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Date: 11 June 2012

Tony Tyler's State of the Industry Speech - 68th Annual General Meeting, Beijing

Flying is safer than it has ever been.

And our planet is more connected than at any time in its history. In 2011, some 2.8 billion people (1)  traveled on 35,000 routes connecting 3,800 commercial airports (2). Together they flew 5.1 trillion kilometers (3) 34,000 times the distance to the sun (4). Aviation is a vital component of the global economy. We support 57 million jobs and $2.2 trillion in economic activity (5). Some 48 million tonnes (6) of cargo with a value of $5.3 trillion was shipped by air (7). That's over a third of world trade (8). The benefits of global connectivity touch virtually every modern business.

With about 100 years of history, air connectivity has established itself as a powerful force for good in our world. And our potential is almost without limit.

But, the state of our industry is fragile.

State of the Industry

Over the last decade (9) airline revenues totaled $4.6 trillion (10). We were among the world's fastest growing industries. But our best annual profit margin of the century so far was 2.9% (11). And the overall result has been a net loss of $16 billion (12).

2012 is another challenging year. We expect revenues of $631 billion but a profit of just $3.0 billion. That's a 0.5% net margin.

And that projection comes with some serious downside risks.

The high price of oil is among the main reasons for our anemic global profitability. Oil prices have softened slightly. But we still expect an average of $110/barrel (13). That will leave us with a fuel bill of $207 billion, almost equal to the GDP of the Philippines or the Czech Republic (14). It will account for a third of our costs. And political risks could easily push the price higher.

The biggest and most immediate risk, however, is the crisis in the Eurozone. If it evolves into a banking crisis we could face a continent-wide recession, dragging the rest of the world and our profits down.

The industry's profitability is balancing on a knife edge. If the bottom line worsens by even the equivalent of just 1% of revenue, our $3 billion profit very quickly becomes a $3 billion loss.

Furthermore, competition to deliver value is as tough as ever. A web search priced economy fares for the 22,000 kilometer round-trip from New York to Beijing in the range of $1,500. That's seven cents per kilometer. By comparison, a New York taxi ride costs $1.25 per kilometer, or 31 cents with four passengers on board (15).

Airlines have worked hard to improve their competitiveness. In ten years, load factors have increased by 9.2 percentage points (16) and fuel efficiency is up by 24% (17).

Our customers have benefitted the most. Flying is more accessible than ever. Some 1.2 billion more people and 16 million more tonnes of cargo will fly this year than in 2001.

In providing this mobility, some airlines are making money. Many are struggling. And some have succumbed. Spanair and Malev (18) are among this year's casualties. Our members face different realities. But the daily struggle to keep revenues ahead of costs is common to all.

The Future

Let's put aside today's struggles for a moment and look ahead to 2030 (19). Twice as many people will travel - 5.9 billion. And cargo could triple to nearly 150 million tonnes. This connectivity will support 82 million jobs and $6.9 trillion of global GDP (20).

We should be optimistic about such a future. But there are no guarantees.

These projections are based on traffic growth of about 5% annually. But if we are held back by even one percentage point, the global economy would forfeit over a trillion dollars and 14 million jobs (21).

Modern economies cannot grow, prosper, and create jobs if they are not connected to global opportunities through aviation. That should make airlines and governments strong partners in supporting aviation's success:

  • Governments need to unleash the power of aviation to drive jobs and economic growth.
  • And airlines need to be successful businesses - somehow keeping revenues ahead of costs and generating returns for their shareholders.

Industry Partnerships

I would never suggest that governments can or should solve all of our problems. Airlines are at the heart of a complex value chain. To be successful, the players in that value chain need to work as partners. If airlines are able to keep revenues ahead of costs, every player in the chain benefits. That is not always well-understood.

Our Global Distribution Systems (GDSs) partners help us to sell 60% of our tickets. Beginning four decades ago, when these systems were created, their cutting-edge technology expanded our distribution horizons. Today, XML standards and customer-friendly interfaces are the new cutting-edge, facilitating revolutions in how the world does business. Airlines are missing out because GDSs, which are built on operating systems dating from the 1970's, have not been able to facilitate innovation like we have seen in other industries.

As a result, multi-million dollar airline product investments cannot break free of product descriptions limited to booking classes like F, C, or Y and their derivatives. And personalized offers based on availability, customer needs, preferences or histories are effectively impractical.

With the full support of our Board, IATA is working on new distribution standards to enable airline product differentiation. We will define the foundation standard this year. And I am confident that the GDSs will join as partners because progress cannot wait.

Cargo partnerships are equally important. Cutting shipping times by 24 hours with e-freight will grow the cargo business for everybody. But despite seven years of work, e-freight penetration was just 11% at the beginning of the year. The Global Air Cargo Advisory Group provides an opportunity to assist airlines, shippers, and forwarders to focus on 100% e-freight by 2015. The e-air waybill is a key focus. Its implementation, which is targeted at 100% by 2014, will bring benefits to all parties while facilitating the move to e-freight.

Governments

Alongside industry partnerships, governments play a key role in our success. They are partners in safety, security, and sustainability. Together, these comprise our license to grow.

Safety

Working together we have made air the safest way to travel. With one accident for every 2.7 million flights in 2011 (22), the industry has never been safer. Compared with 2002, that's a 61% improvement. And in 2011, the performance of the 369 airlines (23) on the IATA Operational Safety Audit (IOSA) registry was 52% better than non-IOSA carriers. IOSA is built on industry best practices and global standards set by governments through the International Civil Aviation Organization (ICAO).

Our good performance is proven by industry safety data. And data is also driving future improvements. A data-driven approach, for example, was the foundation for important work with ICAO and the International Federation of Airline Pilots' Associations to publish fatigue risk management guidelines. And we are strengthening our data collection by building the Global Safety Information Exchange with ICAO, the European Commission, and the US Department of Transportation.

Security

Data can also improve security. Our Checkpoint of the Future vision is for risk-based and data-driven airport checkpoints. The combination of technology and passenger information (24) can make today's airport security hassles a thing of the past. But it will only happen with the support of governments.

Already we are working with the US Department of Homeland Security (DHS), the European Commission, China, Interpol, and another 17 governments (25). Improvements will happen incrementally, but by 2020 airport security could be radically different from what we have today.

Similar principles apply to securing air cargo. IATA's Secure Freight program is based on understanding the identity of the shipper and other members of the supply chain. After successful testing, it is now being implemented in Malaysia. Among the countries scheduled to follow are Chile, Kenya, Mexico, and the United Arab Emirates (UAE). Earlier this month a landmark accord between the European Union and the United States mutually recognizes each other's cargo security regimes. With the strong support of industry, this will improve the efficiency and effectiveness of security in two of the largest cargo markets.

It should also become a model agreement for other cargo markets and for passenger security as well.

Sustainability

Being safe and secure is not a license to grow if aviation is not sustainable. Environmentally, that means managing the 2% of global man-made carbon emissions attributed to aviation (26). We will achieve carbon-neutral growth from 2020. And our goal is to cut net emissions to 320 million tonnes by 2050. That would be half of our 2005 emissions in a world that will be demanding much more connectivity. Success will need the support of governments.

Sustainable biofuels alone have the potential to reduce our carbon footprint by up to 80% (27). They have already powered more than 1,500 commercial flights. But to increase utilization, costs need to come down and the supply needs to increase. That will only happen with government policies to de-risk investment, including setting global standards.

To meet our ambitious targets we will, at least initially, also need globally-coordinated, positive market-based measures. The extra-territorial EU Emissions Trading Scheme (EU ETS) is not a stepping stone on the way. It's a polarizing obstacle that is preventing real progress. Our host country, China, is at the forefront of the opposition to the European ETS. Its carriers are forbidden from participating.

Sustainability should unite the world with common purpose, not divide it with affronts to sovereignty that risk a trade war, a war that nobody wants and from which no winner can emerge. Certainly no airline - European or otherwise - should be a target for retaliation because European governments are acting extra-territorially.

There is, however, common ground. Everyone - including Europe - agrees that the only real solution is a global agreement through ICAO at its 2013 Assembly. Such an agreement, however, is impossible under current conditions. Europe seems more committed to implementing its ETS unilaterally than to sincerely negotiating a multilateral agreement. For Europe's international counterparts it's like being asked to negotiate with a gun to their head.

Nobody can deny Europe the credit for moving sustainability up the global agenda. States are focused on the issue as never before. The onus is now on Europe to seize the moment, take credible action to defuse the situation and get on with finding the global solution that everybody is hoping for.

Governments Beyond Safety, Security and Sustainability

Our relationship with governments goes far beyond safety, security, and sustainability.

The bilateral system, for example, has a profound impact on the industry's structure. Sixty-seven years ago (28) it was established because governments could not agree on a multilateral approach to economic regulation. It has served the industry's development well. But I cannot help but think that had governments known that aviation would evolve into a global mass transit system, they would have taken a different approach.

A perfect world would have open markets and a level playing field. That is not the case today.

Liberal air service agreements, single markets, alliances, multi-national brands, and major trans-border mergers like the one between LAN and TAM are progressively moving the industry towards the basic commercial freedoms of access to markets and global capital. But I see little evidence that governments support an imminent big-bang shift to multilateralism.

We must continue to engage governments on this long-term transformation through processes such as the ICAO Air Transport Conference, which will meet for the sixth time next year. But let's focus our immediate efforts on decisions that governments make every day, decisions which can have unintended consequences, and limit our ability to keep revenues ahead of costs.

I propose an agenda with governments focused on unleashing our potential to drive economic growth and build a financially sound industry based on:

  • A tax regime that does not kill growth
  • Regulation that facilitates growth
  • And infrastructure that can efficiently accommodate growth

Taxes

Let's start with taxes. Governments impose taxes to increase revenue, or to discourage activities or both. Whatever the reason, excessively taxing aviation makes no sense. Taxes dampen growth - with a knock-on effect on jobs and the broader economy.

The UK's Air Passenger Duty (APD) grew from GBP 331 million in 1995 to GBP 2.6 billion (29). It is the biggest aviation tax in the world. So it is no wonder that UK aviation is growing at a slower pace than its Continental neighbors (30).

Making connectivity more expensive destroys jobs and slows economic growth. The politicians had to admit this when the recent increase in APD threatened to end direct long-haul connectivity to Northern Ireland. With inward investment and jobs at stake, the government took action. International APD for Northern Ireland was reduced to domestic levels (31). Regrettably, the government went ahead with increasing this job-destroying tax across the rest of the United Kingdom. They should have abolished it altogether.

If governments are not convinced by demonstrations of the negative impacts of taxation, they should see the positive impact of a low tax regime. Look at Hong Kong, Singapore or the United Arab Emirates. These governments don't see aviation as a sin to be taxed. Instead, they are building their economies around connectivity. The result is a virtuous circle. They are great markets for airlines. Businesses prosper from connectivity. And governments reap the benefits of increased employment and a stronger tax base.

Aviation should be seen by governments as a source of economic growth - but not as a cash cow. Aviation is a powerful workhorse. Using it wisely will deliver benefits throughout the economy.

Regulation

Along with taxes, regulation is also an unavoidable fact of life. Sensible regulation that increases safety or enhances competitiveness is good. But too often even the best intended new regulation has unintended and damaging consequences.

Punitive passenger rights regulation is an example.

  • EU Regulation 261 forced airlines to compensate passengers for the hasty and unnecessary decision by governments to close European airspace, when a volcano erupted in Iceland in 2010. Surely making airlines pay for the mistakes of governments was not the intention?
  • Similarly, the US introduced heavy fines for long tarmac delays. To avoid potential fines, flight cancellations increased - another illustration of an unintended consequence (32)

Directing punitive measures towards airlines shows that governments misunderstand the problem. Airlines don't want delays. And fines don't address their root causes - bad weather, insufficient airport and airway capacity, strikes, third party technical problems and the like, many of which are influenced by governments themselves. The market forces of choice and competition empower passengers and are the best way to drive up service levels so long as governments also do their part.

Of course, investment to unclog airports and airspace is the best long-term solution to the root cause of many delays and to facilitate growth. But Europe is trying to solve its growing airport capacity problem by tinkering with slot allocation rules. The globally accepted 80:20 use-it-or-lose it rule achieves over 95% utilization at key hubs. Europe wants to change it to 85:15. That would perversely incentivize airlines to fly empty planes just to hold on to slots. Noise and emissions will rise unnecessarily - an unintended consequence. Europe will be going it alone - again - and ignoring global standards. And the capacity challenge will remain unaddressed.

Governments also often miss the mark with economic regulation of infrastructure suppliers. Many are monopolies that must be regulated to ensure that the public interest is served. Yet the regulator in South Africa allowed a 161% increase in airport charges and a 70% increase for air navigation fees over the period 2010-15. This was outdone by the Indian regulator which allowed a 346% increase at Delhi - making it among the world's most expensive airports. Both regulators followed prescribed guidelines, but failed to protect the public interest.

And we could soon see this repeated in Brazil. The government raised $12 billion (33) in concession fees to run three of the country's airports - over four times the minimum bid requirements (34). And with the government being both a shareholder and the regulator, we have a recipe for future problems (35).

Regulation is not going to go away - and it shouldn't. But when they regulate, governments must consult with industry, evaluate the costs and benefits, and keep focused on unleashing our power to generate jobs and growth. If we can do that together, it will help in successfully keeping revenues ahead of costs.

Infrastructure

Airlines need infrastructure to grow. Just like taxes and regulation, some governments understand and reap the benefits. Others don't and the economy suffers the consequences.

Air Traffic Management

European air traffic management is stuck in a time warp. By 2020, the Single European Sky (SES) is meant to cut air navigation costs in half and increase capacity by 70% - important goals for the European economy. But states are falling at the first hurdle. The Commission proposed a modest 4.5% annual first stage efficiency target, and the states watered it down to 3.5%. And the latest Performance Review Board assessment is depressing reading. Most states won't meet even the unambitious targets that they agreed to. And airlines face EUR189 million more in costs in 2014.

SES has the strong support of the European Commission, the European Parliament, and Vice President Siim Kallas. And they have the full support of the industry to drive a top down approach. This should include painful consequences for states and air navigation service providers that don't meet their targets.

Europe is, of course, only one part of a global network. We are counting on a swift follow-up in the United States now that the Federal Aviation Administration has funding for NextGen. And the pace is picking-up in the discussion of a Seamless Asian Sky. Let's not lose the great opportunity for Asia to learn from the mistakes of Europe and the United States and implement solutions before growth leads to gridlock in the skies.

Airports

Along with efficient air traffic management, the industry needs airport capacity. A few kilometers of runway and an efficient terminal infrastructure can put global markets at the doorstep of every local economy. Countries that see aviation as a workhorse - China is a great example - have made airport investments a priority. And they are seeing the benefits throughout their economies.

But there are also many examples of less enlightened governments:

  • The United Kingdom has ruled out additional runway capacity at its only hub airport - Heathrow - which is already operating at 99% capacity
  • Frankfurt promptly lost night flights - critical for cargo operations - when it opened a fourth runway
  • Sydney: there is no consensus on future capacity even after decades of discussion
  • And Mumbai's much needed new airport will not open as scheduled in 2014 - construction has not even started

Where governments are focused on jobs and growth, the urgency of accommodating the increasing demand for connectivity is crystal clear. You cannot unleash the power of an industry to drive economic benefits unless it has the capacity to grow profitably.

Growing Together

Our industry's license to grow is earned through partnerships that make flying even safer, more secure, and more sustainable. That must be supported with tax regimes that do not kill growth, regulations that enable growth, and infrastructure that accommodates growth.

Aviation is a complex global business. It's not an easy one to manage. Profits, when we have them at all, are razor-thin. And keeping revenues ahead of costs is a never-ending challenge. But every business connection made, every journey of discovery, and every family happily reunited by aviation re-dedicates airlines, our partners and governments, to the important work of bringing our planet together.

Aviation is a force for good - supporting jobs for 57 million people, uniting families and friends in a global community, facilitating access to global markets, spreading wealth and prosperity, and fostering business, educational, and cultural opportunities in every corner of the world.

I share your passion for the success of our industry. Together, our work enriches peoples' lives everywhere, every day, and with every flight.

Notes

 1 -  Passenger numbers are global system-wide collected by IATA, including non-ICAO states.
 2  - Air Transport Action Group: Aviation Benefits Beyond Borders.  In 2010, there were 3,856 airports with scheduled commercial flights  -- there are 43,982 airfields in the world including military and general aviation. www.aviationbenefitsbeyondborders.org
 3 -  Air Transport Action Group: Aviation Benefits Beyond Borders. 
 4  - Approximate distance from the earth to the sun is 150 million km. Source NASA.
 5  - Air Transport Action Group: Aviation Benefits Beyond Borders. 
 6  - Metric tons.
 7 - Air Transport Action Group: Aviation Benefits Beyond Borders. Value for 2010.
 8  - When measured by value.
 9  -  2002-2011.
10 -  IATA figures.
11 - 2007 and 2010. Source: IATA Financial Forecast
12 - IATA
13 - Brent Crude, consensus forecast.
14 - World Bank rankings.
15 - Reference source $2.00/mile basic fare equals $1.25/km, excluding flag fall and slow traffic charges.
16 - 2001-2011, Source IATA.
17 - 2001-2011, Source IATA.
18 - Malev 14 February 2012 ; Spanair 1 February 2012.
19 - Air Transport Action Group: Aviation Benefits Beyond Borders. 
20 - Air Transport Action Group: Aviation Benefits Beyond Borders. 
21 - Air Transport Action Group: Aviation Benefits Beyond Borders. 
22 - On Western-built jets.  IATA Safety Report 2011.
23 - 239 IATA members and 130 non-members on the IOSA registry as of 31 December 2011. There are currently 381 airlines on the IOSA registry.
24 - Passenger information already collected for immigration purposes.
25 - Nigeria, El Salvador, Honduras, Sri Lanka, Guyana, Bahamas, Belize, Guatemala, St. Vincent and the Grenadines, Barbados, Suriname, Colombia, South Africa, Peru, St. Maarten, India and Panama.
26 - Air Transport Action Group: Aviation Benefits Beyond Borders. 
27 - Over the lifecycle of the fuel.
28 - First bilateral agreement was between the US and the UK, signed in 1945.
29 - Calendar year 1995 was GBP331.  Calendar year 2011 was GDP 2.6 UK HMRC APD Bulletin April 2012, Table 5).
30 - Passenger growth 2007-2011. Germany (2.0%), France (3.2%), Netherlands (3.9%), UK (-0.1%).
31 - In November 2011 APD on all flights from Northern Ireland was rated Band A.
32 - The US Government Accountability Office estimates that the number of flight cancellations has increased by 5,000 since the first set of tarmac delay rules, applicable to domestic flights, took effect in April 2010.
33 - BRL 24.4 billion ANAC Material Fact - Disclosure of the Proposed Economic Classification of each of the Airports  - Auction 02/2011.
34 - Bidding Document - Edictal ANAC nbr. 2/2011.
35 - Bidding Document - Edictal ANAC nbr. 2/2011.

 

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