Good morning and thanks for joining us for Global Media Day. This is something that we started in 2004. So this is the tenth edition. This is a day that we look forward to. It is always great to see many familiar faces who report regularly on the industry. Equally, we are pleased to welcome newcomers. We have prepared a full day of sessions with our top experts to cover a range of issues that we are working on.
Our goal is to build understanding of the challenges that the air transport industry faces. So I anticipate a good day of discussions. Transparency and openness are critical to the success of a trade association. And I am sure that you know that our communications team is always open for your questions and eager to share our insight on what is going on in the industry.
We are holding our tenth media day, but that comes on the eve of an even more momentous event—the 100th anniversary of the birth of commercial aviation. On 1 January 1914 the first paying passenger on a scheduled airline flight was transported across Tampa Bay in Florida. It is a story with many characters. Tony Jannus was the pilot. Thomas Benoist built the aircraft. Percival Fansler was the visionary who conceived the idea for an air service. And the hero of the day was Abram C. Pheil who bought the ticket for $400 proving the concept that commercial aviation creates value.
Jannus, Benoist, Fansler and Pheil were all visionary people. Together, their actions on New Year’s Day 1914 set in motion the development of an industry which, over the next 100 years, would change the world enormously. Fansler summed up the importance of the moment when he said, “What was impossible yesterday is an accomplishment of today—and tomorrow heralds the unbelievable.”
IATA will be celebrating this important Centennial over the course of 2014, starting by supporting a re-enactment of that momentous flight on New Year’s Day in Florida. The focus of the celebration will be on the value that aviation creates. Just think of how different our world would be today were it not for aviation.
Aviation has given people the freedom and independence to explore our world. This has connected people and linked economies. And in doing so it has been a force for development, globalization, the sharing of cultures and ideas and the lifting of many out of poverty. I would even say that it has made our world a more peaceful place through the mutual understanding that it has facilitated.
The numbers are impressive. 2013 will see passenger numbers top 3 billion for the first time, increasing to 3.3 billion in 2014. So we are approaching a point where this industry will move half the world’s population from one place to another over the course of a year—and do it safely.
Later on today you will get an update on safety. In terms of accidents, we took a step back from the record safety performance of 2012, which was an exceptional year in which we had no accidents among the carriers on the IATA Operational Safety Audit (IOSA) registry. At this point we are tracking towards 2013 being the second best year in terms of the accident rate. But, at the same point last year we had more than double the number of fatalities. This year there have been 210 fatalities. Over the course of last year it was 402. Of course that is still 210 too many. And every accident and fatality re-dedicates aviation to doing even better. But moving 3 billion people safely at nearly 40,000 feet in tubes of metal and carbon fiber is an amazing validation of the industry’s commitment to safety. That commitment extended over the whole of the last century during which aviation moved from being an activity for daredevils and the affluent to being so much of a part of daily life for so many that we take it for granted.
Every 60 seconds….
- 52 aircraft take off
- $12.1 million worth of cargo is delivered
- 5,700 passengers will board aircraft somewhere in the world
- And the global fleet will cross over 70,000 kilometers
Throughout 2014 we will be producing evidence of aviation’s many contributions to modern life. You are probably already familiar with our top-line figures. Aviation supports some 57 million jobs and over $2.2 trillion in economic activity. And this industry delivers about 50 million tonnes of cargo that accounts for $6.4 trillion—or about 35% -- of the value of goods traded internationally.
Aviation is critical to the global economy. It is a force for good in our world. And it enables individuals the freedom to make connections that change their lives and our world. I hope that you will join in the celebration of a remarkable century.
As impressive as the achievements of the industry have been, we still face challenges. The first airline—the St. Petersburg-Tampa Airboat line—started with an impressive yield. As mentioned, the first ticket was auctioned for some $400. Even before adjusting for inflation, that is about double the average ticket issued today. The ticket price quickly fell to $5. And the company wrapped up its operations by mid-May of that year. It was an indication of the financial challenges that face aviation and continue to this day.
International Civil Aviation Organization (ICAO) statistics show that airlines have only made a profit in about half of the years since 1945. But I am pleased to say that we will celebrate the centennial in the black.
Before we get into the numbers, please keep one thing in mind. This is a diverse industry. Some airlines are doing quite well. Recent announcements from Delta and Emirates affirm that. But others are struggling with weak profitability as we saw with the Qantas market update last week.
Keeping that thought in mind as background, today we are raising our global profit outlook for this year to $12.9 billion. And we see that increasing to $19.7 billion next year. That is $1.2 billion better for 2013 than we expected in September. And it is $3.3 billion better for 2014.
This is being led primarily by
- A slight fall in the high price of oil
- The growing success of airline innovations that are generating ancillary revenues, and
- The positive impact that mergers and joint ventures are having—generating better connectivity for passenger and driving efficiencies
Brian Pearce is the author of the outlook and will be presenting the details. But before that I do want to give a bit of context to this announcement. The industry’s fortunes are improving. And $19.7 billion probably sounds like a very large number. It is. But it is shared among hundreds of airlines. They will take in $743 billion in revenues by transporting some 3.3 billion passengers. Even a very simple division of the profit by the number of passengers will quickly show that the industry will be retaining a little less than $6 per passenger carried.
To put that into perspective, the McDonald’s down the road here in Geneva will make about the same amount of profit by selling four Happy Meals at a cost in Geneva of $30. Their global margin is about 20%. I don’t begrudge McDonald’s their profits. But when compared to the airline industry it begs the question of whether $6/passenger is a reasonable reward for airlines if you consider the technology, skills and capital that is invested.
The average margin of the airline industry even next year—which if we are correct will see the highest absolute profit ever—will be 2.6%. Many airlines will do better than this. And many others will under-perform. It is an average projection. But what it tells us is that we are not rewarding our shareholders in line with the risk, complexity and value that are inherent in the airline industry.
And with that, I will ask Brian to cover some of the detail of what we are doing.
Presentation by Brian Pearce, IATA's Chief Economist (pdf)
Thanks Brian. That gives us a thorough understanding of how the industry is doing. It is good to approach our 100th anniversary on an optimistic trend of improvement. Having said that, we cannot ignore the fact that airline returns, in general, remain at very low levels. While many things are moving in the right direction, challenges remain.
Over the course of the day you will be hearing in detail about some of our main areas of activity on behalf of our 240 members. I don’t want to steal the thunder of the group of presenters that will follow, but I would like to highlight my thoughts on a few key areas.
As Brian has mentioned, airlines are doing a great job of serving their customers and being profitable in some very challenging trading circumstances. But I am increasingly concerned about governments that don’t seem to “get it” in terms of understanding the value that aviation can contribute to the development of their economies. Let me give you a few examples:
Taxation: Airlines, like all companies, pay taxes. And air travelers pay taxes as well. That should not come as a surprise. But often times the taxes are excessive or in contravention of international conventions—or both! Let me give you some examples of the challenges that we face on taxation.
- In Africa, taxes, fees and lack of transparency are major contributors to making jet fuel costs in Africa on average 21% more expensive than the global average
- Mexico is among the latest states to introduce an environmental fuel tax totaling $37 million annually
- Both of these…and other direct fuel taxes are in contravention of the Chicago Convention
- Yesterday, a budget agreement in the US would see the minimum “security fee” rise from $5 per round trip to $11.20. It bears no relation to the cost of providing security and the excess will remain with the treasury. So it is a tax. And it is estimated that this will extract nearly $13 billion from the industry over ten years—should it take effect as scheduled from 1 July. Why are already heavily-taxed air travelers being singled out in this way?
- And, although also not strictly a tax, the import parity pricing policy in Brazil has the same effect. It makes the purchase of jet fuel in Brazil 17% higher than the global average—in a country that produces most of its own fuel.
- There are also passenger taxes, the most infamous of which is the UK’s Air Passenger Duty (APD). It is the biggest single aviation tax in the world and it accounts for some GBP2.8 billion in 2012-3. And the projection is for this to increase to GBP4.3 billion by 2018-9.
I could go on to describe all the taxes that we don’t like, but that would take a very long time. The point that I would like to make and which I hope that you will consider in your reporting is the economic cost of such taxes. They dampen demand for travel. That’s bad for the airlines, but more importantly, it is bad for the local economy.
We had an enlightened example in Ireland recently where the government decided to abolish its Air Travel Tax from April 2014. In 2008, the year before the tax was introduced; Ireland had just over 30 million travelers. By 2012 that had dropped to 23.5 million. Of course not all of that was due to the Air Travel Tax, but certainly some of it is. And the government decision to abolish the tax was in anticipation of greater economic gains from increased air traffic volumes.
Regulation: Regulation is another area where governments don’t seem to always get it. We are not against regulation. Effective regulation is a core driver of our excellent safety record. In Africa one of our biggest “asks” of governments is to strengthen their safety regulatory regimes to meet ICAO’s global standards. One of the top priorities in the Abuja Declaration by which African governments intend to bring African skies to world-class safety levels by 2015 is the implementation of independent safety oversight in line with ICAO standards. In Africa, our concern with regulation is that governments are not yet moving fast enough to meet the target.
Elsewhere, however, our concerns focus more on governments stepping beyond effective regulation, not basing decisions on effective cost-benefit analysis, and not being accountable for the results. In that respect, the proliferation of passenger rights regulations is a key concern. Please don’t misinterpret. Passengers have rights and they should be protected. Airlines do everything that they can to get passengers to their destination on time. After all, we are a global industry. When things go wrong we don’t want to compound the issue with confusing or conflicting regulation on how passengers should be treated. And with some 53 states now having passenger rights legislation on their books, the chances of that happening are growing.
At the recent ICAO Assembly there was agreement to work on this over the next three years (until their next Assembly) with the intention of providing harmonized guidance. We support their efforts. This includes offering the industry’s agreed principles for passenger rights regulations that was unanimously passed by our Annual General Meeting in June.
We will have an opportunity in 2014 to improve our biggest passenger rights nightmare—EU Regulation 261. It is being reviewed. As a priority, our Board has asked us to make sure that the result is an improvement. Proposals put forward by the European Parliament are a concern. For example, even though many causes for delays are completely outside the control of airlines, the Parliament would limit extra-ordinary circumstances to external strikes and massive disruptions (on the scale of the Icelandic volcano).
We need smart regulation. That means regulation that understands both the costs and benefits that it will bring. And the classic example of the unintended consequences of regulation is the US rule that puts huge penalties on airlines for extended tarmac delays. It worked. Long tarmac delays were a rarity. Now they have disappeared. But at what cost? Flight cancellations have increased simply because airlines cannot risk the burden of the excessive fines. But if you were a passenger, would you prefer to wait or not to fly at all?
I won’t encroach any further into Jeff Shane’s story. He will address this issue in much more detail later today. And Tim Colehan and Michael Gill will present on how we are supporting the strengthening of international regulation so that unruly passengers can be fairly dealt with.
Infrastructure: And the last point that I want to make about governments is the need for them to ensure that there is sufficient availability of cost-efficient infrastructure to meet the demand for connectivity. The picture varies from country to country.
In Brazil, for example, we are confident that by introducing some stop-gap measures airports will be able to handle the influx of travelers for the World Cup. But I am not so confident about the long-term situation. A second tranche of privatizations is showing some better prospects for success because it requires bidders to have significant airport management experience. But the regulatory structure for charges still does not comply with ICAO standards. There is no requirement for airline consultation in setting charges. While aeronautical charges are capped, there is no regulation for non-aeronautical fees such as fuel concession fees. And INFRAERO, an arm of the government, will also be a shareholder which has obvious implications in terms of conflict of interest.
Even where regulation appears to be moving in the right direction, we can often be disappointed with the results. For example in the UK, the CAA had to decide on Heathrow’s price caps for the 2014 to 2019 period. And they were asked to do it with a mandate to focus on the consumer. The result so far is a major frustration. We saw an opportunity for Heathrow to cut charges by nearly 10%, still make GBP3 billion in investments and reward their shareholders handsomely. The regulator is set to allow fees to rise in line with inflation, and agreed an investment program of GBP2.8 billion. It’s a huge disappointment for us and for passengers at Heathrow. We still hope that the regulator will take account of the evidence presented and reaffirm its commitment to a more challenging price regime which can restore Heathrow's competitiveness.
The capacity situation in Europe is becoming a major concern. A recently released report from Eurocontrol projects that, if current trends and policies continue, by 2035, European airports and airspace will fall about 12% short of projected demand. In other words there will be a capacity shortfall of some 1.9 million flights per year.
In Europe this is a combination of failing to strategically plan airport capacity and failing to deliver the Single European Sky. But capacity constraints are not just a European problem. Even in the Gulf with its modern infrastructure, we are seeing capacity constraints in airspace which, if not resolved, could start to be a major limiting factor in the region’s growth.
Tax, regulation and infrastructure capacity are key issues for the industry and for governments. They are also opportunities for win-win solutions. If we get them right, it will be a major enabler for airlines to meet demand. And the increase in connectivity will mean jobs and growth. That is the proposition that we will continue to take to our government partners.
Environment is an area where win-win solutions are critical. Paul Steele will provide a full update on the outcome of the climate change discussions at ICAO. But let me just provide some high level commentary.
For me the outcome of the ICAO Assembly on climate change was a major step forward for both aviation and for the planet. The industry took a position asking governments to facilitate a global market based measure on climate change. We even suggested our preferred option which is a mandatory global carbon offsetting scheme to manage post-2020 growth. No other industry has done that.
And governments agreed. They are working on a longer timeline than the private sector because they have many more complex interests to balance. But, the assembly ended with an historic agreement by governments to develop a global scheme for the 2016 Assembly to approve. As far as I am aware, we are the only sector for which governments have been able to come to such a commitment.
We came away from the Assembly elated—as did all participants. Everyone shared a great sense of accomplishment. So it was with disbelief and shock that we received the news that Europe is returning to its misguided intention to include international aviation in its ETS without any international consultation. This brought us to the brink of a trade war last year. And we hope that the political tensions that this is already causing will not distract governments from the important work to achieve the big prize—finding a global agreement on a market based-measure for aviation. Paul will fill you in on the details of this in his presentation later today.
While we expect governments to provide a playing field on which the airline industry can be successful as it drives broader economic growth, we recognize that the future of our business is in our hands.
Individual airlines are making major investments in their products and services. And at the Association level we are doing our best to support those efforts with efficient industry platforms and standards.
Later today you will hear of what we are doing to improve the customer journey. That includes our vision for a much better airport security experience which will enter a new phase next year. We will be announcing a partnership with the Airports Council International (ACI) to move this forward by working together and jointly engaging governments. This will coincide with a name change from Checkpoint of the Future to Smart Security. It fits with the fact that from 2014 we will start to see live pilots in airports around the world. We have tested individual components of this program and our target is to be live in two airports by the end of 2014. Paul Behan will tell you about this shortly.
New Distribution Capability
Lastly I want to provide a few comments on New Distribution Capability (NDC). We want to enable a modern shopping experience for airline travel products with NDC. It’s about transparency, rich product descriptions and combined pricing for the fare and ancillary services. Airlines are investing enormously in their product and associated services. And NDC will facilitate access to the market so that travel agents will have the capability to make rich offers as airlines can from their website.
The US Department of Transportation (DOT) has our resolution on NDC on their agenda for approval. We expect that will come before year end. There will still be a lot of work to do in order to complete the project, but the DOT decision will be one major step in the right direction. Eric Leopold will brief you further later. But I did want to mention that the big breakthrough for this year is the growing coterie of businesses that understand and support what we are trying to do. We have worked very hard to be inclusive and to encourage input from the global distribution systems (GDSs) and travel agent communities who are so important to the success of NDC. We are learning a lot through this process and capturing input from the intermediaries with whom we are talking.
From a technical perspective, we recently achieved the first live pilot transaction with a ticket sold to a real passenger. This pilot involves Hainan Airlines, Travelsky--the Chinese GDS--and a travel agency.
Other groups working on pilots include:
- American Airlines and JR Technologies (JRT) in the US
- Air New Zealand and JR Technologies (JRT) to develop a distribution of the ANZ SkyCouch
- Travelsky, China Southern and Cript are focusing on delivering rich product content
- Swiss International Air Lines, Datalex, PROS, and HP are testing NDC across a variety of shopping stages
I firmly believe that NDC will be good for our industry—not just airlines. And it will deliver value that will pay big dividends to air travelers. Our board of governors has made NDC a priority and I encourage you to follow it closely.
With that I will say thank you again for coming and for your attention. Now it is my pleasure to open the floor to questions.