Date: 30 November 2009
Royal Aeronautical Society, Montreal
I am honored to deliver the annual Dr. Assad Kotaite lecture. Being in ICAO headquarters is a strong reminder of the tremendous positive influence that Dr. Kotaite has had in shaping modern aviation. In line with that perspective, I shall focus my remarks on a long-term vision for this industry’s future.
The Situation Today
First, what is the situation today? The aviation industry is in crisis. Since 2001, airlines have lost US$53 billion. That includes losses of US$16.8 billion in 2008, the biggest in our history and US$11 billion this year. We are forecasting a further US$3.8 billion loss next year. Look into the detail behind these numbers and you see enormous shifts on key parameters.
What happens to the fuel price impacts the business. In 2001-2002, oil was at US$25 per barrel and fuel was 13% of our costs. In 2008, oil averaged US$99 per barrel and it was 32% of our costs. This year we expect a price in the middle, or about US$61 per barrel for an average of 25% of our costs.
The impact of these swings in dollar terms is enormous. From US$43 billion in 2001 it grew to US$172 billion last year. This year we expect a bill of US$115 billion. This cost is completely outside of our control. Normally prices rise when the economy is doing well but oil prices doubled since the beginning of the year even as unemployment continued to rise. The conclusion is oil price is volatile and we can expect the unexpected.
Demand has a completely different profile, it more closely follows what is going on in the economy. In 2001, 1.6 billion people flew. This year, we expect 2.2 billion travelers. Thanks to aviation, the world is more mobile today than at any time in our history and the number of travelers grows every year.
Since 2000, there were only two exceptions. In 2001, the number of travelers fell by 2.7% and this year, we expect a 4.0% fall. There is a similar profile for cargo which is a leading economic indicator. In this current cycle cargo traffic hit bottom a year ago with a 25% decline last December. This told us that the global economy was in serious trouble. It has recovered some ground but it is still about 18% below early 2008 levels. This indicates that this recession is far from over.
Today’s economic crisis will not, however, change the long-term growth pattern. We hit economic speed bumps from time to time, some bigger than others. But eventually we will return to a growth path that is normally twice the speed of GDP expansion even if all regions will not grow at the same pace. North America and Europe may be reaching maturity but we can expect fast growth in China and India.
The general trend on price shows that travel is more affordable now than ever. Over the last decade and a half, the real price of travel fell by a third. It’s good for consumers and a headache for airlines. Yields are a disaster: -14% in economy, -18% in premium and -20% for cargo. Our past experience has shown that yields never really recover. Intense competition ensures that travel will continue to get cheaper.
As an industry association representing 230 airlines (93% of scheduled international traffic), IATA’s responsibility is to help its members. In this crisis our focus is on solutions that help airlines to improve efficiency. IATA’s settlement systems safeguard US$360 billion of our members’ money.
Our user charges campaign has achieved savings of over US$16 billion since 2004 and our fuel program with shorter routes and best practice in fuel management saved US$14.5 billion in the same time frame.
These are just a few examples but let’s turn to longer-term strategic issues for an industry that is losing money, has volatile costs, expects demand to grow and needs to become profitable at lower prices.
The broad issues that I see with the greatest impact on our future are safety, security, Simplifying the Business, air traffic management, liberalization and the environment.
These issues are common to airlines and governments. Their solutions will be found through cooperation and global standards that have been the hallmark of aviation. Let’s examine each individually.
Safety is our top priority. Responsibility is shared by ICAO and governments as well as IATA and airlines. It is not just words. Air transport is the safest way to move. Let me share with you some numbers that show the dimension of this achievement. In 1945, 9 million people flew and there were 247 fatalities. Last year, 2.2 billion people flew and there were 502 fatalities. Every fatality is a human tragedy. Our ultimate goal must always be zero accidents and zero fatalities. Across the entire industry last year we had one accident for every 1.2 million flights.
For IATA members, it was one accident for every 1.9 million flights and so far this year we have seen a 38% reduction in accidents. The question is how do we continue to drive down the accident rate in a very safe industry? Some issues that we are working with ICAO on include flight crew fatigue and runway safety.
But let me focus a bit on auditing which is playing a key role. ICAO’s Universal Safety Oversight Audit Program (USOAP) checks a state’s compliance with ICAO standards. After considerable debate, the results were made transparent. I applauded this decision which came about the same time as IATA was developing its own audit for airlines, the IATA Operational Safety Audit or IOSA. Progressively we made IOSA a condition of IATA membership. By April of this year, all IATA airlines were on the public registry having met IOSA’s 900 standards. This a fantastic achievement, showing the commitment to safety of airlines in every corner of the world. We are constantly strengthening IOSA. For example, in 2010, IOSA will include all of ICAO’s requirements for safety management systems.
We also launched The IATA Safety Audit for Ground Operations, or ISAGO. Our goal is to improve safety on the ground. It is the first global standard for ground operations and the industry is seeing value in it. To date, 45 companies have been audited and we are targeting a further 80 for 2010.
IATA and ICAO are not the only organizations conducting audits and inspections. Europe has its Safety Assessment of Foreign Aircraft (SAFA)and the US has the International Aviation Safety Assessment (IASA). Each audit has a particular point of view and delivers value by improving safety.
But these audits are delivered in silos, so the point of view is one-dimensional. Linking and using the data together would give a much more powerful three-dimensional picture of how safety is developing. Earlier this year, ICAO Secretary General Benjamin made sharing of audit data a priority. I fully agree.
IATA is launching a Global Safety Information Center to house IATA safety information in a single online database. The bigger vision is to find a way to incorporate safety information from ICAO, FAA, EASA and others into a database that could identify trends and potential hazards.
I hope that this will be discussed at the ICAO High Level Meeting on Safety in March. A decision to cooperate and fully share data will be another example of how we can make a safe industry even safer.
Simplifying the Business and Security
Looking ahead, we are confident that more people and goods will fly. This good news is also a logistical challenge. Getting people and goods efficiently onto aircraft is already difficult. Building infrastructure will help but making airports bigger should not be the only focus.
IATA’s Simplifying the Business program is a step in the right direction with tools to lower costs and improve service. In June 2008, e-ticketing became a global reality. This is saving the industry at least US$3 billion annually and making travel more convenient. Simplifying the Business has revolutionized check-in with new options like bar coded boarding passes on mobile phones. Travelers like the freedom of self-service and are asking for more.
We are implementing options that allow travelers to register passport details, self-tag their luggage, self-board the aircraft, change flights when there are disruptions and register their mishandled baggage. And we are working on solutions to reduce baggage mishandling.
All of this will help speed people through airport processes. But is this enough to accommodate anticipated growth? If we grow at 6% the industry would double in size in a decade. Our current infrastructure and processes will not be able to cope. After 9/11, we had to improve security but we forgot about the cooperation that delivered such good results on safety.
We approach security in splendid isolation. Process by process, government by government, airport by airport, travel has become an obstacle course of disjointed security measures. And it is expensive. Airlines and passengers now pay a security bill of US$5.9 billion each year. Eight years later some things have improved. But with the perspective of time and looking to the future we need to re-think how people move through airports. Technology will certainly play a role. The key to success will be bridging gaps between process owners.
Check-in, security, immigration, quarantine and customs all have a role to play. We must move our mindset beyond passing the traveler from one authority to another. Our goal should be to find common processes, standards and technology to move the passenger through the airport in a way that is fast and secure. This would reverse the trend of asking passengers to arrive at the airport earlier which keeps crowds in airports longer often times standing in queues.
How can we link processes? Perhaps it is a biometric like your finger print, facial geometry or iris that identifies you at each step of the way. Perhaps it is a common check point where we do security and immigration. Perhaps it is a combination of both or something completely new. Already we have an Ideal Process Flow supported by key industry associations and ICAO. Cooperation is the way. Prepare for the future by moving the ideal process flow from theory to reality.
And it is not just about people. Air cargo also faces an obstacle course of paperwork and security measures. We have lost competitiveness against sea shipments. Why? Because our advantage of speed has been eroded. Within 36 hours, you can easily get between any two points on the planet.
So why does the average air cargo shipment take six days? The only answer is the processes that we have in place. IATA’s e-freight project is helping to modernize the system with electronic documentation. This has the potential to save US$4.9 billion and speed up shipments by a day.
Think of the enormous economic impact of freeing up inventories by 24 hours for 35% of the value of goods traded internationally?
The other hurdle is security. As with passengers, the solution is cooperation and a change of mindset. Instead of focusing on a single checkpoint to secure shipments, we must build security throughout the value chain. In this way we can lower costs, improve shipping times and achieve an even higher level of security.
Both solutions for the future of passenger and cargo handling fit well within the history of industry cooperation with governments to solve problems. If we choose to cooperate and use effective technology, I am convinced that aviation will be able to handle the challenges of growth.
Air Traffic Management
Air traffic management presents similar challenges. More people flying means that we need solutions to keep more planes in the air safely. Governments are preparing for this growth. Europe’s SESAR and US NextGen are good examples. Both are opportunities for major re-thinks of how we manage traffic.
Today’s aircraft are much more capable than the ground based systems to guide them. As we upgrade air traffic management there are two technology challenges. The first is to properly use the technology on board the aircraft. The second is to have a global technology and operational standards.
SESAR and NextGen will cover about two-thirds of global air traffic. They must be linked so that airlines can operate seamlessly in both systems. Beyond technology, we also have a political challenge. Europe’s Single European Sky is closer than ever to reality. Coordinating airspace management will deliver enormous efficiencies without impacting national sovereignty. There is no reason to confine this concept to Europe or the large section of Africa that is managed by ASECNA.
The future of air traffic management must consider supra-national possibilities. If we choose to cooperate I am convinced that we could find similar opportunities for efficiency in the rest of Africa, the Middle East, Asia and Latin America.
We face similar challenges in the industry’s regulatory structure. Airlines are battling for survival. But we are fighting with one hand tied behind our back.
The Chicago Convention is not the problem as its global standards played a key role in the development of the safe industry that we are today. The problem is the bilateral system. Governments could not agree on multilateral commercial regulation. Governments negotiated air rights bilaterally with restrictions on flights, fares, routes and ownership. This was a complete step backwards from before World War II when aviation was very liberal. Governments wanted to know who was flying into their territory for security concerns and turning commercial tools into political rights suited an industry that was mostly government owned.
Sixty-five years later it’s time for change. No other industry has such restrictions. Shipping companies operate without restrictions. Almost all other products enjoy global markets. You may have to pay an import tax or a duty but you don’t need the government to conclude a bilateral agreement. Airlines cannot sell their product where markets exist and cannot merge across borders where it makes business sense. The result is a sick industry with too many players.
In a crisis marked by falling demand, market access is not so important. But capital is. Banks and auto manufacturers sought capital with government bailouts or mergers—domestic and international. Airlines could not go to international markets because of national ownership restrictions. We saw some consolidation: Air France/KLM, Delta/Northwest, Lufthansa with SWISS, Austrian, bmi and Brussels and soon BA with Iberia. But these were restricted within political borders.
We could not consider a Chrysler/Fiat kind of outcome. Why? Because the bilateral system is built on national ownership. Airlines have facilitated the global village but we cannot take advantage of its opportunities. The global economic crisis has shown just how outdated the current industry structure is.
A year ago we stared a process to get governments talking about liberalization. We called it the Agenda for Freedom. A few weeks ago in Montebello, seven countries: Chile, Malaysia, Panama Singapore, Switzerland, The United Arab Emirates and The United States of America with the endorsement of the European Commission and in the presence of President Kobeh-Gonzales, signed a Multilateral Statement of Policy Principles regarding the implementation of Bilateral Air Service Agreements. Together these states represent 60% of global aviation. The statement highlighted three freedoms that are taken for granted by any other industry.
The first is the freedom to access global capital markets. Basically this says states should not block other states from liberalizing ownership. Ownership of airlines should be determined by the home government that regulates safety and provides the air operators certificate. If they agree that the airline is good to operate why should anybody care whose cash they are using?
The second is the freedom to access markets. Here the states agreed that restrictions on market access should be the exception, not the rule. Particularly in bilateral agreements states put as few restrictions as possible on the number of carriers and how they serve the market.
The third is the freedom to price services. This basically says that governments should let markets determine pricing. Finally the statement emphasizes the need for a level playing field.
This statement has no legal obligation but having signed it formally as governments it will be difficult for states to ignore these principles. It can be used as the starting point for bilateral negotiations or it can be the basis to interpret bilateral agreements. This is not just industry self-interest. Allowing airlines to do business will be good for the global economy.
IATA commissioned a study of the economic impact of liberalization of both market access and ownership. In the 12 economies studied the average impact was a 0.86% boost to GDP. That’s billions of dollars of business and millions of jobs. Can policy principles make a difference? Last year, The Economist equated the policy principles that IATA was developing to the Helsinki Final Act. That statement helped trigger the fall of the Berlin Wall whose 20th anniversary was celebrated recently. Will this be the Final Act for the Bilateral System? That is a question mark. But if governments choose to cooperate this document will grow and become a powerful force to transform air transport into a more normal industry.
Overcoming all of these challenges will not secure aviation’s future if we are not a sustainable industry. Environment is at the top of our industry priorities along with safety and security. The economics of our business has meant that the industry has always invested to improve fuel efficiency. Over the last 40 years, fuel efficiency improved by 70%.
Climate change has put environment front and center of the industry’s agenda. Every industry must reduce carbon emissions. Twenty-nine months ago at our Annual General Meeting in Vancouver, I announced a vision that air transport should achieve carbon-neutral growth on the way to a carbon-free future. People thought that I was crazy, saying it was an impossible task. I admit that I did not have a clear picture of the entire process. But history gave me confidence. In 50 years, we went from the Wright brothers -- a fragile plane of wood and fabric -- to jet powered airplanes crossing oceans.
In the next 50 years, there are no limits on what we can achieve. First we worked with airlines, airports, air navigation services and manufacturers to agree a four-pillar strategy:
- Invest in technology
- Effective operations
- Efficient infrastructure
- And positive economic measures
More importantly we went to work. Shortening routes and implementing best practices in fuel management are just two examples of how we saved over 70 million tonnes of CO2 since 2004.
Considering that the entire industry’s CO2 output is about 660 million tonnes these measures are significant. This year aviation’s emissions will fall by 7%, including 5% from the recession and 2% as a result of our strategy.
The next step was to set targets; to stabilize emissions with carbon-neutral growth from 2020 and cut our emissions in half by 2050. How will we achieve these? Technology—new planes and new engines, infrastructure—better air traffic management and sustainable biofuels.
Sustainable biofuels from crops like camelina, jatropha and algae are the most exciting new opportunity. They could reduce our carbon footprint by up to 80% and because they can be grown in almost any soil condition they have the potential to create new industries by bringing sustainable energy production opportunities to many of the least developed parts of the planet. Five test flights show that biofuels are safe and can be blended with traditional jet fuel for use in today’s aircraft and engines. We expect certification by 2011 with commercial production to follow.
We brought our targets and plan here to ICAO for endorsement at October’s High Level Meeting. We asked that governments support a global sectoral approach for aviation coordinated through ICAO in cooperation with the UNFCCC.
What is a global sectoral approach? It would mean that governments take advantage of our sector’s unique ability to move globally and account for emissions at a global level not by state. Make aviation fully accountable to pay for its emissions once, not several times over and giving us access to global carbon markets until technology provides the ultimate solution.
The High Level Meeting was a preview of the politics that will dominate Copenhagen. In particular it highlighted the need to reconcile the global sectoral approach with the principle of Common But Differentiated Responsibilities. In the end governments could not agree on our reduction targets.
They stopped at setting fuel efficiency goals but they did stake out some important ground affirming that ICAO should handle aviation, that industry and government must work together and that the door to a global sectoral approach should be left open.
The aviation industry remains committed to both carbon-neutral growth from 2020 and a 50% emission reduction by 2050. In recent months, I have discussed the industry plan with Dr. Pachauri at the IPCC, UN Secretary-General Ban Ki-moon and President Medvedev last week in Moscow.
They all held aviation up as a model for an industry response to climate change. They were particularly interested in how we are bridging the gap between developed and developing nations under ICAO’s leadership. We did it with engine noise reduction and we will find a way with emissions. By continuing to cooperate I am convinced that aviation will secure an environmentally responsible future regardless of politics.
In a short time, we have covered a lot of ground on some very challenging issues. The problems that we face are big and there is much work to be done. To say that there are challenges is an understatement. Our future depends on fundamental changes to the way that we do business and the regulatory structure of the industry.
I look around these halls and I am reminded of the great leadership role played by my friend Dr. Kotaite in a career that spanned over half a century. He was fundamental in bringing people together to build ICAO into the respected institution that it is today. Within the ICAO framework governments and industry chose to cooperate.
The result is an industry that safely transports 2.2 billion people, 43 million tonnes of cargo and supports US$3.5 trillion in economic activity. I am convinced that we will continue to cooperate and to bridge gaps in the spirit of Dr. Kotaite’s long and effective leadership. Our mission is to build an air transport industry for the future that can meet the challenges of cost volatility, growing demand and falling yields and deliver on safety, environmental responsibility and profitability.