Date: 2 November 2011
Airports Council International (ACI) World Annual General Assembly, Marrakech
Thank you to ACI for this opportunity to address the world’s airports early on in my time at IATA and on the special occasion of ACI’s 20th Anniversary. Thanks also for picking such a wonderful location for the celebration—Marrakech. The collective voice of the world’s airports has played a critical role in developing global aviation. And I am confident it will continue to do so—and hopefully in even greater partnership with IATA and the airlines.
I come from over three decades of experience in an airline—Cathay Pacific. During that time I had quite a lot to do with airports in various parts of the world—including being part of the process of building Hong Kong International Airport. And over the last months I have been getting up to speed with what IATA has learned over nearly seven decades of experience. Today, I will try to put those two together with some thoughts on how we can take the complex relationship between airports and airlines forward.
Airports and airlines are in a business relationship. And it is a tough business. We expect airlines to finish 2011 with a $6.9 billion net profit on revenues of $594 billion. That’s a margin of just 1.2%. So business conditions are tough—especially in Europe and North America. And if airlines are having a hard time, so are airports.
The uncertain economic outlook and persistently high oil prices are the biggest factors impacting the global industry. Over this year we have seen freight stagnate and it is now in decline. Airlines carried 2.7% less freight in September this year than they did last year. Passenger numbers are rising with 5.6% growth recorded in September. But it is very difficult to see this trend sustained amid worsening global trading conditions.
Looking to 2012, we are all going to feel more pressure. Airline profitability will decline to $4.9 billion for a net margin of just 0.8%--nowhere near the 7-8% needed to cover our cost of capital.
To be successful business partners, whatever the economic climate, we must keep focused on working together—not against each other. We have so many common interests that this only makes sense.
Together, airlines and airports are in the business of providing global connectivity. Airlines have no business without airports. And an airport without airlines would likely be a slightly inconveniently located shopping mall, with a lot of wasted concrete. We need each other.
One dimension of our relationship is that of a supplier and customer. A good portion of airport revenues are airline costs. And with very few exceptions, airlines have no choice of airports to serve in a particular market. This creates a natural tension.
Wearing my former airline CEO hat, I can tell you that we fully supported IATA ringing the alarm bell when we thought that airport costs—and particularly cost increases—were not justified or deviated from the International Civil Aviation Organization (ICAO) principles. Charges must be transparent, cost-related, non-discriminatory and agreed in consultation with users—the airlines.
No airline begrudges airports reasonable profits or opportunities to grow. In fact airlines need financially healthy airport partners so that we can plan and grow our businesses together. We also need airports to be cost-efficient and affordable. As an airline guy for many years, I can tell you that airport costs are a high percentage of the marginal cost of a new operation – so they’re often the deciding factor on starting a new service or adding frequency.
The point has been made quite strongly by my predecessor with his trademark “shouting politely”. And there has been progress. The epic drama of Toronto Pearson in 2003-4 eventually saw Toronto win the admiration of the airline industry with an Eagle Award in 2010. And we are jointly lobbying the Canadian government with the goal of eliminating the competitiveness-destroying Crown Rent system.
The need for ever-more cost-efficient airports is also on my radar screen. My style in approaching these issues will be my own. And I will continue to work with IATA’s team of charges experts to produce even more productive results by innovating the focus of our dialogue in four important areas:
- Airline engagement in major capital expenditures (CAPEX) development
- A more transparent consultation process
- Long-term charges agreements which include service level agreements
- And the development of innovative concepts for risk sharing
Agenda of Innovation
But charges are only one aspect of our relationship. Without diminishing their importance, it must also be understood that they are not the whole story. The dialogue between airlines and airports must be re-balanced with a forward-looking focus. Today I am proposing a common agenda that builds on past successes and puts innovation at the heart of the many issues that we have in common. These include safety, security, the customer experience, environment, and ensuring the right investments to meet demand.
Safety always comes first. Air transport is the safest way to connect two points. This year 2.8 billion people and 46 million tonnes of cargo will fly safely. That is an amazing accomplishment. We achieved this with global standards and the hard work and cooperation of the entire value chain—airlines and airports included. Together we ensured that global standards are both implemented and constantly improved.
The question then is: can airlines and airports make a safe industry even safer?
We are already doing good work together. ACI helped in developing our Runway Excursion Risk Reduction Toolkit. And we applaud the work that ACI is doing with ICAO on runway incursions. Safety is a team effort.
Auditing to global standards has been an effective tool in spreading safety best practice. Last year IATA airlines—all on the IATA Operational Safety Audit (IOSA) registry as it is a condition of membership—had one accident for every four million flights, outperforming by 53% the industry average of one accident for every 1.6 million flights.
We launched the IATA Safety Audit for Ground Operations (ISAGO) in 2008 with the goal of improving safety on the ground and reducing the $4 billion annual burden of ground damage. ACI was a partner from the beginning and many of the standards are based on the ACI Handbook. Today there are 128 ISAGO registrations covering 83 ground service providers at 104 airports.
At least 25 airports have indicated their support of ISAGO. Seattle Tacoma and Amsterdam Schiphol, for example, mandate ISAGO for all ground service providers to keep or renew their operating licenses. If we are truly serious about safety—and I am certain that we are—then I can’t help wondering why all airports would not do the same.
There is also an opportunity to cooperate in the promotion of the IATA Ground Operations Manual (IGOM)—a globally harmonized ground operations manual—to be launched in 2012. This will help address deficiencies that impact both safety and efficiency—particularly in some rapidly developing markets.
Security needs even greater innovation. Flying has been made much more secure over the last decade. More information about the passenger is being collected and analyzed by governments. Airport checkpoints have been filled with additional equipment and processes. And annual costs have risen to $7.4 billion for airlines alone, not to mention what governments and airports are spending.
But for passengers, security has become the single biggest point of dissatisfaction in the travel experience. Part of the problem is that we are working with a 40-year-old concept for checkpoints developed to keep hijackers off aircraft by detecting metal weapons. To meet evolving threats, we grafted on new processes and technology.
It works. But security as we do it today is not sustainable for an industry that will grow to handle 16 billion passengers by 2050. It needs a major re-think.
IATA is promoting a Checkpoint of the Future concept that will improve the passenger experience while enhancing security. ACI worked with us to deliver some of the foundation concepts for this approach to ICAO.
There are two parts to the concept. First is to differentiate security based on passenger data before they reach the checkpoint. Differentiation does not mean discrimination based on race or creed and this is not an imposition on privacy. We simply want to use the information that is already being collected for immigration authorities in order to make informed risk-assessments at the security check.
While every passenger must be screened to a baseline level, we should be more rigorous with passengers about whom we know less and those on government watch lists. And through known traveler programs we could expedite passengers who have voluntarily provided us with enough information to know that they are low-risk. With the US among countries already trialing known traveler programs, this part of the Checkpoint of the Future could be a reality today.
The second—and longer-term—element of the checkpoint is technology. The vision is to get the passenger from curb-side to the airplane door securely but without having to stop, disrobe and unpack. Some of the technology is ready. And it could be fully realized within seven years.
Last month at the AVSEC World conference, the European Commission and the US both supported the need to differentiate passengers. And more governments are coming on board by agreeing to a set of Checkpoint of the Future principles. Already Interpol and 12 states have signed.
I also heard strong support from airports—starting with Amsterdam Schiphol. Getting security right is a common interest. We must move towards a harmonized vision for security by sharing best practices and data. And we need a coordinated message to governments and regulators. Removing the hassle from effective security will make air travel a more compelling product. And the less time travelers spend queuing, the more time they will have for airport shopping, eating and entertainment.
Cooperation on passenger security would mirror the good work that we are doing with ACI on Secure Freight, particularly in the aftermath of the Yemen cargo incidents last year. The concept is to secure the supply chain based on global standards and best practices. Malaysia is already on board and Mexico and Kenya are both works in progress. With cooperation, we can achieve big improvements.
To be fair, not all of the hassle of travel has been created by security. Our own processes have also stood in the way of passengers getting to their destination conveniently. Airports have been key partners in our Simplifying the Business program that cut costs while improving passenger convenience.
The program started with e-ticketing, CUSS kiosks and bar coded boarding passes. These are three enablers that give us an enormous opportunity to innovate the passenger experience before, during and after their journey. The challenge now is to realize the possibilities in a seamless end-to-end process that we call Fast Travel.
In May, Copenhagen Airport and SAS became the first airport and airline to implement all five Fast Travel projects:
- Baggage self-tagging
- Travel document scanning at kiosks
- Self-service flight re-booking
- And baggage recovery kiosks
We have similar commitments with Etihad and Abu Dhabi International Airport, Air New Zealand and Auckland International Airport, British Airways and London Heathrow, and Air China and Beijing Capital Airport, to name just a few.
We also have to work together on service delivery. A good example is baggage handling. IATA’s Baggage Improvement Program (BIP) provided the framework for Auckland International Airport and Air New Zealand to work together to reduce baggage mishandling by 75%. As many airlines unbundle their product and charge for baggage, improving performance will become a bigger priority. This is another win-win area for our partnership and I urge more airports to sign-up for BIP self-help or one-on-one visits.
As we move these concepts forward, I encourage airports to consider ubiquitous internet access as a competitive advantage that improves passenger convenience and enables higher levels of service. I don’t just mean enabling travelers to update their facebook status on arrival. Providing connectivity to mobile devices can enhance our dialogue with travelers—allowing them to take advantage of Fast Travel options or directing them to shopping or other amenities. Like the bar coded boarding pass and e-ticket, Wi-Fi is a powerful enabler of further innovation.
Innovation is not limited to passengers. We are also working to modernize air cargo processes. Nobody benefits from cumbersome paper processes. Implementing e-freight will lower costs across the supply chain, improve efficiency, reliability, accuracy and security, and has the potential to contribute to shortening process cycles by up to 24 hours. Our goal is to have 10% implementation on available trade lanes by the end of the year and 100% by 2015. It’s a complex supply chain that requires a team effort. Through the Global Air Cargo Advisory Group (GACAG) we are also working with the International Federation of Freight Forwarders Associations (FIATA), the International Air Cargo Association (TIACA) and the Global Shippers’ Forum (GSF). We are eager to expand our airport partnerships to promote e-freight which includes Amsterdam Schiphol, Singapore Changi and Seoul Incheon.
IATA works on targets set by our Board of Governors. These have driven the implementation of Simplifying the Business, IOSA and other major programs. While we are working with individual airports on implementation, we would certainly welcome the opportunity to align targets, programs and delivery with ACI on a global basis.
All of these topics have an impact on what kind of infrastructure we build for the future. Airlines are expecting growth in the range of 5% per year for the period of 2011-2015. That means that in 2015 we will need to handle about 700 million more passengers than this year. And that challenge will grow in size, scale and complexity as global connectivity continues to underpin the global economy.
Building infrastructure to handle growth is a challenge best handled in close cooperation between airports and airlines. The numbers are staggering. The five year CAPEX program at Heathrow alone is GBP 4.8 billion. In dollar terms, Heathrow is spending $4 million a day. And airport charges will have tripled in just over ten years to pay for it. Everybody agrees that Heathrow needs investments to expand capacity and improve efficiency. And everybody—even Heathrow—agrees that the current charges are not sustainable.
To meet this common interest, IATA, airlines and Heathrow formalized a consultative process. One of our staff members is permanently based there to ensure that investments are being made that match the needs of airlines in the master planning framework. This includes working together on important programs to optimize capacity, implement Fast Travel, mitigate noise and emissions through improved procedures and airspace redesign, enhance surface access and improve operational resilience, including planning for winter weather events. Moreover, we are working closely together to convince the coalition government of the need to remove capacity constraints and facilitate growth of this critical component of the UK economy.
Of course, the situation is not pure bliss and we will have some robust discussions on price and service standards, which will be addressed through the Civil Aviation Authority’s regulatory review. But the important thing is that we have an open and honest dialogue on our common future.
It is not just Heathrow. Intensive airline engagement occurred throughout Incheon’s construction and it continues to win awards. And Hong Kong—with which I am very familiar—is working with IATA and the airlines as it seeks both to expand terminal facilities and build a third runway.
It is important that the engagement is ongoing with a rolling CAPEX plan to accommodate aviation’s ups and downs. In Hong Kong, for example, the third runway discussion was accelerated to meet explosive traffic growth. In other locations it may mean adjusting expansion to deal with downturns, new market developments or advancing technology.
The IATA Airport Design Reference Manual provides global standards on important airport development issues such as space allocation to ensure high levels of efficiency and service. I am very pleased to see ACI’s support as we are updating this important reference for airports, governments and regulators.
Now please allow me to digress with a short commercial message. Old instincts die hard and when I have a crowd of potential customers in front of me, I can’t resist at least one commercial message. IATA experts in the exhibition area would be very pleased to brief you on our business intelligence, consulting, training and other services that can help with effective management, planning, and operations. Not only that, we can even help you collect your charges—as we do at Morocco’s 17 airports and many others around the world. In fact, we have helped airports from Addis Ababa and Vladivostok to Paris, Heathrow, Tokyo and many more. So I encourage you to find out more.
But the most important message is that working together is the key. We are doing it progressively on an airport by airport basis. And I firmly believe that greater interaction between ACI and IATA can also help drive innovation at a global level.
Environment is a great example of how cooperation generates much greater industry benefits than could be achieved independently. We did it on noise and we are now being challenged on carbon emissions.
Improving fuel efficiency is in the DNA of the industry. That is why we have been able to limit aviation’s contribution to manmade CO2 to 2%. But it is fair to say that we were late in highlighting this to governments and non-governmental organizations, particularly as the climate change debate developed. But the value chain united—airports, airlines, air navigation service providers and manufacturers—through the Air Transport Action Group (ATAG) to tackle emissions. We have taken the high ground with the most ambitious targets and strategy to reduce emissions of any global industrial sector.
Aviation is committed to improve fuel efficiency by 1.5% annually to 2020, cap net emissions from 2020 and cut net emissions in half by 2050 compared to 2005. We can only do this with a strong partnership and innovation.
There are great examples of airports demonstrating our whole industry climate change targets. I applaud ACI Europe’s Airport Carbon Accreditation program and fully support its global implementation. ACI Europe reports that it has already saved in excess of 700,000 tonnes of carbon emissions with ground operations, building temperature control and other ground based emissions.
Let me also highlight two areas where airports can directly help airlines reduce aircraft emissions. Many airports have installed fixed ground power to reduce emissions on the ground. Zurich Airport went a step further to mandate its use. And Detroit, Stockholm-Arlanda and Madrid-Barajas have allocated airport land to grow feed stocks for biofuels which can reduce our carbon footprint by up to 80%. I encourage airports around the world to team-up with airlines in the development of sustainable biofuels. They have the potential to be a game changer in our common commitment to constant innovation and improvement in environmental performance.
Economic and Social Benefits
Airlines and airports share a common interest in making aviation safer, more secure, user-friendly, operationally efficient and environmentally responsible. These are our common license to grow.
We are partners in a unique industry that turned the world into a global community. Together we support $3.5 trillion in annual economic activity and 33 million jobs globally. We also suffer together from shortsighted government policies or political decisions that misunderstand this critical fact. The disappointing decision that the opening of Frankfurt’s fourth runway will come with a ban on night flights is a case in point. Now we are working with the airport and airlines on a way forward to realize the full economic benefit for the runway investment.
To convince governments we need facts that are relevant locally to politicians and policy-makers. IATA is supporting 54 national studies by Oxford Economics that quantify aviation’s social and economic benefits. We are making these available for all the industry to help in their discussions with policy makers.
We must avoid repeats of the UK’s approach to aviation with government policies that are strangling the industry. The GBP2.5 billion Air Passenger Duty is the world’s biggest aviation tax. Failure to build Heathrow’s third runway limits growth where the UK has its greatest demand. And the intention to replace domestic services with high-speed rail will only drive connection traffic elsewhere. In 10-15 years time, when these policies have robbed the UK of the benefits of a strong and growing aviation industry, people will wonder how they let it happen.
The Benefits of Aviation studies are an opportunity to work together. We must protect our future by helping governments focus on ways to support economic growth through a successful aviation sector.
Having spent over three decades of my life in aviation, I am passionate about this industry. Every plane that takes off carries almost infinite possibilities—bringing people together, reuniting families, facilitating business, and supplying high-value components to global supply chains. Aviation is an instrument of peace that creates wealth—both material and of the human spirit.
During my time at IATA I want to contribute to the integrity of a global air transport system that provides safe, secure, efficient and environmentally responsible connectivity. It is too big a job to do alone. And I am grateful in advance for the support of all our partners including ACI and the world’s airports. With openness to innovation and a common understanding of the issues and the potential, I am convinced that we can together direct the future of a sustainable aviation industry that is an even more successful driver of national and global economies.