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Date: 10 December 2014

Remarks of Tony Tyler at IATA's Global Media Day, Geneva

 

Good morning and welcome to Geneva. I am pleased to see so many familiar faces joining today’s event. Thanks for coming again. And it is great to see a number of new faces as well. Thank you all for taking time out of your busy year-end schedules to spend some time with us.

Aviation is an incredibly interesting, complex and vital activity. We have done our best to put together an efficient day of briefings on what we see as the most critical challenges facing the industry.

Before I get into that discussion, I did want to remind you that we are closing out a very special year. 2014 marks the centennial of the birth of commercial flight. Throughout the year we have been telling the story of a 23-minute flight across Tampa Bay, Florida on 1 January 1914 that changed our world immeasurably for the better. It all began as a partnership of three visionaries:

  • Percival Fansler, an entrepreneur who saw commercial opportunity in the technology of flight
  • Thomas Benoist, who built the aircraft, and
  • Tony Jannus, who safely piloted the plane to its destination.

They could see the value in transporting people quickly over geographic obstacles. But more importantly, there was a fourth man, Abram Pheil, who understood the value well enough to purchase the first air ticket at an auction. He paid a handsome price: $400. In today’s money, that is the equivalent of $9,500.

Of course, that price did not stay for long. Regular one-way tickets went on sale for $5. And the challenging nature of aviation was clear from that very first venture. The St. Petersburg-Tampa Airboat Line ended its operations on 27 April 1914.

Nonetheless, people caught the flying bug. The airline industry grew quickly from a single aircraft, one route and a lone passenger. Since that day 65 billion passengers have traveled by air.

Today the industry is a vital driver of the global economy. We estimate that about 1% of global GDP is spent on air travel. Including direct taxation that will be a total spend of $823 billion next year. For that, we anticipate that 3.5 billion people will travel and 53.5 million tonnes of cargo—worth some $7.3 trillion—will be transported. Air travel is behind some $644 billion in tourism receipts. And the industry supports jobs—some 58 million worldwide with a total economic footprint of $2.4 trillion.

Let me show you a brief video that draws these elements together.

The message that we are trying to get across is simple: without aviation our world would be very different—less connected and much less prosperous. And in the busy lives that we all live, it is all too easy to take for granted the ability to wake up one day here in Geneva, hop on a plane and be almost anywhere in the planet in a short 24 hours. At no other time in human history has mobility been so accessible—or so safe.

It is fitting that the 100 year celebration coincides with the 70th Anniversary of the Chicago Convention. On 7 December 1944 the Chicago Convention was agreed by 52 states who were meeting even as World War II continued to rage. The Convention laid the foundations for modern civil aviation to be built on global standards. And it set up the International Civil Aviation Organization (ICAO).

The preamble of the Chicago Convention gives ICAO a very clear and important mission. First, it recognizes that the development of international civil aviation can greatly help to create and preserve friendship and understanding among the nations and peoples of the world. And it commits ICAO to work towards the development of civil aviation in a safe and orderly manner so that air services may be established on the basis of equality of opportunity and operated soundly and economically.

This coming year, IATA will celebrate its 70th anniversary as well. It was clear that aviation would be a partnership between industry and government. For this reason, IATA and ICAO have worked closely ever since.  

What unfolded was a great success story—but not one without challenges. If you have been following the industry, I am sure that you are familiar with the difficulty airlines have had in achieving sustainable levels of profitability. Margins are thin. And external events can quickly turn a profitable year into loss.

Since the turn of the century, it has been a tumultuous time for air transport. The successive shocks of 9.11, SARS, and the Global Financial Crisis rocked the industry and resulted in deep losses.

But what has been developing over the last few years has been an impressive improvement in the industry’s finances--one that has occurred despite the huge volatility in the price of oil.
In 2004 we were all wondering how airlines could cope with an oil price that was approaching $40 barrel. In 2008 average price spiked at $99 per barrel and then dropped again. But from 2011 to this year, we have seen an average crude oil price in excess of $100/barrel. Projections for next year see oil averaging at $85/barrel. That’s more than double the 2004 price, yet somehow it now seems cheap! There is no doubt that the recent fall in the oil price is a relief for airlines. 

For 2015 we see airlines making a collective $25 billion net profit. That’s up from $19.9 billion this year, $10.6 billion in 2013 and $6.1 billion in 2012.

Brian Pearce, our Chief Economist, is the author of the outlook and he will have a detailed explanation of the forces that have been driving this improvement. It’s more than just the fall in the price of oil.

Before that, however, I would like to impress upon you that, while $25 billion may sound like a lot of money, it is distributed over a very fragmented industry with hundreds of players. Some airlines are making sustainable returns and others are struggling. Over half of the profits, some $13.2 billion, are expected to be generated by airlines in North America. In contrast, the European industry is of a similar size, but will make only $4 billion.

And, even at the global level we must recognize that a $25 billion profit on revenues of $783 billion amounts to a net profit margin of just 3.2%. That’s just a little better than the 3.1% margin generated in 2010. On a per passenger basis, airlines will make about $7.08.

By comparison, Starbucks can charge about $7 for a coffee in Switzerland. Let’s assume that their average global margin of 14% applies. If that is the case, they will retain as much from selling seven cups of coffee as an airline will make selling an average ticket.

Given all the risks in the world today—economic uncertainty, political instability, public health emergencies, and terrorism among them—there is not much of a buffer to absorb a significant change for the worse in the operating environment.

I have given these caveats for context and perspective, not to downplay the significance of the profit that we expect to see generated next year or the tremendous changes that are behind it. And now I will call on Brian to provide the background.

See this Economic Outlook presentation by Brian Pearce, IATA's Chief Economist.

Thanks Brian. The airline industry is delivering great value. And, while the rewards are still shy of sustainable levels, it is good to see that the gap is narrowing.

Of course, financial challenges are but one aspect of the industry agenda. Today you will meet many of our top experts who will address some of the other challenges. Let me take a bit of your time to highlight a few areas that are particularly high on my agenda:

  • Safety
  • Governments
  • Modernization
    • E-freight
    • Passenger Distribution and
    • Security

Safety

Let’s start with safety. It is our top priority. This year has been marred by the two terrible tragedies of MH370 and MH17. Our thoughts and prayers go out to all those involved. And, as with any accident, we will learn lessons from each in order to make the industry safer.

In the case of MH370, as with any accident or incident, the industry had a strong desire to learn from it. Even while the aircraft remains lost there has been a desire to look at how aircraft are currently tracked and what improvements could be put in place. IATA led a cross industry task-force under Kevin Hiatt, our Senior Vice President for Safety and Flight Operations. Kevin will present the report and speak more fully about the work of the task force in the next presentation. But it is an issue that I have followed very closely and I would like to make some high level comments.

The industry task force report was submitted to ICAO at the beginning of the week. It will be considered in their development of a Global Aeronautical Distress and Safety System, or GADSS. The cross industry report includes a set of performance criteria for aircraft tracking. It recommends that airlines evaluate their current tracking capabilities against the performance criteria and close any gaps within a 12 month time frame.

Airlines are taking the tracking issue very seriously. Some already exceed the report’s suggested performance criteria. For others, closing the gap may take more than a 12 month time line for every aircraft.

As aircraft operators, our members took a serious and practical look at the recommendations. While they are committed to improving, they could not fully endorse what would be practically unachievable for some. The IATA approach, which Kevin will elaborate on, has several phases:

  • In the short term, make use of what is already available in their fleets and areas of operation.
  • In the near term, look at the business case for upgrading equipment to meet the performance criteria.
  • In the medium term, monitor new technologies which will become available, including space-based systems
  • In parallel, work with manufacturers and other industry stakeholders to explore the possibility of making systems tamper proof.

This last point addresses the inescapable truth of MH370 that the transponder stopped working. Without speculating on what happened, redesigning the aircraft’s failsafe systems to make sure that transponders cannot be shut off is well beyond the near-term focus of the task force.

So the public should be aware that there is no silver bullet solution on tracking. The industry is working to improve, but some issues such as tamper proofing, will take time to address and implement. Remember, the sealing of cockpit doors after 9.11 took several years to complete.

In the meantime passengers can be reassured that MH370 was an extremely rare, if not unique event. Even though aircraft cannot be tracked in all cases, flying is safe. Over 100,000 flights operate safely every day. And new technology will play an important role in making the system even more robust.

The case of MH17 was an outrage. Civil aircraft should never be military targets. But it highlights a new reality with which we must deal. Powerful weapons are now in the hands of non-state entities and this poses a risk to aircraft. ICAO is leading a task force on how to improve the sharing of security information. Airlines are very skilled at making operational risk assessments. But in the case of overflying conflict zones, they need security information that is clear, timely and unequivocal. The system works today, but clearly there are gaps that must be filled.

We are also calling on ICAO to work within the UN framework to implement the responsible design, manufacture and deployment of weapons with anti-aircraft capability into international law. There is precedent. We do this for various forms of weaponry including chemical weapons, land mines, biological weapons and others. We are realistic in understanding that achieving this will take time. But it must be pursued.

Despite these tragedies, the industry’s overall safety performance remains at a very high level. Looking at Western-built jets, over the first nine months of the year we had one accident for every 4.5 million flights. And for IATA members the rate was one accident for every 6.7 million flights. Passengers should remain confident that flying is safe.

And one of the good news stories of the year is African safety. We have been working with stakeholders across Africa with a goal of achieving world-class safety by 2015. It was a commitment of the African Union in the Abuja Declaration. As of the end of September, there were no hull losses with Western-built jets registered in Sub-Saharan Africa, so better than world-average performance. But there is still a lot of work to be done. First, the results need to be sustained. And as you will see in Kevin’s presentation, if we look at all aircraft types, the African average is more than 11 times worse than the global average. Among the many issues which must be tackled is an improvement in safety oversight by governments.

Governments

This point highlights a reality of the air transport industry—that the partnership with governments is critical. There are some very enlightened governments that understand the strategic value of aviation connectivity. These include Singapore, Hong Kong, Chile, the UAE and Qatar. Others are not so enlightened. In Europe, for example, heavy taxation and onerous regulation are among the root causes of the struggles that European airlines are experiencing.

And the worst case is Venezuela. There are complicated regulations on the repatriation of funds—something which is guaranteed in air service bilateral agreements. Some 24 airlines have a total of $3.6 billion trapped in Venezuela. The government is slowly clearing these funds—but at deep currency rate discounts and with a poor record of keeping its promises.

We are calling on the Venezuelan government to meet its treaty obligations and authorize full and non-discounted repatriation of funds. Airlines cannot afford to operate services for which payment is uncertain. Many airlines have had no choice but to cut back services dramatically. Some have even left the market. The reduced connectivity, of course, is only adding to Venezuela’s very difficult economic situation. And that pressure can only increase as other investors or potential investors recognize the risks of doing business there.

In a more general sense, we can say that aviation is a highly regulated industry. And our positive safety record shows how important it is to have effective regulation.

Not all regulation, however, is created equal. We have embarked on a campaign for Smart regulation. What is Smart regulation? Our definition has four key concepts.

  • First, it must solve real, not imagined problems; 
  • Second, it should be developed in close consultation with the industry;
  • Third, it must stand up to a rigorous cost-benefit analysis—including looking for the costs of unintended consequences;
  • And lastly, it should respect global standards where they exist.

It’s not rocket science. But there is some amazingly “un-smart” regulation out there. I will give you a few examples:

  • The EU’s regulation 261 for denied boarding and cancellations began as a bad piece of regulation because of disproportionate penalties and by failing to recognize the power of market discipline in ensuring high levels of customer service in a competitive industry. And then it was made worse by court interpretations that added compensation for delays and took away most exceptions for extraordinary circumstances. So it has effectively become a strict liability regime for delays.
  • Another example is the US regulation on tarmac delays. It is so strict—with fines up to $27,500 per passenger - that extended tarmac delays virtually have been eliminated. But cancellations have increased enormously —an unintended and unavoidable consequence of poorly thought-out regulation.
  • Even some safety regulation can be called into question. For example, if you depart from Europe with an infant under two years of age traveling on your lap, you will need to use a seatbelt extension to secure your baby. But on the return trip, the Federal Aviation Administration prohibits the use of the same device. What is a parent to think?

Please don’t misunderstand my message. Regulation has its place in the industry. We are, for example, calling on governments to focus passenger rights regulations around some core principles that our members have agreed. And in fact we are working with ICAO on gaining endorsement for these.

We are asking governments to regulate airport monopolies with a firmer hand than currently exists in most markets. Where there is often very limited or no competition, as is the case with infrastructure provision, government has an important role to play. We are calling for rigorous economic regulation to ensure that there is an incentive to deliver cost-efficient infrastructure delivering at agreed service levels.

This point is particularly important as governments struggle to ensure that infrastructure capacity can meet growing demand. Our recent 20-year forecast shows that passenger numbers are expected to double between now and 2034. Cash-strapped governments are increasingly looking to the private sector to fund the needed investments.

IATA has no issue with the principle of private sector participation. It can often bring speed and business acumen that produce very good results. But unless there are clear guidelines established to ensure that service levels are met and that profit levels are not excessive, there is ample potential for the whole exercise to go in the wrong direction. 

Modernizing Processes

Over its 100 years of history, the industry has evolved many unique ways of doing things. In numerous areas, airlines led the development of global systems. We had global reservation and telecommunications systems well in advance of the internet simply because, to a greater extent than most other industries, we were ahead of the curve in developing networks that spanned the globe.

The internet has changed the way that almost all industries do business—aviation included. And IATA is taking the lead in helping the industry in several areas:

  • The cargo side of the business is infamous for its paper-laden processes. The supply chain involves many participants, including governments. And eliminating the paper trail of 20+ documents that accompanies every air cargo shipment has long been identified as a critical development that must happen. The modernization of cargo processes is not occurring as quickly as anybody would like. But there are signs of renewed momentum. We made our 22% target for e-air waybill which is the core document for airlines. And our Board has tasked us to bring this to 45% by the end of 2015 and 80% by the end of 2016. E-air waybill is not the grand prize of the paperless industry that we seek. But it is an important and enabling step towards a data-networked e-cargo industry.
  • The distribution process on the passenger side of the business also needs some shaking up. Using internet technology, airline websites are selling a growing array of product customizations and innovations. But moving this innovation into the distribution processes for travel agents is a challenge. IATA’s New Distribution Capability (NDC) program aims to make it easily possible for airlines to distribute their full product range through the travel agency community. While the global distribution systems were initially wary of what this would mean, recently they are not only supporting the program, they are actively developing NDC-compliant products and services. Yanik Hoyles, who heads our NDC Program, will provide you with more information on how we are moving forward with pilot projects to demonstrate NDC’s capabilities and even helping to fund innovation in partnership with a venture capital firm focused on travel-related businesses.
  • And lastly, the way that we deal with security needs to be modernized. Recently I visited the 9.11 museum in New York. It brought home to me again the vital importance of keeping aviation secure. And it also reaffirmed my conviction that, unless we find a better way to screen passengers, we will never be able to cope with the rising demand. A year ago, we began working with Airports Council International on Smart Security. Carolina Ramirez, our head of security, will update you later in the day on how this project is moving forward, as well as other new initiatives in areas such as cyber security.

I hope that those have been some interesting thought provokers for a lively Q&A session. But just before we get into that, I wanted to briefly return to my comments about how easy it is to become complacent about the amazing things that aviation does and makes possible. An American film maker, Brian Terwilliger, will release a film next year with National Geographic that will help remind people how much aviation contributes to our world. IATA has no commercial interest in the film. But it is a great reminder of just how much this first century of aviation has changed the way that we live—for the better. I will play a short trailer to give you a flavor for what to expect.

Every time that I see the trailer I am reminded of just how amazing this industry is.

But I am sure that at this point you will have lots of questions, so let’s begin the Q&A session. 

 

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