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Date: 25 February 2013

Remarks of Tony Tyler at a Media Roundtable in Hong Kong

It is always a pleasure to be back in Hong Kong. I know you will have many questions for me regarding the issues affecting the aviation industry. Before I address your questions, allow me to highlight four areas.

State of the Industry

First is the state of the industry.  The story of 2012 was weak profits…almost against all odds. With tepid economic growth just above 2% and high fuel prices we would normally have expected losses. But with consolidation and careful management of costs, airlines managed a $6.7 billion profit. That may sound like a lot, but when shared across an industry with $637 billion in revenues, it is a 1% net profit margin.

For this year, we foresee much the same: a slight rise in profits to $8.4 billion for a net profit margin of 1.3%.

If we look to the Asia-Pacific carriers, the region has been consistently profitable. But these profits have become increasingly thin. In 2010 the region’s airlines made $11.4 billion. That fell to $5.4 billion in 2011, then to $3.0 billion last year. Soft cargo markets and slower economic growth in China…on top of the weak global economic situation and high fuel prices are behind this downward trend. For 2013 we see a slender improvement to $3.2 billion. We do expect some recovery in cargo markets this year. But overall, 2013 is going to be another difficult year for airlines—in Asia-Pacific….and in most markets for that matter.

Environment

One of the reasons I am in Hong Kong is to participate in the Greener Skies conference tomorrow. I hope I will see many of you there. Aviation takes its environmental responsibilities seriously. Over 150 leaders of the industry will be gathering here to look at how we can build an even more sustainable aviation industry.

Aviation represents some 2% of global manmade carbon emissions. Our license to grow is contingent on our ability to do so sustainably. Airlines, airport, air navigation service providers, manufacturers have agreed to a four pillar strategy of:

  • Investment in new technologies
  • More efficient operations
  • Better infrastructure
  • And positive economic measures—now more commonly known as market-based-measures or MBMs.

There was a significant development last November when the European Union “stopped the clock” on extending the EU Emissions Trading Scheme (ETS) to international aviation.  The move that was welcomed by governments and industry as it defused a potential trade war because of the EU’s extra-territorial approach to including international aviation in the ETS.  With the clock stopped, governments can focus on finding a global solution through the processes of the International Civil Aviation Organization (ICAO) for approval at the ICAO Assembly in late September.

Reaching a global deal will not be easy. Just look at how difficult the United Nations Framework Convention on Climate Change (UNFCCC) process is. But aviation has a history of agreeing and implementing global standards. It started with safety…and air travel is incredibly safe as a result. And the same tradition is extending to environment. In the last eight months, ICAO has achieved agreements for the start of the first CO2 standard for new aircraft types and for a more stringent noise standard for them as well.

There is every reason to expect that the ICAO process will produce a global agreement on MBMs. And work is going on in earnest in advance of the ICAO Assembly.
ICAO is exploring three options for a global MBM:

  • A carbon offsetting scheme where an airline would have to buy carbon credits to cover any excess emission over an agreed baseline.
  • A carbon offsetting scheme combined with a revenue generating component. A further charge would be linked with credits being bought, and the extra revenue would be used to support further environmental mitigation projects
  • A non-discriminatory, non-distortive global ETS.

An agreement on MBM’s will be critical if the industry is to meet its target of Carbon Neutral Growth (CNG) from 2020. And to help governments in their process, we are working with our members, and under the direction of our Board of Governors, to find an agreement on the fairest way to share the burden of CNG 2020 among airlines. That will require a compromise because the implications of CNG 2020 will impact airlines very differently depending on their circumstances. The situation for airlines in fast growing regions will be very different from those in mature markets, for example.

Finding a compromise among the airlines will not be easy. But it is essential in order to present a unified front as an industry. Otherwise, there is a very real risk that we will end up with a patchwork of measures that would be a disaster for our global industry.  

While MBMs are the main focus of the debate, I will also be reminding the delegates tomorrow that these are only intended to be a temporary measure until technology, operations and infrastructure can provide the long-term solution to managing aviation’s emissions. To that end, I will be reminding governments that their support for the development of sustainable biofuels and sorting out more efficient air traffic management is critical.

I do hope that you will be able to join the conference tomorrow to hear the full speech!

Airport Master Plan 2030

While I am here, I will also be catching up on developments in Hong Kong International Airport’s (HKIA) 2030 master plan. As you know, IATA firmly believes that a third runway is critical to the future of the Hong Kong hub. Last year HKIA handled over 56 million passengers, making it one of the most important hubs in Asia.

Our own studies with Oxford Economics show that aviation and aviation-related tourism in Hong Kong supports support 8.2% of GDP and 7.3% of Hong Kong jobs. That’s about HK$133 billion of GDP and 253,000 jobs. Remaining competitive in aviation is critical to Hong Kong’s economic prosperity.

I am happy that Masterplan 2030 is moving in the right direction, with the Environmental Impact Assessment for the third runway currently underway. The Airport Authority Hong Kong has established various working groups in relation to the Master Plan.  IATA will be participating actively in some of these working groups to share our perspectives and experience. We will also work with the government to ensure that the funding needs for the third runway are met while keeping the airport cost-competitive.

New Distribution Capability

One of the important projects we are working on is called the New Distribution Capability or NDC. Airlines are able to sell tickets directly through their reservations call centers or websites. However, the majority of tickets by value are sold through travel agents. This is known as the indirect channel and it is powered by the global distribution systems or GDSs that aggregate fare, schedule and availability information.

However, these two channels are not powered by the same computer languages. Airlines use modern Internet programming language (XML) on their websites. With this, they are able to offer travel consumers an online shopping experience that is similar in content and display to what they can find on retail websites such as Amazon.com.

But airlines have to use a less flexible pre-Internet message protocol when selling through the GDSs used by travel agents. This legacy infrastructure cannot efficiently support modern retailing practices. For example it is difficult to make personalized and customized offers such as a daily airport lounge pass, or a special meal.

The bread and butter of what IATA does is setting global standard for the industry. NDC is an IATA-led collaborative industry initiative to define a messaging standard that will enable the same retailing opportunities through the indirect channel (travel agents) that you can find on airline websites. For example, in an NDC environment, air travelers will be able to compare fares, and they will also be able to see how the entire travel offer measures up.

There are positive implications for NDC on travel agents as well as they will be able to sell content that they cannot currently find on their GDS terminals.

NDC is a complicated initiative—too complex to explain fully today. But I wanted to raise it on the media radar so that you are aware that we are working with an open collaborative approach with airlines, travel agencies, GDSs and other technology providers to develop the NDC standard. We will commence some trials this year. And we look forward to working with the agent community in Hong Kong on this exciting program. 

I am happy to take your questions. 

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