Good afternoon and thank you for your kind invitation. Martin, you do a great job of bringing attention to our industry's many important issues. I only wish that we had more good news to talk about. We are a great industry. Air transport generates:
- 4 million direct jobs US$400 billion in output.
- 24 million related jobs and US$ 1.4 trillion in related output
- or 4.5% of global GNP
Air transport is the largest single sector employer in Hong Kong. We are a great generator of wealth:
- GDP expanded three-fold in the last 30 years
- But air transport grew seven times.
- With 6% annual growth, this trend will continue.
Our resilience is impressive:
- In the last four years Asia-Pacific has rebounded from SARS, terrorism, war and now natural disasters.
And our record on safety is tremendous. More people flew in 2004 than ever before—1.8 billion—and it was our safest year ever. Tragically there were 428 fatalities—the same level as in 1945 when only 9 million people travelled by air.
This is a great achievement but we will do even better with programmes like IOSA—the IATA Operational Safety Audit. IOSA is the first global standard for airline safety management. Both Cathay Pacific and Dragonair are in the audit process. Already 28 airlines are on the IOSA registry and we will have 100 by the end of the year. IOSA is at the core of our efforts on safety that will lead to a further 25% reduction in the accident rate between 2004 and 2006. Our commitment to safety is strong, despite the dismal situation of our industry's finances.
Airlines lost US$4.8 billion in 2004.
This brings 2001-2004 losses to US$36 billion. There are lots of reasons for the loss, but the extra-ordinary price of oil is at the top of the list. The industry fuel bill grew from US$44 billion in 2003 to US$63 billion in 2004. If oil averages US$43 (barrel/Brent) for 2005, we can expect a fuel bill of US$76 billion and a loss of US$5.5 billion. We cannot continue like this.
The industry has lost its balance.
Governments deregulated airlines, but did not look closely enough at the playing field or the rules. The rules of the game are outdated:
- Despite being a global industry, airlines are restricted by tight ownership and control rules.
- And the bilateral system restricts our ability to serve markets efficiently
And too many of our costs are beyond our control:
- 10% are in the hands of monopoly suppliers—airports and air navigation service providers.
- In most cases there is no regulation to encourage the efficiency that a deregulated industry needs.
- On top of that 20% of our costs are now in fuel—also beyond our control.
- So a third of our costs cannot be attacked.
Labour is the biggest cost item—between 18 and 38% of operating costs. Asia is fortunate to be at the lower end. But we all know how stubbornly difficult labour costs can be. Competition is intense
- More aircraft are entering the industry.
- Aircraft leasing further complicates the picture by giving greater mobility to our assets.
- Low fare competition is now global
And airlines continue to reduce costs and gain competitiveness. Non-fuel unit costs are dropping 2-3% each year. Consumers are happy because air travel has never been so cheap. More precisely, airline yields have never been as low. And what do governments do?
Instead of modernising the rules of the game and putting pressure on our monopoly suppliers—they milk the industry for taxes and charges. They treat us as if we are as sinful as alcohol or tobacco. Mr. Chirac's proposal of an aviation fuel tax to save the world is the latest. We must remember that tourism is the backbone of many developing countries. Taxing the industry that facilitates global tourism simply does not make sense.
It is time to put the industry back in balance.
We need to be as good at business as we are at safety. IATA represents 270 airlines and 94% of scheduled international air traffic. IATA's job is to lead the industry to solutions for safe, reliable and efficient air transport. Today I would like to highlight
- The challenge to Simplify our Business and evolve to a low cost industry
- The need for our partners to match airline efficiency efforts
- And the urgency for governments to look at our industry in a different way.
The first of these is the airline agenda.
Turning US$40 billion in losses into profits will not be easy. Airlines are responding by re-engineering their businesses. Why?—because air transport is evolving to a low cost industry. Consumers value the great network that we have developed. But they get no value from the processes that make it possible. Many of these are paper-based, complex and expensive. We have to keep the value but cut the cost. IATA is leading a programme to Simplify the Business that will cut costs and enhance service. We are creating a revolution in the way people travel and ship with:
- 100% e-ticketing by 2007
- bar coded boarding passes
- common use kiosks for check-in
- radio frequency identification for baggage management.
- paperless cargo
The technology exists. Most airlines already have some of the benefits of this technology. IATA's job is to make these solutions available industry wide. We print over 300 million tickets and handle US$225 billion in industry settlements. By itself e-ticketing will bring at least US$3 billion per year in cost savings. The task is enormous. But saving billions while making travel more pleasant is worth the effort to change. I discussed Simplifying the Business with Minister Yang in Beijing on Wednesday.
The CAAC and the Chinese carriers have agreed to be strategic partners with IATA in making China a model of the new way to travel. In this same spirit of cooperation we discussed the problem of air space management in the Pearl River Delta region. The inefficiency in the system costs airlines over US$400 million per year. Fuel efficiency and environmental responsibility are at the top of our agenda. This unneeded cost is simply not acceptable. I am pleased to report that we agreed to intensify efforts to resolve this important issue for Hong Kong.
Similarly, our partners—airports and air navigation service providers—must match our efficiency efforts.
US$40 billion is the annual bill that airlines pay to our monopoly suppliers—airports and air navigation service providers (ANSPs). This is 10% of our operating costs. We pay when we fly, land and park. So it is important that we pay for value, not inefficiency. Governments fostered airline competition but gave us phantom regulators for monopoly suppliers. And now we are seeing the privatisation of these suppliers.
Quite frankly, I do not care who owns the airport or air traffic control. It is the cost and the service levels that matter. You have a great airport. It won top honours in the IATA and ACI (Airports Council International) AETRA customer satisfaction survey. And it is a great catalyst for Hong Kong's economy. It is important that the privatisation continues to benefit all parties:
- The people of Hong Kong
- The government
- The airport customers—travellers, shippers and airlines.
A successful IPO for an airport privatisation is not just an investor problem—we all need to be winners. I am pleased with the process of consultation. It has been extended to ensure a thorough examination of options. Now let's make sure that we make the right decisions. I am disturbed by the arguments that charges at the airport will need to rise. I believe that the IPO can realise the required HK$30 billion with reduced charges. A cost competitive airport is critical for investors.
Already Hong Kong has the highest charges to airlines in this region next to Japan and the mainland of China. Any increase in charges will disadvantage Hong Kong compared to its neighbouring airports. A successful privatisation should generate efficiencies to allow for reduced costs. We cannot accept a change in structure that results in higher costs. Higher costs would be bad for the airport's future. Lower aeronautical charges support increased hub traffic, which is currently 40% of Hong Kong's traffic. This, in turn, supports retail revenue streams. And it helps the competitiveness of Hong Kong.
Don't risk the role of aviation in Hong Kong's economy by raising charges. Remember you have Macau vying for low cost traffic on the other side of the Delta. And only a short distance away is Guangzhou with its brand new and very impressive airport. Both are eager to get some of Hong Kong's traffic.
As we consider privatisation, let's also remember that the airport is already profitable. It made a HK$520 million profit in FY 2002-2003. This is impressive for a new facility during an economic downturn. FY 2003-2004 was dominated by the negative impact of SARS. But in 2004-2005 we expect a profit of HK$1 billion or a 4% return.
The potential for growth is tremendous—you are part of the fastest growing market in the world. We expect growth of between 5.3% and 5.7%. The potential gain is enormous. And we have recent experience of what happens when the airport stops functioning—the entire economy stops, as we saw with SARS. So let's use the asset strategically to gain maximum benefit. As with any privatisation, our bottom line is simple:
- Transparency
- Efficiency
- Benefits for all stakeholders and
- A strong independent regulator
We are more than happy to work with the Government and the airport to achieve these.
Governments must show leadership and look at our industry in a different way.
Specifically, they must address:
- Security
- Liberalisation.
I'll start with security.
Three and a half years after September 11, security is tougher, but the system is still a mess. Global standards, harmonisation and international cooperation are the backbone of our great safety achievements. But security is being handled in a completely different and inefficient way. Airlines and their customers get the US$ 5.6 billion bill for the resulting inefficiency. We need a different and more effective approach.
Governments cannot continue to ask air travellers to pay for their own security when it is a state responsibility everywhere else. And we cannot continue with unilateral half-measures that ignore the need for global solutions. We need to use our resources efficiently to battle terrorism, not bureaucracy.
Finally, governments must give airlines the freedom to run their businesses like real businesses.
Deregulation without the freedom to do business is not a responsible policy—and it is killing the industry. Competition and markets should define the future of our industry. Governments must not be afraid to lead and facilitate this change. We lost a great opportunity when US-EU talks on an open aviation area failed last year.
The US and Europe are mature markets with similar size and levels of development and technology. Contrast this to China where we see a plan and action. Open skies were declared for Hainan. Liberal bilateral agreements are being signed. And the industry is growing and generating profits. Governments must not be afraid of letting markets work and airlines do business!
And the time for half-measures is over.
Some of you may be surprised by how liberal IATA's thinking is. Others may have noticed a new and bolder approach by IATA to industry issues. I am shouting, in a polite way, to ensure that governments and our partners address our most pressing issues. Why, because change is critical. We cannot live with half-measures and contradictions of the past.
- Intensifying airline competition without effective regulation of monopoly suppliers.
- Creating competition to lower fares while taxing beyond reason.
- National rules for a global industry
- Mis-regulation and micro-management in place of leadership.
Today we have a new IATA that is tough and focused on delivering relevant results. Our members—network airlines—have done a great job. We are working hard to simplify our business and deliver the value that our customers and shareholders deserve. I hope that these same principles will guide Hong Kong's discussion of airport privatisation.
Address to the Aerospace Forum Asia by IATA's Director General & CEO, Giovanni Bisignani