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Date: 19 February 2009

The Wings Club, New York

It’s great to be in New York where I began my career at First National City Bank in 1970. Much more recently, an event in this great city reminded all the world of one of our industry’s great good news stories. Only a few weeks ago, Captain Chesley Sullenberger saved the lives of all155 people aboard US Airways flight 1549 with an extraordinary landing on the Hudson.

Safety is our number one priority. Today I am pleased to confirm that the results show in heroic actions and in the numbers. Flying is the safest way to travel. In 2008 we had 1 accident for every 1.2 million flights. And for IATA members it was one accident for every 1.9 million flights. Safety is not a competitive issue. It is a core promise of our industry to the 2.3 billion people who fly each year.

Our goal is zero accidents and zero fatalities. And the tragic events in Buffalo last week remind us that safety is a constant challenge. There were 502 tragic losses of life in civil aviation last year. That is a significant improvement on the 692 in 2007 but these are all human tragedies. And our membership is committed to doing even better. The IATA Operational Safety Audit (IOSA) is now a condition for IATA membership. If an airline is not on the registry it has no place in our association. Our goal is to improve safety not limit our membership. To raise the bar on safety we have invested over US$30 million in programmes worldwide.

We still have some homework to do. Geographically, the Middle East, Africa, Latin America and the CIS all have accident rates higher than the global average. Safer skies are a partnership of governments and industry working with global standards. In each of these regions we have targeted programmes built on IOSA standards. Even in North America, which has a rate better than the global average, there is work to be done. Our two top areas of concern are:

  • Runway excursions - which are a quarter of all accidents. To address this we are working with the Flight Safety Foundation to release a runway safety toolkit in the coming months.
  • Ground damage - We are rolling out the IATA Safety Audit for Ground Operations (ISAGO) to mitigate the US$4 billion damage done globally each year with a similar approach to IOSA.

But let’s keep in focus the events on the Hudson River, which remind us that aviation has achieved an incredible record on safety.

State of the Industry

If we move south to Wall Street, the results are less impressive. 2008 was a roller coaster. We battled oil prices until they peaked in July at US$147 a barrel. Then we battled to keep our passengers as the global financial crisis deepened. December international passenger traffic fell 4.6%. Premium traffic, where we make money, fell faster at 13.3%. And cargo fell off a cliff, with a 22.6% drop. We transport 35% of the value of goods traded internationally so this is clear indicator that the worst is yet to come.

Airlines ended 2008 with a US$5 billion loss. We expect a further US$2.5 billion loss this year. To better illustrate what this means, the industry-wide top line revenues will fall by US$35 billion (6.5%). The industry is getting smaller. Airlines are cutting capacity. The US carriers were particularly effective with early cuts in June last year. Combined with cheaper oil and a stronger dollar, North American carriers will turn the worst losses last year - US$3.9 billion - to basically break-even this year. However, this is the exception. Other major markets will see increased losses—US$1.1 billion in Asia and US$1 billion for European carriers. This is a sick industry in need of strong dose of change.

Airlines

Since 2001 airlines have changed tremendously. Look at our efficiency gains - non-fuel unit costs down 13% and fuel efficiency up 19%. IATA helped. In 48 months we delivered US$3 billion in savings with e-ticketing. But that is not all. Already over 200 airlines use IATA standard Bar Coded Boarding Passes and the conversion will be completed next year. With our Fast Travel programme, common-use kiosks, already live in 136 airports, will work even harder - from scanning documents at check-in to helping passengers find mishandled luggage. Behind the scenes we are reducing the $3.8 billion annual cost of mishandled bags with our Baggage Improvement Programme. By 2010 the e-freight revolution will cover 81% of international air freight. Combined with e-ticketing, the total potential annual savings of these programmes is US$14 billion.

That is not all. Last year IATA saved US$3.5 billion in fuel fees, taxation and infrastructure charges. We worked with 74 airlines to implement best practice in fuel management. We did the same with ANSPs, optimising 214 routes. As a result we saved US$5 billion in fuel and 15 million tonnes of CO2, and we will do more this year.

Where airlines control their fate, business models have changed, products improved and efficiencies have been achieved. But much of our business is beyond our control. We depend on governments for change. In my seven years at IATA my experience with governments has been that most don’t understand our industry, few have vision and almost all are too slow.

I watched with great interest as the United States elected President Obama on a platform for change. I was pleased that newly appointed Transportation Secretary LaHood understood that expanding capacity - not auctioning slots - is the solution for New York’s congested airports. Encouraged, I went to the White House website to see how transportation fits in President Obama’s agenda. Then I got concerned. Transportation was buried at the end of a section on “other issues”.

I understand that the priority is on jobs and the economy. In the US, aviation supports 10.2 million jobs and US$1.1 trillion in economic activity. Aviation can play a pivotal role in economic recovery. Smart investments - not bailouts - in air transport will pay off in even more jobs and boost other industries. Don’t stop with the planned airport investments. Air traffic management is in desperate need of an upgrade. Airlines and airports cannot be efficient economic catalysts if we operate in gridlock.

I encourage President Obama to allocate the needed US$4 billion as a quick start for the long-awaited NextGen upgrade. There will be an immediate return with 77,000 jobs created. And to get the most bang for the buck there is an urgent golden opportunity - Europe is upgrading its airspace management technology along a similar timeline with a programme called SESAR. Harmonising the two is essential and will generate enormous efficiencies across 60% of global aviation.

Aviation Agenda for Change

Alongside this, I would like to explore with you today an aviation agenda for change with three core components:

  • Efficient security
  • A common-sense approach to environment and
  • Basic commercial freedoms

In each of these the United States could play a leadership role protecting and generating employment and business opportunities in the US and abroad.

Security

No part of our business has changed more post September 11 than security… much of this with US influence. Nobody can dispute that we have become much more secure. It is also clear that we are spending much more - US$5.9 billion a year. But I am not convinced that we are much wiser or any more efficient with many of our processes. As travellers our shared experience is hassle and as industry players it is bureaucracy and cost.

It is time for both to change. Change begins with how we make decisions. We have a great record on safety because data drives decisions that result in global standards. What happens in security? Where is the data that tells us that my shampoo bottle is a greater risk than my belt buckle? There is none. And we spent millions to limit carry-on liquids around the globe. Despite the global approach on liquids and gels, mutual recognition of standards is very limited. We still confiscate millions of bottles of liquids from international passengers crossing jurisdictions even though those bottles have been screened and carried on board

Behind the scenes, it is not much better. We were successful in turning around Department of Homeland Security (DHS) plans that would have seen check-in staff working part-time as immigration officers by collecting fingerprints from passengers exiting the US. But we have still not been successful in getting the various branches of DHS to coordinate with each other on the passenger side. We spend millions to send similar data to neighbors within the DHS bureaucracy. On the cargo-side the government has plans to force airlines to spend billions to scan everything loaded onto the aircraft rather than identifying risks with a supply chain approach.

How do we deal with such a complex set of problems? Our experience with safety success gives us some clues. We need a system that is threat-based, risk-managed and cost-efficient with mutual recognition of standards. Security principles must be a part of the corporate structure of all industry players.  Governments must be accountable to show value for every dollar that is invested. Combined, these are the elements of IATA’s renewed security strategy. Our vision for passenger security is a one-stop process. There is no security value in checking people twice against the same parameters. Domestic travel is one-stop, why not international? All governments need to do is recognise standards among like-minded and similarly developed countries - Canada, the EU, Japan, Singapore or Australia.

The President’s Agenda for Homeland Security is to redouble efforts to meet the threats of airplane-based terrorism. Focusing on the threats with a global approach will be a welcome change.

Environment

The second element is building a global approach to climate change. I am pleased to see that the President’s agenda seeks to make the US a leader on climate change. Airlines contribute 2% of global man-made carbon emissions. IATA’s four-pillar strategy to address climate change and reduce this is based on, investment in technology, effective operations, efficient infrastructure and positive economic measures. The industry united behind this strategy when the CEO’s of the major engine and airframe manufacturers, airports, airlines and ANSPs signed a declaration in April last year in Geneva. We committed to the four pillars and a 25% improvement in fuel efficiency between 2005 and 2020. This was also endorsed by 179 governments at the 2007 ICAO Assembly.

IATA has gone a step beyond with a vision to achieve carbon-neutral growth on the way to a carbon-free future. We are partnering with Solar Impulse—a project to fly around the world, day and night using only the power of he sun. Solar power will not be answer to eliminate the 670 million tonnes of CO2 that this industry produces. But when Solar Impulse achieves its goal in 2011 nobody -ever again - can say that carbon-free flight is impossible.

In the meantime we are saving fuel…and reducing emissions. Since 2004 IATA Green Teams have worked with airlines to spread best practice and with air traffic management organizations. The result is an impressive 59 million tonnes of CO2 saved. This year our carbon footprint will reduce by 4.5% - 2.5% will be because of capacity cuts, the rest is efficiency. In 2008 airlines replaced 931 old aircraft with 1,175 modern aircraft with fuel efficiency improvements of up to 30%. Progress on bio-fuels has sped-up exponentially with tests by JAL, Continental, Air New Zealand and Virgin. The results are encouraging enough to see certification as early as next year. That would allow a production ramp up to meet commercial needs.

What do we need from government? We need leadership that helps us to reduce emissions. Governments need to stimulate the economy with green investments like bio-fuel research or with tax breaks for new fuel-efficient aircraft purchases. NextGen - already discussed - has the potential to reduce emissions by up to 12%. And we also need leadership with a global vision. Air transport is global as is the challenge of climate change. The Kyoto Protocol asked ICAO to deal with emissions from international aviation in preparation for Copenhagen. The ICAO Group on International Aviation and Climate Change will produce an action plan in September. The US is one of the 15 GIACC countries meeting this week in Montreal. It must be a strong voice opposing Europe’s unilateral, illegal and ineffective regional emissions trading plans while building consensus for a global solution.

Commercial Freedoms

The last element that I would like to address is commercial freedoms. Thirty years after the US started deregulation under President Carter, the job is still incomplete. International markets are closed until governments negotiate them open and foreign ownership restrictions limit access to global capital and prevent cross-border consolidation.

In a crisis brought on by financial institutions operating with light regulations, asking for deregulation may seem out of fashion. We need and want governments to regulate global standards for safety, security and environment. This is the Chicago Convention and the role of ICAO. But it’s time for the bilateral system, fathered by the US and the UK 62 years ago, to go the way of the paper ticket - framed and in a museum. What worked in the 1940s is killing the industry today.

To manage through this crisis without bailouts, airlines cannot have one hand tied behind their back with outdated restrictions on ownership. There has been some much needed consolidation - Delta with Northwest, Lufthansa with Swiss, Austrian, bmi and Brussels and Air France/KLM with Alitalia. All of these are within political borders.

T-Mobile is a German company that operates the third largest wireless network in this country. The second largest network - Verizon - is 45% owned by Vodaphone of the UK. Why does the US restrict ownership of its airlines to 25%? Why restrict international capital from offering Americans aviation jobs? And why confine US carriers operating in a mature market from developing new opportunities when companies like IBM, DELL or Dupont can operate global franchises?   What is different about aviation? The answer is absolutely nothing.

Because of the rules we have become a hyper-fragmented global industry with over 3,200 players - none of which has a truly global franchise. And we have been destroying shareholder value for decades with an historical return of 0.3%. We need a return of 7-8% just to cover our cost of capital. Passengers don’t care who owns an airline so long as it is safe and provides efficient service. Governments should share the concerns of their people.

Last autumn, IATA took a very unusual step and invited 14 governments and the EU to discuss this issue at our Agenda for Freedom Summit. We found common ground and common vision among the participants and we are working with them on several proposals including a Multi-lateral Statement of Policy Principles that could help drive this process forward. The most important bilateral arrangement on the planet is the US-EU Agreement on Open Skies. Alongside the Agenda for Freedom I am counting on the leadership of the US and Europe to take their agreement a major step forward in the second round talks. I hope that early in President Obama’s term we will be able to change the structure of aviation - not with bailouts but with commercial freedoms. Our goal is give airlines the tools to deliver sustainable profitability that generates value for investors and a more secure future for our workers.

Conclusion

In these difficult times there are no easy answers for business or for political leaders. Our agenda, however, is low risk. The value of global standards for security has been proven with our success in safety. Our four-pillar strategy on climate change is reducing emissions and the numbers tell us that without commercial freedoms this industry is not financially sustainable. I hope that your new President will find ways to incorporate these changes into his plan to restore the economy.

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