Welcome to our Geneva headquarters. I always look forward to our media day as an opportunity to look forward to the challenges of a new year. But before that, let me re-emphasize some highlights from Brian’s outlook presentation.
For those who were here last year, you will see that our optimism has grown throughout the year. And the profit of $15.1 billion is certainly good news for an industry that lost $51 billion between 2001 and 2009. But let’s put that good news into perspective.
First, let’s understand what this means to investors. Our margins are still pathetic. Industry revenues will be $565 billion. Our $15.1 billion profit is a 2.7% margin. If airlines were charity organizations, this would be a great result. As a business, it clearly shows that we remain a sick industry. We are not even recovering half the cost of capital which is 7-8%. Even in a profitable period, the industry continues to destroy shareholder value.
Second, regional differences in profitability remain significant. More than half the profit will come from Asia-Pacific carriers at $7.7 billion in 2010. This is the largest absolute profit ever for this region. The power of China is driving this forward.
The US contributes another third with $5.1 billion. This is largely the result of the capacity cuts that started when fuel spiked in 2008. And the other star is Latin America, which is delivering a further $1.2 billion, completely disproportionate to its 4% share of industry revenues. Strong regional economies and an innovative approach to consolidation have turned the region’s airlines around over the last decade.
What is disappointing is Europe with a $400 million profit. Their surprisingly strong third quarter performance turned the earlier forecast net loss into profit. But at $400 million, it is really peanuts. The European industry is 13 times the size of Africa. But profits are just four times larger than the $100 million that Africa’s carriers will make.
The same is true for the Middle East airlines. They will make $700 million this year, almost double the Europeans, but on a quarter of the revenues.
Third, 2011 will be more challenging. Global profitability will fall from $15.1 billion back to $9.1 billion in 2011. That will be a 1.5% margin on revenues of $598 billion.
What is driving this deterioration of profitability? As Brian mentioned there are three factors. The first is the price of oil. We are estimating an oil price of $84 per barrel for next year, up from $79 in 2010. This will add $17 billion to costs and bring the fuel bill to $156 billion. With oil now over $90 per barrel, this could turn out to be a conservative estimate.
The second is the gross domestic product (GDP). Globally, GDP growth is predicted to fall from 3.5% to 2.6% next year. Europe in particular is a mess, with growth expected to slow to 1%.
And finally, we see over-capacity. Capacity will grow by 6.1% but demand will only grow by 5.3%. While yields grew by about 7% this year, in 2011, passenger yields will grow by just 0.5% and cargo will be flat.
In summary, we end this year with better-than-expected profits but nothing for our shareholders. Profits will deteriorate in 2011. The industry is still fragile.
A Decade of Change
Our weak financial situation comes despite a decade in which airlines made enormous changes.
- Productivity improvements
Over the last 10 years, productivity improved by 63%. We drove sales and marketing unit costs down by 19%and we improved fuel efficiency by 20%.
- Cost Savings
IATA was very much involved in bringing to the industry over 55 billion dollars in savings since 2004. How? $19 billion in user charges, $18 billion in fuel and operational cost savings and $18 billion with our Simplifying the Business program. There are also other forces for change that are re-shaping the industry.
- Rapidly Growing Markets
Rapidly developing markets are shifting the industry’s center of gravity to the East. Traditionally intra-North America traffic was our largest market. In 2009, 655 million traveled within North America and 662 million within Asia. By 2014, we expect to see 3.2 billion people traveling. That is 800 million more than the 2.4 billion that will fly today. Of that 800 million, 360 million will travel within Asia Pacific.
We are also seeing big shifts in where the money is measured in market capitalization. Today, the largest airline in the world is Air China at $20 billion, followed by Singapore Airlines at $14 billion, Cathay Pacific at $12 billion, China Southern at $11 billion, LATAM $15 billion (LAN 11 and TAM 4), and then Delta and Lufthansa at $10 billion each.
- Globalizing Leadership on Liberalization
The industry’s leadership is also becoming more global. Last week, the US concluded its 101st Open Skies agreement with Brazil. Any open skies agreement is an important step forward. But the US, the father of open skies agreements, is not able to update archaic ownership rules. Some say they are for national security. Others claim they protect jobs. They are just alibis to avoid change.
Ownership rules did not protect the hundreds of thousands of US airline jobs that were lost over the last decade. But liberalization of ownership rules could create global business opportunities that would support employment.
Europe brought a new leadership idea with the creation of a model for change with the European common market. But even more impressive is what is now happening in Latin America. Progressive airlines in the region have built trans-national brands with multi-hub operations. In a decade, the region has been transformed. Passengers are benefitting with safer and more efficient operations and the region’s airlines are more profitable than ever. This should be an example for others to build on.
- Consolidation Taking Hold
We can also say that consolidation is beginning to re-shape the industry. Look at all that has happened in the last couple of years. Air France and KLM; Lufthansa with Swiss, bmi, Austrian and Brussels Airlines; Continental and United; Northwest and Delta; Air India and Indian Airlines; TAM and LAN; Japan Airlines with Japan Air System; Cathay Pacific with Dragonair; and Iberia and British Airways.
Some consolidations have been more successful than others. Usually there is a direct relation between success and the freedom that the airlines have to make significant changes. But the message is clear. Airlines are eager for change. And at some point, consolidation and relaxed ownership rules must give way to a normal industry. That industry will have the commercial freedoms to take advantage of the global village that it made possible.
- Vision 2050
Momentum is clearly building for big changes. This is reinforced by the fact that even after all the restructuring and re-engineering of the last decade, we have not achieved sustainable profitability. What is holding us back? Airlines spent the last decade in survival mode. We needed changes that could deliver immediate results. E-ticketing was a huge change and we implemented it globally in 48 months from start to finish. Our small profit this year gives us some breathing room to think a bit bigger. We must use this opportunity to look ahead.
That is why I announced Vision 2050 at our annual general meeting in June. We are assembling a group of strategic thinkers who will meet in Singapore. These include CEOs, industry wise men, politicians, inventors, technology experts, economists and so on. Singapore’s Minister Mentor Lee Kuan Yew will provide advice from his long history of achievements and his capacity to look forward. And we are tapping the expertise on competitiveness of Harvard University’s Professor Michael Porter. Together we will produce an industry paper that captures the group’s thoughts on sustainable profitability.
Vision 2050 will also look at finding an environmentally sustainable way to power the industry, having cost efficient infrastructure to support the industry and building passenger loyalty. For the most technologically advanced industries in the world, nothing is impossible within a 40-year time frame. I am confident that we will have some very interesting results to report in June.
In the interim, IATA is involved in many of the industry’s biggest challenges. I would like to give you a high level introduction to the issues that will be discussed in greater detail later.
As always, let’s start with safety, our top priority. There were 17 Western-built jet hull losses this year. This gives an accident rate of 0.66 per million flights. Of these, four were with IATA carriers. This puts the accident rate for IATA carriers at 0.28, 58% better than the global average. Clearly, the benefit of the IATA Operational Safety Audit (IOSA) is showing.
But safety is a constant challenge and there is much more work to do. Our priorities to make the industry even safer include implementing our agreement with the US, Europe and ICAO to share safety information, moving our ground handling audit forward, finding a new way to train pilots and mechanics, more tools to avoid runway accidents, and regional initiatives, particularly in Africa, where the accident remains at 12.5 times the global average.
In the afternoon Guenther Matschnigg will brief you more on safety.
Along with safety comes security. It’s a constant challenge and the system must improve. I spent much time trying to get government, particularly the US, to work with industry on security. One success was one-stop-security in Europe, which has eliminated repetitive screening for at least 6 million passengers a year. But that is the exception.
In general, aviation security evolved by adding one measure on top of another with little attention to how it all works together. The US response to the underwear bomber marked a difference. A month after the incident, US Department Homeland Security (DHS) Secretary Janet Napolitano and ICAO Secretary General Raymond Benjamin came to our offices to start a dialogue. Now we are working with the DHS and ICAO on a common agenda to build a robust, efficient and convenient system.
What did we achieve? We convinced the US to stop blacklisting states, eliminated pat-down for all US bound passengers, removed in-flight restrictions on passenger movement. And the Yemen cargo incident was handled much better. Industry was consulted and involved in targeted short-term measures. We offered a three-point vision for cargo security: finding technology that can scan pallets, converting e-freight data to intelligence and finding solutions to secure the supply chain.
On the passenger side, developing a checkpoint of the future is at the top of everybody’s agenda. With today’s terror threats, we need to be able to find bad people, not just bad objects. We can only do that by combining technology with intelligence. This will allow us to assess passengers for risk with appropriate security checks to follow. Further in the future, my vision is to develop a security tunnel. Passengers will identify themselves with a fingerprint, biometric passport or mobile phone boarding pass. As they stroll through a tunnel, they will be checked for all items without unpacking. And they will emerge with immigration clearance and ready to board the plane simply by giving their fingerprint again. This afternoon Ken Dunlap will explain in more detail.
Simplifying the Business
We are also using technology to simplify our business. Later on, Aleks Popovich will explain details of this program that now aims to save the industry over $18 billion annually while making travel more convenient.
Today we are announcing a major achievement in this process. By 31 December, we are confident that the industry will achieve 100% capability for Bar Coded Boarding Passes. Airlines, airports and technology suppliers worked together to achieve this with potential savings of $1.5 billion. And it facilitates many check-in options for the passenger, including using mobile devices. But even more important, along with e-ticketing, it facilitates paperless travel. The same bar code could eventually carry data for ancillary services from in-flight meals and lounge access, to car rentals and hotel reservations.
Jeff Poole will discuss with you later our cost savings programs. This year we saved the industry $3.4 billion. This breaks down as $800 million in airport charges, $300 million in air navigation service charges, $850 million in fuel fees, and $1.4 billion in taxes. But against this, we saw major increases, particularly in taxation. In June, Germany added a EUR 1 billion departure tax. In November, the UK Air Passenger Duty increased to GBP 2.5 billion. And in the same month, Austria announced a EUR 90 million departure tax. These taxes can be 3-5% of the price of a ticket.
Aviation can help drive economic growth, but not if we are beaten to death with new taxes. In 2011, we will launch a major communications initiative in Europe to educate governments on the social and economic benefits of the industry.
The other source of frustration is with European air traffic management. Earlier this month, we praised the European Commission for pushing forward the Single European Sky initiative. Formalizing the Functional Airspace Block for Europe Central (FABEC) was a major step forward. Similarly, getting agreement among governments to accept a pan-European cost efficiency target was a major victory. But for these two steps forward, they took one big step backward by agreeing to a watered-down 3.5% cost reduction target for 2012-2014. States trying to protect the status quo are the problem.
After April’s volcano eruption every government in Europe recognized the need to accelerate the Single European Sky. The 2020 targets are critical to reduce costs by half, increase airspace capacity by 70%, improve safety by a factor of 10, and reduce delays to an average of 30 seconds. Watered-down targets will not get us there.
But I must give full credit to Spain’s government for their determination to improve air traffic management. They are committed to a 15% cost reduction by 2012. Major change is needed. Spain’s air traffic controllers have a nice life delivering a third of the productivity of UK controllers and getting paid at 150% the European average. The strike by Europe’s best paid controllers was irresponsible. As the industry reduced costs over the last decade, Spain’s unit rate for air traffic control doubled. And I fully respect the action of Minister Blanco to bring Spain’s ATC costs in line with global realities.
Paul Steele, who has just returned from COP16 in Cancun, will update you on our efforts there. Air transport is ahead of all other industries. No other global industry can match our commitment to improve fuel efficiency by an average of 1.5% annually to 2020, achieve carbon-neutral growth from 2020, and cut emissions in half from 2050 compared to 2005 levels. This is shared across the value chain of airports, airlines, air navigation service providers and manufacturers.
We are credible, having saved 76 million tonnes of CO2 since 2004. Rob Eagles will explain to you our vision for more effective air traffic management. And Michel Baljet will report progress on biofuels. They will soon be certified and could cut our carbon footprint by up to 80%.
My crazy dream in Vancouver in 2007 is becoming a reality. Moreover, no other industry has achieved a consensus among governments on the way forward. The ICAO Assembly in October agreed on a 2% fuel efficiency improvement target. Provided governments come to the table with improved air traffic management, with a Single European Sky and NextGen in the US, we could achieve this.
They also agreed to principles for a global framework on economic measures that will preserve a level playing field. We continue to fight Europe’s unilateral and illegal plans to implement emissions trading from 2012. Not because we oppose economic measures but they must be the right measures - global, fair and in line with international principles and agreements.
We are working closely with ICAO, which has the responsibility for international aviation and climate change. We joined ICAO in Cancun for the United Nations Framework Convention on Climate Change (UNFCCC) COP16 meeting. Under the leadership of Christiana Figueres, Cancun was completely different from the mess of Copenhagen. Lower expectations helped relieve some pressure. But Christiana has also brought a new approach of engagement with industry. For aviation, Cancun was a great success. The UNFCCC respected our great progress and we continue to work with governments through ICAO to drive our efforts forward.
That is a broad overview of the major issues facing the industry. As you can see, IATA has a big agenda.
As I announced in June, I plan to step down as Director General on 1 July 2011. After investing nearly 10 years of my life to restore IATA’s relevance, I wanted to make sure that I left my baby in good hands. I was part of the selection committee that recommended Tony Tyler, current CEO of Cathay Pacific. I look forward to presenting him as our Board’s recommendation for my successor to our Cairo Annual General Meeting for their endorsement. I am sure that Tony’s leadership will take IATA to the next level. While I will be leaving IATA, I shall continue to watch progress in different roles. This will include working on boards and helping to teach the next generation of leaders.
In the meantime, I continue to lead IATA. And I look forward to taking your questions.