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Date: 6 November 2012

Remarks of Tony Tyler at the AACO AGM in Algiers

Friends and colleagues, good morning. Thank you to Abdul Wahab Teffaha for the kind invitation to address the Arab Air Carriers Organization (AACO) Annual General Meeting. I remember fondly last year’s event hosted by Etihad Airways in Abu Dhabi. And a big thanks goes to Mohamad Boultif and the team at Air Algerie for their excellent hospitality this year. Algeria remains a hugely diverse and fascinating country, both in nature and history. And of course I should extend my congratulations to the nation on the 50th anniversary of its independence this year.

This region is a growing force in aviation. In just the last decade, the share of global international traffic in the Middle East has risen from about 5% to about 11.5%. The interests of the region are represented on the IATA Board of Governors by Saudi Arabian Airlines, Qatar Airways, Etihad Airways and Egyptair. It was the first region that I visited when I joined IATA and this is my seventh visit in all. You can take that as a sign that I am committed to understanding the region’s needs and to delivering value to the industry here.

When we met last year we were in a bit better shape than we are now. We are only expecting airlines to make a net profit of $4.1 billion this year. That is less than half the $8.4 billion that the industry made in 2011. And on expected revenues of $636 billion, that’s a net profit margin of just 0.6%.

For the airlines in the Middle East we are expecting profits of $700 million—down from the $1 billion that they made in 2011. And for airlines in Africa, we expect a second year of break-even operations.

But such a broad brush description does not do justice to the enormous changes that have taken place. The world watches as the Arab Spring approaches its second year. And I am sure that many of you in or near the affected countries watched as demand for your businesses went on a roller coaster ride.

By the third quarter of 2011, most of the affected markets had returned to pre-Arab Spring levels for passenger traffic. And over the last twelve months we have seen continued growth in many North African markets. Passenger traffic to Egypt was up 6% on pre-Arab Spring levels by August and Tunisia had seen the market grow by more than a quarter. In Libya the industry is in a rebuilding phase. There is a lot to be done in the aviation sector to ensure safe and efficient operations, and  IATA will make it a priority to work with AACO and other stakeholders to improve the situation both with the airlines and the infrastructure.

Of course the Arab Spring is not the only factor that is impacting the airlines in this region. Sluggish economic growth, the Eurozone crisis, high oil prices, onerous regulation, infrastructure bottlenecks and high taxes are just the most obvious of factors making the airline business a challenging one to be in.

Of course, none of this will be news to you. You see the challenges every day as you manage your airlines. It’s a tough business. IATA-speak for the region represented by AACO, the Middle East and North Africa, is MENA. And MENA has its own unique challenges and opportunities. Today I would like to examine some of these from a global perspective.

Specifically, I have five topics on my agenda for today:

  • Safety
  • Aviation as a catalyst for growth
  • Air Navigation
  • Environment
  • New Distribution Capability

Safety

Let’s begin with safety—the industry’s top priority. Through to the end of October, there has not been a single hull loss of a Western-built jet in the MENA region. Congratulations to all on a great effort.

But, if we expand the scope to all aircraft, the picture is less positive. In MENA, the all-aircraft accident rate for carriers not on the IATA Operational Safety Audit (IOSA) register is about three-and-a-half times worse than for those on the registry. Flying is safe. But it is our collective responsibility to always make it safer.

In 2006 the Arab Civil Aviation Commission (ACAC) ministers committed to make IOSA compulsory. That was a great initiative. But so far there are only 38 MENA carriers on the IOSA registry. Egypt and Lebanon, Bahrain and Syria are among the countries that have mandated IOSA in some form. And we are expecting that in January the African Union will make IOSA a requirement for an Air Operators Certificate in all of its member states.

IOSA is already a requirement for IATA and AACO membership. But safety goes beyond borders or associations. So IATA is working to help prepare regulators and airlines for the new challenges. And I would encourage those in the African Union to remind your governments that IOSA is extremely effective as a tool to improve safety. And similarly, we should remind those governments in ACAC of their previous commitment.

Aviation as Catalyst for Growth

Now, allow me to move to another of my favorite topics—aviation as a catalyst for growth and development. Globally, aviation supports employment for some 57 million people and about $2.2 trillion in economic activity. Our reach goes far beyond that. About 35% of the value of goods traded internationally is transported by air. That’s another $5.3 trillion of business. And just over half of all tourists reach their destination by air, generating further huge employment and development opportunities.

Aviation has created a global community based on the connectivity it provides. And as I have said many times before, that generates enormous wealth—both material and of the human spirit. We should be proud to remind governments of that. As you know, we have worked with Oxford Economics to quantify the benefits that aviation brings—globally and at a country level. I will return to discuss some conclusions from these in a minute. But first, I would also like to introduce another project that we have been working on to tell the aviation story.

We are preparing a series of six 30 second video clips to highlight the important role aviation plays in our daily lives under the theme Flying Makes It Happen. I plan to present all six to our Board in December. But I wanted to give you a sneak preview today. In fact, this is the world premiere of the first three.

I hope that you will agree that they are an appealing way to remind people of the importance of our industry to modern life. We will have all six ready in the next weeks. They are adaptable for inflight entertainment systems. So please let us know if you would like to broadcast them. I believe that they carry messages worth repeating.

There is also a harder economic side to this story. The Oxford Economics studies reveal how the development of strong aviation hubs can transform economies through connectivity. In the UAE, aviation accounts for nearly 15% of GDP and about 14% of jobs. The development of the three major gulf hubs has enabled Dubai to become a major tourist destination, Qatar to win the right to host the FIFA World Cup, and Abu Dhabi to attract Formula One, to give just three examples.

By contrast, if I look across North Africa, I see some infrastructure developments, but I think the region needs to think bigger. Why not move forward with developing a major North African hub?

The opportunity is there. Africa today is a focus of global investor interest. The continent has enormous natural resources—including oil. Development is happening. Growth is being realized. Political reforms are taking root. Africa today represents about 2% of the global economy with a population of about a billion people. In 1980 China was about at the same stage of development—and look at how much has changed over the following three decades. Aviation played a key role in that development.

At the risk of being repetitive, aviation is a catalyst for economic growth. That means jobs—through tourism, trade and other business opportunities. And that stability is a great foundation on which to build the post-Arab spring world—both in those countries involved and across the region.

Building on world class infrastructure and business-friendly policies, the Gulf carriers are now extending their reach through alliances, equity stakes and innovative partnerships. I would encourage similar thinking across North Africa. That will need some cooperation and thinking that goes beyond borders—certainly in terms of liberalizing opportunities within the region to develop connectivity.

Air Traffic Management

And regional thinking on air traffic management (ATM) is also critical. If you look a little further north—to Europe—there is a clear example of what happens when governments neglect to ensure efficiency in the air traffic management system.

The cost is high. Inefficiencies in the European ATM system generate more than EUR5 billion of direct additional costs and flight delays of 100 million hours every year. The unity of the European Union has not been able to extend itself to producing the Single European Sky. As with three of my predecessors in this job, I spend a lot of time working with European officials to move them towards solutions for Europe’s fragmented skies.

But my message here today is that there is no room for complacency in MENA. In the Gulf, it is already nearing crisis levels with growing ATM delays—the arch enemy of any successful hub. Regional solutions will be needed to sort out the congestion.

There are some 30 different projects and plans in operation to improve the efficiency, capacity and safety of airspace out of Dubai, and similar projects in Doha. I hope these projects will be concluded swiftly and successfully – it would be a shame if the potential of the investment in ground infrastructure was held back by a lack of progress in the air.

North Africa is not immune. Historically traffic flows have been North-South. But regional integration and trade are adding an East-West dimension that is complicating ATM procedures.

The experience of Europe should ring a clear warning. Don’t let congestion problems grow. They can quickly turn unmanageable. And the bigger they are, the more difficult the solution.

Environment

Of course, how well we manage air traffic has a big impact on aviation’s environmental performance. No industry can grow unless it can do so sustainably. And, as you are well aware, no industry has done more than aviation to deal with its climate change impacts.

Our commitments are clear

  • To improve fuel efficiency by 1.5% annually to 2020
  • To cap net emissions from 2020 with carbon-neutral growth and
  • To cut net emissions in half by 2050 compared to 2005

No other industry has made such commitments. And progress on new technology, more efficient infrastructure, biofuels and so on is moving us towards meeting them. Market based measures however will also be needed—at least temporarily. And to be effective for a global industry, we must ensure that these measures are developed with a global approach. There is only one place to do that— the International Civil Aviation Organization (ICAO).

Governments around the world recognize this. And there is an enormous amount of work going on to reach consensus on a mechanism in time for the ICAO Assembly which is now less than a year away. Technical working groups are narrowing down the options on how such a global approach could work.

While the industry is united in its commitments and in its desire for a global approach to market based measures, we are still discussing options for how such a mechanism could be implemented fairly. And AACO has been instrumental in providing some very sensible proposals on how this could work. We appreciate AACO’s support and its very pragmatic approach.  And this issue will certainly be one of the most vigorous discussions at the December board meeting of IATA.

IATA’s role is to provide the support needed to facilitate a consensus. The decision of course rests with our members. But I think that it is important to note how important that consensus will be. If we fail or lose unity, that opens the door for governments to pick us apart and impose solutions that will, quite probably, be more expensive and less workable for our complex industry.

Of course, overshadowing all of this is the specter of the European Emissions Trading Scheme (ETS) which has been extended to international aviation. I am sure that it was guided by the best of intentions to move the aviation and environment debate forward. Indeed, I think that credit should be paid to Europe for moving environmental issues up the global agenda. But continuing to pursue its unilateral and extra-territorial scheme is dividing the world and recklessly risking a trade war. And this at a time when we need unity…and coming at a time when the weak European economy can least afford it.

The crux of the issue is sovereignty. States outside of Europe view Europe’s plans to tax non-European airlines flying in non-European airspace as an attack on their sovereignty. Saudi Arabia is the latest state to forbid its carriers from participating. China, India and Russia have done the same. The US is moving in that direction. These are the most vocal of a group of 25+ countries that have met three times to make their opposition known.

Europe’s ETS is not a stepping stone to a global solution. It has become a road block—poisoning the atmosphere that is needed to achieve a global approach through ICAO.

The challenge is to create space to arrive at a successful conclusion. Europe needs to find a way of relieving the pressure that it has created. But we in the industry must look beyond the ETS towards a fair global agreement in ICAO. There is no time to lose. This week’s ICAO Council meeting will be a critical milestone on the way to the ICAO Assembly in September next year. We must focus our united industry efforts on helping forge that agreement that we have advocated for so long.

New Distribution Capability

Lastly, I would like to spend a few minutes discussing the New Distribution Capability. Last month in Abu Dhabi, the Passenger Services Conference made an historic resolution to agree the foundation standard for a New Distribution Capability (NDC).

Individually, airlines have adopted modern retail techniques on their websites. But 60% of air travel is sold through travel agents. And they are selling your products with the very limited information that is provided to them by our Global Distribution System (GDS) partners. The product—no matter how luxurious and refined and regardless of options available to customize the experience—is basically sold as a commodity with very little differentiation beyond the class of service codes.

It is time to modernize distribution. Our customers expect more. When they buy the hotel component of their travel, they can choose the room category, views, package it with a spa treatment, add breakfast or dinner options. Compare that to the options for buying a plane ticket.

We have lots of ways to add value to our passenger’s travel experience. But the closed standards that power GDS systems cannot efficiently facilitate making these known to the traveler.

People often ask me to describe NDC and to put an estimate on what it will cost. They are difficult questions. Why? Because NDC is basically a set of standards that will allow airlines to make their inventory available to the outside world in the way that they would like to sell it. These same standards will allow GDSs and new entrants into the market to develop vehicles to capture that standardized data and make it available to travel buyers—individuals and agents. Market needs will determine what form this takes.

It’s a bit like creating the standards for the iPhone. Suddenly the phone became a multi-purpose device that does almost anything—including the ability to start your coffee maker in the morning.

In terms of cost, it really depends on what you want to do and how an airline wants to respond to the market. For some, the strategy may simply be to invest in providing the standardized inventory data to potential business partners. Others may choose to develop their own applications. And others may choose to stick with the status quo.

We hope to have some prototypes operating within the next 12 months. We are consulting widely with technical experts from across the travel value chain as well as with regulators and technology providers to ensure that we have robust standards that will create new opportunities for all.

IATA

I am nearly 18 months into the job as Director General and CEO of IATA. When I arrived, I brought with me the expectations that I had as the CEO of a member airline. I wanted my association to deliver value to my business. That thought has guided my work and that of the entire IATA team.

Over the last months, I have worked with my team to review our mission and vision. Our mission is unchanged: to represent, lead and serve the airline industry. That’s what we will continue to do.

But we wanted to stretch ourselves with our vision. IATA’s vision is to be the force for value creation and innovation driving a safe, secure and sustainable air transport industry that connects and enriches our world. That is the value that I wanted from my association when I was a member. And that is the value that, with your support and working hand-in-hand with AACO and the other regional associations, the entire IATA team is determined to deliver to you today.

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