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Date: 29 January 2009

British Air Transport Association Annual Dinner

2008 was a roller coaster ride. We battled oil prices with efficiency as they rose to US$147 in July. Then, as the oil price dropped, we watched our business disappear as the global financial crisis deepened.

The year ended with passenger traffic up 1.8% and cargo down 4%. December traffic results are shocking. Passenger traffic dropped 4.6% and cargo fell off a cliff with a 22.6% decline. Air cargo represents 35% of the value of goods traded internationally. World trade is plummeting and the worst is yet to come. The only precedent is in the 1930’s.

Airlines lost US$5 billion in 2008 and we expect further US$2.5 billion loss this year. That does not fully describe the pain the industry is facing. We expect industry revenues to fall by 6.5% this year. That means that US$35 billion in revenues will disappear. Worst hit will be Asia with losses of US$1.1 billion. The region’s biggest market - Japan - is in recession. Even airlines in China and India, the drivers of post-September 11 growth, are in intensive care. European losses will increase ten-fold to US$1 billion. The only good news is North America. Un-hedged, they dramatically cut capacity as the fuel price peaked in June. Now they are taking full advantage of low fuel prices and may make a small profit. This is the exception. The world economy is in crisis. And so is the airline industry.

Battling the Crisis

One of the few certainties is the need for efficiency, efficiency and efficiency…and more efficiency. Capacity is a concern. The 1.5% drop in December capacity is not keeping pace with the fall in demand. There can be no financial sustainability until supply and demand are balanced. We are handling costs better. Compared to 2001 non-fuel unit costs are down 13% and fuel efficiency is up 19%.

IATA is helping. Our Simplifying the Business Programme delivered US$3 billion in savings with 100% e-ticketing last year. But that is not the end of the story. Already 204 airlines use IATA standard Bar Coded Boarding passes and next year the conversion will be complete. With our Fast Travel programme common-use kiosks, already live in 135 airports, will work even harder - from scanning documents at check-in to helping passengers find mishandled luggage. We have developed a toolbox to improve baggage handling. And by 2010 the e-freight revolution, which is already operating in the UK, will be live in 44 locations covering 81% of international air freight. By rolling out these technology standards globally the additional potential savings are enormous, up to US$14 billion.

That is not all. Last year IATA saved US$3.5 billion in fuel fees, taxation and infrastructure charges. We also worked side-by-side with our members to implement best practice in fuel management. And we did the same with ANSPs optimising 214 routes. The results were US$5 billion fuel cost saving and 15 million tonnes of CO2. And we will do more this year.

Building the Future

We must also recognise that air transport is a resilient industry. This crisis will be tough and long. Eventually it will end. Our goal must be to ensure that aviation emerges as a stronger industry. In that light January had some good news. The day after the UK’s decision to proceed with Heathrow’s third runway a court decision in Germany cleared the way for a fourth runway at Frankfurt. In the case of Heathrow the decision not to go for mixed-mode was a disappointment. And I hope that the government will revisit this soon. Both runway decisions are critical to drive industry growth and economic prosperity.

The question is will cost savings and new infrastructure be enough to secure a financially stable future for this industry? The answer is absolutely no. The average margin over the last 60 years is 1.3%. Just to cover our cost of capital we need 8% or US$40 billion. Last year—a good year—the margin was 2.5%. Cost savings alone will not cover the gap. Government policy must play a key role. But our traditional leaders are letting us down in the UK. You will have the runways but I do not see consistent policy. There is no long-term vision and far too many bad decisions.

To be frank I am deeply concerned. You have a great history, great airlines, fantastic market potential and one of the world’s most important airports with a new leading-edge terminal. But draconian taxation policies, poor regulation and antiquated rules of the game are killing this industry. Let me lay out a three point crisis policy agenda that will strengthen the role of air transport in driving economic growth and regain lost ground in industry leadership.

Point 1: Effective Economic Regulation

There is a problem with the UK’s airports. I support breaking-up BAA’s monopoly but there is little excess capacity in the Southeast. So I don’t see any of the concerned airports developing the sense urgency needed to drive significant change to improve services.

Effective regulation is the critical second element to fixing the UK’s embarrassing airport situation. We continue to work effectively with BATA to overhaul the system with input to both the Department for Transport and the Competition Commission. I am pleased to see my good friend Sir Roy here tonight. In my capacity as member of the UK’s NATS board I am well aware that a tough regulation can drive great results. UK NATS has a price cap of RPI -3.4%. We still managed to beat the profit estimate and keep average delays below the target of 45 seconds, so he could probably be even a bit tougher.

But representing most of Heathrow’s customers I am also well aware that ineffective regulation is a disaster. The BAA made a 10% return on capital employed and EBITDA of 48.8% at Heathrow. How can you justify the decision to allow charges to increase by 86% between now and 2013? Recently Ferrovial has taken a more serious approach on service levels. But, putting Terminal 5 aside, there is much work to do to make sure that Heathrow Hell is and remains history.

Airport infrastructure is too important to leave to the goodwill of changing management teams running a monopoly. The penalties for not meeting service standards were a joke. It was cheaper to pay than to make the needed investments. That’s why we had security queues outside the door. What is needed is regulation that works with tough targets, carrots to reward good behavior and a strong stick for bad performance.

Common-sense approach to Environment

The UK must also re-evaluate its approach to the environment. Environment is an important global issue. According to the IPCC the UK and global aviation both represent about 2% of global carbon emissions. Without a global approach unilateral actions by the UK for aviation cannot bring effective solutions to climate change.

I am proud to say that aviation takes its environmental responsibly very seriously. IATA’s four-pillar strategy is leading industry efforts:

  • Invest in technology
  • Fly planes effectively
  • Build efficient infrastructure
  • And use positive economic measures

The strategy is delivering results. It has saved the industry 59 million tonnes of CO2. This year aviation’s emissions are expected to decrease by 4.5%, 2.5% of that is due to the decline in traffic but the other 2% is efficiency. Airlines invested billions to retire 881 aircraft in the first 11 months of 2008 and replaced them with 1,037 new aircraft that are 20-30% more fuel-efficient. Our target is a 25% improvement in fuel efficiency by 2020 (compared to 2005). Our vision is much more ambitious, to achieve carbon-neutral growth on the way to a carbon-free future with a 50-year time horizon. For an industry that went from the Wright Brothers to the jet engine in the same amount of time, I am convinced that this will be possible.

The industry is united—airlines, airports, air traffic management and the airframe and engine manufacturers. And there are many exciting possibilities. Look at bio-fuels. Airlines and manufacturers are successfully testing new generation bio-fuels that are completely sustainable with the possibility of reducing CO2 emissions by 60% over their lifecycle. We are pushing governments for the certification timeline to move forward to 2010 from the current 2013.

What’s the response of Governments? We see cash grabs painted green with the environment brand. The UK is our worst nightmare. The GBP 2 billion Air Passenger Duty more than covers the UK’s aviation emissions. The government’s decision in November for further increases will make matters worse. And in 2012, when aviation is scheduled to join the European emissions trading scheme, we will pay for emissions another time. It is crazy and it is time to stop. Airlines must cover their environmental impact like all other industries. There is no excuse for double or triple payments. And if Chancellor Darling needs to fund his banking investments, it should not be on the backs of air travelers.

What’s the solution? Leadership. The UK has been at the forefront of the environment debate. If it is serious about solutions, I have two suggestions. First, be a strong voice for a Single European Sky. We have been waiting decades for political leadership to save the 16 million tonnes of CO2 a year that it will make possible and reduce the cost gap with the US. In the single US sky the average ATC cost is EUR 440. In Europe it is 771. By 2012 we need 9 Functional Airspace Blocks operating with a network manager and binding efficiency targets. The 2012 date is deliberate. It is when aviation joins the EU ETS. It is hypocrisy to force airlines to pay for emissions that we don’t want to create. A Single European Sky is a must.

Second, the UK should be a strong voice for a global approach on positive economic measures. A European ETS is illegal as it contravenes the Chicago Convention. I am convinced that legal challenges from ICAO’s 137 non-European states will have the same effect as the hush-kit challenges. Europe will lose. More importantly the regional approach will not be effective in fighting a global problem. IATA is not against ETS. Positive economic measures are one of our four pillars, provided they are global and do not distort competition. We cannot sustain the epidemic of environmentally branded taxes that largely fuelled the US$7 billion increase in our bill last year.

Kyoto asked the International Civil Aviation Organization (ICAO) to handle emissions from international aviation in preparation for the Copenhagen talks. ICAO’s Group on International Aviation and Climate Change (GIACC) will deliver its action plan in September. The UK is a member of ICAO. It has an opportunity, and I would say a duty, to be a strong voice for GIACC to deliver an effective global solution.

Liberalisation

Finally it is clear that the current industry structure—where governments restrict ownership and market access—is also not sustainable. The Chicago Convention is not the issue. Governments have an important role to play in safety, security and setting global environmental standards. After that they need to let airlines get on with business. The bilateral system must change. The UK which, along with the US created the bilateral system, should be a strong force to modernise it. If a Spanish company can buy your major airport or if BMW can own the iconic and very British Mini Cooper, why should BA, or Virgin or bmi be any different?

This industry has over 1000 players because consolidation across borders is difficult, if not impossible. But the case for consolidation is clear. Air France/KLM and Lufthansa/SWISS are strong industry players. I am confident that Delta/Northwest and Lufthansa/bmi/Austrian and Brussels will also deliver efficiencies. And there is no reason why consolidation should be limited to within national or EU borders. In this crisis, we are not asking for cash or bailouts or government investments. We are simply asking for the ability to do business like any other business.

Last year IATA launched Agenda for Freedom. Our goal is nothing more than to provide airlines with the commercial tools to manage their business that every other industry takes for granted. We gathered 15 of the most liberal government players to discuss a way forward. The UK was represented by the EU. We are working with these governments on a multilateral statement of policy principles to kick-start the process. The UK must be a voice for change. Alongside the Agenda for Freedom, the US and EU are looking at the second phase of their agreement on open skies. It is a great opportunity for further change in the most important aviation market in the world accounting for over 60% of all aviation. And I hope that the UK be a strong leader reminding both sides that progress on ownership is a must.

Conclusion

2009 will be a very tough year for aviation—possibly the biggest crisis that we have ever faced. Aviation is important to the UK providing 500,000 jobs and supporting GBP 11 billion in economic activity. As the Government struggles to deliver solutions to restore confidence and re-start economic growth, it must recognise and take advantage of aviation’s power to drive growth.

But to do that, change is needed. That means effectively regulating airport monopolies, replacing cash grabs with coherent global environmental policy and delivering commercial freedoms. This is the start of the list for the UK to regain relevance and leadership in this great industry.

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