Date: 19 October 2009
AACO 42nd AGM, Jeddha
Jeddah, Saudi Arabia
State of the Industry
The global economy is starting to do business again. Cargo volumes are 12% better than December when we hit bottom, but we are still 16% below pre-crisis levels. Passenger traffic is similar, 6% better than the bottom but still 5% below the peak. Planes are fuller but yields are a disaster. US$80 billion will disappear from the industry top line in 2009. That’s a 15% drop in total revenues. Airlines face another year of big losses - US$11 billion.
Middle East Focus
Against this grim backdrop, the Middle East and North Africa region is the only one that is growing. So, it is a pleasure to join you not just because of the great Saudi hospitality, thanks to Khalid Almohem and all the Saudi Arabian Airlines team but also because the Middle East is an oasis of some good news at a very difficult moment for the industry.
Over the first 8 months of the year, passenger demand in this region is up 8% and capacity expanded by 13%. That growth has not yet translated into profitability. Some of you are making money, but many others are in the red. The bottom line is a US$500 million loss, half the loss from last year.
Growth is good but if it does not generate profits, the business is not sustainable. I see some encouraging signs. The region’s wide-body fleet will expand by 8% this year, in line with demand growth. And aircraft utilization in this region is improving at a time when other parts of the world are adjusting capacity by using their fleet’s less efficiently.
The challenges of growing markets are not just in managing capacity. Key issues include safety, cost control, liberalization and environment.
Safety is always our top priority even in this industry crisis. We achieved 100% IOSA registration, an historic milestone. Congratulations to all. But three tragic accidents in this region so far this year remind us that safety is a constant challenge. As of the end of September, the region’s accident rate is 6 times worse than the global average. Flying is still safe but it is a wake up call for all of us.
Our industry has shown a strong commitment to safety through IOSA. In 2006, ACAC made a commitment to require IOSA for all carriers flying to and within the region. So far, only Syria and Egypt have mandated IOSA. Our message to governments in this region is that it’s time for more to come on board and deliver on their commitment.
In a crisis, cost control is critical for airlines and for their partners. When US$80 billion disappears from industry revenues everybody must tighten their belt. We worked closely with AACO to spread this message through the region. At the same time, commercializing some airports is changing the nature of the partnership. Governments must provide the right incentives for efficiency—regulation with teeth.
One of the first big challenges has been a failure. The Government of Jordan signed a BOT agreement with AIG to build a new terminal at Queen Alia International Airport. AIG—the concessionaire, can increase charges without a requirement to consult the airlines and, 54% of the gross revenue goes to the government. The regulator is a business partner of the concessionaire.
The government of Jordan has always had a progressive vision for aviation as an economic driver. I am surprised that the Government of Jordan ignored the ICAO principle of user consultation in concluding this agreement. This must be changed. Consultation would not deny the airport profits but we must ensure that everyone is focused on efficiency.
Liberalization is another challenge of growth. The last AACO AGM was on the eve of IATA’s Agenda for Freedom Summit in Istanbul. The goal of the summit was to focus governments on commercial freedoms. This industry can no longer afford the archaic restrictions on market access and ownership that were agreed 65 years ago with the bilateral system. The flag on the tail cannot secure the future of this industry. Aviation is not a diplomatic activity. We are businesses with bottom lines to protect.
This crisis makes it absolutely clear that progressive liberalization with competition on a level playing field and global investment opportunities must mark the way forward. Next month, some key governments from the region will join other forward-looking governments to play a leadership role in liberalization at our Second Agenda for Freedom Summit to be held in Montreal. Our mission is to facilitate the signing of a Multinational Statement of Policy Principles that will help light the way to commercial freedoms. Our goal is to help governments develop effective tools to make this a normal industry capable of generating sustainable profits.
The biggest challenge to growth is the environment. How we deal with climate change will shape our industry’s future. Our four-pillar strategy has saved nearly 70 million tonnes of carbon. Saving carbon is good business. It reduced the fuel bill by around US$13 billion.
How did we achieve this?
- By working with airlines, in 2009, our Green teams have helped 73 airlines in implementing best practice in fuel efficiency. This includes 6 airlines in this region with total savings of US$80 million
- By working with governments and ANSPs, we shortened 244 routes, including 7 in this region this year
- By working with airports and ANSPs to implement Performance Based Navigation Procedures at over 156 airports—including 7 in MENA
- And by working with manufacturers to plan more efficient aircraft and retro-fit the existing fleet
Driving Efficiency in MENA
A good example of progress involves Jeddah, our host city. I thank Saudi Arabia and Jordan for opening T559. This shortens travel between Amman and Jeddah and on to Sana’a and Aden by up to 10 minutes, saving 9 million kg of CO2.
We need the cooperation of ANSPs to accommodate growth and improve environmental performance. Airlines in this region have invested in the most modern aircraft. The onboard capabilities are much more advanced than the ATM infrastructure. The world is moving towards
Performance Based Navigation and user-preferred routes. This region should start thinking beyond national borders. Why not have a United Arabian Sky with seamless air traffic management and common technology standards? The time to invest is now, before the problems of growth become acute. Governments must start thinking, coordinating and investing as a region.
Returning to the global perspective, carbon emissions will fall by 7% this year - 5% from the recession and 2% from our strategy.
Three areas have the greatest potential for future reductions:
- Fleet renewal
- Better air traffic management with NextGen and Single European Sky along with joined-up regional thinking in other parts of the world
- Sustainable biofuels with the potential to reduce our carbon footprint by up to 80% provided governments develop supportive legal and fiscal frameworks.
Setting Challenging Targets
Mapping out this potential at our June 2009 AGM, our board agreed three tough targets:
- Improving fuel efficiency by an average of 1.5% per year though 2020
- Stabilizing emissions with carbon-neutral growth from 2020 and
- Cutting net emissions in half by 2050 compared to 2005.
After the AGM we worked with airports, ANSPs and manufacturers to develop a united industry position. National solutions for power plants or factories will not work for a global aviation industry. So we defined a global sectoral approach for aviation in the post-Kyoto framework. The key elements are
- That aviation’s carbon emissions be accounted for as a global sector, not by state
- That aviation is fully accountable for its emissions but with no double-taxing or double-counting and
- That aviation must have access to global carbon markets until technology can provide the ultimate solution.
A United Industry at ICAO
I appreciate AACO’s endorsement of the targets and vision, in line with all other regional associations.
On behalf of airlines, airports, ANSPs and manufacturers, I presented our united strategy to ICAO’s High Level Meeting on International Aviation and Climate Change. At the meeting, we learned some important lessons.
First, some governments strongly support our position. I applaud the leadership of UAE and Egypt for the key role that they played. But we have some homework to do to bring on board Ministries of Environment who have not yet realized that managing aviation’s emissions must be done by the experts. In the UN family, that means ICAO.
The second lesson was that our responsible approach to reducing emissions is far ahead of governments.
The ICAO declaration was positive but it was not easy to achieve. At one point, it looked like governments would not be able to agree. I shouted politely, maybe even impolitely, that failure to achieve an agreement would be an enormous embarrassment.
The declaration contained some important references. First, that aviation and climate change should be handled through ICAO and that industry and governments must work together. Second, they noted our targets. But their commitment was to a 2% annual efficiency improvement to 2020 and then beyond to 2050 as an aspirational goal.
It is unique and ironic that the industry’s targets (carbon-neutral growth by 2020 and cutting emissions in half by 2050 compared to 2005 levels) are tougher than the targets of our regulator.
Importantly, the door is open to a global sectoral approach. But we must sell our position before Copenhagen.
On Monday, I had the honor to meet UN Secretary-General Ban Ki-moon in New York at the UN Headquarters. He was impressed by our commitment, results, vision and unity. He said that we are a role model for industry-government cooperation within the UN framework. I am pleased to say that the Secretary-General offered his full support for our position in Copenhagen.
This Friday, I will be in Delhi with Nobel Prize laureate Dr. Pachauri, Chairman of the IPCC. The IPCC is a UN organization and is the official source of scientific knowledge on climate change. Their support will be another badge of credibility.
We cannot be naïve. The politics of climate change are enormously complicated. We saw this at ICAO. The gap between the UNFCCC principle of common but differentiated responsibilities and ICAO’s global standards almost de-railed the meeting. The stakes at Copenhagen are even higher. Failure to address aviation effectively could cost us tens of billions of dollars in uncoordinated economic measures, taxes and charges.
But I am confident. ICAO delivered a solution on noise that was tough but fair to all. Chapter 3 aircraft were phased out with a seven year transition period and special conditions for developing nations. And, as an industry, we achieve impressive reductions in noise. With the right political will among governments, ICAO can find a solution for emissions.
In the meantime, industry is on the moral high ground addressing climate change with a clear and global plan to reduce emissions. We have 8 weeks to Copenhagen. During that time, our united message to governments is simple. Give us a global sectoral approach under ICAO and we will deliver on even tougher targets than those set by our regulators. Now, governments must sort out their politics so that they don’t stand in our way.
We are part of a wonderful industry connecting 2.2 billion people annually, shipping over 43 million tonnes of cargo, supporting employment for 32 million people and US$3.5 trillion in economic activity. The spectacular growth in this region reminds us of the power of aviation to drive economic development.
We are also an industry that faces some big challenges. We are meeting them with speed, passion and commitment. Only 28 months have passed since our Vancouver AGM when I launched my vision for a carbon-neutral growth on the way to a carbon-free future. Look how far we have come. We have delivered results - 70 million tonnes of CO2 savings. We have future possibilities and biofuels are a great example. Our industry is racing ahead of governments with a united strategy and ambitious targets. The Secretary-General of the United Nations has commended our industry as a role model for others to follow.
My crazy dream, with your cooperation and support, is becoming a reality. The next big challenge is COP 15. I count on your support to bring governments in this region on board with our great industry story and challenging future ambitions. Our success in Copenhagen is our shared responsibility.