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Date: 25 April 2012

Remarks of Tony Tyler at the UK Aviation Club in London

Thank you for the kind invitation to address the UK Aviation Club. The last time that I was here I gave you a Hong Kong point of view on aviation as the CEO of Cathay Pacific Airways. Now, as Director General and CEO of the International Air Transport Association (IATA) I’ve had to learn to see and talk about things from a much broader perspective. And that’s good fun too – an old dog learning new tricks.

Last time I was here, I talked about Asia, and particularly China and the impact it’s already having in the world of aviation. That story will develop for a long time to come, but today I’m going to talk more about the UK. 

From a global perspective, the UK also plays a key role. After the US, it is the largest market for international passenger services. If our forecasts are correct, in 2015 we expect 205 million people to travel to or from the UK—accounting for about one in every seven international air travelers. It will also rank seventh for international freight by handling about 2.2 million tonnes of cargo.

Aviation’s economic impact is substantial. In 2009 aviation generated nearly GBP 50 billion of economic activity and supported over 900,000 jobs in the UK. Tourism, which depends on aviation, added a further GBP 21 billion of GDP and 500,000 jobs. And aerospace manufacturing supports a further GBP 23 billion of GDP and 360,000 jobs.

In total, aviation in the UK is at the center of over GBP 90 billion of economic activity and supports the livelihoods of nearly 1.8 million people.

That’s impressive, but aviation’s influence extends much further. Could London function as a global financial center without air transport linking the City to its global customer base? Would the UK be a leading force in global culture without access to global influences? How would exporters get time sensitive shipments to markets around the world, or just-in-time manufacturers receive component parts? And would it be possible for the UK to derive the economic, social and national branding benefits of hosting 17,000 athletes, 60,000 support staff and hundreds of thousands of spectators for the Olympics?

The UK punches above its weight globally because of air connectivity. And its economic prospects grow in tandem with air service improvements. Oxford Economics tells us that for every 10% improvement in connectivity, GBP 890 million is added to the UK’s long-run annual GDP. Those are big numbers, but they should not come as a surprise. Great Britain is an island. Air connectivity is a part of the global community and global economy.

As you might expect from the Director General of IATA, I am a big fan of aviation. I believe that aviation is a force for good in our world that generates wealth—both material and of the human spirit. I assume that I am among friends and like-minded people in this room. So I am sure that you share my concern at how difficult some governments make it for airlines to do business successfully. Sometimes they seem to do it on purpose – other times, perhaps, they just don’t understand what they are doing, or not doing.

I don’t blame governments for all of the industry’s woes. There are plenty of factors making aviation a difficult business – even though airlines have been working hard to improve competitiveness through efficiency, closely matching capacity to demand and other sensible business strategies focused on profitability. There are problems in the value chain—including many monopoly suppliers taking full advantage of their position. And then there are the constant external shocks—from security and public health scares to volcanoes and wars. But today, I would like to examine the role of governments in the context of critical elements that we would like to see as the UK national aviation policy is developed.

State of the Industry

Let’s start with the financial outlook. Looking at the world as a whole, we expect airlines to make a collective profit of $3 billion this year. That sounds big. But that’s on anticipated revenues of $633 billion. So it’s a net margin of just 0.5%. At least we’re in profit—which is a rarity in aviation. But if we are right about our 2012 forecast, it means that since 2001 airlines have delivered a loss of $26 billion on over $5.5 trillion in revenues.

It was a decade of shocks and great change. The industry was able to absorb an increase in fuel as a percentage of operating costs from about 13% in 2001 to 34% today. But with a 0.5% margin, a further increase in the oil price (or any other shock for that matter) could quite quickly turn the bottom line from black ink to red once again. And in fact, the European industry is already in the red with expected losses of $600 million this year.

Doing Business in Europe and the UK

After spending three decades in Hong Kong’s pro-business environment, seeing close-up how things are done in Europe is something of a shocker for me. For almost all industries Europe is a tough place to do business despite being a great market of over 700 million relatively affluent consumers. Government policies conspire to make it extremely difficult to keep revenues ahead of costs.

The modus operandi of the European Commission—with respect to all industries--seems to be to set rules and regulate—whether it is needed or not – and never mind about any unintended consequences. A good example is the recent tinkering with well-established rules for slot allocation in the Commission’s Airports Package proposal. Liberalizing ground handling and formalizing secondary slot trading is positive. But changing the 80:20 use-it-or-lose-it rule to 85:15 will deliver the unintended consequence of forcing airlines to fly empty planes at the expense of both competitiveness and environmental good sense. The package has other examples of unnecessary local changes when the global system works well.

Working with Governments

I frequently go to Brussels with the goal of working with the Commission to help re-build European aviation competitiveness. Although our opinions differ on some issues—I will come to the EU ETS later in my remarks—Vice President Siim Kallas shares this objective. He has been particularly supportive of pushing states to meet their commitments on the Single European Sky. And they certainly need pushing.

The Commission and other important partners are also heading in the right direction on security.  IATA has been promoting an airport Checkpoint of the Future that will make passenger security more effective, efficient and convenient by:

  • Differentiating screening based on risk using passenger data that is already collected for immigration checks at the end of the journey, and
  • Developing technology that will allow our customers to walk through checkpoints without stopping, undressing or unpacking.

Trials on differentiated screening are delivering positive results in the US and the technology has a 7-10 year development horizon. We are making good progress in cooperation with the EC and our other important partners—including the US Transportation Security Administration, the International Civil Aviation Organization (ICAO), Interpol and many governments. The UK is also supportive of the effort which is well aligned with the Department for Transport’s Outcome Focused Risk Based Security initiative. With such broad based support, we should soon be well on our way to a new reality for airport security.

Working cooperatively on security follows the tradition of global cooperation on safety. The results on safety are unambiguous. 2011 was our safest year ever. For Western-built jets, there was just one accident for every 2.7 million flights. That’s a 61% improvement on the 2002 industry’s performance.

UK Aviation Policy

This proves that we can find common purpose and deliver good results by working cooperatively with governments. So I have hope for a positive result from the consultation process on a national aviation policy for the UK.

As the UK’s de facto current policy is to constrain capacity and milk the industry for taxes, there is plenty of scope for improvement! In fact, the two main issues that need to be addressed are: finding the capacity to grow and relieving the tax burden.

I am not here to lecture. But things are going badly wrong and it would be disappointing if we did not seize the opportunity of a policy review to make them better and capture fully the positive impact that aviation can have economically and socially.

Capacity

Let me tackle capacity first. Heathrow is the UK’s only hub airport. Its global role in connecting people and business generates some 220,000 jobs and GBP 11 billion in economic activity. And about GBP 4.5 billion is being invested over the period 2008-2013 to expand its terminal capacity. That’s some GBP 2 million a day. It’s investment that’s urgently needed. But terminal capacity without runway capacity can only take growth so far. And failure to grow in an expanding market puts one on the road to irrelevance.

The UK is falling behind in connectivity. London has less frequent links to 27 emerging market destinations than the daily connections offered from continental European hubs. There are no direct services, for example, to major cities such as Jakarta, Manila, Santiago or the major Chinese cities of Guangzhou, Chengdu or Shenyang. If the UK wants to do business with these developing markets, air connectivity is the enabler. But with Heathrow operating at 99% capacity, new services can only be introduced at the expense of downgrading existing connections. Recently Frontier Economics calculated the cost of declining connectivity at GBP 14 billion in lost trade over the next 10 years.

With such high stakes, a number of proposals have emerged.

Some have suggested that Heathrow focus on point-to-point traffic. That would be the start of a downward economic spiral. There’s a place for point-to-point capacity of course – the other London airports thrive on it.  But a hub adds economic value by facilitating connectivity that could not be supported independently. Being one-stop from the world is efficient for a provincial city, but it cannot support a global capital of finance and culture.

Then there is the proposal for “Heathwick” (or should that be “Gatrow”?) with a high speed train link between the two airports. No matter how efficient the connection, it will never rival single airport connections at competing hubs the likes of Munich, Madrid, Frankfurt, Paris, Amsterdam, Zurich, Dubai, Abu Dhabi and so on. And anyway, without more runway capacity the train wouldn’t bring much to the party.

The government sees replacing domestic traffic with high speed rail as an option to eke out additional capacity. Efficient rail systems have a role to play in a national transportation network. But let’s remember that 300km of rail will get you as far as Manchester while three kilometers of runway can get you the world.

Boris Island and Lord Foster’s Thames Estuary Hub are further interesting and very expensive proposals. But we could get all the additional capacity needed to ensure that Heathrow continues as a great aviation hub for only a fraction of the cost and without the economic dislocation of moving 220,000 jobs.

One of my early assignments at Cathay Pacific was in Osaka Japan. At that time, the city was served by an airport with one main runway almost completely surrounded by an urban community that was very hostile to having the airport in their backyard. After many years of protest, the government decided to build Kansai International Airport on reclaimed land in the Osaka Bay at a total cost well in excess of $20 billion. The plan was that when Kansai opened, the old airport—Itami—would be closed. When the local community realized that thousands of jobs would disappear with the airport’s closure, they lobbied successfully to keep it open to the financial detriment of the less-convenient Kansai.

There is no need to repeat this costly mistake when we have the opportunity to learn from it. One lesson from Osaka is that if a major hub is built, the main competing airport—in this case Heathrow—needs to close. More importantly, while Osaka had no option to grow, Heathrow has the potential to expand. For that reason, I am with those who call for the expansion of Heathrow. The Government needs to find a way out of the political cul-de-sac it has created, and make Heathrow expansion a priority in a competitive new UK aviation policy.

Taxes

Along with addressing capacity, the national policy must also reduce the UK’s high tax burden. Chancellor George Osborne has recognized that reducing taxes improves competitiveness. Under the banner “Britain is open for business” corporate taxes will be reduced from 28% to 22% by 2014. That’s welcome relief. But it is not a comprehensive solution. The high cost of doing business in the UK must also be addressed.

The ever increasing Air Passenger Duty (APD) is a GBP 2.9 billion annual burden on UK businesses reliant on connectivity. And passenger demand is growing more slowly than at other European hubs because the APD is pricing air travel out of the range that consumers can bear.

There is an old adage that says if you want to discourage something, tax it. In fact, the APD was brought in as an environmental measure to discourage travel. At current levels for carbon credits, the APD could more than offset the entire emissions of the global air transport industry. Even though the government subsequently “repurposed” the tax as a revenue measure it’s still a successful discouragement to connectivity.

We saw that clearly in Northern Ireland where the APD meant that international services could no longer be competitive. APD there was reduced to retain the economic benefits of air connectivity. Unfortunately the wisdom of that decision did not extend to the rest of the UK.

Finally, to put some numbers to the economic burden of APD, we estimate that the planned increase in the APD alone will result in GDP losses of about GBP 300 million per year and total job losses of about seven thousand. To ensure that the UK is “open for business”, the national aviation policy must include bringing the cost of connectivity down to make the cost of doing business here competitive.

Environment

Of course a national aviation policy can only support environmentally sustainable growth. Aviation’s license to grow depends upon managing its environmental impacts. We have a long history of doing precisely that. Over the last three decades Heathrow’s noise contour was reduced by 60%. And we have managed to contain aviation’s emissions at 2% of global manmade CO2 with a 70% improvement in fuel efficiency over the last four decades.

While continuing to reduce noise we are stepping-up efforts on carbon emissions. Airlines, airports, air navigation service providers and manufacturers have made three sequential commitments with which I am sure that you are all very familiar:

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

Our strategy is built on four pillars that include investment in new technology such as biofuels and the next generation of aircraft and engines; savings from operational improvements, and more efficient airport and air traffic management infrastructure. We need engine and airframe manufacturers to continue to pursue efficiency improvements and not be lulled into complacency by full order books. Beyond this, sustainable biofuels have the potential to cut aviation’s carbon footprint by up to 80%. Aviation has done the heavy lifting to prove that they work safely and efficiently in commercial aircraft and to certify drop-in biofuels as a replacement to conventional jet fuel. These fuels don’t compete with food crops for land or water. We are seeing important progress around the world, with more than a dozen projects underway involving airlines, aerospace suppliers, fuel companies and other stakeholders.

British Airways, Virgin Atlantic and Thomson Airways are leaders in the field. For example, BA’s plans to source 16 million gallons of sustainable biofuel annually from half a million tonnes of waste are among the most aggressive in the industry. And producing the fuel will generate employment for some 1,200 people. It’s impressive, but still a small part of the fuel needs at Heathrow. For sustainable biofuels to play an even bigger role in aviation in the UK and around the world, we need governments to put in place the fiscal and legal frameworks that will de-risk investment to drive the price down and increase production levels. This is another worthy aspect for inclusion in the new national aviation policy.

The fourth pillar of our strategy is the introduction of positive market-based measures, possibly including emissions trading. Such economic measures are a necessary—if temporary—bridge to enable aviation to meet its environmental targets. But such measures must be agreed upon at a global level under the leadership of ICAO. And to avoid duplication of taxation, it is imperative that all environmental taxes—including the re-purposed APD—be accounted for and eliminated if necessary. Airlines need to pay their fair share—but once, not several times over.

Unfortunately, the UK, Germany and Austria persist with their uncoordinated departure taxes. And on top of that burden, Europe as a whole has chosen a go-it-alone regional approach with the inclusion of international aviation in the EU Emissions Trading Scheme (ETS) from this year. This is driving discord at a time when we need harmony. As a US Federal Aviation Administration official said recently – the ETS is not a stepping stone to a global scheme, it’s a roadblock. The fact is that non-European states see the intention to tax non-EU airlines for emissions over non-EU territory as an attack on their sovereignty.

Representatives of over 20 nations met in Moscow in February 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. Both India and China have already prohibited their carriers from participating in the EU program. Others are planning to follow suit.

No one wants a trade war. But the prospects are growing more likely. We already are hearing reports of retaliatory measures.

There is a solution. And that is ICAO—where global standards and solutions for air transport are made. A working group at ICAO is considering four concrete alternatives for economic measures consistent with the 15 principles agreed upon at the 2010 ICAO Assembly. These include combinations of offsetting, carbon credits, and emissions trading.

The EU deserves full credit for bringing the emissions issue to the front and center of the global aviation agenda. Recently, some voices at the European Commission have sounded much more supportive of a global solution through ICAO than it has in the past. It’s time for the European member states sincerely to take a stake in making the discussions and decisions at ICAO a success. 

I choose these words carefully. If my understanding of the international mood is correct, non-European states are looking for some proof of Europe’s sincerity. The frequent and robust reiteration by the EU Directorate General for Climate Action that nothing can be done to defer or amend the European scheme is not helpful. Europe’s trading partners are looking for signals that it is prepared to find solutions with the international community beyond its current plans in an agreement through the ICAO process. 

Conclusion

In conclusion and turning back to the UK, aviation plays a vital role in this great country.

The national aviation policy discussion is a great opportunity to replace the tax, regulate and restrict policy trajectory of today with one that supports connectivity, jobs and economic prosperity with sustainable growth. That’s exactly what is needed to re-start the UK economy.

By refocusing the policy agenda towards competitive, cost-efficient and sustainable growth, aviation can do so much more than the already impressive support for GBP 90 billion of economic activity and 1.8 million jobs. That is a message that we must take well beyond the common understanding that is present within the walls of this room.

A strong aviation industry is a foundation stone of an economically strong and competitive Great Britain. It is our collective responsibility to make that known—from the people on the high street to the Prime Minister in Downing Street.

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