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Date: 4 July 2014

Remarks of Tony Tyler at the ECAC/EU Dialogue Session, Vienna

Thank you for the kind invitation to address you today. The theme for this dialogue, European Air Transport Competitiveness: The Way Forward in a Global Environment is very close to the heart of IATA’s work globally and could not be better timed.

This year we are celebrating the 100th anniversary of the start of scheduled commercial aviation. In 2014 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. The global connectivity built-up over the last century is a critical component of modern economies the world over. That includes a broadly-defined Europe where nearly 12 million jobs and some $860 billion of GDP are linked to the aviation sector.

The benefits of connectivity can only be fully realized if airlines—the core of the aviation value chain—are strong. Financially, Europe’s airlines are the weakest amongst the world’s major regions. 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%. That’s about $3.23 per passenger. By comparison, North American airlines are expected to earn about $11.09 per passenger.

ECAC's mission is to promote the continued development of a safe, efficient and sustainable European air transport system. The aim of the Commission is to promote a mobility that is efficient, safe, secure and environmentally friendly and to create the conditions for a competitive industry generating growth and jobs. Both align with IATA’s vision to support a safe, secure and profitable air transport sector that sustainably connects and enriches our world. Our motivations are aligned. And the government-industry-regulator dialogue approach of this gathering reflects the fact that we must work together in partnership to achieve our common goals.

Some of those goals are achieved through global standards. We are reminded of that as we celebrate the 70th anniversary of the Chicago Convention this year. It is the cornerstone of efforts that have made flying safe. It is the inspiration for the global approach on climate change that has placed aviation at the forefront of carbon-intensive industries on sustainability.

It is important that we continue to shore-up the industry’s foundation—safety, security, sustainability and so on—based on global standards. However, today’s discussion has a larger context. There is a very long list of things that Europe can and should do to improve the operating environment for its aviation sector. And the motivation for that is because aviation generates jobs and growth through connectivity. Put more succinctly, a successful aviation sector improves European competitiveness.

So, the question that we should be asking is: How can we boost European competitiveness with a stronger air transport sector?

In the spirit of partnership, allow me to be frank. Many of the biggest factors that European airlines struggle with are the result competitive disadvantages placed in their way by Europe’s governments. European airlines are over-taxed and onerously regulated. Moreover, they suffer from a chronically mismanaged air traffic management (ATM) system, insufficient airport capacity and infrastructure costs that are simply too expensive. It’s time to do something about it. Let me elaborate, starting with taxes.

Taxation

It is no secret that many governments in Europe seek to improve their revenue streams. 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. Many governments there value aviation more for the long-term economic value that the industry makes possible, than for short-term tax receipts.

Some European governments have begun to realize this too. The Irish government has removed a departure tax because of the economic damage it was doing. I recognize that most of you in this room are not directly responsible for fiscal policy. But I hope that we can count on you to be strong advocates for taxation policies that take the long-term view.

Regulation

The next area that I would comment on is probably closer to your day-to-day work—regulation. It’s critical to the efficient functioning of the industry.

Experience teaches that we achieve the best results when governments:

  • Use regulation to solve real, not imagined, problems
  • Take full advantage of expert advice and consultation
  • Calibrate regulation and taxation carefully to promote global connectivity
  • Ensure that the costs imposed by regulation do not exceed its benefits, and
  • Respect global standards wherever they exist.

Passenger Rights is a good example of where European regulation has got it wrong. EU regulation 261 is not only a competitive disadvantage for airlines; it also fails in its mission to “protect” passengers. There many reasons why. Its draconian measures penalize airlines for things beyond their control. It injects regulation in an area where market forces could do a better job. The constant widening of its application as interpreted by courts continuously makes the “competitive disadvantage” worse. And, it competes—even conflicts—with some 60 other passenger rights regimes around the world. 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. The industry has contributed to ICAO’s examination of the topic which has already produced a draft set of core principles on consumer protection. This is a step in the right direction of regulatory convergence that is good for all involved.

I hope that Europe will reflect ICAO’s work in its review of EU 261. I want to express industry concern about where Europe’s consideration of regulation on assistance to passengers stranded when an airline goes bankrupt will lead. Over the most tumultuous decade in aviation history (2000-2010) 0.0084% of passengers were stranded when their airline went bankrupt. At IATA, we are exploring with our members the responsible handling of such rare situations with voluntary industry measures to repatriate passengers. For regulators in the room, I encourage robust consultation with industry before using the regulatory sledgehammer to crack a very small nut. The consequences—often unintended—can be very messy and unnecessarily costly.

Infrastructure

Regulation also has a role to play in Europe’s growing infrastructure crisis—both for airports and air traffic management. And here, there are few, if any, competitive forces to incentivize positive outcomes. So governments must become more proactive. Let me take them in order starting with airports.

Airports

Airlines and passengers need safeguards from airport market power. As a basic principle, we believe that airports need effective economic regulation to achieve three goals:

  • Providing protection from excessive charges
  • Incentivizing efficiency gains and driving service quality levels
  • Maximizing the value of investments by aligning with customer needs

This is all the more important for Europe as it struggles with predicted capacity shortfalls. Eurocontrol projections indicate a 12% shortfall between airport capacity and the demand for connectivity by 2035. The economic consequences from that are enormous. We cannot let that happen.

Capital is scarce, so wise investments will be needed. A process of true and transparent consultation is the best way to make sure that capital expenditure drives benefits that airlines and passengers need and can afford.

Economic regulators will need to keep more than a watchful eye. Where light-touch regulation has been applied, it’s been a dismal failure. In New Zealand, for example, airports have made excessive profits with service levels benchmarked as among the lowest in the region. To rectify the situation, airlines have been forced to take very costly legal action on both prices and service levels.

There are signs of progress. In the UK the regulator has been empowered to protect the interests of passengers. When the regulator looked at Heathrow, the conclusion was that charges should fall even as much-needed capital expenditure programs continued. I believe that charges could have fallen further. But an important marker was placed in challenging the airport owners to improve efficiency.

As the Airports Package is refined over the coming months, I hope that we will see a much stronger mandate for independent regulators to apply well-established international norms that bring about fair charging regimes—regimes that will facilitate enhanced connectivity that can drive economic growth.

Single European Sky

As critical as Europe’s airport infrastructure situation is, the priority list for infrastructure is topped by 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.

SES will reduce delays, cut emissions, raise safety levels and contribute to the creation of 320,000 jobs across Europe. Quite simply, it is critical for Europe’s future. But progress has been frustratingly slow.

The SES2+ package is a sensible solution to clear the way for rapid progress. Although this is an EU project, ECAC can play a major role in helping to move it forward. ECAC’s “Strategy for the Future” emphasizes the need for a common approach to SESAR and NextGen, common airspace policies, and the achievement of the SES goals on a pan-European basis. The opportunity to move that sound thinking from paper to reality is now.

We support the SES2+ package and in particular we see SES2+ has three vital elements:

  • The first is the establishment of an independent economic regulator for European air navigation performance. When combined with the strengthened target setting authority of the Commission, it will ensure appropriate recognition and equitable contributions from all member states. Greater independence of the National Supervisory Authorities will also be a key enabler to better performance. 
  • The second is the re-organization and unbundling of ATM support services. Europe’s competitive position cannot afford to be compromised by the enormous costs of duplicated and often-times incompatible support services. And certainly at a very practical level, the EUR 30 billion investment in SESAR cannot be justified if organizational inefficiencies are not eliminated.
  • Thirdly, it provides a framework for Functional Airspace Blocks (FABs) to deliver value. Today they exist on paper, but we have not seen any reduction in fragmentation or the optimization of airspace, human and technical resources that they were meant to achieve. All they have done so far is to provide a fig-leaf to cover a complete lack of forward progress on the part of Europe’s ANSP community.

As clearly as we can see the need for SES2+ in moving forward this essential infrastructure reform, there are headwinds. But all the scare-mongering has little in fact to back it up.

Those who raise sovereignty issues as a reason to delay efficiency should take note of the words of former ICAO Council President Roberto Kobeh González. Last year he stated that “Airspace structures can no longer be based only on national and domestic considerations. Major efficiency gains will be attained through global integration rather than by rigid boundary structures.”   

Similarly, the social arguments against SES—of which we were reminded with strikes in France and Belgium last week—are equally vacuous. The broad economic and social benefits of improved connectivity enabled by SES cannot be held hostage by a privileged few resisters. Change brings with it many opportunities. Some roles will evolve to become even more highly-skilled as we reorganize and modernize European airspace. And an inclusive change management plan will be needed to address fully and fairly the personal situations of those involved.

I cannot express the need for SES2+ strongly enough. The leadership of individual states is needed to turn Europe’s air navigation service monopolies into customer-focused and cost-effective members of the air transport value chain.

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 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 ECAC 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.

Thank you.

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