Date: 1 February 2010
Air Show Aviation Leadership Summit, Singapore
Good morning. It is a pleasure to see such a good turnout at this Leadership Summit. This is a unique opportunity for industry and governments to exchange views. We have a long history of cooperating on technical issues. Safety is a great example. By working together, airlines and governments have made aviation the safest way to travel. We need to broaden the cooperation and I thank our partners Minister Lim and the Singapore Air Show for making this possible.
We are meeting at a critical time for the industry. Over the last decade airlines lost US$50 billion. The worst is over but we still expect a global loss of US$5.6 billion this year. It is tough in all regions but Asia-Pacific’s prospects are improving faster than other regions. Just look at industrial production. Globally, developed countries’ economies are down 10% compared to 2009 but Asia -- excluding Japan -- is up 13%. We expect the region’s US$3.4 billion loss in 2009 to shrink to US$700 million this year. But you don’t need me to tell you that Asia-Pacific is diverse, dynamic and has tremendous potential. Let’s spend a few minutes on each of these concepts.
Asia-Pacific is home to two of the five most profitable airlines in the world. At the same time, there are many carriers in great difficulty. In the first quarter of this year, governments have already provided over US$10 billion in bailouts to Asia-Pacific airlines. One of the largest carriers in the region, JAL, has just filed for bankruptcy.
The two biggest growth markets are experiencing different challenges. India is in a crisis as it tries to adjust its infrastructure and, even more critically, its cost structure to the realities of today. China has put the infrastructure in place but its carriers are struggling to adjust to new trade patterns as the global economy recovers.
The region has seen enormous shifts. Let’s take a look back at Japan and China a decade ago.
Japan was Asia’s biggest player with a domestic market of 2.5 million seats per week, 1.2 million weekly international seats and a fleet of 480 aircraft. China had a domestic market of 1.6 million seats per week, half a million weekly international seats and a fleet of 480 aircraft. Today, the comparison is completely different. Japan has stagnated with a domestic market of 2.6 million seats per week, 1.3 million weekly international seats and a fleet of 540 aircraft. China has seen weekly domestic seats expand to 5.7 million, weekly international seats grow to 1.4 million and the fleet more than double to 1,400 aircraft.
While we see dynamism and diversity within the region, the aspect of Asia-Pacific that excites me most is its potential. In 2009, Asia-Pacific became the largest regional market for air services. More than a quarter of the 2.2 billion people who flew last year, or 647 million people, flew within Asia-Pacific markets. It has eclipsed travel within North America as the traditional leader in traffic numbers. By 2013, we expect Asia-Pacific’s market share to grow to almost one-third of the total market, with an additional 217 million people flying.
Accommodating this massive increase in such a short time will be an enormous challenge. But it is only the very beginning of the potential for this region. In the US, there are three aircraft seats per year for each of the 300 million people who live there. China’s population of 1.3 billion is served by only 0.3 seats per person and India’s 1.1 billion population has only 0.1 seats available per person. When Asians travel as frequently as people in the US, that alone will triple the size of today’s global industry.
Ladies and gentlemen, Asia’s diversity, dynamism and potential are a great opportunity. The events in this region are defining the future of air travel. The question for today is: Are we prepared for the challenges?
Today’s agenda covers the key challenges of battling the crisis, environment, security and liberalization. To start today’s discussions, I will make some brief comments on each.
Battling the crisis
The future starts today and the main issue is surviving the crisis. The picture of the industry for 2010 looks similar to 2007. We expect about the same number of passengers: 2.3 billion. Our expectation for the oil price is about the same at US$75 per barrel for crude but revenues will be US$30 billion less. Yields are the driver. Last year they fell 12% for passenger and 15% for cargo.
To match capacity to demand, wide-body aircraft utilization is down 7% and we expect a further 1,400 aircraft to join the fleet this year. So, significantly improved yields are not in the forecast.
Cost reduction is the other side of the equation. Over the last decade, airlines have delivered some amazing results; labor productivity is up 71%, fuel efficiency improved 21% and sales and distribution costs were cut by one-third.
IATA is contributing as well. Our Simplifying the Business program is making travel more convenient and promised US$13.9 billion in annual cost reductions. E-ticketing delivered US$3 billion in savings and proved that we can reduce costs for the global industry. The other US$10.9 billion savings will come from E-freight, bar coded boarding passes, self-service technology and eliminating paper in the sale of ancillary services from extra baggage to car rentals.
The challenge now is to identify the next area for industry wide cost savings. I look forward to ideas from our first panel. Cost reduction must be shared across the industry value chain. Airports and Air Navigation Service Providers (ANSPs) consume 11% of revenues or more than US$54 billion a year. We have some great partners including Changi Airport which reduced charges by 25% last year and introduced an incentive scheme this year. Not everybody is as proactive. The US$2.1 billion that we saved with airports and ANSPs in 2009 was eclipsed by US$2.5 billion in cost increases.
I challenge the panel to identify ways for all industry partners to deliver reduced costs with efficiency. We must think big. After decades, Europe is finally on its way to an effective Single European Sky. With growth in this region, the air traffic management infrastructure will be challenged to keep pace. Don’t make the same mistakes that we made in Europe. Before air space capacity chokes growth, we should be looking for a seamless Asian Sky.
In looking to the future, another challenge that could constrain growth is environment. Aviation went to the UNFCCC Climate Change talks in Copenhagen with three targets. These are; improving fuel efficiency by an average of 1.5% per year to 2020, stabilizing emissions with carbon-neutral growth from 2020 and cutting our emissions in half by 2050 compared to 2005.
These targets are shared by the entire industry including, airlines, airports, air navigation service providers and manufacturers. They are backed by a clear strategy based on technology investment, effective operation, efficient infrastructure and economic measures.
We have concrete results that show that the strategy is working. I can give you two examples where IATA has been directly involved. By shortening routes and improving fuel management, we have saved 71.4 million tonnes of CO2 since 2004. Green business is good business. These initiatives reduced fuel costs by US$14.7 billion.
There is much more that can be achieved with efficiency. But we must recognize that bigger changes are needed. The development that we are most excited about is biofuels. Sustainable second generation biofuels have the potential to reduce our carbon footprint by up to 80%. They have been successfully tested by five airlines and we expect certification within 2011 at the latest. The challenge then will be to ramp-up commercial production and distribution.
Over the last year, I presented our united proactive approach to world leaders. The UN Secretary General Ban Ki-moon commended aviation’s efforts as a role-model for others to follow. Copenhagen did not end with a binding government agreement. Nonetheless, aviation is united and committed to its targets. The challenge for this year is to bring governments on board with our targets in time for COP-16 in Mexico. The ICAO Assembly this fall is an opportunity to build consensus among governments.
I hope today’s environment panel will contribute to the industry/government dialogue. I hope that they will explore five topics in particular.
- 1. How can industry and governments work together to achieve alignment at ICAO that can be taken to the UNFCCC?
- 2. How can governments support industry’s actions from optimizing infrastructure to the commercialization of biofuels?
- 3. How can we square the diversity that exists around the world and in this region with the need for a global solution to climate change?
- 4. Can the ICAO approach to noise with extended timelines and financial support for airlines in the least developed countries give us guidance on how to deal with common but differentiated responsibilities?
- 5. What is Asia’s role in all of this? Particularly, how can it use its enormous potential growth to support a leading role in developing green industries and technologies that can help aviation and other industries deal responsibly with climate change?
The events of December 25, 2009 made it clear that security remains an industry challenge. We live in a global world with global connectivity and global threats. The shared challenge for governments and industry is to protect the connectivity and eliminate the threats. In the past, the approach of governments was simple, “We command, industry implements.”
Additional measures following 9/11 made the industry much more secure. The shoe bomber later in 2001 and the liquids and gels threat in 2006 introduced even more measures. These were piled on top of measures that were already in place. There was no review to think of the whole process and remove measure no longer necessary.
Governments understand the threats and the tools needed to mitigate them. Industry has the operational expertise for effective implementation. Working together and sharing expertise is the only way forward. This is the way that industry and governments have made flying the safest way to travel. Security was handled by unilateral government measures at great cost with enormous frustration and much inefficiency.
Ten days ago, I saw some hope for a more collaborative approach. As a follow-up to the December scare, The Secretary of the US Department of Homeland Security, Janet Napolitano, spent a day in our Geneva offices with representatives from 25 airlines. Why? To consult with industry on making aviation more secure. This new collaborative approach by the Obama administration is a great opportunity to make security better.
We presented her with five recommendations:
- 1. Industry and governments work together continuously
- 2. Aligning security requirements with the industry’s execution capabilities
- 3. Making passenger data collection and sharing more efficient by creating a single program interface for data exchange
- 4. Getting governments to harmonize their approach across borders so one country’s requirements do not conflict with another country’s laws.
- 5. We agree on the importance of a next generation checkpoint that combines technology and intelligence so we look for bad people, not just for bad objects
And of course, there is also the issue of cost. We are talking about national security which is a government responsibility. Airlines still pay US$5.9 billion each year and this must stop. I look forward to the panel’s ideas on how we can get more governments to cooperate even more closely bilaterally and multilaterally and with industry, how should the cost burden be shared and what role could Asia play in promoting greater cooperation and harmonization.
Finally, Asian aviation will not reach its potential if the airlines are constrained to old ways of doing business. ASEAN has a timetable to 2015 for regional liberalization. Industry is preparing and it is important that the target date is met. This is already slower than the US-EU open skies agreement which has already transformed the trans-Atlantic market with market access. Second stage talks will conclude this year with ownership being the most important issue.
I have said many times that the restrictions of the bilateral systems are killing this industry. Under the current system, airlines have not even been able to cover the cost of capital. What public policy purpose does a financially sick industry serve? What is to be feared by successful multinational brands as we see in telecoms, pharmaceuticals or almost any other business?
An independent study by Intervistas found that liberalization could expand GDP in 12 studied economies by an average of 0.86%. To move liberalization forward, IATA took the extra-ordinary step of calling governments together. This was our Agenda for Freedom. After a year of talks, in November 2009, seven governments, including the US, and the European Commission signed a multilateral statement of policy principles. While preserving a level playing field, the principles addressed liberalization of market access, pricing and ownership. Singapore and Malaysia were among the forward thinking governments that signed. This is a major step in the right direction. For the first time, we have a signed document by governments indicating that change is needed. Of course, a document alone is not the solution. Implementing the principles in bilateral arrangements is what will drive change.
For the panel this afternoon, we need ideas on how to use liberalization to turn this into a sustainably profitable business. The key questions are: What is the future role of government in the industry? What are the models for multinational brands or franchises? How can governments assure a level playing field?
We have an exciting day of discussions ahead. With the worst of the recession behind us, the time is right to look to the future. Aviation is a great industry supporting 32 million jobs and US$3.5 trillion in economic activity. It is clear that we face many challenges that can only be addressed by industry working with governments. Asia is already our biggest market with tremendous growth potential. It is entirely appropriate that Asia has a leading voice in building aviation’s future.
I look forward to engage in a lively discussion with leaders from governments and industry from the region and around the world. The success of aviation as a catalyst for economic growth and integrator of regional and global economies is in everybody’s best interest. Your ideas are critical to managing through the crisis and building a future that is even safer, more secure, environmentally responsible and sustainably profitable.