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Date: 3 July 2013

Remarks of Tony Tyler at the National Aviation Press Club, Sydney

G’day! It is a real pleasure to be in Sydney and hosted by the National Aviation Press Club.

The invitation comes at an auspicious time for aviation. In a few months—on 1 January 2014 to be exact—we will celebrate a century of commercial flight. In a brief 100 years the air transport industry that grew from the first flight of Tony Janus from St. Petersburg to Tampa has changed our world enormously.

And that industry has had great consequence on Australia. Australia is a vast continent that aviation binds together. And it is an island—many thousands of kilometers from its major trading partners. Aviation connectivity is the bridge that provides cultural and business links to the global community.

As you would expect from such a situation, Australia punches above its weight in global aviation. Qantas, one of our founding members, is a leader in innovation—with its ground breaking deal with Emirates and its division of labor strategy with Jetstar. Having competed vigorously with Qantas when I was at Cathay Pacific, I know how strong they are. With Alan Joyce as my Chairman at IATA over the last year, it is even clearer to me that they have solid, forward-looking leadership.

The same can be said of John Borghetti and his team at Virgin Australia. Their links with Etihad and the participation of Air New Zealand and Singapore Airlines is ensuring that Australia has at least two home grown carriers competing to provide global connectivity.
That competition is at the heart of an industry that contributes tremendously to Australia.

Combined with tourism, the aviation industry supports over 6% of Australia’s GDP and 7.4% of the workforce. That’s A$75 billion in business and 800,000 jobs. And that fits into a global picture of this industry supporting some $2.2 trillion in economic activity and about 57 million jobs.

Despite being a major employer and driver of the economy, we sometimes forget just how much value the aviation industry contributes to modern life. For most of human history, travel was time consuming and perilous. Today, once you get to an airport, most parts of the globe are reachable in a matter of hours, in relative comfort and with safety levels so high that we take them for granted.

In fact, last year was the safest year ever for air travelers. The most common measure for aviation safety is the Western-built jet hull loss rate. We count the major accidents where the aircraft cannot be repaired or which is written off because it would cost too much to repair. In 2012 there were no such accidents among our 240 member airlines or among the 380+ airlines that were on the registry of the IATA Operational Safety Audit (IOSA). This includes all of our members for whom IOSA is a requirement.

Safety is, of course, a never-ending challenge. Despite the amazing achievement in 2012, accidents still happen. And constant improvement is our duty. For example, the impact of IOSA on safety is clearly evident. So we have taken the same approach of developing transparent audit standards to manage safety on the ground. The IATA Safety Audit for Ground Operations has the potential greatly to reduce the billions of dollars in damage done on the ground—but only if it is used. It is now in use at nearly 150 airports worldwide. So far only Skystar in Perth and DNATA in Melbourne have undergone the audit. The Civil Aviation Safety Authority (CASA) is among the most well-respected safety oversight agencies in the world. Later this week I will be discussing with CASA how we can increase ISAGO coverage in Australia.

We also have a great challenge in terms of industry profitability. In 2012, airlines made about $2.50 for every passenger carried. That generated a net profit margin of 1.1%--or a $7.6 billion return on $680 billion in revenues.

It’s a pitiful return, but if you put it in historical context, making any money at all under current conditions—with a weak global economy and high oil prices—is an amazing achievement. In 2006 airlines achieved the same 1.1% net profit margin, but with oil prices that were about half of today’s prices and the global economy growing at 4%--about double what we are experiencing today.

Airlines are driving profitability in difficult times with strong performance. Load factors are around 80%—a record high. Only a decade ago the benchmark was around 70%. And airlines are working in strong global partnerships—providing ever greater connectivity. With 40,000 city pairs linked by air, it has never been easier to get where you want to be.

The demand for great connectivity is real. Despite the economic woes, we continue to see more people travel. Today we announced May traffic figures showing a 5.6% increase in travel volumes over the previous year with growth being driven primarily on routes linked to emerging markets. Cargo markets, on the other hand remain flat—as they have been for the last year-and-a-half.

The industry bottom line is, however, improving—slightly. In 2012, the $2.50 per passenger that airlines earned was enough to buy a cup of coffee in most places. This year we expect a 1.8% net profit margin. If we are right, the industry will earn on average $4 per passenger. That may be enough for a sandwich—but it is nowhere near the returns that our investors expect.

To keep up with the growing demand for connectivity, over the next 20 years we will need to attract financing to support aircraft orders in the range of $4-5 trillion.

There is no easy answer to how airlines can achieve sustainable levels of profitability. But today I would like to discuss with you four critical components to securing aviation’s future:

  1. Infrastructure that can support growth
  2. Taxation that does not compromise aviation’s ability to drive economic growth
  3. A distribution system that meets customer needs, and
  4. A global approach to manage aviation’s environmental impact

Infrastructure

Physical infrastructure is critical for aviation to grow. Australia’s biggest hub airport is Sydney. In fact, it is the busiest hub in the Southern hemisphere. When I joined this business in the late 1970’s there was already lots of discussion on how to accommodate the growth of this critical piece of infrastructure—and very little agreement. Three decades later the debate continues.

Credit is owed to Australian innovation for continuing to grow capacity in very challenging circumstances. In a continuation of that, Sydney airport just published its draft master plan accommodating a doubling of traffic by 2033. It seems to be a sensible approach to maximizing the airport’s potential. User consultations will undoubtedly reveal some fine tuning, but in general we support its major principles.

But, let’s not lose sight of the fact that, at some point, the airport will reach its maximum potential. Even the Master Plan acknowledges that. So we have about two decades to select a site, sort out all of the necessary approvals, acquire the land, upgrade surface transport, get the airport built, and, of course figure out how to pay for it all.

That is not a lot of time for such a mammoth and important project. And we need to get it right. It will be a decision with significant long-term consequences. And if we don’t make it soon, the Australian economy will most certainly miss important opportunities to grow.
The government has commissioned yet another study. To be frank, the challenge is to break out of the endless cycle of studies, make a decision and get on with it.

I know that is easier said than done. And I certainly don’t pretend to bring with me answers today that have not been uncovered in nearly a half-century of discussions. But I would encourage you to keep a watchful eye on how your trading partners in Asia are developing infrastructure. We have seen major new aviation infrastructure development almost universally across Asia over the last two decades—new terminals in Singapore and Taipei, new runways and terminals in Tokyo and Delhi; and  whole new airports in Seoul, Osaka, Nagoya, Hong Kong, Bangkok and Kuala Lumpur—and the most massive airport construction program ever seen across China.

Beijing is a great example. Its Capital Airport expanded to handle 80 million passengers in 2012. And plans are underway for construction of a second airport that could handle 100 million passengers annually with completion within this decade.

Australia needs to do business with Asia. But if it does not have the capacity to connect with its trading partners, that is going to be difficult.

If Australia does not have the capacity accommodate the opportunities that aviation is facilitating, the business will go elsewhere.

We also need well-financed solutions to capacity. In that regard, I am concerned about Brisbane’s plan to pre-finance its second runway. We would not consider such financing for other major infrastructure projects. Imagine trying to charge users of an existing secondary road for a super highway the benefit of which others will eventually enjoy. You couldn’t do it.

Not only is this common-sense, but the concept is embedded in principles for infrastructure development agreed through the International Civil Aviation Organization (ICAO). The government needs to take a firmer stance in encouraging the airport to align its plans with ICAO principles.

Taxation

I would also ask the government to take another look at the Passenger Movement Charge (PMC)—originally designed to fund Australia’s border agencies. With last year’s increase to $55 per passenger about A$800 million will be collected in the 2012-2013 fiscal year. By any calculations, that’s much more than is needed to fulfill its original goal.

The question is….at what cost? Or, to put it more positively, what would be gained if the PMC was removed?

In a study that we are releasing today, we have calculated that the PMC adds about 3.5% to the cost of travel from Australia. If it were removed we would expect a 2.5% boost to traffic. That would add A$1.7 billion to the Australian economy and generate some 17,000 jobs.

So, the Australian economy has more to gain from removing the PMC than from keeping it in place.

This illustrates the critical importance of thorough cost-benefit analysis for policy decisions. And I would urge the government to re-evaluate the overall economic impact of making connectivity more expensive than it needs to be.

Distribution

Airlines are not just asking for governments and infrastructure providers to solve their problems. We are working hard—with partners—to solve key issues. This includes modernizing distribution.

Airlines sell tickets in two ways—directly and through travel agents. That is not unusual. Most, if not all consumer products are distributed through several channels. People shop in different ways and having multiple channels is a way of responding to customer needs.

But there is something unusual in airline distribution. If you buy an Apple computer from the Apple website or an Apple re-seller, you get the same range of products. But with air travel products you are more likely to have a richer shopping experience on the airline’s website than you will when buying via a travel agent.

There is a long explanation for why this gap exists. But the short version is that distribution via travel agents is built on decades-old EDIFACT messaging standards. These don’t have the same capabilities as XML—the lingua franca of modern internet based commerce.

IATA’s raison d'être is to set global industry standards. And we want to enable the filling of the gap between channels by creating XML standards for a New Distribution Capability—or NDC. I admit, the name of this initiative is not the most exciting, but what it could enable is.
Seeing is believing. So, I would like to show you a short video of the shopping experience that NDC could enable.

VIDEO

I hope that you will agree with me that the potential for NDC is exciting and could deliver enormous value to consumers and create new opportunities across the travel value chain.

Creating the NDC standard will unleash innovation—and that will mean change. But, let me assure you of a few things. NDC will operate within the same privacy laws that govern every other business. That is no change from today. But, by giving travel agents more information, there will be greater transparency. As you saw in the video, the NDC standard will enable much richer comparison shopping for travel products.

I should also be clear that IATA’s role is to set the standard—which we are doing collaboratively with a broad cross-section of industry players. What you saw in the video is what might be developed when other companies use the standard.  Some pilot projects are in the pipeline and will be operational by year-end. If the market response is positive—and having seen the demonstration, I cannot see why it would not be—then NDC should quickly result in a much better shopping experience.

Environment

The last element that I would like to discuss with you today may be the most critical for aviation’s future—the challenge of managing aviation’s carbon emissions. Airlines are a fuel intensive industry. About a third of our cost structure is fuel. And in burning that fuel airlines emit carbon—some 680 million tonnes a year or 2% of global manmade carbon emissions.
The airline industry recognizes that, as with any industry, its future is predicated on sustainability. We have taken-up the challenge. The industry—airlines, airports, air navigation service providers and manufacturers—established clear targets:

  1. To improve fuel efficiency by 1.5% annually to 2020
  2. To cap net emissions from 2020 with carbon-neutral growth (CNG2020)
  3. And to cut emissions in half by 2050 compared to 2005.

As far as I am aware, no other global industry has set such an ambitious global agenda. And we have agreed on a four pillar strategy to achieve it.

The first three pillars are focused on actual reduction in emissions—through better technology, more efficient operations and infrastructure. There have been significant successes. New aircraft such as the Boeing 787 and the Airbus A380 are about 20% more fuel efficient than their predecessors. Airlines are literally lining-up to invest in more fuel-efficient fleets both with new aircraft and modifications to existing models. And advancements in air traffic management are helping to get all aircraft to their destination more efficiently. Two projects—ASPIRE and INSPIRE—link key routes from the US West Coast, across Oceania and Asia through the Indian Ocean and the Gulf. A huge number of partners—including Airservices Australia, Qantas and Virgin Australia—are working together to make the project deliver results.

We are even making progress on low-carbon alternative fuels, such as sustainable biofuel. A decade ago, aviation had no alternative to conventional jet kerosene but since then we have shown that sustainable biofuels can work just as well. Australian carriers are among carriers that collectively contributed to the safe operation of over 1,500 commercial flights using such fuels. Airlines are eager to do more. But supplies are limited and the price is not yet commercially viable. As governments have done with other forms of alternative energy the biofuel industry needs some government economic incentives in order to grow production levels that will drive costs down. With its vast land mass and coastline, Australia is certainly well suited to be at the leading edge of this innovation.

The last pillar of our strategy focuses on market-based measures. This is critically important to our short-term goal of CNG2020. With the best will in the world, we will not meet this target without access to market-based measures.

Not just any measure will do. It must, among other things, be global, transparent, and ensure that airlines pay for their carbon once—not several times over. The reasoning for that was clearly demonstrated last year. Europe’s plan to extra-territorially include international aviation in its emissions trading scheme (EU ETS) brought us to the verge of a trade war.

Fortunately, Europe stopped the clock on implementation. And that created the space for governments to focus on finding a solution through ICAO. The politics of climate change are complex. And even with the pressure of EU ETS removed, finding a global solution through ICAO will be challenging.

As a responsible industry, airlines are doing everything possible to help governments in their difficult task. A month ago at our Annual General Meeting, airlines overwhelmingly agreed to a resolution on market-based measures that should support their efforts. The industry sent a clear signal to governments that we would prefer a mandatory off-setting scheme as a single measure to manage emissions growth over the 2020 baseline. We see it as the simplest, fastest and most cost-effective solution. And airlines went a step further to agree principles for how to most equitably share that cost.

This is a ground-breaking agreement—ahead of all other industries at the global level. There is still some work to do in turning the principles into practical applications—particularly ensuring as much fairness as possible between fast growing airlines in emerging markets and those growing more slowly in mature markets. But I am confident that will come.

The focus is now on ICAO. The environment will be at the top of the agenda at the ICAO Assembly in September. And I hope that we can count Australia among the states supporting the industry position.

Conclusion

Infrastructure, distribution and sustainability are only a sampling of the many challenges facing aviation. Getting them right will help build a solid platform for the future growth of connectivity—something that I am sure is close to the hearts of all Australians.

IATA’s vision is to be the force for value creation and innovation driving a safe, secure and profitable air transport industry that sustainably connects and enriches our world. That’s a tall order. And success will require the support of strong partnerships—with governments and across the business community. The first century of commercial aviation was marked by enormous transformational change in the way that we live and work together as a global community. I hope that you will share and support my optimism for the development of the second hundred years of global connectivity.

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