Date: 19 April 2010
Press Breakfast, Paris
After a long drive from Geneva, it is a pleasure to be with you this morning. Before I address the main issue of the day - the impact of the volcanic eruption - let me first describe the situation for the industry as we saw it a week ago. Last year was one of our worst ever, with airlines losing $9.4 billion in 2009. Last month, we cut our 2010 loss forecast in half to $2.8 billion. The improving strength of the global economy, particularly in China, is driving the improvement.
We are seeing this with more people travelling. Compared to last year, February traffic was up by 9.5% compared to 2009 and cargo was up 26.5%. These numbers are encouraging, but they are also being compared to 2009 when we saw a very deep fall. Economy travel is now just 3% below pre-crisis levels. But premium travel is improving more slowly and is still 16% below pre-crisis levels. We had concerns that the premium downturn, which was 25% at it worst, was structural. But February results show that it is rising along with the global economic upturn. Even fares are starting to rise as premium fares were up 9.4% in February
There is a lot of ground to recover. The overall size of the premium market today is some 30% smaller than it was in 2008. But prior to the events of last week, there was optimism that we were moving in the right direction. In fact, on overall revenues, we were seeing 2010 as half way to recovery. In 2009, industry revenues fell by $85 billion to $479 billion. This year they will increase by $43 billion to $522 billion.
That optimism was not even across all markets. We are seeing a two-speed recovery. Asia-Pacific, led by Chinese GDP growth at 9.4%, will show profits of $900 million. Latin America, in a great turn-around story driven by liberalizing markets and innovative carriers, will post a profit of $800 million.
All other regions are in the red. The Middle East will lose $400 million. Their model of connecting long-haul markets over major hubs is under significant yield pressure. North America is expected to post a $1.8 billion loss. Carriers in this region adjusted capacity significantly and early but the jobless economic recovery is keeping travel weak.
Europe will post the largest losses at $2.2 billion. The Euro 27 GDP is expected to grow by only 0.9% this year. Slot rules have limited airlines’ ability to adjust capacity. Incredibly we have seen labor unrest across the continent. For Europe’s carriers, we are predicting that 2010 would be better than 2009 when they lost $3.8 billion.
This forecast comes with some risks. Our forecast is based on crude oil averaging $79 per barrel. This is 26% of industry costs. Today oil is more than $85 barrel and it could go higher with the economic recovery. Cost control is critical, especially from labor to infrastructure partners. About 1,400 aircraft are scheduled for delivery this year and long-haul aircraft utilization is down 7 to 8%.
There was one risk that we could not forecast. That is the volcanic eruption which has crippled the aviation sector. First in Europe, but we saw increasing global implications. The scale of this crisis is now greater than 9/11 when US air space was closed for three days. In lost revenue alone, this is costing the industry at least $200 million a day. On top of that, airlines face added costs of extra fuel for re-routing and passenger care - hotel, food and telephone calls.
For Europe’s carriers - the most seriously impacted - this could not have come at a worse time. As just mentioned, we already expected the region to have the biggest losses this year. For each day that planes don’t fly the losses get bigger. We are now into our fifth day of closed skies. Let me restate that safety is our number one priority. But it is critical that we place greater urgency and focus on how and when we can safely re-open Europe’s skies.
We are far enough into this crisis to express our dissatisfaction on how governments have managed the crisis:
- With no risk assessment
- No consultation
- No coordination
- And no leadership
In the face of a crisis that some have estimated has already cost the European economy billions of Euros, it is incredible that it has taken five days for Europe’s transport ministers to organize a conference call.
What must be done?
International guidance is weak. The International Civil Aviation Organization (ICAO) is the specialized UN agency for aviation. ICAO has guidance on information dissemination but no clear process for opening or closing airspace. Closing airspace should be the responsibility of the national regulator with the support of the air navigation service provider. They rely on information from meteorological offices and Volcanic Ash Advisory Centers.
Europe has a unique system. The region’s decisions are based on a theoretical model for how the ash spreads. This means that governments have not taken their responsibility to make clear decisions based on fact. Instead, it has been the air navigation service providers who announced that they would not provide service. These decisions have been taken without adequately consulting the operators—the airlines. This is not an acceptable system, particularly when the consequences for safety and the economy are so large.
I emphasize that safety is our top priority. But we must make decisions based on the real situation in the sky, not on theoretical models. The chaos, inconvenience and economic losses are not theoretical. They are enormous and growing. I have consulted our member airlines who normally operate in the affected airspace. They report missed opportunities to fly safely. One of the problems with the European system is that the situation is seen as black or white. If there is the possibility of ash then the airspace is closed. And it remains closed until the possibility disappears with no assessment of the risk.
We have seen volcanic activity in many parts of the world but rarely combined with airspace closures and never at this scale. When Mount St. Helens erupted in the US in 1980, we did not see large scale disruptions because the decisions to open or close airspace were risk managed with no compromise on safety.
Today I am calling for urgent action to safely prepare for re-opening airspace based on risk and fact. I have personally asked ICAO President Kobeh and Secretary General Benjamin to convene an urgent extra-ordinary meeting of the ICAO Council later today. The first purpose would be to define government responsibility for the decisions to open or close airspace in a coordinated and effective way based on fact—not theory.
Airlines have run test flights to assess the situation. The results have not shown any irregularities and the data is being passed to governments and air navigation service providers to help with their assessment. Governments must also do their own testing. European states must focus on ways to re-open the airspace based on this real data and on appropriate operational procedures to maintain safety. Such procedures could include special climb and descent procedures, day time flying, restrictions to specific corridors, and more frequent boroscopic inspections of engines.
We must move away from blanket closures and find ways to flexibly open airspace. Risk assessments should be able to help us to re-open certain corridors if not entire airspaces. I have also urged Eurocontrol to also take this up. I urge them to establish a volcano contingency center capable of making coordinated decisions. There is a meeting scheduled for this afternoon that I hope will result in a concrete action plan.
Longer-term, I have also asked the ICAO Council to expedite procedures to certify at what levels of ash concentration aircraft can operate safely. Today there are no standards for ash concentration or particle size that aircraft can safely fly through. The result is zero tolerance. Any forecast ash concentration results in airspace closure. We are calling on aircraft and engine manufacturers to certify levels of ash that are safe.
1. Safety is our number one priority
2. Governments must reopen airspace based on data that tell us it is safe. If not all airspace, at least some corridors
3. Governments must improve the decision-making process with facts—not theory
4. Governments must communicate better, consulting with airlines and coordinating among stakeholders
5. And longer-term, we must find a way to certify the tolerance of aircraft for flying in these conditions