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Date: 8 March 2012

Remarks of Tony Tyler at the 37th FAA Aviation Forecast Conference in Washington

Good afternoon and thank you for the invitation to address this very important event on behalf of the International Air Transport Association (IATA). It is always a pleasure to visit Washington which plays an instrumental role in global aviation.

This is a forecast conference, but I hope you will understand if I keep my predictions to a minimum. In December last year, our central scenario was for a global profit of $3.5 billion on expected revenues of more than $600 billion. That’s a 0.6% profit margin.

At that time, the big unknown was the European economy. Had the sovereign debt crisis spun out of control, the impact on the global economy would have been devastating and most certainly have plunged the air transport industry into the red.

For the time being, an economic catastrophe centered on Europe seems to have been avoided, which is good news. But I do think that we need to watch this space for a bit longer as Europe is still not out of the woods. In the meantime, rising oil prices—currently 9% higher than a year ago—are an emerging threat

On 20 March we will be calculating the net of these impacts in a revised outlook.

I should also pass on a warning from our chief economist. The track record of predicting shocks or major turning points in the economy or the industry that have dramatically affected performance is not good. My translation of that is that aviation is an industry with no shortage of surprises!

Aviation is an Economic Catalyst

I believe I am on firmer ground addressing the conference theme, “Aviation: Driver of the Global Economy.” I couldn’t agree more. Aviation drives economies---global, national and regional. Let’s start by looking at some of the key contributions of the US aviation industry to understand this.

According to a 2011 study by FAA’s Air Traffic Organization, aviation generates up to $1.3 trillion in US annual economic activity and 10.5 million jobs. This accounted for up to 5.2% of GDP. Only oil and gas extraction and agriculture make a larger direct contribution.

Our friends at Airlines for America (A4A) looked at the price evolution over the last decade. The price of movie tickets increased 46.4%, gas by 85% and the US Consumer Price Index is up 27%. The average price of a domestic round trip air ticket was only up 6.7%--including bag fees and reservation changes, which means that the real cost of air travel has declined significantly.

Price accessibility enabled more than 600 million people to fly on US domestic routes in 2011. A further 100 million traveled internationally to or from the US. With a population of 313 million, that makes the US one of the most mobile populations on the planet.

That mobility is vital to the modern economy. Every flight delivers connectivity that creates jobs and enables commerce. State and local policy makers understand this. Communities lobby hard to attract new air services because they know that connectivity enables and attracts business and jobs in a virtuous cycle. When tough times hit, cities fight to protect air services, because they understand that without connectivity, business and jobs go away and communities wither in a downward spiral.

But are Public Policies Helping Aviation Deliver Economic Benefits?

Is Washington aligned with this agenda? Aviation gets a lot of attention. But is the focus on unlocking aviation’s catalytic economic power and enabling businesses with global connectivity?

The US airline industry transformed itself over the past decade. A4A helped quantify this in some research which shows that the US industry lost $62.5 billion since 2001. Approximately 25% of the workforce was laid off—more than 137,000 jobs. Weekly departures by US airlines are down 21%--or 46,000 flights. And more than 60 airports, outside of Alaska, have seen service end.

The consequences of this restructuring on local communities and economies are profound.

I spent most of my career in Asia, where governments have used aviation strategically. The reward for this enlightened approach is dramatic economic progress in places like China, South Korea and Singapore. In contrast, Washington sometimes loses focus on how aviation can drive growth, prosperity and job creation, to the detriment of the economy at large.

I believe that if you want to discourage something, wrap it in a web of restrictive regulation and tax it…heavily. Let’s test that theory against elements of today’s national policy agenda.

Taxes

To start, taxes now represent about 20% of the cost of a US airline ticket. The Administration’s 2013 budget proposal heaps even more taxes on aviation, with much of the receipts used to balance the budget or reduce the deficit. That won’t stimulate air travel or economic activity.

Recent Rulemaking

When Washington does look beyond taxation, the agenda often bogs down

  • On complex problems that defy easy regulatory solutions,
  • Or commercial matters that should be left to the workings of the free market.

Fundamentally, a competitive market can and does find solutions to most commercial issues. Adam Smith’s Invisible Hand is a more reliable guide in commercial areas than the hand of regulators. Unfortunately, we are seeing the US retreat from the free market principles by which it was guided during the first three decades of deregulation. In its place we have micro-management regulating how airlines may compete in response to the demands of the marketplace. This discourages creativity and adds costs.

Let me give you some recent regulatory actions to consider.

  • Why require airlines to hold all reservations for 24 hours? It ties-up valuable inventory and is being applied extra territorially to non-US airlines
  • Why require airlines to include all fees and taxes in the price of the ticket being advertised, when the same is not required of other travel products such as hotel rooms and cruises. Is the policy imperative to hide away the heavy tax burden?
  • Why consider forcing airlines to sell all of their products through global distribution systems (GDSs)? With a few keystrokes any consumer has access to every airline’s available fares and attributes in every market.

These are all examples of regulators losing sight of the big picture and getting mired in problems that have little relevance to the concerns on Main Street. Let’s remember that the consumer always has the last word. Deregulation is built on the principle that the market is ruthless with airlines that fail to meet consumer expectations.

I understand that today the regulatory response to unbundling airline products is taking up a lot of policy-makers’ time. Consumers accept unbundled pricing models for everything from mobile phones to automobiles. If they can work their way through customizing an online computer purchase, surely decisions on lounge access or baggage options should not present a problem. What appears to be an institutional bias against fare unbundling is no justification for regulatory excess.

Unintended Consequences

And the more that regulators tinker with the industry, the greater the chances of unintended consequences. The prime example is the issue of tarmac delays.

Nobody wants a delay. For passengers, they are a great inconvenience. For airlines, they are a threat to their business. Costs increase when crew and aircraft are out of position. No airline wants to risk disappointing customers who have plenty of airline options. 

The tarmac delay rules also clearly show that regulators don’t want delays either—given the stiff penalties that they are imposing.

Fines won’t stop bad weather, which is usually the instigating factor in most extended delays. Infrastructure investments, on the other hand, could boost system capacity and efficiency. But policy-makers let the legislative process for FAA reauthorization, which included critical funding for the NextGen air traffic management system, drag on for four years.

If policy-makers want to reduce delays, industry has some suggestions:

  • Ensure that every dollar paid by airline passengers for customs and immigration services is invested to provide officers and airport facilities commensurate with the rising levels of international travelers visiting the US. This will avoid aircraft sitting fully loaded at the gate for hours for lack of room in the immigration hall to unload passengers.
  • Ensure that revenue that is generated from airport fees and charges is used to improve airport facilities. New York is an aviation chokepoint, but the Port Authority of New York and New Jersey is spending hundreds of millions of dollars generated by its airports on non-aviation projects.

How did Washington policy makers fulfill their desire to reduce delays? They created a rule putting the full onus for long tarmac delays on airlines.

The result is an unintended consequence. Since no airline wants to risk a heavy fine for violating the rule, carriers are pre-emptively cancelling flights that face a risk of an extended delay. The Government Accountability Office has estimated that the number of flight cancellations increased by more than 5,000 since the rule took effect. Separately, FAA has estimated that delays and flight cancellations cost the US economy some $31.2 billion. Extended delays may have gone away but at a price.

Solutions in Partnership

This partial list of ill-conceived regulatory measures illustrates a growing frustration among industry that the national agenda is not focused on competitiveness. Indeed, if you believe the premise that I started with—that the best way to kill an industry is to over-regulate and over-tax it—then you could jump to some worrying conclusions.

I am not a conspiracy theorist. While there is a commonality among these measures, I don’t believe that they are the result of a coordinated plot to disable air transport in this country.

But it is precisely a lack of coordination—or should I say vision—that is handicapping aviation in the US. A4A recently launched a campaign for a national airline policy. They could not be more right. If creating jobs and encouraging economic growth is a national policy priority, then the lack of a coordinated national policy on aviation is shocking. A national policy is needed and it must be aligned with the economic needs of communities, states and regions—and focused on improving the competitiveness of the US aviation industry.

And if politicians and policy-makers don’t believe the airlines then we need to look at raising a stronger economy-wide coalition. Airports, manufacturers and tourism-related businesses are obvious kindred spirits. But any business that depends on global connectivity has a stake in a successful and efficient air transport sector. The challenge is to channel that common interest into advocating for real and coordinated solutions.

Working together is not a new concept. We already have a template on value chain cooperation in how we approach safety, security and environment. These are top of the agenda for all stakeholders, so cooperation may come more naturally than on advocating for a national aviation policy. But there can be no doubt that speaking with a common voice is more effective than speaking in isolation.

Of course, all the parts of the industry value chain and its stakeholders may not always agree on everything. But let’s concentrate on those areas where we do agree and deliver a strong message for a coordinated national aviation policy that includes reasonable taxation and competitiveness-enabling regulation. Everybody wins with that…including the national economy.

With that said, let me briefly update you, from the global perspective, on key developments in two priority areas that the FAA and IATA hold in common—safety and environment.

Safety

Safety is, of course, always the top priority. This week IATA announced that the 2011 accident rate for Western-built jets was the lowest in aviation history. The 2011 global accident rate, measured in hull losses per million flights of Western-built jets, was 0.37. Put another way that is the equivalent of one accident for every 2.7 million flights. This is a 61% improvement over the last decade. And I would like to congratulate the US airline industry for completing three consecutive years without a single passenger fatality.

This performance is owing to a commitment to safety shared by regulators and industry that manifests itself in a partnership approach. An example is the Commercial Aviation Safety Team, a joint FAA-industry effort created in 1998 that helped the US achieve a better than 80% reduction in fatal aviation accidents over the 10 years through 2008, with a new goal of reducing the US commercial aviation fatality risk by 50% to 2025.

Another illustration of working together is the 2010 agreement among IATA, the International Civil Aviation Organization (ICAO), the US Department of Transportation and the European Commission to form the Global Safety Information Exchange to share safety information.

It is also owing to global standards. The IATA Operational Safety Audit (IOSA) is the first global safety standard for airlines. All IATA members must pass an IOSA audit every two years. IOSA airlines have a rate for accidents that is more than twice as good as non-IOSA airlines. But you don’t have to fly only on an IATA airline to experience the benefits of IOSA. Safety is a non-competitive issue, so IATA makes this program available to the entire industry; and of the 369 airlines on the IOSA registry, 130, or 35% of the total, are non-IATA member airlines.

Environment

Managing aviation’s 2% share of global manmade CO2 emissions also sits at the top of the industry’s agenda. Airlines, airports, air navigation service providers (ANSPs) and manufacturers have made three sequential commitments:

  • Improving aircraft fuel efficiency by 1.5% annually to 2020
  • Capping net CO2 emissions from 2020 with carbon-neutral growth
  • Cutting net emissions from air transport in half by 2050 compared to 2005

Governments will play a crucial role in helping aviation to achieve these targets by investing in more efficient airport and air traffic management infrastructure as part of our Four Pillar Strategy. This will require cooperation and harmonization across national borders, so, for example, airlines do not have to invest in different cockpit systems for each region they fly into. FAA has been a strong advocate of airline efforts to reduce their impact on the environment. For example, it is working with carriers to facilitate Performance-Based Navigation (PBN), enabling things such Required Navigation Performance (RNP) and Continuous Descent Approaches which in turn help airlines conserve fuel and reduce CO2 emissions. But FAA needs to move faster on implementing RNP and NextGen.

Accelerating the production of sustainable aviation biofuels is also an area for governments, now that the aviation community has done the heavy lifting to prove they work safely in commercial aircraft. Sustainable biofuels offer up to an 80% CO2 reduction over the lifecycle of the fuel. To see them more widely used in aviation, the price needs to drop and supply needs to increase. Governments could help facilitate this with policy initiatives designed to attract investment and de-risk the scaling up of commercial biofuels projects.

The “Farm to Fly” program between FAA, the US Department of Agriculture, A4A and Boeing is a welcome development, as is the commitment by the Obama Administration to invest up to $510 million in a public private partnership to produce aviation and marine biofuels. But much more is needed.

A key, if temporary, pillar of our strategy is market based measures. These must be coordinated among governments to avoid market distortions, ensure fairness and avoid carbon leakage. These are the essence of the principles adopted by ICAO at their 2010 Assembly as a guide for developing a global framework for market based measures by 2013.

Unfortunately, Europe has chosen a go-it-alone regional approach with the inclusion of international aviation in the EU Emissions Trading Scheme from this year. This is driving discord at a time when we need harmony. Why? Because non-European states, the US included, see the intention to tax non-EU airlines for emissions over non-EU territory as an attack on their sovereignty.

Representatives of 24 nations including the US met in Moscow two weeks ago to discuss counter-measures. They issued a declaration urging a global solution through ICAO and outlining possible actions if Europe continues on its unilateral and extra-territorial path.

No one wants a trade war. But the prospects are growing more likely.

There is solution. And that is ICAO—where global standards and solutions for air transport are made. The EU deserves full credit for bringing the emissions issue to the front and center of the global aviation agenda. And I believe that recent indications coming from Europe point toward their understanding that a global agreement through ICAO is the way forward. Now it is time for Europe to sincerely take a stake in making the discussions and decisions at ICAO a success.

I chose these words very carefully because, if I understand the international mood correctly, non-European states will be looking for some proof of Europe’s sincerity. That will mean doing more than simply reiterating its determination to implement its scheme even as it professes to support a negotiated agreement through the ICAO process.

Conclusion

At the beginning of my remarks, I said I would keep my forecasts to a minimum and I have been true to my word. But I will offer a few predictions: Aviation will be the primary means of moving people safely over long distances for the foreseeable future. Aviation will continue to be a force for good in the world. It will connect people to markets, reunite families and enable journeys of discovery. It will continue to be an enormously challenging industry in which margins are squeezed. And finally I predict that everyone in this room cares deeply about aviation and is going to work hard to make it even a bigger success than it is today.

Thank you

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