Date: 30 October 2008
IATA Director General and CEO in Mauritius
It’s a pleasure to be on the wonderful island of Mauritius. When you come to places like Mauritius, some things become crystal clear. The first is that while tourism has brought many economic benefits to Mauritius, all those involved have a responsibility to protect the beauty of this island for future generations. The second is that air transport, as the backbone of the tourism industry, shares in the responsibility to ensure sustainability. Airlines make this wonderful destination accessible to the world, supporting tourism, connecting businesses to markets, and providing jobs.
About 2.3 billion people and 41 million tonnes of cargo will fly safely this year and this will support US$3.5 trillion in economic activity. Without air transport Mauritius, indeed this planet, would be a much poorer place. That is why Mauritius plays above its weight as a leader for international aviation. Vice Prime Minister Duval just participated in our Agenda for Freedom Summit. Air Mauritius is a long-standing IATA member and Sanjay Bhuckory is on our board. Mauritius has a strong voice in the international community.
Sometimes policy-makers take the broad benefits of aviation for granted. I would like to use this opportunity to look at the air transport industry from the perspective of sustainability. What is sustainability? For me, it means ensuring that we meet the needs of the present without compromising our future. For airlines the sustainability debate has two main aspects: financial sustainability and environmental sustainability.
The financial discussion begins with a simple statement: The air transport industry is in a crisis. Between 2001 and 2006, airlines lost US$42 billion. Last year, we made US$5.6 billion, which is less than a 1% margin. This year has been extra-ordinary. Even as we celebrated our profit at our Annual General Meeting, the industry had fallen back into crisis. At that time cost was the issue, oil was at US$135 per barrel. If it stayed at that price, airlines faced a potential cost increase of US$99 billion over the following 12 months.
Since 2001 airlines made enormous efficiency gains. Fuel efficiency increased 19%, sales and distribution unit costs dropped 25%, and non-fuel unit costs decreased 18%. But we could not keep pace with skyrocketing oil. Our 230 member airlines issued a declaration. Our partners - airports and air navigation service providers - could no longer live in happy monopoly land. We demanded that they match our efficiency. Labour could not view the crisis as a spectator. They needed to understand clearly that jobs disappear when costs don’t come down. And governments needed to change to stop crazy taxation, to regulate our happy monopoly suppliers, and to change the rules of the game to give airlines the same commercial freedoms that every other business takes for granted.
Facing such an enormous fuel bill, the industry was not sustainable without major change. Since then the oil price dropped to below US$70 per barrel as the US credit crunch turned into a global financial crisis, demand is falling faster than airlines can reduce capacity. For the first time since the SARS crisis of 2003 the industry is shrinking. Passenger numbers dropped 2.9% in September and cargo fell by 7.7%, which is the biggest drop since the technology bubble burst in 2001. What we gain from cheaper oil, we lose in revenues. Airlines will end the year US$5.2 billion in the red and if the financial crisis deepens the results could be worse. Without change financial sustainability is far from reality.
Let me focus on two areas with particular relevance to Mauritius: Liberalisation and taxation.
We cannot become financially sustainable without the commercial tools to manage our businesses effectively but the bilateral system that governs international operations was designed for another age; the 1940s when we were flying the DC3s.
It starts with two premises: markets are closed until governments agree to open them and airlines will not have international ownership. Neither makes any sense for the industry that made the global village a reality. This is unlike the bailouts that turned the banking sector into a state enterprise in many economies in a matter of days. And it is not just banks. Aerolineas Argentinas was re-nationalised because it could not pay its bills. This is not the solution that we want, but without change the risk is real. To focus governments on the need for change IATA took an extra-ordinary step and facilitated a discussion among 15 like-minded and liberal Government partners. This was our Agenda for Freedom Summit. Vice Prime Minister Duval, Permanent Secretary, Mrs. Premilla Roy, and the CEO of Air Mauritius, Manoj Ujoodha all came to the table with a great story to tell.
In 2006 Mauritius took the courageous decision to open its aviation market. It boosted tourism and it also created tough competition but Air Mauritius emerged as a much stronger player in the global market.
We would like to see more governments with the courage to change. The Summit ended with a shared vision to move the process from discussion to action with a follow-up meeting in early 2009. In the meantime the governments asked IATA to help facilitate a multi-lateral statement of policy on liberalisation and a mechanism to spread best practices in liberal agreements. We will not change 60 years of history overnight but the financial crisis is giving momentum to the need for change. I count on Mauritius to take a strong leadership role in this important aspect of financial sustainability.
The freedom to do business alone cannot guarantee financial sustainability. Costs must be kept under control.
Efficiency - StB
As an industry we have some great results. IATA’s Simplifying the Business Programme played an important role. The vision is to save US$6.5 billion by using technology to make travel and shipping more convenient. After launch in 2004 we delivered 100% e-ticketing in 48 months saving US$3 billion. Mauritius met the deadline and is at the forefront of our other programmes. Air Mauritius already uses Bar Coded Boarding Passes. We have been discussing the use of Common-use Self-Service Kiosks for check-in and earlier this month our e-freight programme went live on the Mauritius to London trade route. I thank the government, particularly the customs authority for their cooperation in driving paper out of the freight process. It makes Mauritius more competitive and contributes to US$1.2 billion in industry cost savings.
But if Mauritius has taken a leadership role in helping drive down costs there are two areas where the government’s approach is misguided. The first is fuel. Even with the drop in prices it is still 36% of our costs. The challenge is to make sure that this does not get more expensive with supply-chain inefficiency or undue taxation. The complexity of the supply chain for fuel in Mauritius is costly and getting more expensive. The transfer fee for the State Trading Corporation increased from 4 cents per gallon in 2003 to 11 cents.
It’s a fee for processing so it’s difficult to understand why it needs to more than double. Now it is nearly a US$10 million disincentive for tourism. On top of that, the government introduced the Maurice Ile Durable tax or the MID tax. It’s a further US$2 million disincentive for tourists and contravenes the Chicago Convention. Why should air travellers fund renewable energy and recycling programmes? I urge the government to reconsider quickly before we see international challenges. And why spoil a great aviation story?
The MID tax also highlights the need to effectively address the issue of environment. Climate change is at the top of the world’s political agenda. For island nations, like Mauritius facing the prospect of rising water levels, the situation is critical. Governments must make sound policy decisions that reduce CO2. Aviation uses fuel and creates carbon. So we are a part of the problem. According to the IPCC, we are responsible for 2% of global carbon emissions. African aviation by itself is 0.05%. Even by 2050 the IPCC estimate that our contribution is expected to grow to 3% of global CO2 emissions. Aviation is and will remain a small part of this important problem.
We take the issue seriously with our four pillar strategy. First, invest in new technology. Second, fly planes effectively. Third, build and operate efficient infrastructure and fourth, use positive economic measures. Our first target is to improve fuel efficiency 25% by 2020 compared to 2005. The IATA strategy is now an industry commitment signed by the CEOs of the major manufacturers, the major associations and their members at our Environment Summit in Geneva. Air Mauritius is one of the signatories. All 179 governments attending the 2007 ICAO Assembly adopted the strategy and the target.
IATA is even more ambitious. Our vision is for carbon-neutral growth leading to a carbon-free future in 50 years. Nobody has all the answers for a plane that does not pollute but I am convinced that an industry that went from the Wright Brothers to a jet engine in 50 years has every possibility to achieve this.
In the meantime we are focused on reducing emissions. Already this year IATA saved the annual equivalent of 14 million tonnes of CO2 and US$5 billion. We did this by working with our member airlines to optimise routes and spread best practice for fuel management. I must congratulate Air Mauritius for its vision and leadership on this issue. Its One Take-Off One Tree programme represents a strong commitment. Air Mauritius will also be one of the pioneer airlines for IATA’s carbon offset scheme
Less visible, but equally important Air Mauritius underwent our Fuel Efficiency Gap Analysis in July. The programme started with Air Seychelles who asked for help to implement IATA’s best practice book. The programme saves between 3% and 12% on the fuel bill and in the last four years our expert teams visited nearly 90 airlines. Already this year we identified 2.7 million tonnes of CO2 savings. On 25 September we took a major step forward in Africa with the introduction of reduced vertical separation minima (RVSM). This will allow more aircraft to fly at or near the optimum flight level saving 120,000 tonnes of CO2 and US$40 million a year. Now the door is open for further improvements like route restructuring and eventually user-preferred routes.
While we are focused on reducing fuel and CO2, many governments see environment as a pot of green gold. And this can impact island nations dependant on tourism. In the name of the environment, the UK doubled its Air Passenger Duty to 40 pounds for long-haul economy flights. Vacations to Mauritius became more expensive but none of the money is helping to improve aviation or the environment because Governments are not coordinating their efforts. Even as the UK thinks of further increases with a new Aviation Duty, the European Union is moving ahead with unilateral plans to bring aviation into its emissions trading scheme - another EUR 3.5 billion burden.
With a decision last Friday of the Council of Justice and Home Affairs Ministers, plans were finalized for a 2012 inclusion. There is no guarantee on where the money will go. And it’s illegal - against the Chicago Convention. What right does the EU have to collect an environment tax over the Indian Ocean? It compromises the work of ICAO, which, in line with the Kyoto protocol, is moving forward on a global solution.
Airlines are not against emissions trading but we need a solution that is fair, global and effective. ICAO is the only place. Africa - with much at stake - must be a voice of reason challenging Europe’s decision, focusing on global solutions through ICAO’s Group on International Aviation and Climate Change (GIACC). South Africa is your nearest neighbour participating in the GIACC. I count on Mauritius to give its full support to South Africa to achieve a successful conclusion.
While government processes continue we have a battle for hearts and minds to fight. We were slow to start communicating on environment and correcting public perception of aviation has been an uphill battle. But we are making progress. For example, ATAG has a cross-industry website with facts on the environment and what aviation is doing. IATA has a travelling exhibition delivering similar messages to passengers in airports. We have a great story to tell and Africa can help. While Europe is leading on implementing taxes, its biggest embarrassment is the failure of a Single European Sky. We waste at least EUR 5 billion a year and 16 million tonnes of CO2 because Europe has not united its skies. Africa’s 17 State ASECNA is a great example of what Europe must achieve. We must tell that story loud and clear.
Aviation is a great industry and I am absolutely convinced that with change it has a sustainable future. Governments must understand the need for commercial freedoms, efficiency, realistic taxation and an effective approach to environment. To support the call for effective policy I will leave you with one last thought on sustainability.
There is a natural alignment of interests among aviation, tourism and the government. The connections made possible with aviation are fuelling the economy of Mauritius. With the right policy framework aviation is a sustainable development mechanism. In Africa, aviation employs 430,000 people and supports US$9.2 billion in GDP. For 10% increase in air transport utilization, 1% is added to GDP. With wise policy aviation can be the driver of enormous economic benefits and a sustainable future.