Date: 7 June 2010
State of the Air Transport Industry
Director General and CEO
International Air Transport Association (IATA)
66th IATA Annual General Meeting and World Air Transport Summit
A Snapshot of the Industry
2.4 billion passengers (1) . 43 million tonnes of cargo (2) . 32 million jobs (3) . Just 1 accident for every 1.4 million flights (4) . 2% of global carbon emissions (5) . $545 billion in revenue (6). $54 billion (7) in charges from monopoly providers. $217 billion in debt (8) . This is global air transport today. Our resilience has been tested by disease, war, terrorism, spiking oil prices and even a volcano. The worst economic recession in 80 years saw revenues drop by $81(9) billion and losses of almost $10 billion in 2009 (10).
Today there is some cautious optimism. Global traffic is back to pre-recession levels (11) with load factors nearing 80% (12) and the bottom line is improving. Asia-Pacific is powering the upturn with $2.2 billion in profit. North American carriers will move into the black at $1.9 billion. Latin American airlines will return $900 million, the only region with two consecutive profitable years.
Middle Eastern and African carriers will each deliver profits of $100 million. But not all regions are recovering equally. Europe with its weak economy will be the only region in the red, with a $2.8 billion loss. But today we are upgrading our global industry forecast to a full-year profit of $2.5 billion (13). This is the first global profit since 2007 (14) . It is a reason to celebrate. But with a margin of 0.5%, it will be a modest party. And we face real downside risks:
Excess capacity is one. The upturn will bring temptation. 1,340 aircraft will be delivered this year (15) and only 500 are for replacement. The discipline of chasing profits, not market share, is the only way to protect the bottom line.
Labor, out of touch with reality, is the next risk. We cannot pay salary increases with our $47 billion in losses (16) . Pilots and crew must come down to earth and strikes at this time are shortsighted nonsense. Labor needs to stop picketing and cooperate.
3. External Costs
Labor is not the only one with hands in our empty pockets. Later this morning, the Eagle Awards will honor our best infrastructure partners. The winners are great examples and role models for others to follow. But some are still happy monopolies. The $2.1 billion in cost savings that IATA achieved in 2009 disappeared with increases of $2.6 billion (17).
This year’s IATA Wall of Shame starts with the 19 European ANSPs (18) who increased your costs by $413 million (19). It is clear that regulated performance targets must replace the cost recovery model. On the airports side, ACSA (20) in South Africa is a national embarrassment, increasing its bill by $1.2 billion (21) over the next five years.
And this year we have a special place on the Wall for the Western GDSs. They are leeches charging at least $4 per transaction (22) when China Travel Sky does it for just $1.20. On top of that, they sell you your data with a seven-digit price tag. That is pure profit. BASTA. We will break their monopoly on your data with a cost-effective solution.
The fourth risk is taxation. Governments went $2.7 trillion (23) in debt to bail out the bankers, stimulate economies and support currencies. Airlines and our passengers should not get the bill to clean up the mess. Any tax increases should be directed at the banks starting with their billion-dollar bonus pots (24) .
The last risk is oil price volatility. From $40 per barrel in 2009 (25) , crude almost hit $90 (26) per barrel earlier this year. Hedging is critical for our business, but speculators are making huge profits. Governments must protect the economy from irresponsible profiteering.
Defining Our Future
Your association will be with you, reducing risks and fighting fires. We are also with you, in looking ahead beyond the cycles and shocks that dominate the horizon. Our duty is to work together to define a vision and build a sustainable future.
The time has come to think big. My vision for aviation in 2050 begins with safety. We will be very near zero accidents. We will use technology to drive change in the air and on the ground. We will emit half the carbon flying very different aircraft and using biofuels. We will have eliminated queues with integrated systems ensuring security as we process passengers. We will operate with almost no delays in globally united skies. We will share costs and profits equitably across the value chain. We will be a consolidated industry of a dozen global brands supported by regional and niche players. And we will deliver value to investors. In just over a decade, I can see $100 billion in profits on revenues of $1 trillion (27). As we near 2050, this 10% margin will become much more robust.
Is this vision another crazy Giovanni dream, like biofuels or e-ticketing? Before the recession at least 10 IATA members (28) already had 10% margins. We must make this a much broader reality.
Change in all areas is possible. This vision can be our future.
Learning from the Past
The last decade tells us that this industry is capable of enormous change. We cut the accident rate by more than one-third (29) . We survived the spike in oil prices to $144 (30) a barrel. We improved labor productivity by 63% (31). Alliances grew from infancy to 56% of traffic (32) . We developed Asia-Pacific into our largest market, one-third of all aviation. We found a global solution on noise and we are now focusing on carbon emissions. Your association worked with you to drive change with speed. Since 2004, we saved 70 million tonnes of CO2 (33). In 48 months, we delivered e-ticketing (34) 100% in every corner of the planet. Working together over the last six years with programs led by your association, we saved the industry over $47 billion (35). The progress of our industry through your hard work has been amazing. Every airline in this room deserves a round of applause.
From Vision to Reality
We overcame challenges with change and we have the passion and commitment to build a sustainable future. But we cannot build that future alone. The changes we need are not always within our control. Governments over-regulate our business and under-appreciate our role. Who can change the attitude of governments? Voters. The same voters that are our customers. Today, we have 2.4 billion potential industry advocates and the number is growing rapidly. To turn them into real activists, we must improve our industry’s value proposition: price, speed and quality. We have the price right. Flying today is 40% (36) cheaper than before deregulation (37). We made travel more accessible but speed and quality suffered. Infrastructure has not kept pace and the result is queues on the ground and delays in the air. And new security processes have created new hassles even as we are Simplifying the Business.
Now, our challenge is to gain the support of our customers to hold governments accountable for their actions. Can we do it? Yes we can. But it means facing the future with the courage to change. My 2050 vision for aviation is built on four cornerstones: profitability, infrastructure, a new energy source and the customer. Let me explain.
Structuring for Profitability
Today’s industry structure will not deliver the profits we need. In a decade when airlines lost $5 billion a year, 574 airlines started operations (38) and less than 200 disappeared (39). Barriers to exit are too high and barriers to entry are low. With 1061(40) airlines, we are the world’s most fragmented industry. Even with the recent round of mergers, the top 20 (41) carriers only account for half the global industry. Efficiency gains never make it to the bottom line because we are deprived of the commercial freedom to operate like a normal business. And poor profitability makes every shock a fight for survival. The restrictions of the bilateral system are a dam that holds us back. It’s time for that dam to burst.
I see a future where governments act responsibly, ensuring safety, security and a level playing field. A future where airlines can build efficiencies across borders to better serve their customers, and achieve sustainable profits to fund growth and innovation.
Shaping the Infrastructure
Infrastructure must be reshaped around the needs of airlines, the core of the industry value chain. I see airports competing to attract business. Successful hubs will be determined by their efficiency. Commercial revenues will be the focus of the airport business and airlines will not be charged but we will be paid for bringing airports more shoppers.
I can even see airport revenues funding the air traffic management system that provides connectivity. And air traffic management itself must change radically. I can see 10 global providers (42) replacing the current 180 at half the cost. Political borders are not blockers. The globalization of telecoms provides a great example. But governments must act faster. After decades of discussions even with a volcano that shut down 29% of global aviation, European transport ministers could only agree on tiny progress for the Single European Sky.
It is time for real leadership to replace the uncoordinated bureaucratic mess that is Europe today. Leadership will turn this European embarrassment into the first of the ten global ANSPs.
Would somebody please give me a date for the Single European Sky? Not a date for FABs (43) or a network manager. I want the $6.5 billion in cost savings of a fully implemented Single European Sky (44). After 20 years waiting, we are fed up. Heads of government must set the date and deliver.
Powering the industry
Today’s jet fuel cannot sustain our industry. Together with our partners (45) we have a strong, united position and common targets on climate change. By 2050, we will cut our carbon emissions in half (46). We are ahead of governments and every other industry. Even UN Secretary General Ban Ki-moon commended aviation as a role model. Our biggest opportunity is biofuels with the potential to reduce our carbon footprint by 80% (47) . Airlines have successfully tested them and some have committed to purchase. Certification is expected within a year. Soon, the price could be right. With every doubling of production, costs should fall 20% . Local production using jatropha, camelina, algae or even urban waste will give greater supply stability. New economic opportunities in virtually any location will break the tyranny of oil.
Governments have a strategic role in supporting this vision. But they are not delivering. Governments are spending $1.5 trillion for economic stimulus but we have only seen $600 million for biofuels (49) . It is peanuts. We don’t want subsidies, but too often governments are only committed to environment when it means grabbing cash. They must invest strategically in biofuels and green technologies. This is not just to support aviation’s vision but to drive economic development and build a sustainable future for our planet.
The Customer of the Future
My future vision places the customer in the center of our thinking. By 2050, we will have 16 billion passengers and 400 million tonnes of cargo (50). In just a couple of decades, the demographics of our customer base will change dramatically. The middle class will nearly triple from 1.3 to 3.5 billion people (51). India and China will account for a quarter of these potential travelers. At about the same time, the GDP of today’s BRICs (52) will equal that of the G7, shifting cargo flows dramatically (53).
How can we accommodate that growth? Already IATA is leading some important changes. To address the challenge of security we are working with the US Homeland Security Department to build a checkpoint of the future. To cut costs, Simplifying the Business is linking the value chain with more efficient processes. These tactical responses can solve problems. But alone, they are not the way to build a sustainable future. Shocks and crises must not prevent us from looking ahead as our predecessors did. They turned the dream of flight into the industry that made the global village.
Looking to the future there are some big questions. Can we serve passengers effectively if building a runway takes decades of debate? Should we continue to grow hubs, develop infrastructure for more direct services, or do something completely different? How will our networks connect to future land transport systems? Will centers of production relocate to more business friendly regimes? Will the manufacturers of today build the eco-efficient aircraft that can also fly without pilots? How can we safely manage more crowded skies? And what will be the role of governments? The questions are endless and we will not find the answers in isolation.
That is why today, I am announcing “Vision 2050—Shaping Aviation’s Future.” This new initiative will look ahead four decades. Our goal is to build an industry that is even more successful at serving its customers. So successful, that they will be our biggest advocates. Later this year I will call together leaders from airlines, partners, stakeholders, governments and customers. Vision 2050 will be an open, robust and comprehensive process. For inspiration, we will meet in Singapore, an aviation role model located between our two biggest future markets: India and China. I look forward to reporting the conclusions at our next AGM.
The Burning Platform
We are launching Vision 2050 in the wake of a volcano that brought Europe to its knees. April gave us a vivid picture of life without aviation: 10 million (54) people stranded. Hotels and convention centers empty. Seafood and flowers rotting and just-in-time production delayed. The volcano cost the economy $5 billion (55), far more than the $1.8 billion (56) of lost airline revenue. The eruption was a wake-up call. The message was clear: without air connectivity, modern life is not possible. Aviation is vital.
Carpe Diem. Now is the time to bring governments and partners on board to join us in building our future. You can be confident that, as always, your association is at your side, full of passion and commitment. We will build a resilient industry on our cornerstones of change. We will protect ourselves from cycles and shocks with sustainable profitability. We will exceed our customers’ expectations and we will be an industry that is even safer, greener and more successful.
In this vision, many things will change. Change is not to be feared but embraced. Since taking on the role of Director General at the 2002 Shanghai AGM, it has been my pleasure to lead your association. Together, we have faced many challenges. As a result, the industry is more efficient and your association is stronger.
Now, I too must look ahead. I have decided on one more important and personal change. At our next Annual General Meeting, after nine years in IATA, I shall complete my duties as Director General and CEO. In his report, our Chairman will outline the process going forward, but I wanted to make this announcement myself and in my own words.
It will remain an honor to work with you to strengthen the industry with visionary change from e-ticketing, to IOSA, and to biofuels. You can be sure that I will continue to shout proudly and politely to make change happen. In the year ahead, I will work to ensure continued strong leadership for IATA’s important responsibilities. And I will lead your association, to drive efficiencies, to challenge governments and partners, and, when needed, to say BASTA on behalf of our great, great industry. Thank you very much.
(1) IATA forecast 2010
(2) IATA forecast 2010
(3) Total jobs supported by aviation (ATAG The Economic and Social Benefits of Air Transport).
(4) IATA Safety Report 2009. Based on the 2009 accident rate of 0.71 Western-built hull loss per million sectors flown, reported for 2009.
(5) Aviation accounts for 2% of global manmade carbon emissions according to the Intergovernmental Panel on Climate Change.
(6) IATA forecast
(7) All financial figures are US dollars.
(8) IATA estimate
(9) IATA forecast: 2008 revenue was $564 billion, 2009 was $483 billion.
(10) IATA forecast: $9.9 billion
(11) By March, total international passenger and cargo traffic levels had returned to within 1.0% of pre-recessions levels. This dipped back to -7.0% in April with the impact of volcanic ash crisis in Europe. Indications are that this was a temporary setback and demand continues to recover strongly (IATA Monthly International Statistics).
(12) April IATA Monthly International Statistics
(13) IATA forecast based on 7.1% passenger traffic growth, 18.5% cargo traffic growth, oil at $79.0 per barrel, and yield growth of 4.5% for both cargo and passenger traffic.
(14) $12.9 billion global profit in 2007
(15) Source: Ascend Worldwide
(16) IATA forecast: Cumulative global losses between 2000 and 2009
(17) IATA negotiates with monopoly suppliers (airports, air navigation service providers and fuel suppliers) on behalf of the industry. With these efforts, in 2009 IATA achieved cost savings of $2.1 billion. But cost increases by suppliers totaled more $2.6 billion.
(18) States that increased their 2010 unit rates by more than 1%.
(19) Airspace users will pay this additional amount in 2010 vs. 2009 for en-route charges for these ANSPs (assuming a constant traffic level). These states are Armenia, Serbia-Montenegro, Poland, Romania, Hungary, Austria, Turkey, Bosnia and Herzegovina, Sweden, France, Albania, the United Kingdom, Italy, Ireland, Denmark, Czech Republic, Germany, the Netherlands, and Lithuania.
(20) Airports Company of South Africa
(21) $1.2 billion is the difference between what ACSA will obtain with the price increases allowed by the regulator for 2010-2015 (cumulative charges increases of 129%) and that it would have obtained by freezing its charges over the same period.
(22) Source: Individual airline reports; Carlson Wagonlit report “The Great GDS Debate,” May 2007. Airline distribution fees to provide full content through global distribution systems is $6-$8. On average, including other charges, the cost per segment is about $4.
(23) IMF World Economic Outlook. Financial stimulus was 3.5% of global GDP while financial support totaled 3.0% of global GDP.
(24) Source: Financial Times, 16 January, 2010 “City high flyers toast payouts in sober austerity,” notes $12-18 billion bonus pool for UK banks alone.
(25) Dollars per barrel (Brent) in January 2009
(26) $88 dollars per barrel (Brent) on 3 May 2010
(27) $1 trillion is the expected industry revenue in 2023. Source: IATA projections.
(28) 2007 margins. Source: Ascend Worldwide and airline financial reports
(29) In 2000, the global accident rate was 1.11 accidents per million flights. In 2009, the accident rate was 0.71 per million flights. This represents a 36% improvement.
(30) July 2008 was the peak for crude oil.
(31) Source: IATA Financial Forecast. IATA member TKP/employee
(32) SRS Analyser for scheduled ASKs in 2009 (79.5% of IATA members traffic, WATS)
(33) Since 2005, IATA Green Teams worked with airlines to indentify operational savings of over 36 million tonnes of CO2. Since 2004, IATA work with industry partners optimized air routes and approach procedures saving some 35 million tonnes of CO2.
(34) In June 2004, IATA committed to eliminating paper tickets worldwide. By June 2008, the task was completed and saved the industry $3 billion annually.
(35) $47.7 billion reviewed by Deloitte. Cumulative savings from Simplifying the Business, IATA’s campaigns to reduce external charges and fuel as well as efficiency improvements to IATA’s various settlement systems.
(36) In real terms, calculated by comparing 1978 airline yields divided by TKP and deflated by the US CPI index. Source: IATA.
(37) Deregulation of the air transport industry occurred in 1978.
(38) Source: Ascend Worldwide for airlines flying Western built aircraft
(39) Source: Ascend Worldwide for airlines flying Western built aircraft
(40) Source: Ascend Worldwide for airlines flying Western built aircraft
(41) Source: SRS Analyser
(42) Source: Airways New Zealand/CANSO presentation, 2003
(43) Functional Airspace Blocks (FAB) defined in the Single European Sky legislation as an area of airspace based on operational requirements, reflecting the need to ensure more integrated management of the airspace regardless of existing state boundaries.
(44) Cost savings is EUR 5 billion from more direct routes, fewer delays etc. This amount was converted to US$6.5 billion at prevailing exchange rates.
(45) Airports, airlines, ANSPs, manufacturers
(46) The air transport industry agreed to three sequential targets on climate change: a 1.5% average annual improvement in fuel efficiency to 2020, capping net carbon emission from 2020 and cutting net carbon emissions in half by 2050.
(47) Source: Michigan Technological University, “Life Cycle Assessment of Green Jet from Oils and Tallow: Comparison to Petroleum Jet Fuel.” February 2009.
(48) Source: IEA estimates based on similar experience with gas turbines in the 1960s, solar power since the 1970s, and ethanol since the 1980s.
(49) Source: US FAA announcement, 9 December 2009. Total grant awards from US Departments of Energy and Agriculture to advanced biofuel projects in the US.
(50) Source: IATA estimate based on mid point of ICAO Forecasting and Economic Sub Group to 2050 for ICAO CAEP 8, February 2010.
(51) Source: Goldman Sachs analysis, December 2009
(52) BRIC refers to the related economies of Brazil, Russia, India and China
(53) Source: Goldman Sachs analysis, December 2009
(54) Source: European Commission
(55) Source: Oxford Economics -- The Economic Impacts of Air Travel Restrictions Due to Volcanic Ash.
(56) Source: IATA, $1.7 billion in lost revenue in April, $100 million in May.