Innovation for the Future
Good morning. It is great to be here in Bucharest. I’d like to thank Transport Secretary Nicu Buică for taking time from his busy schedule, and Mr. Catalin Radu, the President of the European Civil Aviation Conference (ECAC) for his help and for bringing in ECAC as our honorary partner for this Aviation Day. And finally of course, thanks to TAROM for their generous support for this event, especially their CEO Christian Heinzmann.
Aviation is a special industry. With due respect to other business sectors, no other industry has quite such an impact on people, places, jobs and technology, as aviation. Few, if any, industries have aviation’s capacity to inspire and excite. And in 2014, we will celebrate an important milestone. On 1 January 1914, Tony Jannus flew the first commercial passenger flight from St Petersburg to Tampa, Florida.
Since that first flight, we have seen nearly 100 years of increasing global connectivity, facilitated by aviation. This year, for the first time, more than 3 billion passengers will reach their destination by air. The global airline fleet comprises more than 23,000 planes, connecting 40,000 city-pairs. That connectivity is the bedrock of the global economy, bringing people to businesses, products to markets, tourists to holiday destinations, and facilitating the world’s most iconic sporting and cultural events. Fifty-seven million jobs and $2.2 trillion in economic activity are generated and supported by aviation. Fifty million tonnes of cargo worth $6.4 trillion is carried every year, equivalent to one third of the total value of all traded goods.
In Eastern Europe, the hard numbers showing the direct impact of aviation are impressive. In Romania, aviation supports 78,000 jobs and EUR1billion in GDP. In Hungary, 48,000 jobs and EUR 1.1 billion. In Bulgaria, 141,000 jobs and EUR1.75 billion. In Poland, 84,000 jobs and EUR2 billion. And that only touches the surface of the wider role aviation has played in helping re-integrate Eastern Europe into the global economy since the fall of the Iron Curtain. The European Single Market for air services has spearheaded economic development. And connectivity will continue to play a key role in the region’s success.
So today is about looking forward and the challenges we face, particularly if the great benefits of aviation are to be maintained and expanded.
First among our challenges is profitability. In 2012 airlines globally, on average, made $2 in profit on each passenger carried - approximately the value of a cup of coffee. This year, we may even push this up to $4, which would cover the cost of a sandwich. The consequences of this economic tightrope were clear when sadly Malev, one of the oldest names in aviation, was grounded.
There is no silver bullet for boosting sustainability and profitability. But it is clear we need some new and novel thinking. Which is why today’s theme - ‘the future is innovation’ – is so relevant. The aviation industry is nothing if not innovative. We are continually looking to improve every aspect of our products and services. From distribution to safety, security to sustainability, we are finding new solutions to long-standing challenges. And it is not just at an individual business level. At an industry-wide level, we are working together to create innovative solutions.
Take ticket distribution. Travel agents account for 60% of ticket sales by value. Yet they cannot display for their customers the full range of products that airlines have developed, and which they make available on their own websites. So IATA has been developing an innovative New Distribution Capability (NDC) to facilitate the display of this content. I’ll return to this issue a little later – complete with audio-visual demonstration – but first I want to address some of the regulatory hurdles the aviation industry is facing.
Many of the innovations that airlines look to introduce require them to work closely with governments. So the industry needs governments to adopt an innovative mindset as together we look to build a healthy industry.
There are three areas in particular where the industry needs governments to think innovatively and put in place a better regulatory framework to enhance the benefits of aviation:
- Passenger rights, and
- Infrastructure provision
Let us start with environment. It is well-known that aviation contributes some 2% of global manmade CO2 emissions annually. As an industry, we take our responsibilities to reduce our carbon emissions very seriously. That is why in 2008 we adopted a four-pillar strategy for cutting carbon, and in 2009 set tough targets for emissions reductions. Our targets are:
- A 1.5% improvement in fuel efficiency per year to 2020
- Capping emissions with carbon-neutral growth from 2020 (CNG2020)
- A 50% reduction in net carbon emissions by 2050 (compared to 2005).
Aviation remains the only global industry to have set such tough targets for carbon emissions. And we have a coherent and detailed four-pillar strategy for meeting these goals.
Pillar one of our strategy is technology. Collectively over the next 20 or so years, airlines will invest a staggering 4-5 trillion dollars in new aircraft. The manufacturers have responded with a new generation of greener, more fuel-efficient planes. And we are pushing forward with sustainable aviation biofuels, which could offer up to 80% reductions in emissions over the fuel’s life-cycle. There are some fantastically innovative projects underway, including right here in Romania. The Camelina Value Chain initiative in which TAROM and Airbus are involved demonstrated the successful production of aviation biojet from camelina plants cultivated in Romania. The next phase of the project will have to focus on the challenge of industrial-scale production, and for that, strong support from the government will be required.
Pillar two is improved operations. There is more we can do, together with our partners, to help fly more efficiently. We are working with air navigation service providers (ANSPs) to deliver more direct routes. We are working with the airport community to reduce power use on the ground, and on board our planes, we are reducing weight.
Our third pillar, better infrastructure, needs stronger government support. In particular, the Single European Sky is making glacial progress. It offers the chance to reduce aviation emissions in European airspace by at least 10%, so there is no excuse for delay.
Our first three pillars are medium-to-long-term solutions. But more immediately, to reach our CNG2020 target we need governments to agree a short-term, global Market-Based Measure (MBM).
The discussions on MBMs are not easy. And the aviation industry is committed to supporting governments in the difficult negotiations at the International Civil Aviation Organization (ICAO).
At our Annual General Meeting in June, IATA members overwhelmingly endorsed a resolution calling for governments to agree a single global MBM. It also stated that a mandatory offsetting scheme, as a single measure to manage emissions growth over the 2020 baseline, would be the simplest, fastest and most cost-effective solution. The resolution also outlined the principles under which a single global carbon offsetting scheme could be implemented and importantly how it could be applied to individual airlines.
So my message to European governments is: help us achieve CNG2020 by working to make a global MBM happen. Europe can take credit for pushing the aviation emissions issue up the international agenda. Stopping the clock on including international aviation in the EU Emissions Trading Scheme was the right decision - but the world needs a global solution and cannot afford to get sidetracked by regional agendas. But a positive conclusion at the September ICAO Assembly is far from assured, and if an agreement is not reached, and individual regions go their own way, then the threat of a trade war will loom again.
Passenger rights are another good example of where regulators and industry should work together to promote connectivity. At the moment there seem to be some regulators and politicians who believe that airlines don’t want to provide good customer service. This is absurd. The competition faced by airlines, not just between themselves, but with other modes of transport like rail, means that airlines have every incentive to keep their customers happy. They won’t stay in business otherwise. Furthermore, airlines have also stated clearly that on the rare occasions when we don’t get people to their destination within a reasonable time, appropriate remedies should be provided.
It is totally appropriate that governments set some simple guarantees. But that’s not what’s happening. Regulators—the guardians of competition—are micro-managing our businesses. And the rules can be so prescriptive that they stifle innovation, or even create unintended consequences that will actually make things worse.
To take an example: the European Union is at present considering an amendment to its current passenger rights regulations, known as Regulation 261, which would make the operator of the first leg of a multiple-leg journey liable for compensation for the total trip, if it is deemed responsible for a delay that results in a missed connection and - because of the re-routing - a delay on arrival at final destination. This could have disastrous consequences for European connectivity. Here in Romania, airlines make use of some of the major hubs in neighboring countries to provide interlining connections to cities where a direct service from Romania is not viable. This revision to 261 threatens your connectivity to those parts of the world. If carriers feel the risk is too great, then they will cease to offer connecting flights. Or, at best, connection times will grow to lengths which will damage economic competitiveness.
This example, and there are others, show that many regulators simply don’t have a clear understanding of how the aviation system works, nor the unintended damage that results to the economy from their actions. It is time for regulators to take a Hippocratic Oath, the first rule of which would be to do no harm. The second would be to become advocates for good regulation to promote the benefits of aviation.
This will be best achieved through taking full advantage of expert advice, evaluating the costs and benefits of decisions; and working to ensure global harmonization.
In addition to developing regulations that support connectivity, governments have an important role to play in ensuring sufficient aviation infrastructure is available, managed efficiently, and provides good value to users. Infrastructure costs have risen sharply in real terms over the last few years. Airports ANSPs and other infrastructure fees and charges now account for around 15% of airline expenditure and the concern is that this money is not always being spent wisely.
In Europe the most pressing infrastructure issue is the Single European Sky (SES). The aims of the SES include a ten-fold increase in safety, a three-fold increase in capacity, a reduction in environmental impact of 10%, and 50% cut in costs. These are the minimum improvements needed to equip the European aviation system to compete in the 21st century against rapidly-growing rivals. And yet, progress remains stalled. The lack of political will to push states to unify the European airspace is costing the continent EUR 5 billion a year.
Earlier this year IATA, together with the Association of European Airlines (AEA) and European Regions Airline Association (ERA), published ‘A Blueprint for a Single European Sky’ which set out a vision for how SES can be reached. Among its recommendations were the establishment of an independent economic regulator, and a reduction in control centers from 63 to not more than 40. The main lesson we can draw from the report is that implementing SES is completely feasible – all that is lacking is the political will. There are two steps which governments in Eastern Europe can take to make immediate progress. Firstly, to realize the benefits of SES, it is essential that the SES II+ package proposed by the European Commission is supported. The package helps to ease the contribution of individual member states through new tools to enhance cooperation and performance. As it happens, the SES II+ Rapporteur in the European Parliament is a Romanian: Marian-Jean Marinescu, who understands the importance of this project. I hope the Romanian government will be supporting his efforts.
The second step is to make genuine progress with the Functional Airspace Blocks (FAB). Romania and Bulgaria should be pushing for the Danube FAB to work, but there is little sign of joined-up thinking. For example, Romania is tendering for a new air traffic management system alone, when surely these sorts of procurements should be approached from a FAB perspective with the aim to optimize airspace resources, both human and technical.
Finally, I want to return to the topic of airline ticket distribution, which I know is something that people here are taking a keen interest in.
In the Internet age, customers are increasingly expecting more empowerment in their online shopping. Airlines have responded by innovating a tremendous range of products and services on their own websites, which are built with modern XML messaging standards. But travel agents cannot access the same information, because their systems use a pre-Internet standard that doesn’t have the same capabilities as XML. This is changing: all of the global distribution system (GDS) companies are working towards making it possible for airlines to merchandize their products better. But each is working on its own proprietary solution. Part of IATA’s mission is to set global industry standards to enable harmonization and greater efficiency across the entire industry. I could spend a few minutes describing how this will transform distribution – but I think it will be much more vivid for you to see how it might work in action. So here is a short video.
Play NDC video
I hope that the brief glimpse you have seen about the innovative possibilities NDC opens up makes you as excited as I am about the future of our industry. Later on today we have a session on NDC which will provide much more detail. But just to be clear – as there has been some misinformation in the press:
- NDC will not contravene privacy laws. The NDC standard does not require passengers to supply personal information to receive an offer. It does provide the opportunity for customers to identify themselves to have their loyalty recognized by the airline – but only if they choose to do so.
- NDC will not bypass travel agents. It will enable them to sell all of what airlines have on offer.
- And NDC will not eliminate comparison shopping. It will give customers better information on which to make decisions. And it will enable passengers to compare the base fare as well as the cost of all the options that are available.
The business case for NDC is compelling. Pilot projects are already underway. And business partners across the stakeholder chain, including travel agents, GDSs and other technology providers, are increasingly on board. This is an excellent example of how, together, the industry is innovating for the future.
I began this address by commenting on the upcoming 100th anniversary of commercial aviation. Tony Jannus piloted a 23-minute passenger journey that changed the world. But I think that history has overlooked someone equally important – his passenger. The intrepid Abram C. Pheil was the first airline passenger. Since then he has been followed by first hundreds, then thousands, then millions and now billions more travelers who have discovered the possibilities of flight.
But if more and more people are to access the opportunity of flight for the next 100 years, then airlines need to be given the freedom to grow. Experience shows us that aviation prospers most strongly when it is free of government interference. The issue is not ownership, but freedom of strategy. The full-service carriers in Eastern Europe are facing a significant challenge from new competitors, and they will need to adapt their business models to survive. They will not be able to do so if they are held back by their owners. Governments need to understand that their role is not to micro-manage the business, but to exercise strategic vision. When I look at Eastern Europe, I see it lacks strong carriers. Contrast that with what has happened in Latin America, where consolidation and commercial innovation has created a profitable airline industry. Eastern Europe also needs its governments to foster efficient air traffic management, and to fight for better regulation to encourage connectivity.
We are all – aviation professionals, politicians, and regulators alike - stewards of this industry. Our responsibility as stewards is to continue to develop safe, secure, sustainable and profitable connectivity, so that in the next 100 years, billions more get to enjoy the magic of flight.
Thank you very much.