It is a pleasure to join the Forum this year. Thanks to my good friend and predecessor at IATA - Pierre, and thanks to the organising committee for the kind invitation to discuss aviation and sustainability.
I am not a sustainability expert so I rely on the definition of the Bruntland report to guide my comments: “Sustainable development meets the needs of the present without compromising the ability of future generations to meet their own needs.”
In other words, if development is not sustainable there is no future for our industry. Today the concern is with environmental issues. They are at the top of our political agenda but we must also address sustainability from two other key perspectives: First, aviation’s contribution to global economic development and second, the financial sustainability of our industry. Let’s start with financial sustainability. Without that our ability to deal with the other two areas is limited.
Financial Sustainability
The period since 2001 has been tough. To survive, airlines have been tough in response. Labour productivity is up 56%, sales and distribution costs dropped 13%, non-fuel unit costs are down 15% and load factors are at record highs (over 80% in July and August).
The results show in the bottom line: for the first time since 2000 airlines will turn a profit this year of US$5.6 billion. When you remember that revenues are US$470 billion, this is peanuts; it is a return of less than 2%. We need 7-8% just to cover the cost of capital.
That means a sustainable return for the industry is in the range of US$40 billion. But at least the number is black, a welcome relief after US$42 billion of red ink. But with US$200 billion of debt the balance sheets will be fragile for some time to come. The financial recovery story is amazing. We improved the bottom line even as fuel prices skyrocketed from US$40 billion in 2002 to US$132 billion today.
How did we manage that? A strong economic expansion helped, although the credit crunch puts a question mark over our US$7.8 billion profit forecast for 2008. Let’s remember that airline performance is absolutely cyclical and unlike previous cycles we may be approaching the downturn with little cash in the bank to cushion the fall.
Improved efficiency is the other contributing factor at the industry level. Our Simplifying the Business Programme, led by 100% conversion to ET by end of May next year, will contribute US$6.5 billion in annual savings.
At the same time restructuring by individual airlines has completely changed the industry. Look at the US: after 144’000 job losses and a complete re-vamp of the business, the US carriers have gone from being the industry’s sick-man to the most profitable this year. We expect North American carriers to post a profit of US$2.7 billion. Europeans are enjoying steady improvement based on the strength of long-haul premium traffic. They will be US$2.1 billion in the black. Asia will see its profits decline to US$700 million resulting from more modest yields, in the wake of a 42% capacity increase since 2001.
We are doing a good job in areas of the business that we control but we need governments and our infrastructure partners to deliver change and to achieve sustainable levels of profitability.
Infrastructure costs
First, infrastructure costs. Monopoly infrastructure providers cash an annual bill of US$43.5 billion - 11% of our revenues. Our partners will argue that this is a constant 11% but that is not good enough. To be fair, we are working closely with air navigation service providers, benchmarking to achieve efficiency, and some airports understand our business realities. Working together we achieved US$893 million in cost savings last year. More recently we signed an agreement with Seoul Incheon for a 10% reduction.
The problem is that other airports raised charges by US$1.9 billion. Charges are going up faster than we can achieve reductions. I have shouted politely with our airport partners for 5 years and still the situation is not acceptable.
We spend and you pay is not a sustainable business model, so it’s time for effective economic regulation recognising the arbitrary nature of charges.
The European Commission produced a draft directive requiring independent national regulators. We are now working to strengthen the draft with cost efficiency targets that will make it meaningful.
The situation in the UK is among the worst. The BAA monopoly is not working with rising charges and falling service levels. Heathrow is an embarrassment and T5 will not solve all the problems. The UK is investigating the BAA monopoly. We support the breaking up of BAA to serve London more effectively and we are demanding effective independent regulation as part of any privatisation process from Argentina to Singapore. Airports need the right incentives to contribute effectively to our industry’s financial sustainability.
Liberalisation
Liberalisation is the other critical factor that is beyond our control. Our goal is to be allowed to run airlines, the same as any other normal business. To fly where markets exist and to merge or consolidate where it makes business sense. While these basic commercial freedoms are enjoyed by almost every other industry, they don’t apply to aviation. We hoped for a major breakthrough in the US-EU aviation talks earlier this year. We got half a solution with an open skies agreement, but missed the opportunity to fundamentally change the industry with a new approach to ownership.
The benefits of consolidation are clear for all to see. Swiss and Lufthansa are generating better profits as a result of their merger and Air France/KLM have never been more profitable.
The US-EU deal will facilitate further consolidation, but confined to Europe. On the other side of the Atlantic mergers are less likely. In North America we will see more carriers following Air Canada’s lead, spinning off parts of the business to please investors. Both are artificial solutions to compensate for the failure of governments to follow-up on deregulation with effective liberalisation.
Everybody knows that there are too many airlines. IATA alone has 240 members and there are hundreds of others - domestic, charter, low cost etc.
We must tear-up the bilateral system. Cross border consolidation is essential to financial sustainability. Fortunately, ownership is on the table for the next stage of the US-EU discussions. But, as we wait and watch this painfully slow process, we are encouraging Asia to take a greater leadership role. Intra-Asia will be our biggest market by 2010. Making it a single market is another great opportunity for change.
To deliver the financial results and sustainability that are the starting point for a successful industry, we must achieve commercial freedoms for airlines to compete effectively on a level playing field and airlines cannot take their foot off the gas in driving efficiency - the new industry paradigm.
Sustainable Development
All this will help us fulfil a vital role in sustainable development. Airlines are at the core of a value chain that supports 32 million jobs and US$3.5 trillion in economic activity - 8% of global GDP.
Even more impressive than the scale of our economic footprint is our growth. Since 2004, 3 million new aviation jobs were supported by aviation and US$600 billion was added to economic activity. Why is this important? Because we are supporting the Millennium Development goals by connecting products to markets and people to business.
A recent IATA study looked at Kenya, where a US$350 million investment in airport infrastructure and aircraft generated a US$200 million annual boost to Kenya’s GDP. That is an economic return of almost 60% annually. Aviation is one of the most efficient investments in development possible. With just 3 km of runway entire populations are connected to the world, with enormous positive impacts on wealth generation and poverty reduction. Aviation is a critical component of sustainable development
Environment
As with almost any human activity, there is an environmental cost. CO2 emissions from aviation have a climate change impact, like all industries, aviation must respond responsibly. Let’s start with the facts: environment tops the industry’s political agenda here in Europe. Fortunately, we have a good track record. According to the Nobel prize-winning IPCC, aviation is 2% of global carbon emissions. Emissions are directly related to fuel consumption and our achievements are impressive.
Fuel efficiency improved 70% in the last 4 decades and the IATA target is a further 25% by 2020. Demand for air travel is growing at 5-6% a year. Efficiency gains will limit our contribution to global CO2 to 3% even in 2050.
No matter how you look at it, airlines are a small part of a big issue. It is clear that running a green business is good business. Our US$132 billion fuel bill is the biggest green incentive of any industry, and the Dow Jones Sustainability Index has outperformed the market by 2%.
As green businesses, airlines are investing billions to re-fleet. There are over 6,000 fuel-efficient aircraft on the manufacturers’ order books and, we are pushing governments for greater efficiency and capacity so we don’t waste resources. Every minute that we can save on flight time saves 152 kg of carbon and US$120 in operating costs. If we could shave even just a minute off of every commercial flight the potential savings are 5 million tonnes of CO2 and US$3.8 billion. So how are we moving forward?
Environment: The Strategy
IATA’s 240 members agreed a four-pillar strategy to guide us:
I) Invest in new technology
In addition to re-fleeting governments must provide a stable regulatory framework so that investment in new airframes, engines and alternative fuels can take place against an agreed technology roadmap.II) Build and use efficient infrastructure
The IPCC has identified a potential 12% savings in ATM alone. That equates to 73 million tonnes of CO2.III) Operate planes effectively
The IPCC sees the potential for another 6% efficiency gain here.IV) Economic measures
First, positive measures to encourage technology investment, but also working with governments to define an emissions trading scheme that is fair, global and voluntary.
The strategy is not just words - we have delivered real results. In 2006 IATA’s fuel programme saved a lot of CO2: 6 million tonnes by shortening 350 air routes; 8 million tonnes from IATA GO teams working with airlines to implement best practices; 1 million tonnes through better operational procedures.
But we cannot do it all on our own. Governments must be involved. We took our strategy with specific demands to the UN, at the ICAO Assembly in September. All 179 ICAO Member States participating in the meeting endorsed IATA’s four pillar strategy including our 2020 fuel efficiency improvement target of 25%.
Our biggest disappointment was Europe: It has confused taking leadership with taking cash and is determined to press ahead with its own emissions trading system. To be blunt, this course of action is completely political and totally irresponsible. Why? Because the environment is a global problem. As I said, our US$132 billion global fuel bill is an enormous economic incentive. Regional emissions trading schemes will - at best - only cause diplomatic and trade battles. Already all States outside Europe are challenging the European Union because the EU is contravening the Chicago convention - the bible of international civil aviation.
I will go further and say that the Europe Union is acting like a hypocrite. For the past 15 years it has been discussing a Single European Sky, wasting a lot of hot air in discussions, with no action. Europe has achieved a single currency - the Euro, but the 34 European air navigation service providers are living in a completely different age, wasting 12 million tonnes of CO2 annually in delays and inefficiencies.
We can give Europe credit for pushing forward the debate on aviation and the environment. But charging for airline emissions without fixing the mess in air traffic management does nothing to improve environmental performance. Instead of practical measures we get taxes like Gordon Brown’s billion Pound increase in the UK’s air passenger duty.
I asked Mr. Brown - then chancellor - how many trees are you going to plant with the money collected? There was no response. His successor is looking to make the situation worse by complicating the calculation, and his neighbours have discovered this new revenue source. The Netherlands and others have similar proposals. Instead of delivering results, Governments are buying their green credentials by punishing airlines and their customers. The environment does not benefit - only the national budget.
Environment: The Vision
Industry is racing ahead of governments. Despite our practical measures to limit our emissions, we recognise that our carbon footprint is growing. This is not politically acceptable - for any industry. So we must do more.
You asked to me discuss how aviation is responding to the sustainability debate. The answer is that we are not responding - we are leading.
At our AGM in June this year I put forward a vision to become carbon neutral in the medium-term, and zero emissions in the longer-term. Our technology partners, engine and airframe manufacturers agree that we must ultimately aim for zero carbon emissions and the fuel suppliers recognise that this is a priority for their customers.
Already some of the potential building blocks for a carbon-free future are here: fuel cells, solar powered aircraft and bio-fuels.
I don’t have all the answers but I have faith in this great industry. Our history is built on turning dreams into reality. Enormous innovation is possible in 50 years. The Wright brothers first flew 40 metres in 1903; 50 years later we had jets that could cross oceans. Today - 50 years on again - we are an industry that flies 2.2 billion people safely each year.
Conclusion
We are the world’s most exciting industry, but we also face many challenges. Airlines have delivered amazing results in the last years, transforming their business and contributing tremendously to wealth generation and eliminating poverty with governments and partners on board.
With a common vision for a liberalised, efficient and environmentally responsible industry I am convinced that aviation will become the benchmark for others to follow with a very bright and sustainable future.