potential savings of US$1.2 billion.
In total the savings will be US$6.5 billion, and we are determined to achieve even more efficiency with technology:
- Our Baggage Improvement Programme takes a holistic approach to reduce the US$3.8 billion annual cost of mishandlings
- While Fast Travel will bring more self-service options to passengers from check-in to self-boarding and baggage tracing.
Air transport is one of the most fragmented industries. Over a thousand players fight for traffic. The largest airline has less than 5% of the market.
The 60 year-old rules that govern air transport were made for another era.
The bilateral system prevents airlines from acting like normal businesses.
Airlines cannot serve markets until governments negotiate access. And we cannot merge or consolidate across borders because of foreign ownership restrictions. Who cares who owns an airline so long as it is safe and provides efficient service?
There are consolidation success stories like LH/Swissair. AF/KLM. They are among the most profitable airlines with well-served customers. But barriers still exist. I am hopeful that the US-EU will reach a second stage agreement that includes ownership. But even that would not be enough.
So we are following-up on our Istanbul declaration with An Agenda for Freedom Summit where we will facilitate a discussion among progressive governments. The vision is to work within the bilateral system to give airlines greater commercial freedoms while governments retain responsibility for ensuring a level playing field and effectively regulating safety, security, monopolies and environmental standards.The goal is to allow airlines to operate like any other business.
Along with greater commercial freedoms, the industry needs regular revenues to survive. IATA plays a key role. Our systems are the industry’s financial backbone. In 2008, we will process US$ 360 billion of your funds.
In times of crisis it is more important than ever to keep sales revenue flowing and protect airline funds. But if this crisis deepens, more bankruptcies are sure to follow, involving high impact airlines and a large number of agents.
So IATA is taking measures to strengthen and align regulations for BSP, CASS and Clearing House to better help us to recover any deficit of an airline in one service, by offsetting it against its surplus in other IATA services and to minimise the credit risk for the other airlines in the system.
Rules on security deposits and transfer of codes are being driven to recover past debts and to secure future performance.
IATA is also preparing rapid response teams comprised of 70 trained support staff set to parachute in to key locations if the situation deteriorates. Contingency plans are also in place should banks remove credit lines to assure un-interrupted and reliable service.
For the longer-term, we are investing in IT to centrally operate the settlement of all BSPs and CASSes worldwide. We have also actively driven innovation and efficiency by introducing new financial services, tightening regulations and credit risk management and changing Clearing House from monthly to weekly clearance, reducing interline credit risk exposure by 75%.
Initiatives such as electronic invoicing, first and final interline billing, and most recently the Simplified Interline Settlement project also help the industry to eliminate paper, simplify processes and reduce cost.
The Simplified Interline Settlement project alone will save the industry $700 Million per year and ramp up the speed of Clearing House even more.
The industry is in a crisis. We are sick…and we need to get better.
That means change. IATA is leading change - for airlines. And we are pushing for change with our partners and with governments. The focus is on improving efficiency, reducing external costs, Simplifying the Business and gaining greater commercial freedoms.
Despite the crisis, this is an exciting industry, full of great people. If we keep that focus and continue to remind governments and partners of their role, I am confident that of our future as a safe, secure, efficient, environmentally responsible and profitable industry.