Date: 14 September 2010
Jorge Chávez Dartnell-Centenary Celebrations, Lima
Thank you to my good friend Mr. Ramón Gamarra Trujillo, Director General of Civil Aviation for Peru, for the invitation to be here. Today, we celebrate the 100th anniversary of the first aircraft to cross the European Alps. This milestone was achieved by the great Peruvian Jorge Chávez Dartnell. This was a technical triumph, flying over challenging terrain such as the Alps. It was an international event; a Peruvian was the first to connect Switzerland and Italy. Crossing the Alps was an act of courage. It eventually cost Jorge Chávez his life, with a very hard landing in Italy. As an Italian, living in Switzerland, I am reminded of the bravery of Jorge Chávez every time I fly home. Even with today’s technology, crossing the difficult terrain of the Alps is inspiring. In his 1910 Bleriot XI Monoplane, it was a great pioneering act. The symbolism of his achievement has stood the test of time.
Technology continues to drive our industry forward from safety to environment. We are a global industry connecting countries and continents. And you still need a lot of courage to run an airline. I will focus my comments on a few key areas: safety, infrastructure, taxation and regulation liberalization and climate change.
State of the Industry
Let me set the scene with the global state of the industry and the situation here in Latin America. The decade since 2000 has been punctuated by successive crises and industry losses of nearly $50 billion. We also saw great innovations reducing costs and improving efficiency. Two examples are fuel and Simplifying the Business.
As the oil price rose to a peak of $147 a barrel in 2008, IATA took a leadership role by sharing best practice in fuel management and working with governments and ANSPs to optimize routes. We saved over $15 billion in fuel costs and over 75 million tonnes of CO2 emissions. In 2004, IATA launched Simplifying the Business. We changed processes from e-ticketing to e-freight saving a similar $15 billion to date. Combined with our work on user charges and taxation and cost reductions in BSP and CASS, IATA delivered over $47 billion in savings.
Along with the individual efforts of airlines, the industry has been transformed. Today, there is some cautious optimism. Traffic is now 3-4% above pre-crisis levels and we forecast a global profit of $2.5 billion for 2010. That’s a 0.5% margin on revenues of $545 billion. This is good news but not cause for a big celebration as challenges remain. Europe is still weak with losses of $2.8 billion expected this year. The pace of recovery will slow in the second half as fiscal stimulus measures end before jobs have been created. Nonetheless, the situation is more positive than what we have seen in past years. Our mission is to turn this improvement into sustainable profitability.
Latin America focus
Although the last decade has been a disaster for the industry, it has been a renaissance for many carriers in Latin America. A decade ago, Latin America was a mess with deep losses, state-run carriers, poorly privatized airports and an accident rate nearly seven times the global average. Today, it is the only region that we expect to deliver two consecutive years of profit.
Safety, while much improved, is still an issue and I will address this later. But the transformation of this region around the good work of carriers like of LAN, TAM, GOL, COPA, TACA and Avianca has been amazing. Over the last decade, US carriers lost two-thirds of their market capital, Europe lost half, but Asia is up 20%. In Latin America, LAN is up 19 times and GOL and COPA have doubled.
Everybody is talking about India and China. The success of this region is one of the great untold stories of our industry. It is also a region divided between those embracing change and those who are hanging on to old ways. Over the last five years Peru’s economic growth has been twice the Latin American average. Second quarter GDP growth was nearly 12%, faster than China’s 10.3%. Open and liberal economic policies have benefitted the Peruvian economy and your enviable economic position is an opportunity to change and invest in the future.
Safety is our number one priority and a constant challenge. The region has improved but we cannot be complacent. For the first six months of this year, the accident rate in LatAm was three times the global average. IATA’s members are committed to safe operations through IOSA. 37 Latin American carriers are on the registry including all 26 IATA members. And five governments in Latin America: Brazil, Chile, Costa Rica, Mexico and Panama have endorsed IOSA. IOSA makes a difference. Mid-year results show the accident rate for IATA airlines is two and a half times better than the industry average. I invite my friend Ramón to take this great meeting today as an opportunity that cannot be missed. In the memory of Jorge Chávez, it is time to make IOSA as requirement in Peru as well. And I encourage CLAC, under the direction of my friend General Huepe, to become the first to require IOSA for all airlines flying to, from or within the continent.
Latin American aviation can only contribute to economic growth if the infrastructure supports growth safely and cost effectively. There is some progress. IATA is working with the DGCA to introduce RNAV RNP procedures. In Lima that could shave 8 to 10 minutes off flight times. Similar procedures in Cuzco reduced diversions and cancellations. Argentina and Ecuador are among the countries reducing high airport charges. To keep competitive, Peru must review and reduce the $18 million charged for fuel uplift.
Taxation and Bureaucracy
There is also an urgent need for governments to stop overtaxing air transport. Peru’s tax regime for aviation is complex and costly. Peru ranks 74 out of 133 countries in the World Economic Forum’s Travel Competitiveness Index. This is behind Chile at 57 and Brazil at 45. Why this low ranking? High aviation taxes contribute to this low ranking. Air transport is an economic catalyst and government policies should not bury it in taxes.
I was very concerned by the Congress’s attempt to “protect consumers” by making all domestic tickets 100% refundable, 100% transferable and so on. It is important that conditions be transparent to the consumer but this would have only added costs with no benefits. Understanding the significance of aviation to Peru and the potential damage of this legislation implementation was stopped. It is important that such policies continue to be consistent with global standards.
The same is true for the bigger regulatory picture. Globally, air transport supports 32 million jobs and $3.5 trillion in economic activity. Latin America’s share is 700,000 jobs and $22 billion in economic activity. We are an important industry but globally, we are not a profitable one. The historical profit margin of around 1% is far below our 7-8% cost of capital. The restrictions of the bilateral system on ownership and market access are among the reasons for this poor performance. They are archaic rules that belong in a museum. Latin America is a leader in helping us change. The multinational ownership structures of LAN and soon TAM, COPA and TACA/Avianca have delivered profitability, improved safety standards and better service.
This is a great lesson to the entire world and you have built a solid platform for even more progress. The combined market capitalization of LAN and TAM is $12.8 billion. That is more than Delta, Continental, United, Lufthansa or BA-Iberia which are in the $7-8 billion range. With the modern ideas of this region on trans-national ownership and multi-national brands, Latin America through LAN/TAM is well-placed to play a key role in global consolidation.
I encourage CLAC to take on an even bigger leadership role that is building regional consensus around an even more liberal future for aviation in this region. Making the Fortaleza agreement a reality would be a good start. Opening air service markets between Peru, Argentina, Bolivia, Brazil, Chile, Paraguay and Uruguay would be major step forward integrating the economies of the region.
But I encourage CLAC to go a step further and look to liberalize ownership as well. The success of multinational brands LAN/TAM, COPA and TACA/Avianca has been positive for the region. But governments make it difficult with bureaucracy that leads to complicated ownership structures. Governments need to focus on liberalization as a positive development and support it.
IATA recently commissioned an Intervistas study on liberalization. In Peru alone, liberalization of market access and ownership would generate 77,000 jobs and boost GDP by $3.2 billion. Multiplied across the region, the positive impact would be enormous. There is no public policy reason to complicate the process. I believe that CLAC can lead in building a Latin American open aviation area, eliminating outdated ownership restrictions. With two years of profitability, a core of strong carriers Latin America is ready.
I encourage the governments in the region—including Peru, to borrow the courage of Jorge Chávez to strengthen the industry with coordinated regional liberalization that could also be a catalyst for change.
This brings me to the environment. We need a globally coordinated policy approach. The global aviation industry, airlines airports, manufacturers and ANSPs have agreed to a four-pillar strategy based on technology, operations, infrastructure and positive economic measures.
More importantly we have agreed targets. A 1.5% annual improvement in fuel efficiency to 2020, capping emissions from 2020 with carbon-neutral growth and cutting emissions in half by 2050, compared to 2005. UN Secretary General Ban Ki-moon commended aviation as a role model for others to follow.
We also have a solid track record. Since 2004, IATA has helped the industry save over 75 million tonnes of CO2. How? By working with governments and ANSPs to optimize routes and by working with airlines to spread best practice in fuel management. We have some good examples. The optimized route between Lima to Madrid is saving nearly 400,000 kg of CO2. Similarly, we are saving over 600,000 kg of CO2 on flights between Panama and Buenos Aires. But we are missing out on the opportunity to save 5 million kg of CO2 between Buenos Aires and Montevideo because governments cannot agree.
Right now, biofuels are the most exciting possibility with the potential to reduce our carbon footprint by up to 80%. Four years ago, biofuels were a dream. Today they are a tested reality with certification in a few months. Our focus is on second generation fuels from camelina, jatropha and algae. These do not compete with food crops for land or for fresh water and they could offer this region some enormous economic opportunities. Energy industries and economic wealth could be generated in even the harshest landscape. I am pleased to see TAM’s plans to be the first Latin American carrier to test biofuels.
The region also needs to get involved at the global policy level. First, it must be much more vocal in opposing regional schemes like the European ETS which hurt long-haul traffic more than others. This means writing letters to European governments, making speeches and telling the world that Europe has no right to be the cashier for emissions for a flight between Lima and London that crosses a dozen countries on route. And you must question why London intends to continue collecting an additional $3 billion annually even after the European ETS starts. Second, we need the region to be vocal at the ICAO Assembly which opens in two weeks. It is our best opportunity to achieve a global solution that could be endorsed by COP-16.
ICAO has a good track record including its global solution on noise with special provisions for developing states. But ICAO can only be successful if states are willing. Let me be clear on an important point. The UNFCCC principle of common but differentiated responsibilities (CBDR) should not be blocker at ICAO. A global agreement at ICAO will not compromise the rights of states to negotiate under CBDR in the UNFCCC process for non-aviation issues. The UNFCCC is making this clear and supporting a solution for aviation led by ICAO.
CLAC endorsed IATA’s position at its Executive Committee Meeting two weeks ago in Mexico. The support of the 22 Latin American governments at ICAO will be a positive force for the global solution that we need.
This is a major step forward for our industry position and I hope that other regions will follow. And let’s not forget that Latin America will play a big role at COP-16. Mexico will host the event in Cancun under the leadership of Christiana Figueres, from Costa Rica. We count on Peru’s support in line with the CLAC commitment for a global solution on aviation at ICAO and at COP-16.
Like Jorge Chávez the challenges that we face are many. His dying words reportedly were “Higher. Always higher.” This is an inspiration for our industry to this day. I am confident. The industry has been through a decade of crises and we have changed, adapted and survived. Latin America has been a star and Peru has been a part of this great story delivering profitability, improving safety and developing innovative business models.
In the coming months, we will be preparing for our Vision 2050 summit. With this, we will look ahead 40 years to see what is needed for our industry to be sustainable. The questions that I have raised today will be a part of that vision. This region has an enormous amount to contribute to the global industry. I look forward to working with Peru and the whole Latin American community to continue to build an industry that Jorge Chávez would be proud of. One that is safer, greener and even more profitable.