Date: 10 December 2015
Remarks of Tony Tyler at Global Media Day
Good morning and welcome to IATA’s home in Geneva. It is great to see such a good turnout of media from around the world—many familiar faces and a few new ones as well. I have been in the business for nearly four decades and believe that it is a very exciting industry in which to work. Our goal today is to make it an equally exciting industry to write about.
IATA offers a unique view on the airline industry. As some of you may know, we were founded 70 years ago in Havana, Cuba—shortly after the signing of the Chicago Convention and the establishment of the International Civil Aviation Organization—ICAO. The world was a very different place in 1945. The airline industry had been around for about 30 years. But it was still very much transport for the elite in society. Much of the industry stopped functioning during the war years. And to a very large extent airlines were government-owned with a mission that was an extension of foreign policy.
Even as much of the world was still waging war, leaders in industry and governments could see that aviation had an important role to play in building the post-war world. And for aviation to play that important role, it needed global standards to guide its development.
To this day, global standards are at the core of the work of both IATA and ICAO. They are as important today as they were when we were founded. In fact, a good argument could be made that global standards are even more important for an industry that has become integral to our modern world. Think about it. Today 100,000 flights will take off and land safety. And that happens every day as a million people and about 150,000 tonnes of cargo are transported to their destinations over a dense network of 54,000 routes reaching literally every corner of the planet.
Our membership stands at some 260 airlines, operating with various business models. Together they provide 83% of the world’s air transport services. In doing so, they are at the heart of a global value chain that directly employs nearly 9 million people and supports jobs for 50 million more. Air transport industry activities contributed 3.4% of global GDP. And a third of the goods traded internationally—when measured by their value—get to their destination by air.
All of this could not happen without global standards. It would be chaos—operationally, commercially and strategically. To mark IATA’s 70th anniversary, we have chosen the theme of “Flying Better. Together.” It says it all. Because of the work that airlines do through IATA, the industry creates and delivers value that could not otherwise exist. A few examples:
- The IATA Operational Safety Audit (IOSA) is a global standard that is a requirement for our members, is used far beyond our membership and is delivering results by helping to make the industry safer.
- Our settlement systems are the financial backbone of the industry—handling nearly $400 billion of industry money. They enable airlines to distribute their product globally through the travel agent community. And because of them, consumers can buy a ticket to travel anywhere at any one of the nearly 80,000 IATA-accredited travel agents, pay in a single currency and travel with confidence.
- And by working together on environmental issues the airline industry—with our partners in the value chain—was able to come up with a global strategy to manage its emissions based on improvements in technology, operations and infrastructure, as well as the development of a global market-based measure (MBM). We had enough confidence in the strategy to commit to carbon-neutral growth from 2020 and to cut net emissions to half the 2005 level by 2050.
I would like to show you a short video produced for IATA’s 70th that will recall these themes.
With that as background, let’s look ahead to the agenda today. It covers topics where the industry faces challenges and where, by working together through IATA, they are being addressed.
The top priority for the industry is safety—always has been and always will be. Gilberto López-Meyer is our newly-appointed Senior Vice President for Safety and Flight Operations. Gilberto is the former Director General of Civil Aviation for Mexico, former head of Mexico City Airport, is a pilot, lawyer and ran an airport services company. Later today he will present to you on the industry’s safety performance and some of the issues that we are leading on behalf of the industry.
I won’t steal Gilberto’s thunder, but I would like to comment on one issue which has been at the top of the industry’s agenda—aircraft tracking. The loss of MH370 was a shock. Although one piece of the aircraft was found in Reunion Island, the wreckage has not yet been located. And we still don’t know the cause of its disappearance. But early on, the industry recognized that, if a large passenger plane like a Boeing 777 could disappear, we needed to improve the way that aircraft are tracked.
As an outcome of ICAO’s High Level Safety Conference in February 2015, IATA worked with ICAO on the Normal Aircraft Tracking Implementation Initiative (NATII). Essentially, the purpose of the NATII was to ‘test-drive’ the proposed tracking standard and recommended practices to see if they were fit for purpose. The NATII exercises showed us that it was unrealistic to set a 2016 timeframe, and so it was pushed back to 2018. Regardless of this, many airlines are in the process of equipping and others are making improvements or upgrades to existing tracking capabilities.
For me, this is a great example of industry and governments working together to tackle issues with pragmatic measures.
Alongside safety is security. That we live in a dangerous world is a reality. The threat of terrorism is present and active. A new dimension has been added with the movement of foreign terrorist fighters. And the sad reality is that our industry—despite being an instrument of peace—continues to be a target.
That was clear in the tragic downing of the Metrojet flight over the Sinai, which by all accounts was a heinous terrorist act. And the recent attacks in Paris, Bamako, Beirut and San Bernardino are all affronts to a way of life for which the freedom to travel and explore our planet are critical elements. In the face of these acts and threats we must be strong.
The terror threat is constantly evolving. As an industry we have been very aware of that in our intense work with governments on counter-measures, especially since 9.11. Travelers and crew should be reassured. We have processes in place to keep them out of harm’s way by screening passengers, securing the cargo chain, providing governments with information to vet passengers, and guiding our flightpaths around conflict zones. Governments are our partners in security. Their intelligence is vital in guiding our efforts.
There is no perfect system. But aviation is well practiced in its efforts to stay at least a step ahead of the terrorist threat. And the confidence of governments in the ability of our countermeasures to adapt to evolving threats is clear: effective targeted actions have generally replaced knee-jerk reactions to new developments. It is telling that the European Union recently completed the long-awaited one-stop security agreement with Canada—a step in the right direction for risk-based security.
Carolina Ramirez, our global head of aviation security and facilitation, will provide a detailed update later this afternoon.
This week, the other issue sharing the headlines with terrorism is the global effort to reach an agreement on climate change at COP21 in Paris. And sustainability is as much a part of aviation’s license to exist and grow as are safety and security.
As you know, managing aviation’s international emissions is the responsibility of ICAO—a principle established at the time of the Kyoto Protocol. But COP21 is significant for the aviation industry. If it ends with an agreement in a positive political dynamic it will set the mood for a successful outcome for the important decisions on aviation and the environment that will be taken at the triennial ICAO Assembly in September-October of 2016.
The industry has been consistent in asking for governments to take a global approach on aviation and climate change. We are supporting the leadership of ICAO in achieving a global agreement on a framework for a market-based measure at its Assembly. And to help governments in their difficult work, the industry has done its homework. We are united in a preference for a mandatory global carbon offset scheme as a key tool in achieving our carbon-neutral growth commitment from 2020. That combines with efforts in other areas, the results of which are seen in our continuous improvement in fuel efficiency.
Michael Gill, our director for aviation environment and the executive director of the Air Transport Action Group (ATAG) has come from the COP21 talks to update you later this morning.
All of these areas point to one key fact about the aviation industry—that it is highly regulated. Governments do play a necessary role in the industry. We are partners with a common interest in the success of aviation. Airlines are also businesses, so we need to be able to keep revenues ahead of costs in order to pay the bills and reward our shareholders. For governments, the connectivity that aviation makes possible is a critical element for economic success.
That common interest is combined in our Smarter Regulation initiative which is starting to gain some traction. Smarter Regulation is built on a few fundamental principles. Regulation should be consistent with global standards, proportional, well-targeted at solving a real problem, fair, and clear about what is expected. These common sense principles are best achieved through a process of rigorous consultation that includes a focus on keeping the compliance burden to a minimum and a comprehensive cost-benefit analysis.
We are starting to see positive results. Earlier this year the Civil Aviation Safety Authority of Australia announced its regulatory philosophy based on ten principles which are well-aligned with what we call Smarter Regulation.
But there is still a lot of work that must be done. To give you some idea of what is still on the agenda, here are several examples of current hot issues.
- The US government has just passed a Highway Bill which increases the security fees paid by air travelers in order to fund upgrades to the road network. We weren’t consulted about the increase. It is totally unjustified and violates international agreements with more than 100 countries. Needless to say, we are protesting!
- Norway also recently announced its intention to impose a new departure tax equivalent to EUR 8. It also came without consultation or even consideration of the damage that such a tax would do.
- China just announced changes to how it allocates slots at its airports with a combination of a lottery and an auction. This completely ignores the well-established worldwide slot guidelines which were developed for just this purpose. Peter Stanton, who heads our worldwide airport slots activities will tell you more about why this approach is a major issue for the industry in his presentation this afternoon.
- Also this afternoon you will hear from Chaitan Jain from our external affairs department who will talk about the need for smarter regulation in the area of consumer rights where governments seem to be constantly inventing new and more complex regulations without considering how they impact travelers with journeys that begin in one country and end in another, or the competitive incentives that airlines have to treat their passengers well when things go wrong!
- And I know that Hemant Mistry engaged you this morning on one of the challenges that we face with European airport charges. Last week the EC published its “Aviation Strategy for Europe”. I suppose we should be grateful that it pays at least lip service to the importance of aviation to Europe’s economy. It’s overdue recognition of an industry that is critical to the continent’s success. But European strategy is largely satisfied with the status quo rather than corralling the EU member states into implementing regulations that would deliver a much-needed Single European Sky. And it has little to say about the issue of airports taking advantage of their market power—virtual monopoly position—to push up charges in the absence of significant competition.
Alongside working with governments, we also work directly with the industry to help it to do business better. And we have a few presentations today to explain the breadth of our activities:
- Tim Schaaf, our director for Marketing and Sales will provide some interesting insights from AirS@t, a commercial product that helps airlines to benchmark their service offering.
- Yanik Hoyles who heads our New Distribution Capability (NDC) program will tell you about exciting developments as we work with the industry to modernize distribution.
- Lastly, Jon Godson, who focuses on best practices in our environment team, will look at our work to help airlines address the challenge of reducing the illegal trade in wildlife.
These presentations should all provide useful background for your reporting; however the main news event for the day is our look at the industry’s financial performance. Fortunately it is a good news story. Our outlook for this year has improved to a $33 billion net profit expectation for a margin of 4.6%. And profitability continues to strengthen in 2016 with the expectation of a $36.3 billion profit for a 5.1% net margin.
For those who regularly follow our outlook assessments, you will note that these are better numbers than we have reported before. Indeed the industry is surpassing an important benchmark. The cost of capital is just under 7.0%. And our expectation is for airlines to achieve a return on capital of 8.3% this year, increasing to 8.6% in 2016.
So we are finally—after years of destroying capital—delivering the minimal level of profitability that an investor would expect. One of our CEOs at the Board of Governors meeting last week described the state of the airlines as “less poor than we were before”. With average per passenger profit of less than $10, I would say that the profitability is still better described as “fragile” rather than “sustainable”. And, as I well know from decades in the industry, we should enjoy the benign trading conditions while they last but not get used to them!
With that, I will invite our Chief Economist Brian Pearce, the author of the outlook, to take you through the major industry trends that drew him to these conclusions.
Thanks Brian for that comprehensive review. I would like to follow-up what Brian said by emphasizing one thing. Before you go off and write the headline of record airline industry profits, please be clear that we are really talking about airlines achieving a normal level of profitability. The industry’s results are good, but they are not outstanding when compared to the profits that are generated in other parts of the global economy.
There is no “easy money” profitability that is sustainable for any business. Any profit in a competitive business environment is hard earned. The point that I want to make is that the airline industry has strengthened its profitability to an ordinary not an extraordinary level. And, as Brian mentioned, the core of that success is primarily in North America. Large parts of the industry are still struggling—including some making losses.
And I would specifically highlight the situation in Latin America. As Peter Cerda, our regional vice president for the Americas discussed this morning, the deepening recession in Brazil is dragging down the industry across the continent. Earlier this year we projected that Latin American airlines would make a $600 million profit and now we see a $300 million loss in 2015. The situation is being made worse by government policies which inflate fuel prices and other critical infrastructure costs.
Also on the same continent we have Venezuela which is blocking the repatriation of $3.8 billion of industry money. I hope the newly-elected parliament will be able to address this situation urgently. But the message that we have for governments across the continent (and everywhere else too for that matter) is to use aviation as an economic driver. There are a number of success stories. Singapore, China, Chile, the Gulf States and South Korea are top-of-mind as examples of aviation positively impacting the economy.
Value of Aviation—a force for good.
And that brings me to the last issue that I wanted to address before taking your questions. Actually it is a favorite theme—aviation as a force for good. I alluded to it earlier when I spoke about aviation’s role in the global economy. The positive impact of aviation pervades modern life. And one of our key goals is to get governments and industry stakeholders to understand that better. It’s a tough job. Unfortunately, many only fully appreciate the value that aviation brings when it suddenly becomes unavailable—the inconvenience caused by a major storm or as illustrated by the infamous European ash cloud crisis of some years ago.
In addition to that, as with most trade associations we have the requisite data and research to prove aviation’s value with facts and numbers. But there is something very special about aviation—its impact on people. To try to tell the people story, we have launched a website called “Plane Stories”. It responds to the natural curiosity that people have about aviation, it addresses some difficult questions that many frequent fliers might have and it attempts to tell the story of an industry that is providing amazing value to our world. When you have some free time, please have a look!
With that, we are here to respond to your questions!