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Date: 15 November 2011

Remarks of Tony Tyler at the IATA Fuel Forum in Paris

Good evening. It is a pleasure to see such a great attendance at this Fuel Forum. And I extend my thanks to the Joint Steering Group—dedicated colleagues in airlines and oil companies—and our kind sponsors for making this gathering possible. 

Although this is my first IATA Fuel Forum, I have followed fuel issues very closely, particularly during my time as CEO of Cathay Pacific Airways. Let me recall two of my most vivid fuel-related memories:

  • At the top of the list is 13 April 2010 when CX 870 from Surabaya became uncontrollable as a result of fuel contamination. Superb airmanship and a good bit of luck brought the A330 home safely.
  • And then there was 2008 when oil skyrocketed to $147 per barrel and the fuel needed to power our fleet had become a villain that was robbing airlines of profitability. Lives were not at risk, but I don’t think that there was an airline CEO anywhere who was not wondering how an airline could survive if Goldman Sachs had been correct in predicting oil going to $200 a barrel. Then, of course, the price crashed, confounding the hedging strategies of many airlines—my former airline included.

Rest assured that fuel and the issues surrounding it are on my radar screen. Since taking up this job four months ago, I have been very pleased to learn about and follow IATA’s extensive involvement in this critical part of our business.

From my perspective, I divide IATA involvement in fuel issues into three areas: safety, environment and commercial. And in each of these areas, I would like to share some ideas on how we can develop the strong partnerships that exist in the industry to deliver value through innovation.

Safety:

Safety always comes first. Following the Surabaya incident, on 5 May this year we had another reminder of the importance of safeguarding fuel quality when Tel Aviv’s fuel supply was contaminated. The industry—including IATA and ATA—worked with regulators to assess the situation and ensure that safety was not compromised.

Both incidents show the need for systems and processes that keep the fuel supply safe. At the global level real progress has been made towards a solution. Even before the final report of the Hong Kong Civil Aviation Department’s investigation into Surabaya was submitted, three groups of experts—nominated through this forum—began working with ICAO to address the issue with a manual of global standards for fuel supply storage and provision. Working with industry experts and in cooperation with ATA, a first draft was produced in June. This is a true innovation in how we manage fuel with standards, best practices and procedures to safeguard fuel quality throughout the supply chain—from the refinery to when it is delivered into the aircraft.

The manual is working its way through the ICAO processes. You will get an update on this in the joint sessions tomorrow. But I wanted to highlight the great cooperation that has brought us so quickly to this point. The work is not complete. Along with working through ICAO, we are also engaged with the engine manufacturers to help complete the guidance by providing quality requirements at the point of contact with the aircraft.

One of the great hallmarks of IATA is its ability to harness the resources and technical expertise of the industry for the good of all. Alongside the work of the Technical Fuel Group, IATA quality audit pools for fuel, de-icing and anti-icing and drinking water perform mission critical functions supporting safe operations around the world by sharing information. I dare say that no airline has the resources to do it all by themselves. And even if they did, the results would neither be as comprehensive nor as efficient as what we achieve through these pools.

So, under my watch at IATA, I plan to continue to support fully —and expand if necessary—these activities which fulfill two of my top priorities: to improve safety and to deliver value to our members.

Environment

Fuel is intimately concerned with one of aviation’s great challenges—to reduce its carbon emissions. Airlines are responsible for 2% of global manmade CO2 emissions. That is about 660 million tonnes of carbon a year. In 2012 we expect a fuel bill of about $200 billion or 32% of average operating costs. Emissions trading schemes and environmental taxes are progressively adding to the cost burden.

Aviation must be sustainable. Sustainability is our license to grow and provide the connectivity that has turned our planet into a global community. We have embraced this with commitments 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 levels. You are all familiar with our four pillar strategy to achieve this with technology investments, better operations, more efficient infrastructure and globally harmonized positive economic measures.

Before I address the headline-grabbing dispute over Europe’s extra-territorial plans to extend its emissions trading scheme to international aviation, let’s look at some technical aspects of our approach to climate change.

Fuel Saving Operational Measures

First, saving fuel is in the DNA of every airline. But to do this, we also need the cooperation of our partners—particularly air navigation service providers, regulators, manufacturers, suppliers and airports. From my own experience, I know how difficult it can be to turn the common interest into results. The congestion in Hong Kong’s Pearl River Delta continues to waste an enormous amount of fuel—and so create unnecessary emissions—every day. There is a common understanding that this needs to be fixed. The various governments have discussed a solution, but of course we would all like to see its implementation faster than seems likely to happen. And on a much broader scale, the same impatience exists with the excruciatingly slow progress on the Single European Sky and NextGen in the US.

We continue to work with Europe and the US to speed up implementation at the technical level while increasing the pressure on decision makers to put their political will behind turning these projects into reality. The arguments for moving forward are sound and bear repeating. A Single European Sky would improve Europe’s competitiveness with EUR 5 billion in cost savings and eliminate 16 million tonnes of carbon emissions annually.

But in the meantime, we are also working within current technologies and procedural capabilities to deliver efficiencies. Our latest project is iFlex which focuses on optimizing flight routings in less dense airspace. Trials on the Johannesburg to Atlanta route saw Delta Air Lines report average per flight savings of 8 minutes, 900 kg of fuel and 2.9 tonnes of CO2.

Sustainable Biofuels

Alongside saving fuel, the other aspect of our approach to climate change is finding different fuels—namely sustainable biofuels. The progress that we will report to our Board in our 2011 Report on Biofuels next month is a story of revolutionary proportions. Five years ago, there was no alternative to jet fuel. Today there is—with sustainable biofuels. They are safe, approved and airlines are using them for commercial flights.

With the potential to cut aviation’s carbon footprint up to 80% over the lifecycle of the fuel, sustainable biofuels have the potential to be a game changer. But, they are still expensive and supply is limited. In other words, we need to commercialize them.

I am under no illusions that this will be an easy process. But there is no shortage of commitment from the industry. Projects to use municipal waste to produce jet fuel are being developed in London, Northern California, Sydney and Rome. For example US-based company, Solena, is working with local airlines to build plants capable of turning 500,000 tonnes of normal organic urban waste into 16 million gallons of jet biofuel each year.

To move to broad usage, governments must set policies that:

  • Foster research into new feedstock sources and refining processes;
  • De-risk public and private investments in aviation biofuels;
  • Provide incentives for airlines to use biofuels from an early stage;
  • Encourage stakeholders to commit to robust international sustainability criteria;
  • Make the most of local green growth opportunities;
  • And encourage coalitions encompassing all parts of the supply chain

Such policies would help increase volumes and drive down costs—exactly what is needed to move forward. And at this time of global uncertainty, it makes sense for governments to invest in sustainable biofuels that will increase energy self-sufficiency and create jobs in the green economy.

Let’s make no mistake. Airlines are committed to using sustainable biofuels. Why? Because they will be critical to achieving carbon neutral growth and eventually cutting aviation’s emissions. Combined, these are the industry’s long-term license to grow. So, to secure our future, we need to make sustainable biofuels work commercially.

Good things are happening. We have seen an impressive acceleration in new supply projects over the last 12 months. There is an opportunity for both our traditional suppliers and new entrants to engage in this exciting development. We need all to come on board, work together and speak with a common voice.  That is the way to convince governments to provide the right policies to develop a sustainable aviation biofuel industry.

Emissions Trading

Now let me turn to the European ETS issue. Europe’s relentless determination to include international aviation in its regional emissions trading program from 2012 is distracting the attention of governments from finding the global solution for market based measures that we all need and want.

Airlines have long understood that the extra-territorial plan is flawed. The market distortions that will result are unacceptable for a global industry. Many of you in this room have struggled with the costly and onerous monitoring and verification requirements. It is difficult to understand how reporting for what is essentially a tax could require more effort and resources than what is needed to manage fuel use for safety purposes.

But the real pressure for change is coming from governments who view Europe’s plans to tax beyond its borders as an infringement on sovereignty. The US is processing legislation that would prohibit its carriers from participating. And earlier this month 26 states sponsored a declaration at the ICAO Council which opposes Europe’s plans.

But let me be very clear that aviation is not against emissions trading. Market based measures are a key component of our environment strategy. But they must be realized in a global approach that does not distort markets or infringe upon sovereignty. And the only path to achieve that is through ICAO—the same way that we achieved a global agreement on the Balanced Approach to noise that has guided industry and governments on this issue for a decade. Through ICAO, governments have already agreed to principles for such a global scheme and a work program is in place to produce a framework by the 2013 Assembly. So it’s time for Europe to take credit for pushing progress and re-focus its efforts on contributing to a successful global scheme.

Commercial

Finally, I would like to address the commercial aspects of fuel. Basically we need a reliable supply at a reasonable cost.

Supply Reliability

Supply reliability is an issue we face even at our largest hubs. Tankering fuel during the Buncefield disruptions at Heathrow cost up to $20,000 per long-haul flight. And each tech stop required because the aircraft cannot uplift enough fuel could cost up to $10,000. 

Supply disruptions are costly. But we have not given them sufficiently close scrutiny because our operations people have always found technical solutions. And the additional costs have been absorbed—unnoticed by most. I was pleased to hear that there was a fruitful discussion among airlines on collecting data to see if there is a business case to support investments that could mitigate some supply risks. This is a perfect issue for cooperation among airlines, airports and fuel suppliers. I shall follow progress on this closely.

Cost

But the biggest unknown in the fuel area remains the price. A decade ago crude averaged $25 per barrel. It was 13% of our cost structure and the annual cost was $43 billion. Surviving with oil at $100 a barrel was unthinkable. Next year we expect a price of $100 per barrel and a total bill of $201 billion that will consume 32% of our costs. Oil at less than $100 has somehow come to look cheap.

That change in perception illustrates an enormous shift in the business model of airlines over a decade of change. There is no doubt that airlines today are more efficient. But we are not any more profitable. In the outlook for 2012 we expect revenues of $632 billion but a paltry $4.9 billion profit for a margin of 0.8%.

So where did all the efficiency go? A good part has been absorbed in the fuel value chain. Others have weighed-in too—including governments with their taxes. And the rest has been transferred to passengers. As I have said before, the problem with the airline business is that it is all about turnover and there is not a lot of leftover.

Oil is a scarce resource. The long-term price path is upward—with volatility as a result of political and economic uncertainty. While sustainable biofuels have the potential to help us in our environmental efforts, current costs are prohibitive. So I don’t see any long-term scenario for cheaper fuel costs.
But there are many things that inflate the market price—taxes, charges, concession structures and fees, and government mandated pricing formulas. We need to address these.

Taxes

The Chicago Convention prohibits taxing jet fuel for international aviation. Despite that, El Salvador, the Bahamas, the Dominican Republic, Uruguay, Mexico and China are among states which impose such taxes. And Panama and Jamaica are planning to join their ranks.

Even if we put the Chicago Convention arguments to one side, it is clear that taxing aviation does not make economic sense. When the Dutch Government tried to collect $300 million with a departure tax, $1.2 billion disappeared from the Dutch economy. They had the good sense to repeal the tax. The same lesson applies to fuel tax. Making connectivity more expensive through taxation comes with a broadly felt economic penalty.

Pricing Formulas

Aside from taxes, governments also create pricing policies which can artificially inflate the price of fuel. Brazil is a classic example with a pricing parity formula that pegs prices to the Houston market—including theoretical costs for import duties and transport. And it is a $400 million competitive disadvantage to the Brazilian economy even though Brazil supplies 80% of its needs domestically.

Brazil is not alone. China, Jordan, Cuba, Congo, Angola, Qatar and Yemen all use similar tools. And Colombia and Costa Rica are planning to do the same.

Competition

In other countries, fuel prices have been influenced by restrictive concessions for suppliers and into-plane service providers at airports. At the same time, we see a number of major oil companies pulling out of retail operations. In some cases the market space has been taken-up by companies primarily focused on trading oil as a commodity. Without the upstream operational knowledge of the business, the risk to quality of service exists.

We support competitive environments at airports for the supply of oil. Competition keeps both price and quality in check. Our work in India is a good example that is starting to yield positive results. The 2009 introduction of common-use fuel infrastructure increased competition that saved $360 million for airlines. Some issues remain to be solved, but this is a great start.

We are working in Russia and Poland on similar programs and I understand that you will be briefed on these later in the week.

And in parallel, we need to ensure that there is regulated transparency for monopoly providers of fuel infrastructure and in the concession arrangements with airports.

Solutions

To convince governments to take action—to reduce taxes, change pricing formulas or introduce regulation—we need strong economic arguments. As an airline man I am passionate about the industry and the good that aviation brings to the world. Every plane that takes off carries almost infinite possibilities as we connect people, economies, families and businesses. This industry generates wealth, both material and of the human spirit. And the connectivity that is our product has turned the world into a global community.

I am sure that this is obvious to every person who is connected to the industry. The challenge is to turn this intuitive passion into arguments that will convince governments to change policies for the better. I don’t have all of the answers, but I believe that there are at least two components that will move us forward in our dialogue with policy-makers: quantifying the economic benefits that we make possible and working as a united industry team.

Aviation is a catalyst for economic growth and jobs. At a global level aviation supports $3.5 trillion in economic activity and 33 million jobs. But to convince national government, we need to break that figure down into numbers that mean something at a national level. IATA commissioned 54 national studies with Oxford Economics on the Benefits of Aviation. These are tools for anyone in the aviation industry to use to convince governments to derive strategic economic value from aviation-enabled connectivity.

This is not a theoretical exercise. From my more than three decades working for an Asian airline, I have seen with my own eyes the power of aviation to drive economic development in economies as diverse as China, South Korea and Singapore. These new Benefits of Aviation studies quantify those benefits to help all players in the industry support strong arguments against taxation—a particularly powerful tool at a time when aviation is increasingly being seen as a soft target.

Under my watch, IATA will continue to be a strong advocate for the industry. But the results will be much better if IATA is a strong voice in a united chorus, rather than as a soloist. One of the themes that I will be pursuing as IATA’s Director General and CEO is the need for the complex value chain that is the aviation industry to focus on common issues and speak with one voice.

Certainly, there are issues on which we will have differences of opinion and those will not go away. But if we can keep sight of the bigger picture, we can help to influence policies that give us a license to grow together, that produce a stronger aviation industry or promote efficiency that will benefit and create opportunities across the entire supply chain and in the wider economy.  Our success in working together on safety should be the inspiration for how we approach governments to promote actions and change to grow the industry stronger.

Conclusion

The Fuel Forum is the perfect place to foster such a mindset. I know that you have a busy agenda for the following days. I wish you luck in finding value chain solutions to the problems that we face in common. And I look forward to monitoring progress through Hemant and his very capable IATA fuel team which is here to serve your needs and add value to your work.

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