Date: 20 August 2009
British Chamber of Commerce, Sao Paulo
It is a pleasure to be in Sao Paulo and thanks to the British Chamber of Commerce for hosting this breakfast.
Brazil is an important player in global aviation. IATA has a special relationship with this country. TAM is an active and supportive member of IATA and we work with all the major players such as GOL/Varig, Webjet, Azul, Ocean Air and ABSA. IATA also partners with Embraer, a top player in the global aerospace industry.
The IATA office, established in 1978, has both BSP and CASS operations. These are the financial backbones of the international aviation industry. In Brazil, we process over US$3 billion in settlements annually, for 40 participating airlines, 2,200 agents and 550 freight forwarders.
This gives us a unique insight on the business. Times are tough. In 2008, airlines lost US$10.4 billion. It started with high oil prices in the first half of last year. Today, the sick global economy is destroying airline profitability. Nobody knows how long the recession will last or how deep it will be. International freight traffic is a barometer of economic health. Airlines transport 35% of the value of goods traded internationally. Cargo hit bottom in December at -23%. June was -16.5%, which is better, but not a recovery. Passenger demand has stabilized around -7% but heavy discounting means that international premium revenues are down 30% or worse. We expect a US$9 billion loss this year.
Airlines are in survival mode. Conserving cash, managing capacity and cutting costs are the three “Cs” of survival. Getting them right is not easy. Airlines completely transformed their businesses after 9/11. IATA helped with our Simplifying the Business program. Key elements of this program, including common-use airport kiosks and e-ticketing, delivered US$4 billion in savings and have made travel more convenient. We are working on an additional US$10 billion in savings with programs to improve the efficiency of airport processes, baggage handling and e-freight.
Today’s situation is more difficult than after 9/11. Airlines face the simultaneous challenges of the financial crisis, the impact of Influenza (A)H1N1 on passenger confidence, the industry’s response to climate change, the need for radical global restructuring and questions about our safety record following recent tragic accidents.
Brazil faces these challenges at a critical turning point in its aviation development. In February, Minister Jobim put in place a new Civil Aviation National Policy that set a broad policy direction from safety and environment to growth and operational efficiency. Air transport supports 2.6% of Brazil’s GDP. More than US$40 billion of business and thousands of jobs depend on the success of this industry. The entire economy benefits from a competitive aviation sector. To be successful, Brazil must make some important decisions to change the industry at home and to influence global policy on key issues.
Fiscal and Infrastructure Handicaps
To start, Brazil must use the national policy to build a more competitive industry by addressing major fiscal and infrastructure handicaps. I am encouraged by some positive developments. In May, the liberalization of fares was a step in the right direction. Eliminating the PIS/COFINS tax on jet fuel is another good example. This is improving the competitiveness of Brazilian aviation by US$100 million a year. But Brazilian jet fuel prices remain high because of the Petrobras import parity pricing policy. This adds 30 cents to every gallon of fuel sold in Brazil and makes no sense for a country that supplies 80% of its jet fuel needs domestically. The annual burden is US$450 million for Brazil’s airlines. Fuel is 32% of costs for Brazil’s airlines, far more than the global average of 23%. We are working with the government on a new formula to bring prices in line with market realities.
Along with fuel pricing, infrastructure needs urgent attention. Air traffic management improved significantly from the chaos of a few years ago. Today the issue is the airports. I am pleased that the government is looking at concessions. Private investment with the right conditions can help improve infrastructure. But we have seen more failures than successes because too often governments are keen for the cash and forget effective regulation. Airports are monopolies that have an important role in driving economic growth. Concessionaires must have robust independent economic regulation to ensure that the airport is run efficiently, serves and consults its customers effectively and drives economic development.
You do not want to follow Quito’s example. The airport is a cash cow for the investors but a nightmare for airlines and travelers. Without effective regulation, charges increased 79% since 2005 with no improvement in facilities. For Brazil, ANAC is in the best position to deliver robust independent economic regulation. It can only do this if it has the teeth to do the job effectively and if it is independent of political pressure.
Potential investors will also demand transparency in funding. The opaque ATAERO tax must be eliminated. Airlines should pay for the infrastructure that they use but that does not happen in Brazil. INFRAERO charges do not equally recover the costs for each individual airport. On top of this, airlines pay a 50% surcharge known as ATAERO to cover gaps. This is an unacceptable US$370 million financial mistake. What happens? Funds from Sao Paulo and Rio de Janeiro airports are used elsewhere instead of making much needed improvements at those airports with a large portion of ATAERO fees siphoned off for non-aviation uses.
Airlines and passengers are being overcharged and all of Brazil’s aviation infrastructure is suffering. On top of being a domestic disaster, ATAERO is an international embarrassment as it does not comply with UN policies developed through ICAO where Brazil has a seat in the Council. IATA’s position is clear. INFRAERO must be funded on a cost recovery basis with charges that are transparent, agreed with users and compliant with international standards.
Sao Paulo is a good example of why Brazil needs to address these issues. It is no secret that Guarulhos is congested and needs an urgent solution. Turning away aircraft with congestion pricing is not a solution. Every aircraft that does not land means lost jobs and lost economic opportunity. IATA’s Worldwide Scheduling Guidelines are helping airports around the world deal with congestion. They do not eliminate the congestion but manage it effectively. Once ANAC formalizes Brazil’s participation, the guidelines will be a big help in managing traffic at Guarulhos as well.
Congestion is not just on the runways. Terminals need upgrading, particularly in advance of the World Cup. Airlines cannot afford to pay for great cathedrals. So I am skeptical of grand plans for over-built new terminals. Before spending any money, INFRAERO needs to look at the existing terminals in consultation with the airlines. Together they must decide on plans starting with making the most of existing infrastructure.
An effective aviation sector is a key driver of competitive economies. The new civil aviation national policy can help drive Brazil’s economic growth if it focuses on reducing costs, improving efficiency and meeting customer needs through effective consultation.
Alongside these local issues, Brazil has an important role in global air transport. Putting the economic crisis aside, the top global issues are: safety, H1N1, environment and liberalization. Let me address each of these separately, starting with safety.
In May, the Air France Flight 447 accident was a reminder that safety is a constant challenge. The cooperation of the Brazil authorities in finding the wreckage and the investigation is a great example of how aviation became the safest form of transport. Two other tragedies followed, with one in Iran and one in the Comoros. In total, there were 49 accidents this year, 11 fatal. That is fewer than at the same point last year. The accident rate has improved, but the number of fatalities is now over 650.
Flying is safe. But these accidents tell us that we have more work to do on our number one priority.
The IATA Operational Safety Audit is a condition of IATA membership. Since April, all of our members are on the registry. TAM is on the registry as is ABSA. And it was a pleasure to present GOL its registration on Tuesday. Many governments, including Brazil, have mandated IOSA for their airlines. This is a good example of a proactive government in a region where safety is still an issue.
In May, we had another shock with H1N1 in Mexico. Years of preparation for Avian Flu, following our experience with SARS, meant that the industry was ready. IATA worked hard to spread the World Health Organization message that travel restrictions would not help in fighting H1N1. Most governments understood the message but public confidence in travel took a beating.
One lesson was learned. The WHO six phase scale efficiently tracked H1N1’s geographical spread but it did not indicate the severity of the disease. This is a critical element for industry and government to react appropriately. One solution could be to implement a color scale to accompany each of the six phases. This pandemic is far from over and is most intense in this region. The challenge in the coming months will be to communicate effectively and coordinate globally under WHO’s direction. Brazil’s initial unilateral and costly approach was a disappointment. I hope that Brazil will now take a leadership role to keep governments in the region focused on effective measures.
Later this year, governments will meet in Copenhagen to plan for the post-Kyoto period. Global awareness of climate change started with the 1992 Earth Summit in Rio leading to the Kyoto protocol. This established the first global framework for emissions reductions and gave ICAO—our UN counterpart—the responsibility for aviation’s international emissions. Environmental responsibility is a core promise for aviation along with safety.
In June, at our Annual General Meeting in Kuala Lumpur, airlines committed to three targets:
- A 1.5% annual improvement in fuel efficiency to 2020
- A 50% absolute cut in emissions by 2050
- And carbon neutral growth by 2020
Carbon neutral growth was a bold decision. No other global industry has committed to achieve this, let alone in 11 short years. The industry - airlines, airports and manufacturers - is united in its four-pillar strategy to achieve the goals by investing in new technology, more effective operations, more efficient infrastructure and positive economic measures.
This year we expect our carbon footprint to shrink by 7%, including 5% due to the economic recession and 2% as a direct result of the strategy. Now we need governments to be equally committed. To start, governments must improve air traffic management. We also need governments to take biofuels more seriously. Our focus is on sustainable source-crops such as babassu, camelina, and algae. Already four test aircraft have flown on sustainable biofuels. As a leader in biofuel technology, I hope that the Brazilian government will provide the fiscal and legal framework to encourage serious investments by fuel companies and others.
Most importantly, we need governments at Copenhagen to adopt a global sectoral approach for aviation which was recently endorsed by G8 Leaders in L’Aquila, Italy. This considers two important facts; a single flight can cross many borders and aviation is an industry that was built on global standards. Accounting for aviation’s emissions at a global level rather than by state makes sense.
Brazil is a major player both at the UNFCCC and ICAO. Brazil has the leadership responsibility to ensure that ICAO can bring to Copenhagen a position that represents the aviation industry’s globally harmonized approach for controlling emissions. This is in the best interest of the environment. We cannot allow the UNFCCC’s principle of common but differentiated responsibility to stand in the way of effective global solutions. We count on Brazil’s support for the aviation industry’s ambitious global goals and targets.
Lastly, I would like to spend some time on liberalization. Brazil is the 10th largest economy in the world but has only 13 million international air passengers. That is only a third of what markets like Thailand and Singapore have annually with much smaller economies and populations. As a result you are not maximizing the economic benefits of air transport. Part of the problem is the very traditional protectionist policy approach of the bilateral system.
Unlike any other industry, airlines need a government treaty to sell its product and airline mergers are limited by archaic foreign ownership restrictions. Late last year, Brazil took two historic leadership steps. First, it accepted our invitation to join IATA’s Agenda for Freedom meeting in Istanbul. The 15 invited governments focused on finding a way to give airlines the commercial freedoms that every other industry takes for granted. We are now working on a multi-lateral statement of policy principles to promote a more normal approach for aviation. CONAC’s recent proposal to increase foreign ownership possibilities to 49% would be a step in the right direction and I hope that Brazil will be one of the first signatories when the group plans to meet again in November.
The second action was almost immediately after the summit when Brazil signed a very liberal agreement with Chile. The sky has not fallen but opportunities for travel between Chile and Brazil have expanded.
IATA recently studied the potential impact of further liberalization. Liberalization of ownership and market access could generate 400,000 jobs in Brazil and add 24 billion (1) Reais to Brazil’s economy. The stakes are high! I hope that Brazil, as the region’s largest economy, can take leadership to promote liberalization in Latin America and globally.
If I have given you the impression that aviation is an industry in crisis, that is correct. Urgent policy action is needed. Not for bailouts but to provide the tools for aviation to fulfill its role as a catalyst of economic activity: cost-efficient infrastructure, fair charges, reasonable fuel prices, an effective approach to environmental responsibility and the freedom to do business while maintaining safety as the top priority.
At the same time, I hope that I have left you with a sense of hope. Air transport was built by turning the dream to fly into reality. We have met many challenges in our past. We will survive this crisis too. Brazil is at a turning point. Decisions in the coming weeks and months will change the course of aviation in Brazil with a potential big impact on the economy. IATA is here to help as a partner, building a Brazilian aviation sector that will be greener, safer and a profitable driver of the economy.
(1) Approximately US$13 billion at prevailing exchange rates