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A Financially Fragile Industry Critical to Modern Life

By Giovanni Bisignani Director General & CEO, IATA

We begin 2011 with new challenges. The $15.1 billion in profit that airlines made last year will fall 40% to  $9.1 billion this year, and margins will shrink to 1.5%. This pathetic profitability comes nowhere near the 7-8% needed to cover the cost of capital. And even this is not assured.

As the world watches the instability in the Middle East, the oil price has risen to about $100 per barrel. That’s a big leap from $84 per barrel, the consensus estimate in December. With fuel consuming 27% of the industry’s operating cost, the consequences are sobering. For each dollar that the price rises, airlines face the challenge of recovering an additional $1.6 billion in cost.

Our financially fragile industry is critical to modern life. The strikes and severe weather that disrupted hundreds of thousands of travelers in recent months have made this abundantly clear. But where are the government policies to support efficient global connectivity? 

A rare leadership example is the Spanish Government’s determination to reform its air traffic management system. Its bold action to bring its controllers into today’s reality—top of the league in salaries but near the bottom on productivity—shows the courage that this industry needs. It is an example for all governments, particularly those in Europe that are at a pivotal point in implementing the Single European Sky after decades of trying.

 As the industry moved from shock to crises in the past decade, long-term vision often gave way to a necessary agenda of short-term survival. Our approach to the environment is a notable exception. The industry’s united commitment to capping emissions with carbon-neutral growth from 2020 and cutting emissions in half by 2050 compared with 2005 levels won great respect from governments attending the UNFCCC COP-16 meeting in Cancún, Mexico.

 Our second year of profitability, albeit weakening, is a unique moment to take a broader long-term view. That is Vision 2050. In four decades, we will have the opportunity to serve 16 billion passengers and carry 400 million tonnes of cargo. This growth is shifting the industry’s center of gravity eastward. Intra-Asia traffic cover took travel within North America as the industry’s biggest market in 2009. Looking forward to 2014, half of the 800 million extra passengers who will travel then will be in Asia. And four of the top five airlines by market capital are also located in the region.

In mid-February, I met with 30 strategic thinkers in Singapore, to challenge and enhance the four cornerstones of Vision 2050: profitability, environmental responsibility, technology and meeting our customer needs. With the inspirational support of Singapore’s Minister Mentor Lee Kuan Yew and the competitiveness expertise of Harvard University’s Professor Michael Porter, the discussions were vigorous and challenging. I look forward to presenting the results along with some initial steps forward at our Annual General Meeting in June.

The aviation industry was built by turning dreams and visions into reality. Getting governments to listen and to act will be the continuing challenge.

 

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