The outlook for the industry has deteriorated for this year. We now expect losses of US$11 billion. That is US$2 billion worse than our previous forecast of US$9 billion in losses. This loss is accentuated in the three major regions. North American carriers will lose US$2.6 billion, Asia-Pacific carriers US$3.6 billion and Europe’s carriers US$3.8 billion - the largest. Middle East and African carriers will lose US$500 million each and Latin American carriers will break even.

Impacting Factors

When we hear so much about green shoots in the economy, why is the airline situation getting worse? Volumes are still negative compared to 2008 but they have improved. Cargo in July was down 11.3% compared to last year, much better than the -23.2% that we saw when we hit bottom in January. This is a sign that the global economy is starting to work again. But it is weak and fragile. Similarly, passenger traffic in July was -2.9%, better than the March low of -11.1%.

We expect to end the year down 4% in passenger and down 14% in cargo. This is better than the -8% and -17% that we previously forecast. Unfortunately, these better volumes have had a limited impact on profit. Why? Because yields have fallen through the floor. The downturn in premium traffic is in the order of 20% compared to 5% for economy and airlines are heavily discounting for the premium passengers that remain. On the cargo side, despite the improvement in volumes and the retirement of 227 all cargo aircraft, the utilization rate is still less than 50%. As a result, we see yields falling 12% for passenger and 15% for cargo.

Revenues will still be US$80 billion below 2008 and the added cost of fuel is driving the worsening forecast. In this forecast period, we also revised our view on 2008. We saw major revaluations of goodwill and fuel hedges were restated. Our net profit figures strip these out as there is no realized cash impact with this changed airline reporting. Our 2008 loss estimate goes from US$10.4 billion to US$16.8 billion. Combining last year and this year, losses are US$27.8 billion and that is larger than the US$24.3 billion lost in 2001-2002 after September 11.

This industry is in a massive crisis and our first look at 2010 shows that losses will continue. We forecast US$3.8 billion losses. This is based on oil at US$72 per barrel, approximately a 1% improvement in yields and 4.6% growth in revenues.

Changing the Industry

What are the implications of this crisis? There are several risks. Larger airlines have built-up cash reserves of US$15 billion, US$12 billion in debt and US$3 billion in equity. This is a war chest. To fight the crisis, critical investments in new fuel efficient fleets are being postponed. Already we see the price of fuel rising. This could come back to bite us if we don’t convert the war chest to strategic investments in fuel efficient aircraft at the right moment.

Smaller airlines have not been able to build up their reserves. They rely on banks that are still not lending. As cash flow gets squeezed with falling yields and rising costs, we could see some casualties in the coming months.

And finally, the situation with yields could be a long-term disaster. While yields can easily fall, they almost never recover. So the fall in yields could be a long-lasting structural change. Even with better volumes we don’t see industry revenues returning to 2008 levels until 2012 at the earliest.

IATA and Industry Actions

What can we do about this? It is back to basics for airlines. Cut costs, manage capacity and conserve cash. We are helping in many ways. Let me mention three specifically.

Simplifying the Business. It did not end with e-ticketing that saved US$3 billion in industry costs. We added another US$1 billion in savings with common-use self-service kiosks. We are now working on an additional US$10 billion with programs covering self-service, baggage management and e-freight.

Getting our monopoly service providers to respond to commercial discipline is a challenge. Airports and air navigation service providers must match our efforts. Some are showing great business sense; Singapore reduced charges by 25% and Malaysia by 50%.

But I see some big issues in the US and there are three US airports that are a concern. New York JFK and Newark could soon be the most expensive airports in the world. There is lots of scope to reduce costs and improve efficiency. Los Angeles is another. The airport is doing a good job at controlling costs but politicians keep adding costs with unrealistic promises. This must stop.

Governments also have a role in this crisis. Airlines - unlike car manufacturers or banks - are not asking for bailouts. But we do need government action.

First, governments must stop crazy taxation, much of which is branded environment but completely unrelated to any environmental efforts. The global air transport sector is approaching Copenhagen with a clear vision. We have tough targets, including carbon neutral growth from 2020 and a 50% absolute reduction in emissions by 2050. We also have a strategy: technology investment, efficient infrastructure, effective operations and positive economic measures. At Copenhagen, we need governments to leverage the efforts of the air transport industry and find a global solution grounded in a global sectoral approach.

Finally, we need governments to see this crisis as a wake-up call. It highlights the weak structure of the industry that results from outdated restrictions on what, for any other industry, would be normal commercial freedoms. Airlines need government treaties to enter new markets and restrictions on ownership mean that we cannot access global capital or merge across borders.

This must change. We have high hopes for the second round of US-EU negotiations. And we continue to work on our Agenda for Freedom.

That is a brief update of the global situation and some key IATA activities and challenges. Airlines remain in intensive care. This crisis is not over yet.

I look forward to your questions.