It is a pleasure to be here in Washington, a city shaped by government and diplomacy. IATA is not a government…and we have lost some of our reputation for diplomacy. So, I thank you for your warm welcome and ask your understanding of my frank business style.

IATA represents the industry—270 airlines from 130 countries. Put another way, we represent 98% of the international air transport industry. On behalf of the industry, our 94 offices operate a 200-billion-dollar settlement system. We are a big industry….1.6 billion passengers a year, of which one-third travel internationally. We are also an industry in crisis and in need of change. Our members understood the need to change and re-engineered their businesses. We all know the hundreds of thousands of jobs that disappeared from the industry in recent years.

The airlines have done a good job in restructuring, but many of our members' problems are caught between governments and diplomacy. When governments don't communicate, IATA's role is to broker effective solutions. This means leading the industry's agenda for change. We need strong partners in this mission.

US leadership was critical in creating a global mass transit system that is the engine of the world's economy. As we move forward with change, US leadership remains critical. While the US is still a global leader in many areas, in some cases unilateral action and politics are being substituted for leadership. What our industry needs is leadership to change the way we approach issues.

When I joined IATA in June 2002, the industry needed immediate solutions to problems like increased security and cost reduction. Over the previous ten years, airline yields declined by an average of 2.7% annually, while unit costs were reducing only 2.2%. You can see the problem.

Airlines were doing their part to control costs but many of our monopoly providers were not. Polite meetings and diplomatic letters were not going to get results quickly enough to bridge this gap. The industry needed an association that could shout in a polite way and lead change in our approach to cost reduction.

Toronto is a good example. As airlines downsized, cut, squeezed and battled with bankruptcy, the airport gave us a multi-billion dollar bill for overbuilt and poorly managed infrastructure. We needed a terminal…but we got Versailles with boarding bridges. Someone had to say loud and clear that the airlines cannot afford to pay for Toronto's extravagance.

This is not a message you can deliver in diplomatic terms.

To survive we needed to change the agenda of our monopolist partners—airports and air traffic control. Our bill increased over 5% per year between 1992 and 2002 and airlines simply could no longer afford to pay for their inefficiency. Our monopoly suppliers had to move from cost-plus pricing to a mindset of cost reduction and efficiency improvement.

We still have some work to do with Toronto, but the good news is that the new Minister is listening. And, outside Canada, airports and ATC providers are beginning to understand our message. Vienna, Singapore Changi, Prague, Dublin and Seoul's Incheon are among airports that reduced fees or rolled back planned increases.

We are even seeing results at Eurocontrol where a US 5.5 billion dollar headache has become 2.2% smaller this year. In Japan we convinced the government to change privatization plans for Narita that would subsidize loss-making airports with airline money.
Last year our efforts saved the industry over US 600 million dollars.

The international bill for airports and air traffic control is 10% of our operating costs—US 15 billion dollars—so you will be hearing more from us on this issue.
I am not a diplomat, but we have raised awareness of this issue, and I am committed to getting the results that our industry needs. We already discussed cost reduction….there are three other items on our agenda for change that I would like discuss with you today:

Safety, Security, Liberalization

Setting the Scene

First, let's review recent history. At our Washington AGM last year, I described an industry hit by the Four Horsemen of the Apocalypse. SARS, Terrorism, War and a poor economy cost the entire industry over US 30 billion dollars over three years.

Today the situation is not great…but it is certainly more positive. If there is one thing that the crisis taught us, it is the importance of cargo in counter-balancing the wild changes in the passenger business. For many airlines cargo was a financial lifeline. Passenger traffic is improving and in most markets we are back to pre-9.11 levels. Unfortunately routes to and from the US lag behind the recovery elsewhere.

US carrier international traffic in 2003 was still almost 13% below 2000 levels. Industry-wide, cost cutting and restructuring will likely result in a US 3 billion dollar profit on international operations for 2004.

On revenues that are in the order of US 150 billion dollars, this is far from acceptable, and US airlines are still expected to post losses this year. The industry is fragile.

There may be a fifth horseman of the apocalypse—the price of oil—, which is hitting US carriers suffering form a weak dollar most severely. Every cent added to the price of a gallon of fuel adds US 600 million dollars to our costs. This means that we will have to deal with a total fuel bill of US 67 billion dollars, US 8 billion dollars more than airlines paid in 2003.The crisis is not over, but we are moving in the right direction.

Safety

While driving our agenda for change, one area is constant: our commitment to safety, our number one priority. Even in the middle of the industry's worst crisis, airlines continue to invest in safety. Last year, safety, in terms of the hull loss rate, improved 43% over the last ten years, making it our best year ever. Our Board challenged IATA to lead the industry to a further 25% improvement. Our partners in achieving our safety goals are the FAA and ICAO.

The US has long been a global leader in safety, and the effectiveness of Administrator Marion Blakey significantly advanced this global role. For example, last month I met with Marion in Santiago de Chile where we successfully used an American Airlines Boeing 777 jet to demonstrate a joint FAA-IATA project to enhance safety through satellite navigation and onboard avionics.

Another example of what can be achieved with partnership is the IATA Operational Safety Audit (IOSA) — the only global benchmark for best practice in safety. This is a remarkable example of an industry self-regulating—but government recognition is essential.
We appreciate the endorsement of both ICAO and the FAA. In the meantime, IOSA is available to both our member and non-member airlines with no charge for IATA's operating costs. And, we have made IOSA a condition of IATA membership and are working to certify all of our members by 2006.This is a challenging target…but I am confident.

Security

This brings me to another major operational challenge—security.
Recently Rod Eddington remarked that airlines and terrorists share one thing in common—a global base of operations. Unilateral government actions may be effective in an emergency situation but leadership is essential for a global solution. The US is positioned to play this role but a change in perspective is necessary. Standardization of Workable Procedures: The world's economy depends on efficient international transportation made possible by global standards—largely coordinated by IATA. Poorly coordinated security procedures put the system at risk.

When governments cooperate on security, the system grows stronger. When they do not, airlines are caught in the middle, and it is the system that suffers. For example, look at the recent US requirements for access to airline reservation records or PNR.

A unilateral US requirement left all carriers in the US market with a giant problem. If they complied with the US rules, they broke European privacy law. IATA helped facilitate a solution, but recent developments may put this in danger again. We are also working to streamline information requirements. In some cases, carriers are being asked to submit similar but different information to several departments of the same agency.This is inefficient and costly.

Similarly, operating crew have up to four checks of the same information….and still may be denied entry to the US. We need to use our resources to fight terrorism…. not battle paperwork. Another example is found in the US law requiring biometrics in passports this October. IATA supported biometrics in passports long before September 11. We helped develop the ICAO worldwide biometric standard which the US now requires other countries to implement.
IATA's evaluation: great initiative, but the timeline is not achievable. Countries and airports will not be equipped to securely issue or read the passports with the new requirements by the deadline. I join the Departments of State and Homeland Security in supporting a delay in implementation. The point is that we all want the same goal.

Working with the international industry will achieve solutions that are operationally efficient with a realistic timetable. The security agenda is large—APIS, CAPPS 2, US- VISIT, cargo screening, sky marshals, and blast-resistant cargo containers to name just a few items.Leadership through coordinating and not just imposing solutions is what we all need.

Funding the System: We cannot talk about security without addressing its enormous cost to the industry. The US has accepted that defense against terrorism is a national security responsibility….not an airline issue.
I applaud the US government's decision to take on much of the cost burden of security.

And…I defend it against those governments who call it a subsidy.
The US has demonstrated leadership in accepting the state's responsibility to pay for the defense of its citizens on planes, trains, or in their living rooms.
We need a level playing field.

Other governments must follow…and, as the US looks at even greater expense on security, it must make its decision permanent.

Liberalization

This leads me to the last topic on my agenda for change—liberalization. US leadership resulted in many of the great innovations in our industry. De- regulation started here in 1978 and the US created the term open skies. If the current talks between the US and Europe are successful, they will again change the face of the industry. I am concerned that the talks are becoming more focused on domestic politics than on the airline business.

The opportunity to lead change is being sacrificed, and it is the industry that will suffer—on both sides of the Atlantic. While the US and EU continue to talk, other parts of the world are implementing change. The single market in Europe created opportunities for network carriers to merge—KLM and Air France—and for low-cost carriers to grow. It also allowed carriers to disappear—Sabena and Swissair.

In Australia there is no nationality restriction on anybody setting up a domestic airline—witness Virgin Blue. In China there is consolidation around 3 major carriers—Air China, China Southern and China Eastern. Meanwhile, experiments with liberalization are moving ahead—Hainan Island, China's Hawaii, is now a free market for air services.

If this experiment is successful, we can expect progressive liberalization starting with Chengdu. Already there are moves to make Shanghai a free port for air cargo. This year Hong Kong signed open skies agreements with Thailand and Malaysia; Thailand with China; Singapore with the UAE and so on.
I could go on…but the point that I want to make is that a changing world is creating enormous new opportunities for our industry. And, it is the carriers in the most aggressively open markets that are among the strongest in the industry: QANTAS, Singapore, Cathay Pacific, not to mention the European carriers. What does this mean for the US? Again, there is a great opportunity to lead change, but we must look beyond our traditional ways of thinking and doing business.

Let me give you an example: Last year at our AGM, Secretary Mineta proposed an increase in allowable foreign ownership of US airlines to 49%. Quite frankly there is not much use in owning 49% percent of a company.

And, if there is any concern over national defense, it can easily be resolved with golden share rules or similar measures. Failure to move forward with this symbolic change is an alibi to avoid change on more substantive issues. US airlines, US labor and the US economy will benefit from access to global capital—there is no reason why airlines should be singled out with ownership restrictions. You have a unique opportunity to achieve something truly progressive between two markets of similar dimension and level of development.

Our industry needs leadership that is not afraid of change. As the industry moves forward with change, there is a clear and critical role for US leadership, starting at home. Aviation is not unique in its need to change. Governments that deregulated airlines now need to lead change by liberalizing the operating environment. Airlines need freedom to act like any other business.

Every day that we delay change, the adjustment is more difficult.

What is my vision for the industry if we succeed with our agenda?

· Blocs of liberalization will combine to build larger markets.

· A modernized Chicago Convention will continue to guide our industry.

· Global cooperation will enhance safety and security levels.

· Consolidation will lead to efficiency across the industry

· Investors will see airlines as a good investment.

From the perfect storm to the perfect world?

It is good to have a dream!

To quote your countryman Donald Douglas, who changed our industry with innovation:

"Dream no small dream; it lacks magic.
Dream large. Then make the dream real."

Government involvement in leading change is essential as we pursue our dreams.

Be assured that IATA will push the agenda for change forward on all fronts.....and we will not be diplomatic about it!

 -Leading Change- International Aviation Club Washington, DC, 20 April 2004