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Date: 17 November 2011

Remarks of Tony Tyler at ALTA Leaders Forum, Rio de Janeiro

Thank you for a very warm welcome. I am pleased to be in Rio de Janeiro which truly lives up to its name of “Cidade Maravilhosa”.

Thanks to Roberto Kriete, Chairman of the Executive Committee, Alex de Gunten, Executive Director and the entire ALTA team for the invitation to address this forum. I would also like to acknowledge the presence of Luis Rodrigues, President of the Latin American Civil Aviation Commission (LACAC), who has been so supportive in maintaining a positive and proactive relationship with government authorities.

ALTA and IATA are part of the same team. IATA has a global role and ALTA is regionally focused. But most of ALTA’s members are also members of IATA. That is why we have always worked closely together. One of my priorities is to work even more closely with the regional associations and, indeed, any body or organization that can help us make the world a better place for airlines to do business.

Having spent 33 years in the business, I am passionate about this industry. Every airplane that takes off carries with it almost infinite possibilities. It connects people and commerce, creating wealth—both material and of the human spirit. Aviation is the lifeblood of the global economy, supporting 33 million jobs and $3.5 trillion in economic activity. We are privileged to work in this industry…and share a responsibility to ensure its continued success.

State of the Industry

Aviation is a great industry. But it’s a tough business. Since 2001, airlines took in nearly $5 trillion in revenues. But the net result was a loss of $30 billion. 2010 was the best year of the decade, with a profit of $15.8 billion, which was a 2.9% margin. We expect that the margin will shrink to 1.2% this year. And we are looking at an even tougher 2012….with revenues of $632 billion generating a net profit of $4.9 billion for a margin of just 0.8%.As I have said before, aviation is all turnover with very little leftover.

Against this backdrop, Latin American and Caribbean aviation is a bright spot. For the sake of simplicity I shall refer to the region as LatAm. The region’s carriers have generated net profits since 2009. And we expect LatAm carriers to top the charts this year with an EBIT margin of 3.4% and a net profit of $600 million. Furthermore, September figures show LatAm’s international traffic growing faster than the world average. And more importantly for the bottom line, premium traffic is very strong. The four top growth markets for premium traffic year-to-date are connected to, or within, LatAm.

It is absolutely clear that the hard work of the last decade has transformed the region’s air transport industry for the better. Along the way LatAm’s carriers have taken a global leadership role in cross border ownership structures. And the merger of TAM and LAN will create an aviation powerhouse of global scale.

But challenges remain. We are still a long way from the 7-8% profitability needed to cover the cost of capital. The region’s success is not shared equally by all carriers. Some are struggling financially. And safety levels across the region are not uniformly world-class. And of course, LatAm carriers are not immune to high oil prices or the uncertain global economic outlook.

But you don’t need me to remind you that running an airline is difficult. IATA’s role is to support your success. My focus will be on innovation—finding new ways to address our common challenges. Today I would like to discuss innovation in the strategic areas of:

  • Safety
  • Security
  • Environment
  • Infrastructure

Safety

Safety is our top priority. In 2010 the industry recorded one Western–built jet hull loss for every 1.6 million flights. IATA members outperformed that with one hull loss for every 4 million flights.

Against those statistics, LatAm’s performance is cause for concern. Although the region had a perfect record of no hull losses in 2009, the 2010 accident rate was three times the global average. And with three hull losses this year, LatAm is performing four times worse than the global average.

So there is a problem that still needs to be fixed. Ronald Reagan once said that you can achieve great things if you don’t mind who gets the credit. That is the approach that we must take with safety. It’s a team effort.

That is why the partnership to create the ALTA-IATA Trend Sharing Program (AITSP) that we will seal today is so important. It enables all ALTA members to join the Global Safety Information Centre (GSIC)—adding an important regional dimension and depth to our data collection. With this additional data we will be better able to track, analyze and reduce safety risks in the region. This innovative agreement, the first of its kind between IATA and a regional association, reflects our shared commitment to safety.

That the number one cause of accidents is runway excursions is already a well-known fact. And the trend line has gone up in recent years. Working with the Flight Safety Foundation and subsequently with the International Civil Aviation Organization (ICAO), we developed Runway Excursion Risk Reduction Toolkits (RERR). Next year, IATA, ALTA, ICAO and Airports Council International (ACI) will jointly host runway safety seminars in the region.

Of course global standards are the foundation for success in safety. I am pleased that 42 LatAm carriers are on the IATA Operational Safety Audit (IOSA) registry—including 18 non-IATA airlines.

Following on IOSA is the IATA Safety Audit for Ground Operations (ISAGO). It is improving safety and helping reduce the $4 billion annual cost of ground damage. Montego Bay, Lima, Bogota and DGAC Chile are among the 11 airports and three safety regulators in the region who have given their formal support. And I encourage more airlines to join the audit pool that currently includes Copa, TACA, GOL and LAN.

Security

We must also take an approach based on cooperation and global standards in addressing security. It is a government responsibility but can only be delivered in cooperation with industry.

This year marked the tenth anniversary of the tragic events of 9.11. Air transport is far more secure today than it was back then. But that has been achieved at enormous expense—a cumulative total of $100 billion spent by airlines and governments. And at the same time, security has become the biggest point of dissatisfaction for many travelers. Too often it is slow, unpredictable and overly intrusive.

During my time at IATA, I want to see major innovations in the way that we do security—starting with the airport checkpoint. Although we have grafted processes and technology onto it, today’s checkpoint still functions very much as it did 40 years ago—when its purpose was to catch hijackers by detecting metal objects. It works, but it will not be sustainable.

The Checkpoint of the Future will bring two important innovations:

  • First, a risk-based approach to differentiate screening based on what we know—or don’t know—about the passenger. This includes the possibility of voluntary known-traveler programs to help expedite the process. But it does not require any further information than is already collected, so there is no infringement on personal privacy.
  • Second we envisage technology that will allow passengers to move through the checkpoint without stopping to unpack or remove layers of clothing.

The technology is still five to seven years away but repurposing current equipment and using passenger data could reduce wait times by up to 30% today. And we are moving fast. Already 12 states and Interpol have signed a statement of principles supporting the concept—including 10 from LatAm.

Last year’s Yemen printer cartridge incident reminded us that cargo security must also be addressed with a risk-based approach. But there is no Checkpoint of the Future solution for cargo—nor should there be. The innovation needed is to secure the supply chain. That means shippers, freight forwarders, airports, airlines and regulators working together on a multi-layered approach combining advanced electronic information and physical screening. ICAO is aligned with this vision. I am also pleased that Mexico and Chile have committed to IATA’s Secure Freight initiative.

I look forward to working with ALTA to promote both these innovations across the region. We must also cooperate to discourage regulators from deviating from global standards for the information required for passenger and cargo facilitation. This does not improve security. But it creates a compliance nightmare.

Environment

Environment also needs cooperation and a global approach. As a united industry we 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 levels.

I have just come from the IATA Fuel Forum where much attention focused on sustainable biofuels. With the potential to reduce aviation’s carbon footprint by up to 80% when calculated over the lifecycle of the fuel, sustainable biofuels are a potential game changer. They are tested, approved and being used on some commercial flights. Brazil and Mexico have important projects that are helping us to move forward.

The challenge is commercialization—to increase the supply and reduce the cost. To do so, and create jobs in the green economy, we need a united voice asking governments to create the fiscal and legal frameworks to support the development of a successful biofuels industry.

Unfortunately, the attention of governments is being distracted by Europe’s unilateral plan to include international aviation in its emissions trading scheme (ETS) from 2012. The industry has long opposed this because regional schemes distort markets and open the door to a patchwork approach of conflicting, competing or layered measures including taxation.

But let me also be clear in stating that the industry supports market based measures—including emissions trading—as a key pillar of our environment strategy. But such measures must be globally coordinated through ICAO. This is certainly the position of IATA, and I urge every airline in the region to unite behind this message and carry it to their respective governments.

States are now expressing very clearly their opposition to the ETS. They see the extra-territorial imposition of taxes as a threat to sovereignty. The Latin American Civil Aviation Commission (LACAC) issued a statement of opposition on behalf of the region’s governments. The US is debating legislation preventing its carriers from participating. And recently the ICAO Council agreed to a Declaration—sponsored by 26 states including 8 from LatAm—urging Europe to abandon its plans and support a global solution through ICAO. As 2012 draws near, we can expect growing pressure on Europe to accept credit for raising the profile of the issue…and change course to support a global solution.

Airspace & ATM

Modernizing airspace infrastructure goes hand in hand with improving safety and environmental performance. There is a lot of scope to work with LatAm governments to improve air navigation.

Along with promoting coordination among air navigation service providers (ANSPs) we need some fundamental changes in mindset. I have great respect for the job done every day by air traffic controllers. But some ANSPs treat our aircraft as if they are still controlling B727s and DC-8s. As a result we are not fully utilizing the tremendous leap in onboard capabilities that has accompanied the fleet modernization.

This is not a technology issue, it is a cultural one. All stakeholders must work to replace a mindset of “This is how we’ve always done it,” with one that embraces innovation and the efficiency gains which our aircraft can produce. There is visible progress. The ANSPs of Mexico and Chile are changing their workforce culture. Brazil is also addressing the issue. But there is a lot more to do.

We should also be utilizing technology available today to expand the use of performance-based navigation (PBN), which offers safety and efficiency gains. LatAm is a leader in this regard and IATA is working with ALTA and the region’s stakeholders to expand such capabilities. The benefits speak for themselves. Successful implementation at Cuzco resulted in a 93% reduction in delays and diversions by airlines authorized to fly required navigation procedures (RNP).

Airports

Of course, innovation in the air must be matched by equal efforts on the ground. We live in a virtuous circle. Airlines are a catalyst to economic growth. And economic growth powers aviation’s expansion. But it grinds to a halt, if we have no place to land our planes and pick up passengers.

Having the right infrastructure is a launching pad for economic growth. I saw this first hand over three decades in Asia. The enabler for Cathay Pacific to become one of the world’s major airlines was the development of the new Hong Kong International Airport. But more important than the success of the home airline is the economic contribution that connectivity—supported by the airport—brings to Hong Kong.

Looking around LatAm, it is clear to me that investment in runways and airport facilities has not kept pace with the impressive traffic growth. We have not successfully or fully explained to governments the economic benefits that aviation brings.

That is why IATA is funding a series of 54 national studies to quantify these benefits. We are doing this in close cooperation with regional and local associations and stakeholders. ALTA has been an excellent partner in the effort for the Latin American studies.

Yesterday I was in Brasilia to bring the study to the attention of the government. Aviation contributes 32 billion Reais to the Brazilian economy—1% of GDP. This supports nearly 700,000 high quality jobs. And if we include those involved in tourism, the number jumps to 900,000. Aviation should be on the government’s radar screen as an industry worth nurturing as a strategic asset.

To protect and grow that economic value, I urged the government to review the pricing parity formula for fuel. Tying the price to the Houston market and including theoretical charges for import duties and transport is a $400 million annual competitive disadvantage to Brazil’s airlines and its economy. It should not be that way in a country that can supply 80% of its fuel needs domestically.

Another issue which the government must address is the inadequate runway and terminal capacity in Sao Paolo. The economic center of Brazil needs world-class connectivity. That should be a core part of the government’s economic strategy. And the same argument concerning airport infrastructure could be made to governments across the region—including Buenos Aires, Antigua, Caracas, Bogota and others—which suffer from insufficient capacity.

It’s not just having a building and some concrete. Our business models depend on airports accommodating the billions of dollars in new aircraft that we are buying in order to meet business demand. We need well-designed terminals capable of facilitating the rapid transit of passengers. And we need reliable, robust airport IT infrastructure that is capable of evolving to meet customer demands for self-service from check-in to baggage recovery, which we are addressing with Fast Travel.

The physical constraints at many airports are the result of an outdated regulatory and financial model that values aviation more for its role as tax collector than for the wealth it creates. Across the region we see:

  • Cross subsidization of airports
  • Revenue diversion of charges to the general treasury
  • Lack of financial transparency
  • Lack of competition among airport service providers

Each one of these is a serious issue. In aggregate they are a roadblock to the growth of aviation and the economy.

Where governments are not able to support development directly, they are turning to the private sector. Privatization is not a panacea. Careful thought is needed to understand the potential benefits and to avoid the very real pitfalls. The Latin American region suffered tremendously from a series of misguided privatizations about a decade ago.

We don’t care who owns an airport, so long as they are committed industry partners. And to ensure that, governments must accompany any privatization with a regulatory framework that supports transparency, user consultation, investment in future facilities, service level standards, and efficiency incentives—and of course all in line with ICAO principles.

Brazil is at a vital crossroad in this regard. We are seeing the beginnings of a much needed transformation in the approach to its airports to match the dynamism of airlines like TAM, GOL, Azul, Avianca and Trip. The Agência Nacional de Aviação Civil (ANAC) is introducing pragmatic airport regulation and the government has embarked on a privatization program that should open the door to desperately-needed investment at key airports, especially Sao Paulo.

This is potentially good news, but we also have serious concerns. The possibility for a conflict of interest exists, with the government having dual roles as a major shareholder in the airport concessionaire and the economic regulator. Additionally, airlines do not have a place in the rate-setting and development processes, nor is there a mechanism for ongoing and regular discussions between the aviation community and the airport owner.

We will be working closely with ALTA and the local industry to bring a global perspective to the decisions that will be taken in the coming months. Our message will be that the long-term interests of the Brazilian economy transcend any short-lived or temporary financial gains from a privatization process. I raised these issues personally with the Minister yesterday. And our team in Brazil will continue to do so. But we will be far more effective as a chorus of industry advocates than a solo voice, so I urge others to join the effort.

Conclusion

Taking a long-term view of Latin American aviation, one must be optimistic. The tremendous effort on the part of government authorities and the aviation stakeholder community is delivering huge benefits to the region’s economies. But this really is just the beginning. There is vast economic potential waiting to be unlocked and it will only be realized with a successful aviation industry.

IATA is at your service—keeping your money safe in our financial systems and promoting the global standards that have allowed the industry to grow safely and turn our planet into a global community. It is our responsibility to continue to work together, with a common voice and vision. In doing so, we will achieve a safe, secure, efficient and environmentally responsible aviation industry that supports sustainable economic development in LatAm…and globally.

With major changes in the industry’s structure and infrastructure on the agenda, I plan to keep a special watch on progress through the IATA team, in partnership with ALTA and of course in direct contact with our members. I am confident that we will find the innovations needed to take Latin American aviation to even greater heights. It’s up to everyone in this room to help make it happen.

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