Date: 19 March 2009
Malaysian International Chamber. Kuala Lumpur
Kuala Lumpur will soon be the focus of the global air transport industry. I am here to prepare for the IATA Annual General Meeting and World Air Transport Summit which Idris and the Malaysia Airlines team will host from June 7 to 9.
For those of you not familiar with IATA we are the global association of the world’s airlines. IATA’s 230 member airlines carry 93% of scheduled international traffic. Our Kuala Lumpur office, opened in 1993, now handles nearly US$1.4 billion in our US$350 billion global settlement system. For our AGM we expect over 700 industry leaders to visit this wonderful city.
State of the Industry
They will help build the industry strategy in the face of this global economic crisis that challenges us all. Just look at the numbers. January passenger traffic was down 5.6%. Premium traffic, where airlines make their money, was off 16.7%. And cargo is a disaster with a 23.2% fall. The only good news is that the spot price of fuel is low. Unfortunately immediate relief is being delayed by hedging at higher prices. Our last industry forecast made in December was for a US$2.5 billion loss in 2009 based on a 3% fall in passenger demand and a 5% drop in cargo. This is now looking very optimistic and next week we will issue a revised forecast.
State of Asia
The global numbers are bad and the Asian numbers are a nightmare. In December we projected a US$1.1 billion loss for Asia’s carriers, the worst performance in the industry. The shocking slowdown in Japan - the region’s largest market, and China - the region’s fastest growing, makes this forecast look optimistic.
January passenger traffic in the region was down 8.4%. Capacity cuts at 4.3% were aggressive but business is disappearing faster. Cargo was down by an unprecedented 28.1%. This region’s carriers are the biggest players in cargo - with 44% of the market. As air cargo transports 35% of the value of goods traded internationally, the poor cargo performance is bad news for the region and the global economy. World trade is falling off a cliff. Malaysian exports fell by nearly 28% in January.
The world has never seen such a fall. The recovery will bring change. Asian countries, Malaysia included, cannot rely on debt-fuelled Western consumer spending to drive their economies. Governments will have to find policies that balance the risks with stronger domestic and regional economies. Until confidence returns to the global economy, tough times will continue.
Battling the Crisis
As businessmen in such a difficult environment, what can we do? Cut costs, adjust capacity to demand, simplify processes and encourage innovation everywhere. IATA rose to these challenges and delivered results that went directly to the industry’s bottom line.
We started with what we can control. First, we made sure that our US$350 billion settlement system was robust enough to meet the challenges of an unstable global financial situation. We protected ourselves against airline and travel agent failures. What we had not seen as a threat was the potential collapse of our banking partners. None-the-less we made it through 2008 without missing a payment even in some very difficult circumstances.
On June 1, we delivered 100% e-ticketing delivering US$3 billion in savings to the industry. Our Simplifying the Business programme has identified US$11 billion in additional savings by using technology to make travel and shipping more efficient and convenient.
These include many programmes being implemented here in Kuala Lumpur with two of our strongest partners - KLIA and MAS. Bar coded boarding passes - used by more than 30 airlines at KLIA - will help the industry to save US$ 1.5 billion by enabling web and mobile phone options. Common use self-service kiosks are already in use at KLIA. Our plan is to make them work harder. By the end of this month KLIA will be among the first airports in Asia with kiosks that can capture passport information to be transmitted to government agencies. Our plans for kiosk-based self-service options from check-in to mishandled baggage claims have the potential to save the industry US$1.6 billion. We are now testing the improvements of our Baggage Improvement Programme launched at KLIA in October. This will contribute to total potential industry savings of US$1.9 billion. And finally there is a US$4.9 billion revolution in air cargo with our e-freight programme. Malaysia will join this later this year.
We also delivered results on costs beyond our control. Airlines pay monopoly suppliers nearly US$50 billion a year - or 10% of our revenues to land, for their fuel supply and for air traffic control services. Working with industry partners we achieved US$3.5 billion in efficiencies that are savings to the industry. Fuel represents 32% of our costs - about US$174 billion in 2008. That is a 400% increase over 2003. Our strategy is focused on using fuel more efficiently.
Working side-by-side with our member airlines our Green Teams promoted best practices in fuel management saving between 3 and 12% on their fuel bills. And we also worked with airports and air navigation service providers to shorten routes and reduce delays. Combined these efforts saved US$5 billion.
The industry is in survival mode. Nobody yet knows how deep or how long this crisis will be. Every efficiency gained is a battle won. I have to congratulate Idris on the great job of turning Malaysia Airlines around. With his impossible targets many thought that it could not be done. But he has built a solid foundation for the airline’s future. At the same time the success of Air Asia shows that the demands on this industry are dynamic and can be efficiently served with various business models. Who benefits? The Malaysian economy.
I mentioned earlier that Asia Pacific carriers are the largest players in the global air freight market. And even with this recession we still expect Asia Pacific to become our biggest single market in a few years. Air transport is the lifeblood of the global economy. IATA’s member airlines help support 32 million jobs and US$3.5 trillion in economic activity.
Malaysia has benefited greatly with expanded export markets for high tech and enormous possibilities for tourism which is 13% of Malaysia’s GDP. Even in the middle of this economic crisis, we must not lose sight of the fact that this crisis will be over some day. And an efficient air transport industry will continue to play a significant role in driving Malaysia’s economy.
Malaysia has always prided itself on efficient transport infrastructure. KLIA was a visionary achievement and the country should get the maximum from your investment. Now the challenge is to keep KLIA as competitive as possible to support tourism and international business. In this tough climate all businesses, including airports, need to look for ways to do more with less. Two recent important decisions will help.
First, Dato Seri Bashir and the KLIA team were instrumental in an important decision. KLIA will reduce its charges by 50% for two years starting in April. KLIA is one of our good partners understanding that a low charges policy benefits passengers, airlines, the airport and the Malaysian economy. So we should also be looking at long-term ways to keep costs competitive and low. Second, the decision to drop plans for a new airport at Labu was a good one. It keeps the focus on developing KLIA as the nation’s hub. In doing so, the priority must be on providing efficient infrastructure that delivers low costs for all airlines.
Building a low-cost terminal presents some challenges, particularly on charges, to ensure that it contributes to the overall success of KLIA. First, charges for common facilities and services including landing and security charges must be equal. Second, we need transparency to ensure that airlines and their customers pay for what they are using. Cross-subsidisation is not acceptable. And finally, the opportunity to use either facility must be available to all airlines. These are the agreed principles of ICAO - The International Civil Aviation Organization. As a council member of this UN body, I am confident that Malaysia will fully comply. I would also like to encourage Malaysia to take these good decisions keeping costs low and focusing on KLIA. To get the greatest economic benefit from its airport investments Malaysia needs a long-term strategic plan for air transport
Building the future
This crisis also gives us an opportunity to make some critical changes - for survival today…and a solid future tomorrow. Our AGM will focus on environment and liberalisation. Malaysia can take a leading role in both.
This is a critical year for the environment debate. The decisions at December’s Climate Change Conference in Copenhagen will be the most significant since Kyoto in 1997. Political leaders must balance growth with environmental responsibility.
What is air transport doing about its 2% contribution to manmade CO2? We have a four-pillar strategy: to invest in technology, build efficient infrastructure, operate aircraft effectively and use positive economic measures. One year ago all the major industry players - from manufacturers to airlines, airports and air traffic control providers - signed a declaration committing themselves to the four-pillar strategy.
IATA’s target is a 25% improvement in fuel efficiency by 2020. No other industry has shown a commitment this strong. It is not just words. The results are impressive. This year airline CO2 emissions will shrink by 4.5%. About 2.5% of this comes from capacity cuts and the rest is the direct result of our four-pillar strategy. There is a great example here in Malaysia. Malaysia Airlines, Singapore Airlines and AirAsia are working with KLIA to implement continuous descent approaches that could save between 160 and 480 kg of carbon on each landing.
Our vision is for carbon-neutral growth in the near term and eventually a carbon-free future. When I announced this at our Vancouver AGM in 2007, many thought it was impossible. We are working with the explorer Bertrand Piccard and the Solar Impulse team. In 2011 they will fly around the world - day and night - using only the power of the sun. Solar power is not the answer for commercial aviation but it proves that carbon-free flight is possible and gives hope for commercial solutions such as bio-fuels.
Only a few years ago flying an aircraft on bio-fuel was a pipe dream. Japan Airlines, Continental, Virgin and Air New Zealand have proven that wrong. Their tests with real aircraft showed that bio-fuels could meet tough technical requirements for low freezing points and high energy content. New generation bio-fuels such as algae and jatropha are completely sustainable, do not compete for land or water with food production and work with existing aircraft and engines.
We could see certification as early as next year. Malaysia could play an important role with the expertise of Petronas.
Unfortunately, while we struggle with technical achievements, Western governments pile environmentally-branded taxes on the industry. By 2012 the UK’s Air Passenger Duty will add GBP 85 to the cost of every Malaysian vacation starting in the UK - GBP 170 if the travel is in a premium class. On top of that ETS proposals in Europe, the US and elsewhere could add billions more in cost. Each dollar added to the cost of travel to bail-out the bankers puts Malaysian jobs at risk - particularly tourism.
Malaysia must be a strong voice to fulfil the vision of Kyoto with a globally coordinated ICAO solution. By September ICAO must produce an action plan for the Copenhagen conference in December. All ICAO member states - especially council members like Malaysia - must prove that they are as committed to the industry with an effective global solution.
We also face another risk which will impact all of us as governments in crisis mode shore up their economies. We are seeing national approaches which could reverse some of the benefits of globalisation. International business needs connectivity to bring tourists, or sell products. We must counter de-globalisation with greater commercial freedoms for airlines to serve global markets even more efficiently.
The freedom to sell products globally is something that every other business takes for granted. Airlines are the exception. Markets are closed until governments negotiate them open. And foreign ownership restrictions have resulted in a hyper fragmented industry of 3,200 players that have been destroying shareholder value. Over the last six decades airlines generated a margin of 0.3% - not even enough to cover our cost of capital. Government “protection” has made air transport vulnerable to economic shocks.
Today’s crisis should send a strong message to governments that we must modernise the rules of the game. At our last AGM in Istanbul we launched the IATA Agenda for Freedom. Our goal is to give airlines the same commercial freedoms that everyone else in this room probably takes for granted. We are working with 14 governments and the European Commission on proposals to deliver change quickly, particularly on ownership.
Malaysia is a good example of the benefits of liberalisation. Opening of the KL to Singapore route spurred a 50% increase in capacity . A similar 37% increase occurred when Malaysia and Thailand traffic was opened up. This crisis is an opportunity to go even further - faster. The plan is already in place with the ASEAN Roadmap for Integration of Air Travel Sector (RIATS). But the region missed the December 2008 deadline to open markets between capital cities on a multilateral basis.
Malaysia can demonstrate the benefits of liberalised markets for both business and tourism. I count on you to push strongly for a Single Aviation Market in ASEAN including market access and ownership by 2015. And, as governments are tempted by the crisis to build economic walls, I hope that MICCI will be a strong supporter for the opportunities and benefits of global access.
Air transport has brought enormous and positive developments to the people and businesses of Malaysia. I congratulate the Government on its leadership and the industry for effective execution. The elements for success are in place - excellent infrastructure, reasonable costs and innovative airlines.
But we cannot be complacent. Changes in the global economy have never been so dynamic. To weather the storm and build the future, a long-term strategy to keep Malaysian business competitive is essential. Malaysia must be a strong voice driving change and innovation to make the industry even greener while opening new commercial opportunities.
This year’s AGM will be one of the most important for our industry. I can think of no better place to meet than Kuala Lumpur. As the face of Malaysia’s international business and key stakeholders in our success, I encourage you to follow our discussions closely.