Date: 17 June 2014
Remarks of Tony Tyler at the International Center for Competitiveness Studies in the Aviation Industry, Rome
Thank you for the kind invitation to lead-off this round table discussion with a few thoughts from the perspective of IATA. The timing of this discussion is quite unique. It comes at the confluence of three facts:
- First, in a few weeks Italy will take on the important role of Presidency of the European Union. This is a critical opportunity to influence the direction of the European Union as it continues to emerge from the financial crisis.
- Secondly, the global commercial air transport industry is celebrating its 100th anniversary. This year airlines will safely transport 3.3 billion passengers and 52 million tonnes of cargo. This activity supports jobs for 58 million people worldwide. And airlines deliver over a third of the goods traded internationally by value—worth some $6.8 trillion. Having built global connectivity over the last century, aviation is a critical component of the modern global economy.
- And lastly, is the fact that European aviation is financially the weakest amongst the world’s major regions. Witnessing first-hand the plight of Alitalia—among the worst cases—this should not come as a surprise for you here in Italy. We expect European airlines to realize a post-tax net profit of $2.8 billion this year, for an average net profit margin of just 1.3%. Put another way, they will make about $3.23 per passenger. That’s less than a third of the $11.09 per passenger that their counterparts in North America will earn.
To re-cap, over the last century aviation has become a cornerstone of the global economy, the European industry is struggling, and Italy has an opportunity to deliver positive changes.
Let me be a bit provocative. As the International Center for Competitiveness Studies in the Aviation Industry is hosting this event, I would like to reflect on the concept of competitiveness. You may expect me to say that a strong aviation sector is an important component of Europe’s competitiveness. But I take a different and stronger view. A healthy aviation sector is a pre-requisite for competitiveness and growth—in other words, an economic necessity.
A modern economy cannot survive and develop without the global connectivity that only aviation can deliver. Italy is no exception. And neither is Europe.
Europe has an impressive air transport sector. The 200-plus airlines in the EU28 support 9.2 million European jobs and about $660 billion of Europe’s GDP. They connect a continent that accounts for 10% of the world’s population, is the largest single economy on the planet, and which is home to impressive world heritage sites, cultural assets and academic institutions.
So, how is it that Europe’s airlines are not more successful? I believe that it is because of the competitive disadvantages that Europe’s governments place in their way. The industry here is over-taxed, onerously regulated and suffers from a chronically mismanaged ATM system, insufficient airport capacity and overall costs for infrastructure that are too high. Let me elaborate.
On taxation, the poster child for onerous taxation is the UK’s Air Passenger Duty. Alone it collects nearly $4.5 billion. But it is not the only one. Germany and France also have counter-productive passenger taxes. And we were dismayed that Italy may add to the burden with its proposed regional noise tax—IRESA—which could not be more wrong. It does not comply with ICAO policies, international agreements or even EU law.
This year the European tax bill for airlines and their passengers will reach nearly $40 billion. For perspective, that is more than double what is paid in the Asia-Pacific region where many governments value aviation more for the long-term economic value that the industry makes possible, than for short-term tax receipts. Some European governments are coming to this realization. The Irish government has removed a departure tax because of the economic damage that it was doing. During its Presidency, I hope that Italy will help focus European governments on the economic value that aviation can deliver.
European regulation of the aviation industry generates several competitive disadvantages. First is that Europe is developing a tendency to over-regulate—often even when global standards already exist. And this often comes with unintended consequences. Passenger Rights is a good example. EU regulation 261 seeks to “protect” passenger rights. But its draconian measures compete and conflict with some 60 other passenger rights regimes. From the passenger’s perspective, all this “protection” is just a confusing mess.
Airlines are committed to providing safe, comfortable and quality services to their customers. IATA’s members last year even adopted a resolution outlining a set of fair and consistent global best practices on passenger rights. And we are encouraging governments to do the same by working through ICAO.
ICAO is the forum where governments agree global standards to support global air transport. That is why it is has always been the focal point of our approach to managing aviation’s carbon footprint. The industry is asking governments to agree on a mandatory global carbon offset scheme through ICAO which we will need to achieve our commitment to carbon neutral growth from 2020. And earlier this year we had a reminder of how successful the ICAO process can be when governments agreed on revisions to the Tokyo Convention which will modernize the rules for dealing with unruly passengers.
What does all this mean for the Italian Presidency? I hope that Italy will be a strong voice for aligning EU Regulation 261 to global principles on passenger rights and that it will encourage European governments to ratify the changes to the Tokyo Convention. Moreover, we are counting Italy to be a strong supporter of the ICAO process to develop a global framework for market based-measures to manage carbon emissions.
There is also an urgent need to address the failures of “light touch” economic regulation of infrastructure providers. For example, earlier this month the German air navigation service provider announced that it was putting up its charges by $300 million a year from 2015. Italy provides another illustration. There is a mismatch between actual demand and CAPEX expenditure at Italy’s main airport which is generating large-scale inefficiency. This is arising from the 10-year “contratto di programma” framework which does not include the opportunity to adjust CAPEX or charges to real market conditions. The result was a massive increase in charges last year. Fiumicino, with a 70% increase, is the most egregious example. So far, the regulatory structure has not been able to provide an acceptable result.
These examples show why we need a counter-balance to the market power of many infrastructure providers. Effective independent regulators must apply well-established international norms to bring about fair charging regimes—regimes that will facilitate enhanced connectivity that can drive economic growth.
Over the next months, there is an opportunity to take meaningful action as the Airports Package is refined. And I am pleased to see that Italy is starting a consultation process to look at the economic regulation of airports. I hope that this a good sign that Italy will be a strong voice in driving cost-efficiencies at the European level during its Presidency.
And lastly, I call on Italy to be a strong supporter of much-needed infrastructure improvements. The problems are many. By Eurocontrol’s own estimation, there will be a 12% shortfall in Europe’s airport capacity by 2035. That is a major concern for Europe’s economic growth. But the severity of Europe’s infrastructure constraints is evident in that there is an even higher priority issue—delivering the Single European Sky (SES).
The costs of inadequate air traffic management to Europe are enormous—at least EUR 3 billion for airlines and EUR 6 billion for consumers in lost time and productivity each year. On top of that, there is the environmental cost of 7.8 million tonnes of unnecessary carbon emissions.
Europe needs the SES. But member States—Italy included—are not delivering. They are pandering to local interests and sacrificing social and economic gains to the frustration of the European public. I cannot put this too strongly. The failure to implement SES is the biggest infrastructure issue that the aviation industry faces. The next six months will be critical in determining the adoption of the “SES2+ package”—something that Europe urgently needs.
We must seize this opportunity to evolve European air navigation service monopolies into customer-focused and cost-effective members of the air transport value chain. The most important contribution that Italy could make to Europe’s air transport sector over the next six months is to push forward SES2+.
Over the last 100 years, commercial aviation has demonstrated its ability to be a catalyst for economic activity and a driver of prosperity. Europe’s air transport sector—including Italy—is in desperate need of leadership to alleviate the tax burden, improve regulation based on global standards and develop infrastructure to enable success. We are counting on Minister Lupi to be a strong force for much-needed progress and set the stage for aviation to make an even greater contribution to European development in its next century.