It is a pleasure to be in Cairo, an historic city with warm hospitality. Transportation has always played an important role in Cairo, starting with its strategic location on the Nile. Today, it is home to Egyptair, one of the fastest growing airlines on the African continent. And in June 2011, Cairo will host IATA’s Annual General Meeting (AGM).

In the last decade, Egyptian aviation has been completely transformed with the commitment and vision of Civil Aviation Minister Ahmad Shafik and the Egyptian government. We have seen effective aviation policies and impressive infrastructure developments. Egyptair increased its competitiveness as a strong player in the global industry.

I am always pleased to address the Arab Air Carriers Organization (AACO) AGM. IATA and AACO cooperate on many issues including environment, fuel, user charges, Simplifying the Business and much more. Later today, I look forward to signing, with my friend Abdul Wahab Teffaha, an extension of the IATA / AACO training agreement. Before that, I want to discuss the state of aviation and the impact of global challenges on this region.

Global State of the Industry

After a horrible decade with cumulative losses of $50 billion, airlines are now returning to profitability at a global level. Last month, we upgraded our forecast to an $8.9 billion profit for 2010. The upturn has been stronger and faster than anticipated. Traffic is already 2-3% above pre-crisis levels of 2008. Capacity management has been effective with an 11% growth in demand being met with a 7% increase in capacity. As a result, yields are improving, and have risen between 7 and 8% this year. That is driving our improved profitability. However, 2011 will be different.

The inventory re-stocking cycle that drove growth this year is completed and we must now rely on consumer demand to achieve a sustainable recovery. With little improvement in employment levels around the world, this seems unlikely. We see global capacity growing by 6% ahead of a 5% demand improvement. Yields will stop growing and profitability will fall back to $5.3 billion, representing a net margin of just 0.9%. Even with a profitable outlook, aviation remains a fragile industry with $210 billion in debt. IATA is always your partner delivering relevant savings. Since 2004, IATA saved the global industry $47 billion in taxes, charges, fuel, and by Simplifying the Business. I will update you on some of these programs later.

State of the MENA Industry

But first, let’s take a closer look at the Middle East and North Africa (MENA) region. Between 2009 and 2010, the bottom line for the region’s carriers improved by $1 billion to a profit of $400 million. A more cautious approach to capacity is helping to drive this improvement. This year, we expect demand growth of 21% from passengers and shippers while capacity will only increase by 15.9%. This balance will shift in 2011. Capacity will grow at 10.6%, faster than the 10.4% expected increase in demand. In line with the global trend, the region’s profits will fall back to $300 million. Congratulations to all for surviving the crisis. But 2010 is as good as it gets in this cycle. The hard work of running airlines continues.

Challenges

MENA is growing. Over the last decade its carriers went from 5% of global passenger traffic to 11%. Planned purchases of $200 billion in aircraft over the next decade will continue to support growth. An expanding global presence brings the challenge of playing a larger and more important role in the global aviation community. This includes the key areas of safety, infrastructure, Simplifying the Business, government involvement and environment.

Safety

Safety is our top priority. Earlier this month, I signed an agreement to share safety information among IATA, the International Civil Aviation Organization (ICAO), the US Federal Aviation Administration and the European Commission. This is a symbol of our shared commitment with governments and a major step forward for safety.

Numbers tell the story. The 2009 hull loss rate for Western-built jets was 0.71 accidents for every million flights. This is a 36% improvement over the last decade. We can be proud of being the safest mode of transport. But I have concerns in MENA. You had no Western-built jets hull losses in 2006. But in 2009, this jumped to 3.32 accidents per million flights, 4.6 times worse than the global average. With eight accidents so far this year, half of which in Iran, the situation in this region is still a concern.

The region’s rapid growth must be accompanied with a strong safety record. Global standards have an important role to play. IATA’s Operational Safety Audit (IOSA) is the global standard for managing operational safety. Already 35 carriers in the region are on the registry, including all 26 IATA members. Egypt was the first government to mandate IOSA. Lebanon, Syria and Bahrain joined later and Jordan is expected to join soon. I challenge all governments to take advantage of IOSA.

I congratulate the region for its leading role on improving ground safety with IATA’s safety audit for ground operations (ISAGO). Thirteen MENA-based ground handlers are on the ISAGO registry. We have formal support from Kuwait, Jordan and Oman, and ISAGO will be mandatory in Lebanon from June 2011. As MENA grows, IOSA and ISAGO are key global standards to make flying even safer in the air and on the ground.

Infrastructure

Infrastructure is critical to support growth. MENA’s record is impressive. Cairo’s new terminal is a good example of the $100 billion being spent on airport infrastructure which also includes at least eight new runways in the Gulf area. Governments and industry are supporting effective air links with strategic investment. But what is being built and planned on the ground is not being matched in the air. Military airspace is a big obstacle. Over 60% of the airspace in the Gulf area is restricted to civilian aircraft. This limits airspace capacity and flexibility and forces airlines to operate inefficient routings.

IATA is working to improve airspace capacity with regional solutions. In the Gulf Area, we are working with governments on a regional airspace re-design. In North Africa, we are developing capacity for rapidly growing East-West traffic. And to support the region’s ultra-long haul operations such as Sao Paolo to Dubai, we recently announced iFlex. The flexibility to operate such routes with optimum conditions can save 2% fuel burn and 5-10 minutes flight time. Finally, over the next year, we will complete MENA’s reduced vertical separation minima implementation by bringing Iraq on board. All of these initiatives will deliver real efficiencies that support the region’s growth.

Technology and Simplifying the Business

Technology also supports growth by improving efficiency. Simplifying the Business targets industry savings of $17.7 billion. Together, we achieved 100% e-ticketing in 2008 and later this year, we will celebrate 100% bar coded boarding passes. I congratulate the region, airlines are 92% complete and airports are at 90%. Airports in Abu Dhabi, Dubai, Bahrain, Muscat, Doha, Kuwait and Sharjah have Platinum status for reaching 100% already.

E-freight is also making progress with Dubai and Egypt on board. The United Arab Emirates (UAE) is a global top performer - the originating country for 21% of all e-freight shipments. And over one-third of all international e-freight shipments are by Emirates. Jordan, Kuwait, Qatar and Saudi Arabia have all passed the high-level assessment and we expect to launch next year. Clearly e-freight is providing an important competitive advantage. The hurdle is adapting local regulations to facilitate modern business practices.

Government Involvement

I have said many times that this industry must operate as a normal business. Government interference with the bilateral system makes this impossible. The result is a hyper-fragmented industry with razor-thin profits in good years and major losses in the bad times. Aviation’s growth in MENA is delivering economic benefits to the region. To maintain these benefits, governments must help keep costs down by controlling taxes and charges.

A good example is the Prime Minister of Tunisia who responded positively to my appeal to eliminate the 10% import tax on fuel that was against the Chicago Convention. We are now working in Jordan to curb unilateral increases in taxes and charges that followed a badly structured airport privatization. Airlines should not become cash cows for governments or concessionaires. Meaningful consultation and an agreed investment plan that meets user needs is the solution.

Airlines must also have the commercial freedoms to conduct their business like a normal business. That means flying where markets exist and being able to fund growth with access to global capital markets to fund growth. Morocco and Jordan concluded open skies agreements with Europe, and Tunisia is exploring a similar relationship. But along with some cutting edge examples of liberalization between this region and others, I see continuing restrictions on travel within the region. As a result, growth is not balanced. Long-haul traffic is growing much faster than intra-regional connections. The Damascus Convention of 2004 provides a framework to remedy this with regional liberalization. But the number of countries ratifying it is disappointing.

Look at the Association of Southeast Asian Nations (ASEAN) which will completely open markets among its 10 members by 2015 or Latin America where innovative ownership structures have met passenger needs, improved safety and created a profitable industry. To drive aviation’s economic benefits, government must have policies that support a competitive cost structure and balance long-haul opportunities with stronger regional markets.

Environment

Finally, MENA shares industry-wide commitments for environmentally responsible growth. I appreciate the strong support of AACO carriers for aviation’s ambitious environmental targets. Many states in the region are also supportive of our strong industry position particularly the UAE, Bahrain, Jordan, Kuwait, Qatar and Yemen. Together with manufacturers, airports and air navigation service providers, the industry is committed to improve fuel efficiency by an average of 1.5% per year to 2020, cap emissions from 2020 with carbon-neutral growth and cut emissions in half by 2050 compared to 2005. No other industry has made similar global commitments or has such a credible track record.

Last year, airlines emitted 625 million tonnes of CO2. Since 2004, IATA programs helped save 76 million tonnes of CO2 emissions. MENA carriers are making important contributions. An average fleet age of 11 years compared to a global average of 13 years is contributing to improved fuel efficiency. Egyptair and Qatar Airways are joining IATA’s industry carbon offset program. And I would encourage all carriers to provide your customers with the same high quality offset options.

IATA is also working to improve operations. Implementing performance based navigation at six airports in the region and in improving en-route airspace in the Gulf area is saving thousands of tonnes of CO2 annually. Globally, IATA’s fuel efficiency initiatives have already achieved savings close to $16 billion and we are moving fast on many opportunities. For example, in a few years biofuels went from a dream solution to cut our carbon footprint by up to 80% to a reality tested by five airlines.

This region is playing a role. Qatar Airways has been among the pioneers in alternative fuels and the UAE is investing heavily in biofuels with its International Renewable Energy Agency (IRENA) project. With certification expected in a few months, we are asking governments to provide legal and fiscal incentives for efficient commercialization.

Our achievements are impressive and our targets are ahead of those of our regulators. The industry had great credibility at the ICAO Assembly earlier this month where we asked governments to endorse our targets and agree on a global framework to manage aviation’s emissions. The results were positive. There was clear confirmation from the United Nations Framework Convention on Climate Change (UNFCCC) and governments that ICAO has the responsibility for aviation’s international emissions.

In line with the Kyoto Protocol, keeping the discussion at ICAO, an institution that understands our industry, was critically important. Many developing states including Algeria and Saudi Arabia were trying to mix aviation with other UNFCCC issues. This was not constructive. But we were successful and through ICAO, governments delivered an historic resolution. For the first time, governments agreed to collective aspirational goals for improvement in fuel efficiency and for carbon-neutral growth from 2020.

Our 2007 vision is now part of the first global sectoral agreement by governments to cap emissions. Governments also agreed to develop a global framework for economic measures by the next ICAO Assembly in 2013. In the meantime, they agreed on 15 principles for market-based measures that aim to minimize market distortions, treat air transport in line with other sectors, ensure that our emissions are accounted for only once and recognize past and future efforts. These are all important steps that no other sector has taken.

One key question remains: Will the agreement be enough to stop the European Union Emissions Trading Scheme (EU ETS)? Europe’s ETS legislation allows for adjustments to conform to global initiatives. We are on solid ground to challenge ETS implementation particularly alongside other environmental taxes such as the UK Air Passenger Duty or the German departure tax. In fact, the Air Transport Association of America and IATA have launched a legal challenge in the UK. At least 120 countries have formally recorded their opposition to Europe’s plans at the last ICAO Assembly. The challenges of these governments must be joined by those of their airlines. If you have not done so already, you should write to register your opposition and ask your government to formalize its opposition directly with Europe.

Would I have liked to achieve more at ICAO? Yes. But given the global impasse in climate change, the ICAO resolution is the best of any other possible outcomes. It puts ICAO at the forefront of other UN agencies dealing with climate change. I shall go proudly to Cancun in December, alongside ICAO, to present aviation as a role model for others to follow. We will work with ICAO to strengthen and deepen the resolution for the next Assembly. And as an industry, we remain united in our determination to achieve our targets.

Conclusion

Environment is a long-term issue. No other industry has been more responsible, can boast a better track record or has more ambitious commitments than aviation. At my meeting with UN Secretary General Ban Ki-moon, he commended aviation as a role model. I am very confident that the solutions to environment and our other issues will be achieved by the many great people who are leading aviation to an even brighter future.

To help facilitate this process, as announced at our last AGM, I will host Vision 2050 in Singapore with a group of 25 global leaders working with Professor Michael Porter of Harvard University and with the inspirational support of Singapore’s Minister Mentor Lee Kuan Yew. We will look at critical issues affecting our industry’s successful development. The discussion will be based on four cornerstones of environmental responsibility, efficient infrastructure, effective business models and satisfied customers. The work of the group will be presented at our next AGM here in Cairo and passed on to our leaders of tomorrow.

It’s been over two decades since my first job in aviation as CEO of Alitalia. The last nine years, as Director General and CEO of IATA have been challenging and exciting, at times exhausting, but always a pleasure. Why? Because I have had the great privilege to work with the remarkable people of our industry, many of whom are in this room. As you know, I plan to conclude my duties at IATA next year, although I will remain close to the industry in different roles.

In the meantime, I am a member of the search committee working to find the best candidate. And in just over seven months, I look forward to presenting my successor to the AGM for approval. So this will be my last AACO AGM. But I shall remain a follower of this industry and particularly the Middle East. This region has almost limitless opportunities to build its future by meeting the challenges of growth that I have outlined. I look forward to developments in this region that will make it an even stronger player in an industry that is safer, greener and more profitable.